You are out of town for a job interview and desperately in need of a haircut. After a quick search you call a local salon with great reviews to make an appointment. They ask you on the phone if you have any allergies and whether you are getting a haircut for a special occasion.
You get there early. While you wait, they offer you free snacks, bottled water, and hand you an Ipad to watch your favorite show on your preferred streaming service. You get your haircut, pay and before you leave, they hand you an envelope. You open it as soon as you get in your car, and you realize that it’s a greetings card to wish you good luck on your job interview. Now you’re sitting in your car with the biggest smile.
The haircut was more expensive than what you’re used to but you didn’t mind paying more. But why?— After all, it was the same haircut you get at home. What was it about this haircut that made it more valuable? Well, it all depends how we define value and who defines it.
From the customers’ vantage point value is about overall satisfaction. To deliver it, businesses need to think about the customers’ profit first. The equation we should be trying to solve on behalf of customers is BENEFITS – COSTS = PROFIT.
Two things to unpack. One, customers seek three sets of benefits: functional, transactional and aspirational. In the example above, getting a good haircut is a functional benefit, having a good experience at the salon is a transactional benefit, and making a good first impression at the interview is an aspirational benefit. Two, in addition to money, it also costs people time and energy (physical, mental and emotional) to buy.
So to raise customer value, we have to figure out how to increase customers’ benefits, lower their costs or do both. When we lead with empathy for customers, we suddenly realize that, like this salon, we can increase customer value without touching the product or service itself simply by increasing our customers' aspirational and transactional benefits. But this is unfortunately not the direction most businesses take.
Unlike the salon, most companies think about value from the vantage point of the company. The fundamental equation every company is trying to solve is business profit where (PRICE x UNITS) – COSTS = PROFIT. And there are fundamentally two ways to solve this equation. Business owners can either figure out how to raise their prices or lower their costs.
The challenge is that when we focus on maximizing business value, we tend to make decisions that are good for the business but not necessarily for the customers, like a salon that uses cheaper, lower quality products to reduce costs, or arbitrarily raise its prices to match the competition. Either way, they may have figured out a way to maximize business value but it added no value for customers.
empathy-led value creation
When we focus on the people we seek to serve, we try to increase customer profit first. We look for ways to improve the product or service to increase customers' functional benefits. We also look for opportunities to cut costs and pass the savings on to our customers by lowering our prices. When we lead with empathy for our customers, we also realize that we can increase value by increasing transactional and aspirational benefits, or by lowering non-monetary costs like saving customers time, making it easy for them to find us or buy from us, or lowering the risk associated with choosing us.
Ultimately, you paid more for the same haircut because the entire experience was more valuable to you. Someone else may find it absurd to pay as much for a haircut because they don’t value the same things as you do. Value is subjective. It lives in the hearts and minds of customers. And empathy-led value creation is fundamentally about understanding our customers’ needs, wants and aspirations, so we can align business objectives with customers’ interests.