Welcome to your Sunday morning edition of the GrowthCurve.io newsletter. We exist to help SaaS executives level up.
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Let's dig in...
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We tend to use the word "value" liberally in SaaS sales and customer success.
But what does it actually mean when we say it?
More importantly, what does it mean to our prospects and customers?
The consequences of a poor value proposition are low growth, low renewal rates, and low expansion.
Given the impact of growth and net retention on the market value of SaaS companies, it's clear that we need a scientific understanding of how to drive and deliver value to customers.
I wanted to learn more about the psychology of value. So I set out to find academic research on the topic.
A brief Google search led me to the work of Valarie Zeithaml, a professor at the University of North Carolina's Kenan-Flagler Business School.
Zeithaml's research centers around a model that brings together several concepts. Product features (or "attributes"), quality, price, and of course, value.
There’s a lot going on in the model below, but I want to draw your attention to three core elements of the study:
Perceived Quality
Perceived Sacrifice
Perceived Value
Zeithaml's model identifies the relationships between product features, price, quality and value.
The research reveals a complex relationship between a product's features, costs, value proposition, and the consumer's decision to purchase it.
The perceived value of the product is, as one would expect, a major variable in the decision. But it turns out that value is highly subjective. Furthermore it's based on consumers' perceptions of both the quality (benefits) and costs which are also subjective in nature.
In a scenario as simple as deciding between available fruit juice options, the product category at the center of Zeithaml's research, it's clear that people don't buy products for their features but for the abstract benefits they provide.
For example:
You buy fruit juice for nourishment and refreshment
You buy clothing for protection from the elements and the way it makes you feel to dress up
You buy accounting software to help you close the books faster each month and to make your staff more productive.
This is neither new nor surprising.
But no matter what type of product you sell, it's critical to understand how buyers form their perceptions of quality, price, and value.
Perceived Quality: What you get
Zeithaml's definition of quality goes well beyond our typical definition of software quality, e.g., low defect rates, speed, reliability, and usability.
In the context of the 1988 study,
Quality can be defined as superiority or excellence. By extension, perceived quality can be defined as the consumer's judgement about a product's overall excellence or superiority.
This definition is loosely based on a study conducted 50 years prior which defined the quality of a product as its "instrumentality." The extent to which it achieves an outcome.
(That guy must've been the world's first customer success executive 😀).
In addition to taste, consistency, thickness, and purity - "intrinsic attributes" of fruit juices - the product packaging also influenced consumers' perception of its quality and benefits.
Concentrated, frozen juice offers a radically different experience than a juice box when it comes to convenience. Juice boxes are easy to grab on the go and even young children can self-serve.
On the other hand, juice from frozen concentrate must be prepared, and little Johnny is likely to make a massive mess pouring himself a glass from the pitcher.
For consumers on a tight budget, frozen juice may be of higher perceived quality despite the preparation and serving headaches. Meanwhile, a working mother of three values the convenience of juice boxes.
The way the product is packaged - an extrinsic attribute - becomes a part of its utility to the consumer.
Consider Ted Levitt's research on the concept of the "whole product:"
...consumers purchase more than the core product itself. Rather, they purchase the core product combined with complimentary attributes, the majority of which are intangible.
B2B software buyers also evaluate the “whole product.” SaaS customers don't judge product utility based on features and functions alone. The external attributes must also meet their needs:
is there an ecosystem of resources and expertise to tap into?
are there people at the company to help with issues?
how well the product fits the use case and need?
was it purpose built for my industry?
does it eliminate pain points?
Over the years I've pushed my sales and customer success teams to think more broadly about the positioning of our offerings than features alone.
Turns out that pushback was well-advised.
Customers weigh the nonfunctional (extrinsic) attributes of your product just as much the intrinsic features. In essence they are evaluating how well your company delivers against their needs.
Perceived Price: What you give up
The selling price - or objective price - of a product is only part of the total cost equation for consumers.
Zeithaml describes "perceived sacrifice" as the aggregate of monetary and non-monetary price.
As consumers form perceptions of price, they combine objective, monetary cost with the non-monetary investments of time, effort, energy, and focus to form a total "perceived sacrifice."
