session 5a cv

HBM525 – Session 5a. CUSTOMER VALUE (=Benefits-Costs)

Dr. Bill Callaghan

Structure- 3 parts(1) The customer perspective(2) The supplier perspective(3) Some analytical/metrics tools

Part 1.The customer perspective A while ago HBR article sought to understand the

benefits of a service by considering “ a day in the life of a customer”. - the idea was to examine the needs and benefits a

customer received from a service or product – and their frustrations.

- other analysts say we should “staple ourselves to an order” and follow it through the system to help us understand customer experiences fully and what goes right and wrong in delivering the product.

Definitions- Customer Value- what is it?

Sometimes called “VC” – value to the customer- when we are looking at the customers perspective.

CV=Benefits minus Costs Consider the purchase of a car and outline

(1) the benefits and (2) the costs.

So Defining Customer Value …….. Value is:

The ratio of (or difference between)- all received benefits (functional, emotional, and social) as compared to all sacrifices (again, functional, emotional, and social).

Net difference is value and can be positive (good) or negative (bad).

Presumably, if value is negative, you will not engage in this exchange or with this person/firm again (why not?) OR

Alternatively, you may choose to adjust your perception of value

Other Views of Value Some see value as a tradeoff between

quality and price or Value as a long term business asset rather

than a transaction based evaluation by the customer

“value for money” has different interpretations by consumers. e.g. the cheapest . It is a relative measure.

Customer Value Components Three component parts often used in the literature

Functional value (i.e. rational) Does it do what the customer wants it to do?

Emotional value How does the customer feel about the product/service?

Social value Does the product/service enhance or diminish the

customer’s social standing?

PART 1 – THE CUSTOMER PERSPECTIVE

(1) Woodall’s Inventory of costs and benefits See benefits and sacrifices on the next

slide. Note Woodall uses the term “VC” for

value to the customer.

Types of Value- Exercise Pick some products such as

a pair of shoes, conveyance for a property purchase, a haircut, education, and life insurance

In your groups discuss each aspect of functional, emotional, and social value from the customer’s perspective for one of these. Consider if any tradeoffs might be involved between the 3

types of value. What would you measure to assess perceived customer

value for one of the products above?

(2) The Kano way of looking at product attributes. Based on a product design view of

customers assessment of features in terms of benefits.

Attributes Expectations and Requirements from a product design perspective ( Kano) 5 Types of Product Attributes

1. Must have features -needed for customer to have any interest in the product. If not there will cause very high levels of dissatisfaction.

2. One dimensional features – degree to which present has a direct impact on customer satisfaction or dissatisfaction..

3. Attractive features. Not expected but when delivered are a bonus – and really enhance satisfaction.

4. Reverse features. Frustration and dissatisfaction drivers. Customer does not want and interfere with product use.

5. Indifferent features. Does not really care about. Removing them would not change satisfaction or dissatisfaction.

From Kano Method

All above have cost implications as well as benefit implications!

(3) A product lifecycle approach- costs to the owner. This considers an accountancy approach to

assessing value. Useful for looking at competitive products

over the ownership life. See next slide.

Costs to the Customer – A product over its lifetime/lifecycle of the customer.Lifecycle of a product- areas of economic costs

Price Paid e.g. capital cost.

Acquisition Costs e.g. time and effort spent looking and placing order.

Usage Costs e.g. covers installation, training and operator costs and running costs – e.g. consumerables.

Maintenance Costs e.g. cost of repair, servicing

Ownership Costse.g. risk if needs to be replaced because of breakdown, lease/rental costs, insurance costs

etc

Disposal costs e.g. ….

Example – cars Honda BMW

Price Paid $50k $60k

Acquisition Costs $2k $2k

Usage Costs $1k $1k

Maintenance Costs $15k $20k

Ownership Costs $3k $5k

Disposal costsDepreciation/ trade in loss

Depreciation/trade in loss

When we look at costs this way we have to ask what are the Value Drivers for our brand?

Exercise - How does the above framework work for a mobile phone? A refrigerator?

This is also known as an Economic Value or “Savings” Perspective We could look at the sources of economic value for a customer.These

are sometimes seen as “savings” for the customer Sources of economic value are:

1.Price paid e.g. online prices – books /software.- covers terms of payment as well as price

2. Acquisition costs e.g. costs of ordering- covers logistics , inventory aspects

3. Usage costs e.g. reduce labor handling costs with packaging- may also cover installation and training costs

4. Maintenance Costs

5. Ownership Costs e.g. financing terms- also might cover insurance/ warranty

6. Disposal Costs e.g. guaranteed pickup

(4) Factors influencing customers perception of value. What influences how a customer sees

value? – and what might cause this to change over time?

Woodall’s view is on the next slide.

