In the classic book, Competitive Advantage, strategy guru Michael Porter introduced the value chain in a stylised diagram based on a manufacturing business but many people overlook the idea of a consumer value chain.
The Consumer Value Chain
A business performs many different activities to create its own products or services which it intends to sell to make a profit. The traditional value chain is a way for the strategist to look at the business to see how activities can be improved to:
- Reduce the costs of the necessary activities; or
- Improve the performance of the activities in ways that create extra value for the customer, differentiate the business and encourage the customer to pay a higher price for the products and services on offer.
The key to improving performance in ways that customers value can be found by examining the customer’s own value chain to find ways that it can:
- Reduce costs for the buyer
- Improve the buyer’s own activities and products in ways that it can increase prices and/or sell more.
The traditional value chain provides a guide to this process when the business is selling business-to-business but it doesn’t provide much guidance when the business sells to consumers.
What Michael Porter Has To Say About The Consumer Value Chain
In his book Competitive Advantage, Michael Porter says the following about the consumer value chain:
“A consumer’s value chain represents the sequence of activities performed by a household and its various members in which the product or service fits. To understand how a product fits into a household value chain it is usually necessary to identify those activities in which a product is directly or indirectly involved, typically not all the activities a household performs…. a household’s value chain reflects its members’ habits and needs.” (pages 130 & 131)
Identifying The “Consumer”
If we are to think through what a consumer wants, we need to identify who is the consumer and how that may differ between the user of the product or service and the person who makes the buying decision and who makes the economic sacrifice of paying for the item. There is also the knock-on impact onto other members of the family or household.
A child plays with a toy but it may have been chosen and paid for by the child, a brother or sister, a parent, grandparent or someone else. The child gets the pleasure while the buyer gets pleasure from having a happy child or fills a social obligation.
If the present is a set of drums (or anything else that is irritating), then the child’s pleasure comes at a cost to other members of the household.
Sometimes one person will benefit from a purchase, other times everyone in the household will get benefits (e.g. a television).
The consumer for consideration in the consumer value chain is therefore a complicated concept which will depend on the product or service that is being sold but it will be a composite of:
- The user who gets benefit from the product
- The product selector – the person who makes the choice
- The person who incurs the cost of the product
- Others affected by the product in use.
The Goal Of The Consumer
It’s easy to assume that the goal of a business is to increase profit which can be achieved by selling more products at higher prices and with lower costs.
But what is the big goal of consumers and what are the main drivers to the achievement of that goal?
That’s a big question for philosophers but I’m going to try to keep it simple here.
I believe the main goal is “happiness”. I want to be happy and I want my family to be happy.
Money helps but it’s not the big goal. It’s more of an enabler which makes life easier and more comfortable.
We do certain things to acquire money to allow us to buy or do certain things.
It’s an input and an output of the process of living as a consumer.
The three big inputs are:
The consumer value chain needs to take into account all three.
Time is fixed. One hour spent on one activity means an hour sacrificed elsewhere. Anything that saves time therefore creates value because it means we have more time to spend on other activities.
Energy is variable but comes at a cost. Expending a lot of energy on one activity means that less is available elsewhere although the relationship isn’t as clear and absolute as time. As people get used to exercise and spending energy, their bodies normally get fitter and they are able to do more. Sometimes expending more energy saves time, sometimes it doesn’t. Reducing effort and the energy required for an activity usually creates value for consumers – we want things to be easier.
One of the ways that consumers reduce the energy and effort is to satisfice. Instead of continuing to search for the best solution, they can take action when something satisfactory is presented. This also creates customer inertia where customers are not satisfied but continue to consume because of the perceived difficulty of changing.
Money is variable and as consumers we can earn more by either working more hours, finding ways to earn more per worked hour or leveraging our time to earn more. Saving money adds value because it means that more can be spent on other activities and products.
The Consumer Value Ownership Lifecycle
The consumer is involved with the product in different ways at different times in the ownership lifecycle:
- Selection and purchase
- Delivery, installation and making the product ready for use
Each stage offers opportunities to save time, energy and money which can be included in the consumer value chain.
How Do You Use The Consumer Value Chain?
How do you make decisions in your family about expenditure? Do you have some kind of trade off where everyone in your family has the chance for some treats or does one person dominate the spending of any spare cash?
Paul Simister is a business strategy coach who helps business owners to differentiate their businesses and develop winning strategies. Get your free copy of my ebook The Six Steps Profit Formula.
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