The Impact of Value - Close Rate
The customer’s perception of value drives the customer’s behavior. The greater the perceived value of an offering versus the customer’s alternatives, the more likely the customer is to make a decision to select the offering.
The concept of Close Rate represents the outcome of the customer’s decision-making process. Close Rates for a specific customer can be either one (a sale), or zero (no sale). As shown in the chart below, the greater the perceived value of an offering versus
alternatives, the higher the probability the Close Rate will be a score of one. Over several transactions this probability becomes the percentage Close Rate for a specific competitor or offering.
The vertical axis represents the Close Rate, which ranges from 0 to 1.0 (or 0% to 100% of the time). This is a measure of how often you win the sale when presented. The horizontal axis represents customer preference for your offering versus other available offerings.
The shape of the curve demonstrates that if the preference for your offering is low, your Close Rate will be low. As preference increases, your Close Rate increases. It is important to note that this relationship is not linear because the buyer’s behavior does not change proportionately with every change in the perception of value. There is a great deal of inertia around the customer’s purchase decision. Thus, the Close Rate curve goes flat when decision makers view products as about equal.
The multiple Close Rate Curves on the chart indicate that a company’s Close Rate is also a function of the number of competitors for a sale. Thus, if the preference for each competitive offering is essentially equal, the Close Rate for each competitor will be 1 / # of competitors. Each of four competitors with presence in a market would win one-fourth the sales when their values are perceived as equal.
The inelasticity of Close Rate relative to changes in preference is similar to the concept of price inelasticity. Price inelasticity exists when customers do not change their purchase behavior when price reductions occur. This range of price inelasticity is called a “price band.” Close Rates do not move within a price band.
For example, research in the writing instrument market showed very large price bands. Parker Pen conducted research that revealed sales of its jotter pen did not increase at the retail level when the price was between three and five dollars. Below three dollars, sales increased dramatically and above five dollars sales dropped precipitously.
As the chart below shows, the shape of the Close Rate curve is “flat in the middle” where customers perceive all offerings as about equal. The Close Rate curve becomes almost linear as the difference in relative perceived value between offerings increases.
To improve Close Rate, the marketer needs to address the product’s Value Proposition as well as the channel’s ability to communicate value. Great value alone will not generate a great Close Rate.
When a company is trying to increase the value it offers, the issue for decision makers is to identify what part of the value equation should be fixed. Should benefits be increased? Should costs be reduced? What changes will positively impact the value proposition the most? Making changes randomly is often a trap. For example, downsizing reduces internal costs and allows a manufacturer to decrease the price to the customer. This reduces the customer's cost and increases his perceived value of the supplier's products or services. However, downsizing also may reduce the benefits, making it harder to do business with the supplier, disrupting long-term relationships and, therefore, reducing value to the customer.
Ask the following questions before cutting internal costs:
Will this change (reduce or increase) the value the customer perceives?
Will it change the value positively enough to change the customer’s behavior?
The answers to these questions come from an in-depth understanding of the customer’s perception of value. Value represents the customer’s view of the benefits and costs of your offerings. Since companies ultimately exist to create customer value, their decisions should align around the creation of incremental customer value.