From Woodall (2003)

The Values change process Flint and Woodruff (2001) provide a model for considering what

influences customer values. Their focus was on business purchasing officers as customers i.e

customers who buy supplies for their organization. First they define the environmental factors:

Changing external customer demands Changing internal demands Competitor moves e.g. innovation Changing supplier demands e.g. price increase Macro environmental change ( economic, social, technological,

government, social forces)e.g. exchange rates

They then define “current capabilities tension drivers”.

Knowledge level ( knowledge of customer about the changed requirement) Performance Level ( past and current performance) Control level ( degree of control over decision)

These drivers lead to 3 dimensions of TENSION: 1 Affective – i.e. emotional stress, panic, features may be part of this. 2 Perceived Extensiveness i.e. impact on personal workload and others

workload. Effort and time frame involved. 3 Temporal Dynamism – refers to changes in tension. i.e. it may grow and

subside in urgency/pace required.

The outcome The researchers see that this may lead to customers becoming more aware of their

dependence on suppliers. ( for service assistance, information, new ideas, design help etc)

This in turn finally leads to changes in what customers value.

(5) Quality – what is it? And How do we measure Quality? We distinguish here between tangible products

and services a bit more directly. Two ways of looking at the product and its quality- one for the more tangible products and one for services.

The Services one is based on the SERVQUAL (from the 90’s) approach by the 3 researchers- and has links to customer satisfaction.

Do we assume a Price – Quality relationship in different categories?

price - quality relationship

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Quality Definition- tangible

Garvin (1984)

Service Quality

Parasuranam, Zeithaml and Berry (1988)

1. Performance Primary product characteristics

1. Tangibles Physical evidence associated with the service

2. Features Secondary product characteristics

2. Reliability Reliability and consistency of service

3. Reliability 3. Assurance Ability of employees to inspire trust and confidence

4. Conformance Degree to which design and operating characteristics match specifications

4. Responsiveness Willingness to help, Promptness of the response

5. Durability Product life 5. Empathy Caring, individualised attention

6. Serviceability Speed, courtesy and competence of repair

7. Aesthetics Product looks, feels, sounds

8. Perceived quality

(6) Woodall’s summary of CV components. Splitting Monetary and non monetary

issues. See next slide.

From Woodall (2003)

Some Complications in taking a Value perspective. 1. We are often dealing with Perceptions. Measurement is may be

indirect. 2. Identifying and Assessing Emotional Value – much customer

value delivery work has been done in a b2b context and involves mainly rational benefits- but with b2c environments….and services, b2c where such issues may be relatively more important.

3.Tradeoffs are frequently involved– e.g customers might weigh up the brand, price, and maybe the technical sophistication of the offer before making the purchase decision. Compensatory and non compensatory models.

4. Other issues?……………………..

PART 2 – THE SUPPLIER PERSPECTIVE

Part 2.The supplier/business perspective We have mostly been focused on the

customer viewpoint – now it is time to look at it more from a business perspective.

(1) A Customer Experience Approach. Process Improvement and Cost reduction ( as well as generating Ideas for CV improvements).

If we look at the customer experience by examining the processes that are involved in the buying process and after (i.e. following a customer order) we may get ideas about: (a) areas that need to be improved to improve

value. (b) areas that need to be monitored carefully.

General Example -Stages in Customer Ordering Cycle

Order Planning Order Development Order Evaluation Order Placement

Customers do not recognize your solution in solving a problems

insufficient or incorrect information on your solution

Misperceptions or incomplete information limit fair evaluation

Difficulties in placing order with your business

Stages in the customer cycle

Potential problems/ opportunities to build value

Order Entry Order Processing Order Delivery Customer Invoice

Order recorded or priced incorrectly

Order in process but customer not aware of order status and delivery

Product delivered late or damaged; wrong product delivered

Bill has errors, no one to contact, and calls lead to voice mail hell



After-Sale Services Product Usage Product Problems Returns and claims

Problems after purchase with no one to call; calls not returned

inadequate instructions; no hot line offered

Product does not work and must be returned at customer's expense

Customer has to fight to get warranty claim resolved



A more management driven view. In the previous example we took the customer viewpoint

fairly strongly to find ideas for CV improvement. We can also look at processes ( which we do using

“service blueprints” or process mapping or analyzing touchpoints to see if we can reduce either: (1) direct costs of providing the service or doing the process (2) reducing the costs of errors.

The logic is that if we can reduce costs we can also pas some savings on to improve the CV equation.

Aspects of the Supplier Perspective Customers are seen as assets and having a long

term value (customer lifetime value concepts etc). The organization must attract, serve and retain

customers – sometimes referred to as managing “customer equity”. Customer acquisition and the cost of customer

acquisition is currently a major issue in may businesses. Customer retention is a basic management challenge.

