Uncovering the Future Drivers of Customer Demand

Senior managers must make an array of high-stakesbets in their quest for profitable revenue growth. Tosucceed, they need practical insights and a way toquickly reach consensus and execute their next moves.

Oliver Wyman’s Customer Value EngineeringTM

platform uses cutting-edge demand simulation and decision support techniques that integrate theinsights of future customer demand with the micro-economics of the business. This allows our clients tomake highly informed decisions with minimal risk,driving significant growth in revenues, margins,sales close rates, and average deal size.

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In their quest for revenue and earningsgrowth, senior managers must place adaunting array of make-or-break bets. Theyhave to develop new offers; make brand,channel, and marketing moves; differentiatethemselves against low-cost competitors; andfight for market share. In today’s fast-moving,hyper-competitive marketplace, there’s lessmargin for error, so executives need morethan the right answers. They also need amore effective process to reach consensusand push for fast and successful execution.

The success or failure of these bets will bedetermined in each case by how the cus-tomer responds. But trying to anticipateshifts in customers’ priorities is a trickyproposition. The challenge is to discover the next big thing that customers will value;it could be different pricing or financing,

better support, an extended warranty, speedof delivery, or some other factor.

That’s why there is gold to be mined by getting inside the customer’s head. Forexample, corporate buyers care about priceand product features. But beyond price andfeatures, they also value reliability, ease ofdeployment, delivery date, and maintenanceand service arrangements. Moreover, buyersare influenced by users inside their organi-zation, functional peers in their own andother industries, and expert analysts at trademagazines and rating firms. Cumulatively,these surrounding factors may account for70% to 80% of the purchase decision, asExhibit 1 shows. Yet many companies spendat least 80% of their resources solely onprice and product features. The trick is tocut through the day-to-day business of

Exhibit 1 Decision factors for a technology product

Product specifications

Brand Influencers Salesprocess

Ongoing support200 40 60 80 100%

External/marketendorsement

Brand

Internal/useropinion

Qualityof

demo/trial

Quality of sales team

Installationsupportservices

Productavailability/

deliverytime

Ease ofinstall

Remote management

Automaticfeature upgrades

Supportcoverage andresponsiveness

Warranty coverageand duration

Source: Oliver Wyman client example

Price

There is gold to be mined in understandingthe customer’s decision-making process.

New/advanced features

Core features

Performance and reliabiity

Interoperabilitywith existing environment

User interface

Financingoptions

Price

Time to value

100%

80

60

40

20

0

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transactional negotiations and find the realdrivers of value.

In this regard, the classic combination ofmarket research plus business case analysisfalls short. It can miss important drivers ofvalue, it rarely links those drivers with thecompany’s microeconomics, and it offerslimited means for building organizationalconsensus. Managers need an effectiveprocess to play out the many potentialmoves and competitive reactions, determinethe impact on the bottom line, and reach aconsensus to execute the strategy quicklyand successfully.

To that end, Oliver Wyman has spent threeyears integrating a range of advanced ana-lytic marketing science, decision support,and strategy development techniques intoone cohesive decision-making platform. Ourproprietary Customer Value EngineeringTM

(CVE) methodology allows companies toidentify and quantify the true emergingdrivers of customer value––those things thatcustomers will actually pay for in a compet-itive context––and evaluate the bottom-lineimpact of alternative strategies.

Customer Value Engineering uses sophisti-cated demand simulation techniques,including the ability to observe customerbehavior in future-defining market scenarios,which allow managers to effectively “see thefuture” by testing different strategic moves.At the same time, the approach uncoverspowerful short-term operational levers, suchas pricing moves by customer segment orchanges to the warranty duration.

Customer Value Engineering serves as a platform for senior managers to answer a broad array of critical questions:

Optimizing offers

What should I do to:

� Optimize the value associated with

the next product release?

� Understand customers’ priorities

and tradeoff mentality?

� Break into a new space, such as small

and medium businesses?

� Overcome the switching cost advantage

of the incumbent?

� Ensure that I’m making the right

pricing moves?

� Shift from product to solution?

