It’s not the employer who pays the wages. Employers only handle the money. It is the customer who pays the wages.
Henry Ford As marketers, we should be committed to the proposition that the creation of customer value must be the reason for the firm’s existence and certainly for its success.
Stanley F.Slater, Colorado State University
According to Fortune magazine, Citigroup; FedEx; General Electric; Intel; Johnson &
Johnson; Microsoft; Nestle; Nokia; Singapore Airlines; Sony; Toyota; and Wal-Mart are among the most admired companies in the world. Stellar corporate reputations are based on eight criteria1:
■ Innovation
■ Financial soundness
■ Employee talent
■ Use of corporate assets
■ Long-term investment value
■ Social responsibility
■ Quality of management
■ Quality of products and services
Such criteria are evidenced by companies that practice customer value (CV) thinking.
Designing and delivering superior customer value propels organizations to market leadership positions in highly competitive global markets.
The Internet explosion of the middle- to late-1990s was characterized by a frenzy of entrepreneurial activity and new business concepts; billions of dollars raised in (often misdirected) venture capital; a soaring stock market; and a marketing mindset advocating e-commerce. Exciting e-businesses such as Amazon.com, Cisco Systems, Dell Computer, eBay, Expedia, Priceline.com, and Yahoo! achieved remarkable success by pioneering innovative and better ways to create value for customers with changing needs and wants.
These businesses survived the dot.com meltdown of 2000 by creating winning strategies based on superior value for their customers. Unfortunately, most of the start-up Web- based companies lacked a solid business model, strong value proposition, and a long-term focus and, ultimately, they failed.
In the new economy, tradeoffs are not necessary. Customers want fair prices and acceptable quality; good value and their business to be valued; innovativeness and image status; physical goods and value-added services; and retail shopping malls as well as online merchants. As Barnes and Noble learned, customers want “bricks and clicks”—the ability to buy books in the marketplace (store) or the marketspace (http://www.bn.com/).
In the 1980s, the battle for customers was won or lost based on quality alone. As TQM (total quality management) became the rage in business, quality gaps diminished and companies focused on customer service. Enhanced customer value synthesizes and extends the quality and customer service movements and has emerged as the dominant theme for business success for 21st century companies.2 Although this philosophy is commendable, not all companies have embraced it. The unprecedented number and magnitude of recent bankruptcy proceedings is evidence of not placing the customer first.
For example, Arthur Andersen, Enron, K-Mart, United Airlines, and WorldCom were rocked by major accounting scandals; ethical gaffes; greedy top executives; misreading market needs; and/or shoddy management practices.
Managing customer value is even more critical to all organizations in the new service and information-based economy. Progressive companies that create maximum value for their customers will survive and thrive; they will be able to carve sustainable competitive advantages in the marketplace. Firms that do not provide adequate value to customers will struggle or disappear. By examining relevant customer value and marketing concepts and applications, this opening chapter accomplishes four objectives:
■ To explain why CV must be the overall basis for business strategy
■ To offer several key CV implications for forward-thinking managers
■ To discuss the attributes of value-creating organizations
■ To explain how the customer value funnel (CVF) can be used to improve managerial decision-making (see appendix at chapter’send)
THE IMPORTANCE OF CUSTOMER VALUE
Great companies do not simply satisfy customers; they strive to delight and “wow” them.
Superior customer value means continually creating business experiences that exceed customer expectations. Value is the strategic driver that global companies, as well as mom-and-pop small businesses, utilize to differentiate themselves from the pack in the minds of customers. How is it that Lexus can sell sport utility vehicles for $65,000 and Taco Bell can offer meal combinations for less than $4.00 and both are considered good values? Value is the answer—and value is defined by your customers. Companies that offer outstanding value turn buyers (“try-ers”) into lifetime customers.
What Does Value Really Mean?
The concept of customer value is as old as ancient trade practices. In early barter transactions, buyers carefully evaluated sellers’ offerings; they agreed to do business only if the benefits (received products) relative to the cost (traded items) were perceived as a fair (or better) value. Thus, value is “the satisfaction of customer requirements at the lowest total cost of acquisition, ownership, and use.”3
According to a dictionary definition, value means relative worth or importance.
Furthermore, it implies excellence based on desirability or usefulness and is represented as a magnitude or quantity. On the other hand, values are the abstract concepts of what is right, worthwhile, or desirable.4 Management’s values have an impact upon how an organization creates value and, ultimately, its success. The legends about the Frito-Lay sales rep stocking a small grocery store’s potato chip rack in a blizzard and Art Fry’s
“intrapreneurial” initiative that brought Post-It to 3M reinforce organizational cultures.
