To us, this is the value of the relationships that Instagram had created. (We also know from statements that Facebook had made that it was interested in Instagram’s users and didn’t want Google, Apple, or someone else to get them.) It certainly wasn’t Instagram’s code. Google could have likely put a team of engineers on the project and in a few months created a very similar set of features that were also free to users. That would have cost them much less for the “same” thing (if all you were looking at were the features).
This isn’t just the case for software and other technology companies. When Pixar was acquired by Disney in 2006, it was “worth” just under $2 billion, according to the company books, but “earned” an extra $2.3 billion in goodwill (an extra 100%). Nextel was “worth” $5.3 billion when it was purchased in 2004, but “earned” an extra $30 billion in goodwill (that’s almost 680%!). Every healthy company, in every category, has premium value, but no one knows just how much until events like these. It’s hidden from view by traditional business measures and blind to those who practice it.
It’s fair to say that premium value is the largest component of relationship value (which comprises all five types of value). There’s no traditional way to measure relationship value (or its premium component), but it would be foolish to claim it didn’t exist.
And yet, the first two kinds of value, functional and financial, because they’re relatively easy to measure, get most of the serious attention in business. Sometimes, as in the nonprofit world, or even in some places in government, they’re not as stressed, but they’re very visible. The other forms of value, the premium types, are also there, but blind spots cause companies to ignore them in a business setting, hand them off to people not accountable for the bottom line, or treat them as mercurial or random.
Because they’ve been difficult to define, articulate, and measure, some companies, such as ad agencies, have a tendency to lump the types of premium value together and call them emotional, because they’re all equally invisible—unlike basic value, they take place on the inside, in people’s states of mind. Branding firms do the same thing, but lump it all under brand (and, unfortunately, never differentiate the components). Regardless, they’re distinct and need to be approached differently if you hope to innovate in order to grow premium value.
There is also a lack of effective tools for measuring and understanding premium value’s impact on relationships. It’s not enough to know it’s there. Most business owners don’t know how to visualize and understand this value, let alone relationships—and, less still, how to innovate to improve them. For them, these types of relationship values are equally significant blind spots. Most leaders know intuitively that these relationships are important and valuable, but they fail to prioritize or act on them when making either strategic or tactical decisions. Relationships don’t show up on the income statement or on the balance sheet after the fact (in owner’s equity). They don’t make an appearance in strategic discussions, even though their long-term effect on both should be obvious. In fact, neither revenue nor profit is sustainable without the foundation that relationships provide.
At this point, we can’t fully solve the “naming, defining, measuring” problem of premium value entirely, although Nathan and Steve gave it a shot in the book Making Meaning: How Successful Businesses Deliver Meaningful Customer Experiences (New Riders, 2006). Although there has been some progress in developing metrics, these forms of value have a certain intangibility (they exist only the mind, after all!) that will probably always make them tougher to work with quantitatively than the other, more basic forms of value. However, whereas relationships can’t be easily measured, they can, in fact, be worked with to provide superior value for customers, to build superior returns for investors, and to build enduring relationships between businesses and customers that benefit both hugely.
A New Approach
This book offers a solution for building and managing relationships like these, one that’s been deployed successfully in a wide range of contexts. It involves tools and processes that help you accomplish a number of tasks:
• Understanding and visualizing your relationships with customers
• Identifying the best opportunities for innovation (and total value)
• Creating better relationships
With these new tools and processes, you’ll be able to see when and where your customers are having the experiences that create great relationships—and the value that comes with them (and when they’re not). You’ll learn how those customers feel when they first encounter your products or services. You’ll understand how they feel when they buy them or if they regret buying them at all. You’ll understand their reactions to your customer service and ongoing attempts to stay in contact with them. You’ll also have a complete picture of where you interact with people, what happens when you do, and why it matters.
Knowing all this is not merely important in theory. It also provides a strategic foundation for innovating to improve relationships and increasing value for your company. You can turn from being passive and reactive to proactive and helpful. You’ll be able to prioritize opportunities for improvement. You’ll know where to innovate and what to expect from your efforts. And you’ll be able to evaluate your innovation program over time. In other words, you’ll understand and know how to influence your relationships, moving them from your blind spot into plain view.
You’ll also begin to see the impact that your entire organization has on these relationships. They don’t live in product development, customer service, or in the store. They live everywhere, because they’re reinforced (or decreased) by nearly every action the company takes. This new view of relationships will give you a way to strategically tie together the disparate pieces of your organization and focus them on the impact they can have on building long-term value. Too often, one part of the organization is countering the gains of another part because there’s no way to tie them together. Our tools help illuminate these at a strategic level and show how everyone within the organization can contribute to successful relationships (and more value).
At the beginning of this chapter, Comcast was painted in a fairly negative light; however, this company is trying to become more conscious of building lasting relationships. For example, it is creating online tools that enable people to do more for themselves—and thus avoid its harried service reps. This may seem to be an admission of failure, but it’s actually a promising sign. The company is innovating to improve an experience that it knows isn’t great. This is our goal, as well: to describe relationships so that you can innovate to make them better.
This book is divided into two halves. The first half, (Chapters 1–4), describes what relationships are and how they are built. It also introduces a tool called a waveline diagram. It provides a visual representation of relationships, since a picture is worth a thousand words and many more dollars. The second half (Chapters 5–12) looks at an innovation process called becoming by doing. It is a holistic program that touches not only on how to create things that your customers want, but also how to manage relationships inside and outside your company.
Welcome to the new world of relationships. Hopefully, this book will take them out of your blind spot and enable you to understand the value that relationships create for your company. As brand loyalty has fallen and customers have become both more fickle and more savvy, it’s time to start focusing on their real needs and consciously build a relationship with them.
EYE OPENERS
In this chapter, we’ve introduced a new definition of value in business (and design) and how it requires us to take