The company must also manage the many processes that are involved in product or service delivery – and these impact on value performance.

(2) The Strategic Supply Chain Management Approach Idea is that the Total Supply Chain to the

Customer is seamless and operating in the most cost efficient manner. View is that there is never a steady state and change

has to be adapted to. Many factors may impact on the supply chain approach. E.g. currency movements, competitor moves, changing consumer attitudes/needs, growth rates, shareholder priorities, joint ventures, availability of capital funds etc

Formal Definition Supply chain management (SCM) is the

integration of the activities that procure materials and services, transform them into intermediate goods and final products and services and deliver them to customers.

Principles of SCM It starts with the customer Manages logistics assets

(warehouses/inventory/delivery/transport etc) Organizes customer management Integrates sales and operations planning Leverages manufacturing and sourcing

capabilities Focus on strategic alliances Develop customer driven performance measures

Value Creation – supply chain emphasis Three Drivers of Value

1. Customer Service (service levels by segments, billing accuracy, consistent quality, communications)

2.Costs of goods sold ( cost reductions, productivity increases, procurement and distribution savings)

3. Capital Efficiency ( inventory optimizations, capacity utilization

Marketing’s Role The simple idea is that marketing,

operations management and all other areas of the organization work together to meet customer requirements! marketing may be seen more about sales and

marketing communications and managing demand!

Hallmarks of a strong supply chain approach 1. Coordination/ synchronization of processes. E.g. JIT,

effective use of information for planning/ forecasting. May mean emphasis on scheduling challenges in manufacturing.

2. Alliances with suppliers and others

3. Quality management Approach. TQM philosophy

Changing SCM approach/issues Coverage of services ( emphasis on service

standards) Time compression for products to market /

faster information flow Globalization Organizational integration Customization and ………………………..

(3) Joint Ventures /Partnerships/ Diversification Approach to delivering customer value

This perspective recognizes that many business markets are organized as networks. This is value that is created as the result of being part of a networks (channel arrangements, partnering, alliances etc). SCM puts emphasis on this but it is worth a separate point.

Networks are everywhere – both business and personal Current example – Qantas rumored to be seeking

ownership of a retail network of travel agents. Other examples – e.g. Sony Ericsson mobile phones.

The Role of Channels in CV What do they do

1. Transformation 2. Timeliness 3. Location (logistics is part of this service) 4. Possession 5. Information transfer 6. Channels also take risks

Transformation Key areas

Manufacturing Assorting e.g Dell Sorting – buying large quantities and selling

smaller quantities Standardisation – grading into categories Storing

Risk Sharing Key way to add value is to assume risk Assuming risk may or may not be risky

What is risky to one may be mundane to another Knowledge and skill are often keys to this

Sharing risk is often as important as all other means of creating value This is one reason why Ford hires another firm to

ship its cars

Risk Sharing cont Risk often not eliminated, only spread

Distributor carries many products Retailer stocks several lines Manufacturer sells through several channels Banks lend to several customers

All this adds up to spreading risk Each additional risk must be balanced by additional value

capture Think of your own firm

How does it share risk with others? Either by farming out or by assuming it from others

Shared Value Facilitation Organisations team up to create value

Sometimes value is more easily created in partnership Matching skills creates more attractive proposition to end

customer

Obvious ways this happens Manufacturer and retailer

get right products to consumers where they want them And manufacturer does not have to deal with consumers,

something they are sometimes bad at doing.

Shared Value Facilitation Aside from risk sharing/assumption how

does your firm facilitate value creation with others? Why not go it alone?

Specialisation is key to this Firms that specialise find that others come for

shared value facilitation Examples include logistics firms, brokerage firms,

auction houses, job shops, etc.

Channel Length Channels can be any length at all

Some are very short (producer sells directly to end user)

Others very long (many organisations involved along the way)

Think of several different channels. How long is each one? Why are some long and some short?

PART 3 – METRICS AND ANALYIC TOOLS FOR CV

SOME ANALYTIC TOOLS FOR CV Obviously market research can measure

perceptions and satisfaction with experiences. We also have compliant systems that may help

identify problem processes/ reasons for failures. In addition we have direct logistics measures for

managing stock, transport and delivery performance ( e.g. in terms of time, % of orders filled etc), costs and more.

Other tools Productivity measures may also be relevant to see the

efficiency of our business versus competitors – or in order to have abase line to improve on.

We have looked at Life Cycle Costing. If we monitor prices we can compare o competitors

e.g. Relative price of Brand x= Product price of x/Average price of all market offerings (competitors)*100

= $55/$34*100= 161 i.e. 61% more expensive. But we also need to know about the relative performance of

brand x. to work out CV.

session 5a cv

Business