Value may be best defined from the customer’s perspective as a tradeoff between the benefits received from the offer vs. the sacrifices to obtain it (e.g., costs, stress, time, etc.). Value is created when product and user come together within a particular use situation. Thus, each transaction is evaluated according to a dissatisfaction, satisfaction, or high satisfaction experience in terms of the value received. These service encounters affect customer decisions to form long-term relationships with organizations.
As an area of formal marketing study, value-based thinking has evolved in its approximate 60-year life—it originated at General Electric after World War II. Value- driven marketing strategies help organizations in ten areas5
■ Understanding customer choices
■ Identifying customer segments
■ Increasing competitive options (for example, offering more products)
■ Avoiding price wars
■ Improving service quality
■ Strengthening communications
■ Focusing on what is meaningful to customers
■ Building customer loyalty
■ Improving brand success
■ Developing strong customer relationships
According to Woodruff and Gardial, a three-stage value hierarchy exists that consists of attributes, consequences, and desired end states. These levels of abstraction describe the product or service; the user-product interaction; and the goals of the buyer (person or organization), respectively. For example, a new-car buyer may seek attributes such as comfortable seating; an easy-to-read instrument panel; smooth shifting; a Consumer Reports endorsement; no pressure sales tactics; and a good service/warranty program. At higher levels of abstraction, buyers may want driving ease, no hassles, reliability (consequences), and, ultimately, peace of mind (desired end state).6
Service, Quality, Image, and Price: the Essence of Customer Value
Providing outstanding customer value has become a mandate for management. In choice- filled arenas, the balance of power has shifted from companies to value-seeking customers. CV can be expressed in many ways. The S-Q-I-P approach states that value is primarily a combination of service, product quality, image, and price. Top-notch companies often differentiate themselves and create legendary reputations largely due to singular attributes. Although a focus on key attributes is advisable, firms must meet acceptable threshold levels with respect to each dimension; formidable global competition provides little room for weakness in any area.
The service factor must reign supreme in value-creating organizations. Nordstrom, Ritz-Carlton, and Southwest Airlines are renowned for unparalleled customer service.
Extensive field studies in Europe, the U.S., and Asia by Cap Gemini Ernst & Young (a worldwide leader in management and information technology consulting) found that global consumers value courteous and respectful employees and honesty more than merchandise quality or low prices.7 In addition, a recent study by CustomerRespect.com found that only 41% of Fortune 100 companies responded to an Internet communication within 2 days; 22% eventually responded; and, amazingly, 37% never responded. (The insurance sector was the most responsive; drug companies were the least responsive).
Thus, this research indicates that nearly 60% of giant companies fail to take their Web presence seriously.8 Furthermore, as Chapter 10 will demonstrate, customers defect for service reasons about 70% of the time.
Hewlett-Packard, Lego, and Rubbermaid are obsessed with product quality and innovation. Ben & Jerry’s and Harley-Davidson’s cult-like followings are attracted to the ice cream and motorcycles, as well as to what the organizations stand for (image).
Brands-Mart and Wal-Mart are committed to offering great prices. Successful retailers such as Home Depot, Victoria’s Secret, and Walgreens (see case study) realize that price is only part of the value equation—value is the total shopping experience. This includes such customer benefits as dominant product assortment; respect for customers; time and energy savings; and fun, as well as fair prices.9
Because tradeoffs exist among the S-Q-I-P elements, companies cannot expect to be market leaders in all areas. The cost of developing and sustaining a four-dimensional leadership position would be overwhelming. Clearly, customer value is a much richer concept than just a fair price; superb service, top quality, and a unique image are also highly valued by target markets. Realize that CV is a multidimensional construct.
Varying emphases on S-Q-I-P explicate a company’s value proposition (see Chapter 7).
Customer value insight 1.1 explains how Speedpass creates value for customers.
CUSTOMER VALUE INSIGHT 1.1: HOW SPEEDPASS CREATES CUSTOMER VALUE10
ExxonMobil’s Speedpass taps into the service dimension of saving time by creating strong relationships with users based on brand equity. A preprogrammed tiny Speedpass wand (small enough to fit on a keychain) is waved at gasoline pumps or retail cash registers to expedite transactions. Primarily used at gas stations, this radio frequency identification technology cuts about 30 seconds of precious time from typical 3ẵ minute service encounters. Although this may not seem significant, in today’s convenienceseeking society, more than 5 million customers said it matters to them;
management expects five times that number to sign on by 2006.