Like we saw above, juice consumers' non-monetary costs include preparation time, storage, and inability for toddlers to self-serve.
In the software world, we refer to this combination of costs as total cost of ownership (TCO).
TCO is the sum of monetary and non-monetary costs. It includes staffing, ongoing administration, integration, optimization, user training, and opportunity costs of other projects the customer must forego [2].
In B2B customers perceive total sacrifice relative to the industry, size, stage, and maturity of their companies.
Perceived Value: Is it worth it?
From 2013-2017 I worked for an HR talent management software company. Payroll and HRIS integrations were mandatory for nearly all of our customers.
Our platform was modern and API-driven, but most of these 3rd party targets were old and required bespoke integrations which were prone to breakage.
Over time we noticed that customers were leaving for less sophisticated "all-in-one" offerings from the same clunky payroll providers.
We were appalled!
Zeithaml's work illuminates what was happening.
The perceived sacrifice of integration support headaches and risk of employee payroll inaccuracies outweighed the perceived benefits of our modern platform.
The perceived sacrifice was too high.
The most frustrating part of the whole value equation is that it's so damned subjective.
Zeithaml acknowledges this more tactfully:
What constitutes value - even in a single product category - appears to be highly personal and idiosyncratic.
Every customer makes a judgement call on whether a product, with it's benefits and costs, is worth implementing or renewing.
While we can't control prospect and customer value perceptions we can certainly influence them.
We can do this by ensuring product development, marketing, sales, customer success, services, and support teams work together to define a set of offerings that minimize customer perceived non-monetary costs, maximize direct benefits, and keep delivery costs (Cost of Goods Sold) low enough to make the product's sticker price as low as possible while maintaining industry-standard Gross Margins.
(If that financial jargon sounded like Greek to you, grab a copy of our Financial Literacy Course here).
A general rule of thumb is to aim for a 10x perceived value-to-perceived sacrifice ratio. [3]
So what, now what?
What do we do with all of this?
For me, it’s a call to action. To double down on company-wide customer centricity in a few different ways:
1) Know your customer more intimately than your competitors.
Understand your customers deeply. Both their stated and unstated needs as well as those that exist around your product.
Incorporate customer and market feedback into your product roadmap planning process, AND into how you deliver education, services, and support. Treat all customer touch points as if they are part of your whole product (because they are).
2) Build post-sale commercial acumen in customer success and account management.
If you buy into Zeithaml's research, it makes absolutely zero sense to have any team focusing on customer value without familiarity of commercial terms of the relationship.
It's impossible to truly understand value without understanding all of the associated costs and their implications (such as commercial terms like fees, entitlements, payment terms, contract length, and even core legal terms that apply to customer contracts).
Ensure these teams communicate and convey value at every turn. Every message and touchpoint should reinforce why your service is worth it.
3) Empower internal champions
In B2B, everything I just discussed is happening simultaneously across a number of economic, technical, and user stakeholders.
Hopefully, at least one of those stakeholders is your internal champion. Gird them for battle. Treat them like an extension of your team. If their perceived sacrifice, including risk to their own career, is higher than the perceived benefits of your solution, you're dead in the water for that sale or renewal.
4) Sell value not features.
Train and enable sales and customer success to drive and communicate value versus features. Provide great support and service options so that commercial teams can be hyper-focused on value.
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Quality, price, and value are the pillars upon which successful SaaS businesses are built.
As leaders, our job is to create a clear vision and build offerings that not only meet the needs of the market, but move it forward.
In the end, this is what SaaS leadership is all about.
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[1] I love reading academic research papers and patent filings. You can learn so much from these documents, but because they are written by researchers for researchers, most are good bedtime reading for insomniacs. But I love that they put models and words around concepts I've experienced in my work over the years. I read this paper so you don't have to.
[2] Post-ZIRP (zero interest rate period), companies no longer have extra bandwidth to take on an unlimited number of projects. They must be deliberate and thoughtful about choosing the initiatives that will drive the most profitable, efficient growth.
[3] Not backed by any research that I know of, but something I’ve always held in my mind.
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