An image of an elegant Vermicular-brand Japanese rice cooker flashed on the screen at the Wharton Customer Analytics Conference. The speaker, Ridhima Raina, asked the audience how much they thought it cost.
After several guesses were ventured — most around a couple of hundred dollars — Raina said, “I’m from India and I eat a lot of rice. I would spend maybe $300 or $500. But on eBay, I checked this morning and it was $1,000.”
A leader in customer strategy and marketing practice at Bain & Company, Raina asserted that the main reason Vermicular can charge so much for its rice cooker compared to other brands is that the product spikes on what she called “elements of value.” It reflects two elements in particular, she said: sensory appeal, and design and aesthetics. By Bain’s calculations, these elements contribute an eye-opening 40% to the product’s Net Promoter Score (NPS), an index that measures how willing consumers would be to recommend a product to others. NPS is widely considered a key customer metric associated with customer lifetime value and revenue growth.
There might be additional value-based reasons for someone to pay top dollar for a rice cooker, Raina said. Investing that much money could be a motivation to prepare meals at home more often and to eat healthier. The product could provide a sense of well-being.
Identifying and putting numbers around how customers perceive the value of products is an ongoing project at Bain, said Raina. “Understanding value is hard,” she noted. Although the science of pricing has progressed greatly, our grasp of value hasn’t caught up, she said. While firms certainly are aware that customers have feelings and opinions about their products, there’s no established way to translate those often hard-to-define attitudes into what customers will be willing to pay, and ultimately into business success.
Toward that end, Raina and colleague Ilker Carikcioglu, a senior manager of global advanced analytics, presented their company’s “B2C Elements of Value” pyramid. They explained that the chart, based on a 2015 Bain study with about 10,000 consumers in more than 50 companies, identifies 30 universal elements that meet fundamental human needs.
Amazon succeeds because it delivers “more elements of value to their customers than their competitors do.” –Ridhima Raina
According to the speakers, the pyramid was inspired by psychologist Abraham Maslow’s famed “hierarchy of needs” concept, proposed in 1943. Maslow placed basic human needs like food, water, and shelter at the bottom of the pyramid that must be met before people ascend to complex desires such as creativity, fulfillment and self-transcendence, which are at the top of the hierarchy.
In the Bain schematic, the base of the pyramid contains “Functional” elements of value, which refers to what a product does for the customer. For example, it might reduce effort, save time, make money or help them connect. On the second level one finds “Emotional” elements. Does it reduce anxiety, give a sense of wellness or nostalgia, have pleasing design aesthetics, reward or entertain the user?
The third level up reflects “Life-changing” elements such as providing hope, self-actualization, affiliation and belonging or motivation. Or the product might serve as an heirloom for future generations, such as a Rolex watch, Raina said. Topping the pyramid are “Social Impact” elements which convey the sense of doing good for others. Raina gave the example of buying Warby Parker glasses knowing that the company will donate a corresponding pair to someone in need.
Carikcioglu noted that when he and his team had analyzed the original data to look for relationships between the elements of value, NPS, and growth, it quickly became clear that whether or not a brand delivered on multiple elements made a big difference. He presented data showing that if a brand had only one element of value, it correlated with an NPS of only 17 and revenue growth of 3%. But brands possessing four or more elements were associated with superior results: an NPS of 58 and revenue growth of 13%.
iPhones and Amazon
Carikcioglu cited smartphones as products that “absolutely crush” the elements of value. “When you think about it, our entire lives revolve around these little devices,” he said. He pointed out that they connect us to the world, motivate us, inform us and help us get organized, among other things. They can also serve as a status symbol — for example, if you possess an iPhone in a country where they are uncommon. The value of smartphones spans three levels of the Elements of Value pyramid: functional, emotional, and life-changing, he said. In Bain’s assessment of specific companies, Apple delivered on 11 elements, Samsung on 9, and LG on 5.