Speedpass drivers average one additional visit per month to Mobil stations and spend about 3% more than other customers. Because Speedpass is easier to use than credit or debit cards, ExxonMobil hopes that its very loyal users will use it to buy a variety of goods and services in the near future. Speedpass is now accepted at 440 Chicagoland McDonald’s restaurants and is being test-marketed at Stop and Shop Supermarkets.
Drugstore chains video stores and other national partnerships are being explored The
ever-growing Speedpass database is likely to attract high-profile retailers. In turn, this expanded buying network will appeal to the next generation of Speedpass holders and thus customer value is created for all participating parties.
CUSTOMER VALUE: MARKETING MANAGEMENT IMPLICATIONS
Maximizing customer value is an evolving challenge for service marketers. Visionary companies are responding to the new breed of smarter, more demanding customers by rethinking some of their traditional job functions, using customer value-based decision- making and stressing customer retention strategies. To adapt more effectively and efficiently to customers, new types of value providers (value adders) are often needed.
Some changes may seem to be cosmetic; however, in reality, they are sound strategic responses to the changing business environment and the need to deliver superior value to customers. Consider these four examples:
■ Procter and Gamble, the quintessential consumer marketer, recently renamed its sales force the customer business development (CBD) group. Selling is now only a small part of the CBD rep’s job function. More important marketing activities include assisting customers in reducing inventory; tailoring product and price offerings in each market; and creating suitable co-marketing promotional plans.11
■ Merck, Xerox, and other Fortune 500 companies have created market segmentation managers.
■ Micro Motion’s (a Colorado-based division of Emerson Electric that specializes in the production of mass flowmeters) differentiation strategist is charged with the
responsibility of enhancing the company’s customer service activities.
■ Vacation Break, a Ft. Lauderdale travel provider and developer of vacation ownership resorts (acquired by Fairfield Communities in the late 1990s) called its front desk receptionist the director of first impressions.
A customer value decision-making framework offers management a unique and potentially superior way of understanding business problems and opportunities. For example, the customer value funnel (see the appendix for this chapter) is a systematic, multifaceted, integrated, and rich tool for making customer-focused marketing management decisions. Managers can consider value-based criteria such as economic values; relevant values of the various constituencies; maximizing value over time; value adders (or destroyers); value-based segments; and value tradeoffs to improve their business analyses. An initial list of six important customer value issues for managers to ponder is summarized in customer value checklist 1.1.
CUSTOMER VALUE CHECKLIST 1.1: GUIDELINES FOR CREATING CUSTOMER VALUE12
Do your goods and services really perform?
Do your company and its people give more than what is expected?
Does your firm stand behind its work with service warranties?
Are your pricing policies realistic?
Do your advertising and promotional materials give customers the necessary facts?
Do you use frequent-buyer programs, toll-free numbers, and membership clubs to build customer relationships?
The adoption of customer value in management’s mission and vision statements means that customer retention (relationship management) becomes the primary vehicle for market success. Amazon.com’s digital franchising concept links more than 40,000 Web sites and pays “associates” 5 to 15% of any revenues they generate. This clever cyber- based marketing strategy resulted in a 50% increase in new accounts; repeat customers accounted for 60% of all orders.13 Enhanced customer value goes beyond isolated transactions and builds long-term bonds and partnerships in the marketplace. Strong customer-corporate ties change buyers to advocates. Increased customer loyalty results in increased usage frequency and variety. Perhaps more important, however, is the fact that delighted customers play an important word-of-mouth, public relations role that creates new business opportunities via referrals.
Conversely, bad-mouthing by dissatisfied customers can be not only harmful, but also the death knell to a company. Consider a case in point: one unhappy buyer at a computer superstore determined that this company lost $50,000 of his business (direct lifetime value) and another $350,000 (indirect lifetime value) due to negative word-of-mouth comments to his family and friends.
THE VALUE-CREATING ORGANIZATION
Organizations should be viewed as value-creating entities. Customer-responsive organizations create value by solving individual customer problems. Delighted customers perceive a high value relative to the economic cost and hassle of obtaining a solution.14 A strong competitive advantage can be gained through consistently providing superior customer value. As Figure 1.1 shows, value-creating firms such as Dell Computer score high in purpose (they understand their business and customers’ desires) and high in process (they know how to utilize internal procedures to respond to customers effectively and efficiently).
