What is the best way to understand VALUE (in terms of what our customers want)?

Value is the topic I find most interesting in lean.

Find the right balance between value and price and your company will thrive quickly. Get it wrong and all your efforts simply won't matter.

To me, this is the ultimate purpose of all genchigembutsu – constantly challenging our understanding of what customers value and exploring how each person in the organization interprets and works in line with it. The extreme division of labor in companies today often creates a complete disconnect between a person's task and the satisfaction of the end customer (imagine you are looking at a welding operation at a third-tier supplier). And the most important challenge of a lean organization is dealing with this. So, addressing value is a big deal!

Make sure the seller is attentive

Let's start by recognizing that customer satisfaction is a complex issue. First, we don't all dream the same dream or want the same thing. Second, the human mind works on two distinct (and disconnected) levels.

One level is the now, which is how you feel about the product or service right now (that occasional squeaking noise that drives us crazy). The second is hindsight: at any moment we are evaluating previous choices in terms of how satisfied we are with our life journey (all right, sometimes it squeaks, but what a great deal in miles per gallon!). Moreover, these arrangements change over time just as you change over time. Asking customers what they like and dislike is essential, certainly, but it can't be taken at face value. People will usually share the first thing that comes to mind about their experience with the product now (thus falling prey to the natural bias of emphasizing the first idea that comes to mind). Unfortunately, this reveals very little about the true reasons for their choices.

Totally Happy

People have a hard time assessing absolute value, and so they instinctively compare their satisfaction. Think about it – are you being paid fairly? Or are you happy because you earn more than your colleagues for the work you do (or unhappy because you earn less)? That's why I think of value in terms of preferences. Not everyone has the same preferences. Wealthy people often prefer style and status over efficiency or cost. Less fortunate people choose practicality and lower cost of ownership over glamour. Your challenge is to segment markets according to stable preferences.

Remember that this is a tricky exercise. For example, I often travel with a colleague who hates paying a lot for airfare. He is always willing to suffer the mistreatment of a low-cost airline for a cheap ticket. I prefer easier interactions, particularly early in the morning and late at night, and am willing to pay for that. We do more or less the same work, work in the same group, have very similar lifestyles; and yet we have two totally different stable preferences, which has a big impact on airlines.

Getting customers' fundamental preferences right or wrong has, by far, the greatest impact on your company's future. I have been watching the automotive industry for more than twenty years and have seen how Toyota clearly focuses on people's preferences for durability, fuel efficiency and resale value. French automakers, on the contrary, bet on style. American automakers on power. Clearly, we now know who made the right bet. Every additional car Toyota sold on its long journey to becoming number one was taken from one of its competitors. They chose wisely and had the operational capability to meet those preferences.

But shouldn't we compete on every dimension? Ideally, yes. Toyota is now saying that we must also work on design and performance and, in fact, a product should compete on all preferences. But we all know that at the operational level reality exists. And, indeed, reality resists. Choices must be made. Who wins when you face a tradeoff between a more stylish line or a known robust standard for a headlight? Or any other clear choice in understanding and serving your customers' specific preferences? Which way do you go? If you want to make things customers simply won't buy, the best way to get there is to be unclear about the customer preferences you are pursuing and the way you will translate them operationally into clear offerings.

Understanding value is about obsessively (and perfectly) formulating the right customer preferences at two levels:

• At the company (or brand) level: what generic preferences should all our products reflect? A construction company, for example, may decide that all of its buildings – regardless of the client architect's requirements – will include a special effort toward lower energy consumption. How could you write the sentence “Toyota = peace of mind” for your own business?

• At the product level: each specific product needs a preference identity that matches its target market. Think of the Lexus, which combines the driving of a Mercedes with the comfort of a Cadillac; or the iQ, which is the size of a Smart with the feel of a sedan; or the Prius, which perfectly combines the consumption/pollution of an electric car with the range of any normal car.

  This may seem easy to do, but it is an illusion that arises from hindsight. When you are in the thick of product development, you are overwhelmed with information and saturated with opinions about what customers really want. Understanding customer value means being able to formulate statements of customer preferences clearly (out of all the things customers could prefer) in order to align the company's efforts on those choices. Because these bets have an enormous impact, your understanding of these customer preferences should be constantly challenged and refined.