Reducing the risk of major business designmoves and investments

What should I do to:

� Test alternative scenarios and choose

the right strategic path?

� Get the organization aligned with

the chosen strategy?

� Ensure that the planned $1 billion invest-

ment will yield the desired return?

Identifying next-generation value spaces

What should I do to:

� Drive profitable growth in our mature

or low-growth businesses?

� Most effectively counter a major

competitor’s move?

A platform with many uses

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The Customer Value Engineering platformworks through four capabilities:

� Listening to the voice of the customer.Oliver Wyman’s proprietary customer sci-ence methodologies, such as StrategicChoice Analysis® and InformationAcceleration®, get inside the buyer’s headto uncover which considerations willdrive and create demand for future goodsand services. Our conditioning techniquesplace customers in a realistic and relevantpurchase environment and ask the rightquestions (so outcomes are actionable) inthe right way (so buyers reveal what reallymakes them tick). We can quantify thevalue and interaction effects of brand,outside influencers, or downstream serv-ices. This goes well beyond traditionalmarket research techniques.

� Modeling the drivers of business economics. It’s not enough to know whatmakes demand happen. Executives alsoneed to know the variable costs of actingon that information so that they candetermine whether a given move willmake or lose money. Customer ValueEngineering links the information abouteach demand driver directly to the micro-economics of the business. This analysisanswers questions such as: If the brandmatters most, where should we invest toimprove brand equity, and what will itcost? If external influencers matter,should we shift the marketing mix awayfrom golf tournaments and toward better relations with trade journalists? If customer service matters, what exactly merits investment––a shorter wait on

the phone, the knowledge of call centerrepresentatives, or the speed of technicianresponse? If the customer is asking for24-hour delivery of a turbine, what arethe economic implications?

� Creating a robust strategy platform.The next step is to embed the key valuedrivers and business economics data into what we call an Interactive StrategyModelTM, or ISM. Managers can use thegraphical ISM dashboard, as shown inExhibit 2, to evaluate the impact of possibleinitiatives on various financial metrics andgame out how competitive countermoveswill affect the half-life of any given strategy. This allows companies to turnstrategy into action with minimal risk.

� Accelerating the time to value. To arriveat a high-stakes business decision, thesenior management team must beengaged throughout the process, as theircontributions and consensus are criticalto a successful outcome and rapid execu-tion. We collaborate closely with clientsin workshop settings to identify the bigplays and the tactical moves for explo-ration, and to translate those hypothesizedmoves into the relevant customer researchand interactive decision-making tools.For executives evaluating large strategicinvestments, searching for the next wave of opportunities to drive profitablegrowth, or considering the best way tooptimize products in the marketplace,Customer Value Engineering provides thenecessary discipline to reduce the risk of and maximize the return from thesemake-or-break decisions.

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“Two years after the work was finished, we still rely on the CVE insights.”

– Market Intelligence VP, global technology firm

“Anyone who has a big make-or-break business decision must be eating this up.”

– Head of B2B Pricing, North American telecommunications operator

“Every division above a certain size should do this every couple of years.”

– Head of Corporate Strategy, global technology firm

“We have to fundamentally change how we go to market, and this looks like what we need.”

– CMO, North American communications company

What Oliver Wyman clients say

Exhibit 2 Interactive Strategy ModelTM sample dashboard page (disguised)

Oliver Wyman experience

Redesign of a computer server businessgo-to-market strategy: A global computerequipment manufacturer and services firmbegan to experience erosion in one of its keyserver divisions. Senior management facedtwo key questions: What unusual offer attrib-utes could jump-start the business and cre-ate a differentiated value proposition? Andhow could the firm effectively counter a setof big moves by competitors? We workedwith management and other industry expertsto identify potential moves and to quantifycustomers’ reactions to these moves. Withintwo quarters of project completion (andafter five years of slow or negative revenuegrowth), the prescribed go-to-market strategy helped drive double-digit revenuegrowth in the business.

