Businesses exist for one reason, to serve a need or a gap that exists in a marketplace. Without the existence of this gap, particular business offerings will be rendered obsolete. This is true for both service-based businesses and product-based ones. A gap could also be satisfied by many players if one player cannot satisfy the whole market or there might exist certain market preferences that different players come in to offer. All in all, that gap has to exist for a business to have any prospect of growth.
So how come some businesses don’t do well in areas where they offer to fill such gaps? And why do other businesses thrive in the same position? The answer to this lies in VALUE CREATION.
Consumers subscribe to a service or a product based on two fundamental principles,
Either they need the product for basic life sustenance, or
They desire to have the product based on many other factors such as personal preference, social pressure, excess capital etc.
On the first principle, the main thing that influences the buyers’ decision is Price. Quality is also a priority, but a minor one since, basic life sustenance products are universal, hence we have many businesses playing in this space. This usually ends up standardizing the quality of such products, thus we have very many similar products competing on price. From a business perspective, playing in this space is very hard as the competition is steep. You need to be very smart in order to win the price game. This will involve tactics such as strategic sourcing of raw materials, slight quality compromise, scaling up your distribution to have reach, and so many other tactics. In this space, you will find legacy brands taking the cake since they have years of experience and their footprint in the market proves to be a formidable advantage for any new market entrant.
It is only of late that we have seen legacy brands being challenged by new entrants due to Innovation and financial muscle. For example, in Retail, Amazon is now the largest retailer beating the likes of Walmart due to their innovation and leverage on e-commerce. We have also seen the same company, bullying an already established diaper company, Diapers.com through subsidizing their prices so much that the competition is literally choked out of business. As unethical as this may sound, in such a category this is the only way that we have seen thus far, to challenge the status quo.
On the second principle, the main thing that influences the buyer’s decision is Quality of product and service. Price is also a priority, but a minor one, since we are now in a niche category where the buyer’s decision is on personal preferences, which is highly influenced by feelings. Businesses in this category, work tirelessly to improve their product and service from the customers perspective, rather than from the cost side of things. The reason for this, is, for example, someone will prefer to get a Kshs 1,000 haircut rather than a Kshs 200 haircut just because, the shop where he gets his haircut does not have a customer line hence he gets his service quickly. The differential in pricing is not entirely based on cost structure, but rather what the customer is willing to pay. On the other hand, the customer paying Kshs 200 for a haircut, does not mind the line, in fact, maybe he likes it when there are other people, just to have some casual conversation about this and that. Both clients got their value but at significantly different price points.
Both of these examples give contrasting philosophies, but 1 main idea emerges VALUE CREATION. For any business to thrive and survive, they must fill a market gap, but must also create VALUE for the clients they want to attract. Case and point, let’s take the barbershop example again. Lest say in your home location, there is no barbershop and you feel that there is a need to open one. Based on this research you decide that opening your barbershop will make business sense, so you start crunching the numbers. Factoring in rent and all basic costs, you realize that with traffic of 100 clients per day, each paying Kshs 200, you will make a margin of 10%. With all of this done, you decide to open the shop. Business starts to pick up but entering month 2, you realize that you have lost customers. Instead of 100 clients, you are now barely raking in 50 clients per day. What does this tell you? Either you underestimated the market need, or the quality of service is not up to par for the market.
Given in month 1 you had great traffic, this means that your market research was on point. Now the issue is plain to see, the value you sought to give, is just not the value the clients expected to receive. Like we said, for businesses to thrive, we need to satisfy a gap and create value for the clients. This is such a crucial part for businesses in the introduction stage. Without a customer profile analysis, you will not know what type of service your expected clients demand.
VALUE CREATION is the core reason why businesses exist. If you don’t understand what value your clients want to derive from you, then don’t expect them to pay attention to your business.
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