The success of Amazon can also be understood in terms of elements of value, said Raina. Although one can point to Amazon’s strategy, leadership and M&A, she said, “I would argue that it’s because they deliver more value and more elements of value to their customers than their competitors do … [and] most of their traditional competitors for sure.”
“[T-Mobile] decided, ‘Look, network quality is a commodity now, so what else can we do? Let’s listen to the customers.’”–Ilker Carikcioglu
She said Amazon is extremely successful on seven functional elements: The company saves time, simplifies lives, reduces effort, avoids hassles, reduces cost, provides quality and offers variety. On the emotional level, Amazon “provides access.” Raina noted that Bain is currently refreshing its Elements of Value data and expects to see Amazon wielding even more elements going forward.
Raina and Carikcioglu discussed T-Mobile as a company that has been beefing up its elements of value over the past few years, with profitable results. “They decided, ‘Look, network quality is a commodity now, so what else can we do? Let’s listen to the customers,’” said Carikcioglu.
He noted that a Bain study performed six months ago revealed that T-Mobile had managed to increase its elements of value from three (“connects, provides quality, provides access”) to 10. It had added qualities such as variety (for example, Netflix) and appealing design and aesthetics. Reducing cost, saving time and providing information also came into the picture: “Their pricing is transparent; taxes and fees included.”
As a result, the speakers said, T-Mobile has gained market share from its competitors. Moreover, between 2013 and 2016, its NPS leaped to 22 from -1 and its market cap to $48 billion from $14 billion.
Emotional Beats Functional
Raina and Carikcioglu asserted that not all elements of value are equal. The upper levels of the pyramid actually pack more of a punch. Emotional elements are twice as powerful as functional elements in predicting NPS, so companies should think about how they can focus on those factors.
They noted that today, insurgent companies are tending to deploy emotional messaging whereas incumbents lean toward emphasizing functional value. “Just look at RxBars,” said Raina, referring to the advertising slogan of the trendy insurgent protein bars: “Real. Delicious. No B.S.” “They’re doing spot-on marketing, and that really shows.”
“Do you know your value proposition and what customers really value? Articulate it in a way that people get it.” –Ridhima Raina
She also talked about Harry’s Razors, the shaving subscription service founded in 2013 that competes with veteran brands like Schick and Gillette. The company’s advertising messaging focuses on value levels above the functional. “We see insurgent razors perform better across the board on elements of value and have significantly higher NPS — five times higher.”
Raina also pointed out that when it comes to perceptions of quality, the incumbent brands do well, but not as well as some of the insurgents. There may be a halo effect going on. “Being relevant and emotional is pulling [the insurgents] up on a lot of the functional elements, in terms of perceived value.”
According to Raina and Carikcioglu, the message for companies boils down to this: Deliver multiple elements of value and try to appeal to customers beyond the functional level. Make sure that information is reflected in your advertising. “Do you know your value proposition and what customers really value?” she said. “Articulate it in a way that people get it.”
The B2C Elements of Value pyramid can be applied at a variety of stages, the speakers said, including strategy, design and go-to-market planning, and execution. They noted that it could also be useful in investing, when evaluating a company from the private equity or venture capital side. Raina said the pyramid could help predict a fledgling company’s future NPS and revenue growth.
The speakers were asked if they thought that marketing products on an emotional level would reach a saturation point. Would customers eventually get tired of it and just want companies to excel on function?
Raina didn’t think so. She pointed out that even Amazon, which “crushes it” on functional elements, possesses aspects from higher up in the pyramid and seems likely to acquire more in the future. She also noted that the Elements of Value pyramid is based on insights from psychology, and “as people, [emotions are] what makes us tick.”
Carikcioglu agreed, saying that according to consumer behavior and behavioral economics studies, human beings are fundamentally “irrational, emotional and impulsive.” That doesn’t promise to change anytime soon, he said, so we can assume the emotional appeal of products and services will continue to be a potent selling tool.