Unfortunately, many organizations do not master purpose (customer focus) as well as process (customer support) activities. Typical of many government agencies, the Internal Revenue Service (IRS) represents a bureaucratic organization. Although the IRS does a reasonably good job processing tens of millions of tax packages annually, they rank relatively poorly on the purpose dimension. Recent developments in electronic filing (e-
file); fax-on-demand tax forms and instructions; TeleTax phone service; and a Web site are all steps in the right direction. This organization has a long way to go, however, to overcome an unfavorable image. Most Americans perceive the tax system as overly complex, imprecise, time consuming, and, at times, unfair or even unnecessary.
Segmentation, targeting, and positioning (STP marketing) and the 4 Ps—product, price, promotion, and place—are focal points for value creation actions in the firm. These strategic controllables have major implications for attracting (conquest marketing) and keeping (retention marketing) customers. Sometimes, companies may go too far in one direction at the expense of the other. For example, in the 1990s, America
Figure 1.1 The Value Matrix
(Adapted from Capowski, G. [1995], Manage. Rev., May, 34.)
Online’s solitary focus on the former cost the company millions of dollars in bad press;
dealing with customer complaints, dissatisfaction, and defections; and legal fees. During this period, the company was viewed by its existing clients as adversarial (AOL’s sales orientation is discussed further in Chapter 2). In spite of difficulties in the AOL-Time Warner marriage, America Online has made solid improvements on the purpose and process dimensions. If it is to remain a market leader, AOL must commit to becoming a value-creating company.
On the other hand, some companies try really hard, but just cannot seem to get it quite right even though they are well intentioned. A foreign car repair specialist may do an excellent job of scheduling appointments with busy professionals only to find that the service technicians generally take longer than expected to fix cars or they routinely run out of stock on key auto parts.
The value matrix is a most useful tool for management. Where would you place your company and your major competitors in the four quadrants? If your answer is anything other than creating value, clearly you have some homework to do. Because markets are dynamic, the status quo will not do; even value-creating organizations must constantly work at getting better to stay on top.
SUMMARY
To succeed in the 21st century, service organizations must do a great job of creating customer value. Developing strong bonds with customers creates loyalty, which leads to
high customer retention rates. Each firm must find the right mix of value ingredients to satisfy and delight its target markets. Designing and managing customer value is critical for business executives in today’s highly changing and competitive markets.
Next, the two dimensions introduced in the value matrix will be explored. Chapter 2 explains what customer orientation means (purpose) and Chapter 3 reviews how to plan and execute customer operations (processes) effectively.
CUSTOMER VALUE ACTION ITEMS
1. What is meant by CV? In general, what do customers truly value in: (1) the
marketplace and (2) the marketspace? Provide an example of how a specific retailer and an e-tailer create value for their customers.
2. How does Dell Computer design and deliver value for customers? How can Hewlett- Packard compete successfully against Dell in the PC market? As market niche players, what can Apple or Gateway do to offer superior value to customers?
3. Based on the S-Q-I-P approach, analyze five airlines (your choice) based on the following CV dimensions: service, product quality, image, and pricing. Rate the airlines as above average (+), average (0), or below average (−) on each component, and then compute overall CV scores for each of them.
4. Using the value hierarchy framework (attributes, consequences, and end states), conduct a value analysis of a hotel chain and an online travel facilitator.
5. Identify three “best practices” from service industries/firms that a cable television or cellular phone provider can adapt to deliver better value to its customers.
6. Identify three companies that stress conquest marketing and three others that emphasize customer retention. Are these the appropriate strategies for these organizations? Why or why not?
7. How can your organization improve with respect to purpose (customer focus) and process (customer support) activities?
8. Identify a decliner, adapter, and star in the restaurant industry. What value-based strategies should these restaurants use for repositioning and/or future growth?
APPENDIX: ANALYZING BUSINESS SITUATIONS—THE CUSTOMER VALUE FUNNEL APPROACH*
To compete successfully, organizations must evaluate all pertinent actors and factors in a market. This briefing develops a managerial perspective featuring a four-stage customer value funnel (CVF) framework. The CVF approach is a valuable tool for understanding and assessing business dynamics and situations. You are encouraged to utilize the questions at the end of this section when analyzing the case studies in Part V of this book.
Management’s objective should be to maximize value over time, realizing that customer values have a major impact on business processes and performance. Thus, the enhanced customer value approach offers management an alternative view of how to compete effectively in dynamic and volatile markets. This value maximization premise means that corporate success should be evaluated in a new light. Business performance should be built on a dual foundation of paramount value concepts: (1) anticipating and