IT equipment offer optimization and differ-entiation: An international IT equipmentfirm saw price erosion and fierce competitionfrom domestic and international competitorsin one of its main product lines, which was rapidly losing market share. Seniormanagement wanted to discern which offerelements beyond price could help the linemake substantial improvement. Our CVEeffort identified clear and differentiatingmoves that could turn around the businessand help displace the competition at keytarget accounts. One year after project completion, this multi-billion-dollar business posted sharp revenue growth,including a quarter with almost 40% revenue growth over the prior year.

Telephony provider growth strategy:A North American telephony provider facedincreasing competition in its broadband

service offerings to small and medium business customers and was using reducedprices as the primary lever to preserve its leading market share. We helpeddevelop a robust understanding of buyingpreferences and tradeoffs, which allowedthe company to reposition its offer mix and promote “value” in order to drive subscription and revenue growth. The strategy was tailored to each defined customer segment and then quickly executed in the market.

Telecommunications network investmentdecision: A telecommunications firm wasconsidering a substantial investment toupgrade its networks for TV over DSL to offer a “triple play” of Internet, TV,and voice services over one network.Management was divided over demand for these bundled services and thus thepayback of the investment. To estimatedemand, we created a future market withaudiovisual simulation of the services forconsumers. We were able to isolate thedemand, revenue, and profit impact of bundled offers, pricing changes, and brandequity, all in the context of competitivealternatives. Our approach challenged conventional wisdom and helped seniormanagement understand how demand and profitability would be affected by each offer design and investment alternative, sothey could concentrate on those elementsthat have the greatest impact on valuegrowth. The firm decided against a $1.5 bil-lion infrastructure investment and focusedinstead on partnerships and offer enhance-ments that could yield $1.4 billion in incre-mental revenue profitably.

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What Oliver Wyman clients say

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“We all saw what we need to do; so now we can move forward, and we’re not going tokeep revisiting the question.”

– COO, communications equipment manufacturer

“Now we can’t say ‘we don’t know’––the answers to our critical business questions are all here.”

– Marketing and Strategy EVP, global information technology firm

Telecommunications pricing and go-to-market strategy: Senior managementat a U.S. telecommunications servicesprovider suspected that the business net-work solutions sales force was too relianton price discounts to drive sales and notfocused enough on other differentiatingcharacteristics. We analyzed how cus-tomers traded off various offer elementsincluding price, service level agreements,technology features, and functionality.The analysis confirmed management’sintuition: Deep price discounts did notincrease the sales rate, and other offer elements had more influence on cus-tomers’ purchase decisions. The sales forcequickly refocused the sales messaging andtightened controls around discounting.After these changes took effect, the com-pany saw an increase in revenue per dealwith virtually no decline in the sales close rate, dropping the incremental revenuestraight to the bottom line.

Broadband offer optimization: A U.S. Internetservice provider wanted to optimize itsoffering for existing broadband subscribersand those migrating to broadband. It neededto understand which services (digital music,

anti-virus software, and so on) drivedemand, and whether bundling, upselling,or other tactics would create the mostvalue. We addressed these questionsthrough demand research and interactivemodeling, revealing that bundling twoadditional features with the base offer and using one to upsell could increasesubscribers by more than 60% and raisesubscription revenues by 30%.

Software company future business designand strategic investment: A global softwaredeveloper and services provider faced thechallenge of needing to make a number ofbig bets with limited resources for its futuresystems management software platform.After generating numerous hypothesesaround potential directions, Oliver Wymanand the client team tested a wide range ofalternatives. We determined the value asso-ciated with each element of the business,from brand strength to pricing models, user interfaces, and emerging systems manage-ment capabilities. Then we designed theoptimal set of investments and strategicmoves. The transparent CVE process wasinstrumental in coalescing and mobilizingthe organization.

About Oliver WymanOliver Wyman is building the leading global management consultancy, combining deep industryknowledge with specialized expertise in strategy, operations, risk management, organizationaltransformation, and leadership development. The firm works with clients across a range ofindustries to deliver sustained shareholder value growth. We help managers to anticipate changes in customer priorities and the competitive environment, and then design their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities.

www.oliverwyman.com

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For more information, please contact our global coordinator, George Faigen,

who is based in the U.S. 1 212 345 8296, george.faigen@oliverwyman.com