It’s good to talk, but better to listen. Treating customers fairly in product design.
10th November 2007
For firms to succeed they must treat customers fairly throughout the product lifecycle. No amount of fairness in operational delivery can compensate for poor product design.
Firms have traditionally assumed that their product designers understand customer needs. As a result, many products contain features that neither address customer needs nor enable their sales people to sell them fairly. Firms that gain real insight into customer segments and lifestyles before they start the design process will be more likely to treat their customers fairly, achieve commercial success and increase customer retention.
Product designers must also consider the balance between the value obtained by the product provider from the customer, and the value the customer receives from the product’s features and benefits. This is called the value exchange. Too great an imbalance either way suggests that the product may be unfair for either the customer or the firm. If the product is market-competitive but does not deliver a genuine value exchange, then the whole market may be unfair.
Regulatory action in the payment protection insurance market illustrates this point. This action directly relates to the sale and distribution of PPI, however, it also indirectly relates to an unbalanced value exchange. Regulation on the basis of price is not advocated, however, a low value product will compound unfairness when poorly sold.
The Financial Services Authority’s TCF consumer outcome two provides that “products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly”. To deliver this outcome, the product design process requires a structured approach that will balance benefits for the customer and the firm.
Good product design requires firms to:
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Identify target markets |
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A successful proposition relies on clarity about which customer segments exist, the needs of those segments, and designing products to meet those needs. Recent success stories in the banking sector include firms which have identified untapped markets for particular customer segments that had historically been thought to be a poor credit risk. Once these firms properly understood the behaviour of the segment, they found that they were able to view the segment differently, design a bespoke product for the segment and quickly capture a substantial new customer base.
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Use customer insight
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Effective customer segmentation requires a firm to regularly gather customer insight. How do customers feel when they interact with the firm? What kind of products and services do they need? What do they think about the firm and how can the firm improve the experience for them? Not only is this vital for those who produce marketing propositions, senior managers must also clearly understand how customers perceive their firm. Only then can they drive real and lasting change.
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Build a fair proposition
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Products should have built-in fairness. When developing a proposition, firms must be able to measure the value exchange between themselves and the customer. Once a tool has been built to assess this, it should be applied to new products as they are designed and applied retrospectively to legacy products.
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These steps should result in a fair product which has been designed for an identified target market. In building the assessment tool to measure the product fairness, certain factors should be considered to generate an overall fairness score.
Firstly, products should be assessed to understand why a feature is included in the proposition. Is the feature copied from a competitor or is it based on quantitative research that demonstrates consumers would benefit from receiving the feature? Are the features attached to the product actually used? An expensive add-on which is never used may well be better removed from the product design and the value that this creates subsequently returned to the customer.
Secondly, product performance post-sale should be assessed to understand if there are patterns which might cause the need to question the product’s fairness. Issues such as the number of complaints received that relate to product features will assist in making this assessment. Robust feedback mechanisms need to be embedded into the organisation to achieve this.
Thirdly, the profit and loss of products and other key ratios, such as performance against plan and return on investment, should be measured against the value the customer derives from the product. Instances where this gap is too great would indicate the need to revisit the customer insight. In order to effectively embed TCF, firms must balance fairness with commercial benefit when designing products. Emphasising customer insight and intelligent customer segmentation at the start of the design process, as well as throughout the whole product lifecycle, will support this. This means listening to customers and learning about their lifestyles and aspirations before the designers’ pens hit the paper. Only once the firm has a fair product portfolio can it aspire to fairly deliver those products to market.
Stuart O’Sullivan
Principal consultant
Huntswood