  But don't change course too quickly. Steve Jobs, for example, was obsessed with calligraphy, and his taste for texture became key to Apple's products (whether this was an identified customer preference or a voice that whispered in the genius's head, I can't say). The moment he left on the journey of all journeys, his successors claimed he had gone too far and that customers wanted simpler graphics à la Microsoft. As a lifelong Apple user, I find that statement frightening. Conversely, when Larry Page took over as CEO of Google, he focused on beautiful applications instead of the existing goal of rapid evolution – a choice that has been successful (so far).

  So how, in the fog of war, can you understand what these key preferences are and how they play out in specific aspects of each product? The answer is genchigenbutsu and the product takt. As Jim Collins pointed out with his “hedgehog” strategy, business leaders tend to be selected for their steady power and persistence in clear strategies. That's great when it works, but think of all the great leaders who drove their companies into bankruptcy by strictly adopting the wrong ideas. Where, then, should we look to confirm our ideas about customer preference?

• Marketing and related activities: the first place to look would be surveys and competitor analysis to get a sense of how the whole market is moving. This is a very poor guide for actually selecting preferences, particularly at the product level, since this information will make you a follower, not a leader. But, on the other hand, it is an essential part of reading the market: what is the market's current obsession?

• GenchiGenbutsu: visit customers, investigate every customer complaint and find out how customers actually use your product as opposed to what you think they do with it. As an author, I would like to think my customers actually read my books, but more often than ever, they buy the book for their subordinates to read – and put it on the “do when I have time” pile. What does this tell me about how I should write books? Or, more to the point, about what makes books sell? There is nothing wrong with a “hedgehog” notion of what the customer prefers (say, durability), but you also need a fox strategy of looking at many, many specific examples to understand what durability really means, how it works and what competing preferences your customers have.

• A product's “takt”: As Eric Ries points out in “lean startup”, the only sure way to test customer preferences is to split a test group and test product variants. This is possible with websites, but harder to do with real products. So, accepting that anything the market says should be taken with a large grain of salt, you need to rethink your products in terms of a flow of products, not a single product. Product flows imply that you launch products at a regular pace (or takt) and think very carefully about which bets you are making with each product and what each product's sales curve tells you about what customers really prefer. This is a radically different approach to product launches from the traditional “let's put some sexy gadget in the new product and hope people buy it”.

When exploring customer preferences, what should we look for? In March 2011, Toyota announced “we want Toyota to be a company that customers choose and that makes every customer who chooses us smile”. How do we pursue this? In his brilliant exploration of the aesthetics of green design, architect Lance Hosey (The Shape of Green) highlights three elements in connecting with a product:

1. Attractiveness: how your product provokes a “wow, I want that” reaction in your target customers. This isn't only about B2C – I have seen many investment decisions made simply on the basis of “I want that” (some new IT system? A big German machine?) by someone senior enough. So, clear your mind and look at how customers react to your product at first sight: what is there in it to want that would make them smile?

2. Relationship: do you remember that jacket you finally had to throw away (no wait, put it back in the closet just in case...) because you wore it so much it ended up becoming part of you? Some products grow with you as you use them. They develop a relationship with their users that most other products don't. As users, in most cases, we tend to rent an object to do a job (in Clayton Christensen's terms). But with some products, this simply isn't the case, as we develop an irrational feeling for the product (some, on the other hand, we have to use and hate). So, pay attention to this: do customers learn to love your products or do they remain indifferent?

3. Effectiveness: does the product actually perform its function – and how durably? Last night, I was struggling with a brand-new corkscrew that doesn't fit the hand and that broke the cork halfway through. So I had to rummage through every drawer to find the old basic one that did its job very well. Pay attention to how customers use your product and how easily it keeps working – beyond all the bells and whistles around it.

Finally, these qualitative preferences need to be expressed in terms of quantitative performance measures – again, not the simplest task. In the end, I believe understanding value is about being able to get a sense of the performance/price ratio in the customer's mind. But, again, absolute numbers don't make much sense and people will keep comparing across a range of products – or, more complicated, across alternative ways of getting the same job done.

I don't believe there is a simple answer to your question, but, still, I am convinced there is no more important question than this one. Summing up the discussion, I would say that the best lean way to understand customer value would be to understand that:

1. Understanding customer value is the result of customer experience data points against explicit preference hypotheses.

2. Understanding customer value is a deliberate and obsessive process.

3. Because it is about distinguishing signal from noise in an area where each data point carries a value judgment and a personal bias.

4. Understanding customer value is about expressing how preferences translate into specific product performance metrics while recognizing that the notion of performance is not necessarily the same as the metrics (the idea of quietness is not necessarily the decibel count).

5. Understanding customer value is an ongoing process, not a static one.