Explaining Customer Value Systems
A better view of your business approach to a market is by thinking in terms of a customer Value System within which value is created by your business’s products and services and consumed by your customers. Within that value
Value systems are specifically designed to address the needs of a particular customer segment with a particular product. A beer company, for example, sells its products to women, young men, sports fanatics and other groups, but each segment must be approached through a distinctive and unique value system.
That said, it is the entire value system from vendors to product disposal that needs to be optimized when seeking to maximize the value we extract from an opportunity, and they can play a critical role in the success of your business strategy.
One painful lesson from the failure of many companies is that “transplanting” a business model from one product to another is sometimes a recipe for failure. Instead, each new product or business opportunity must be run on its own value system, entirely optimized for the customers it serves.
When Kodak tried to enter the digital camera space in the late 1980s, they wanted to do it in their own way. For almost a century, the company had made most of its money from film products, and ever since its beginning their business model was clear: they would make money from consumables, not from hardware.
Cameras were sold at relatively low prices since Kodak would make its money selling its photographic film, for which they owned the intellectual property.
In the minds of Kodak’s executives they were a film company, which meant that every time customers said cheese they would make money.
Not surprisingly, when they entered the digital photography space they did it in a way that resembled that thinking. In collaboration with Philips, they developed the Photo CD, a film-based digital imaging product.
Customers would take their pictures with their cameras the same way they did before, but now they would take the film roll to a photofinisher where the images, rather than being physically printed, were stored on the Photo CD (their product) to be later viewed on a computer or TV.
The product, although sketchy by today’s standards, reflected Kodak’s prevailing thinking: they still wanted to get paid every time their customers said cheese.
Looking back at what they did you can probably point at many things that were wrong with that approach, but one point that sticks out is how they wanted to transplant their profit model (each photo pays) into a new value system.
Their mistake was not recognizing that digital photography needed a different ecosystem to prosper, one with the right profit formula and a new business model specifically designed for it. In fact, they probably needed a new type of customer for the new product: geeks and teenagers for example.
That kind of tunnel vision creates deadly blind spots for incumbents.
Kodak’s decisions back then reflect a way of thinking that’s still prevalent in many industries today: executives evaluate new products through the lenses of their existing business models, leading to underperformance of new products or failed launches.
To prevent tunnel vision and get the most out of new products you must embrace the fact that both products and customers must reside within a value system that is specifically designed to maximize the value that can be captured from a particular opportunity.
Within this value system, you must find a value proposition that creates customers’ incentive to buy, a market positioning plan that sells those benefits and makes them available to the right customers, a value network that’s optimized to deliver the promised value and a business model that captures a piece of the value created and converts it into profits.
When developing new businesses all decisions count, from the selection of the right customers, and the optimization of the job the product offers to do for them, to the determination of the right pricing for those customers, picking the right vendors and partners and the selection of the right sales and distribution channels.
Everything counts and that’s why each one of these decisions has to be thought out to maximize the value of the particular opportunity that’s been captured.
In the end, it is the entire value system that must be optimized, from vendors to product disposal, if you want to maximize the value that the product creates for its users and for your company.