CUSTOMER VALUE

Company’s first task is to –Create customers and not to create products. --- Peter F Drucker. Customers think before they buy--- ----- Which product will give them more value. -----They are value maximizers for less cost. CUSTOMER VALUE *******************************************************************************
( CUSTOMER PERCIEVED VALUE):- It means the customers’ evaluation of the difference between all the benefits and all the costs of the product. Total Customer Value =Customer Benefits(Economic+ Functional+psychological) MinusCustomer Costs (cost of evaluation+cost of obtaining+cost ofusing+cost of disposing) *******************************************************************************
Customer Lifetime Value (CLV) *******************************************************************************
The profit generated by the customer’s purchase of an organization’s product or service over the customer’s lifetime. Customer Lifetime Value (CLV)The amount by which revenues from a given customer overtime will exceed the company’s cost of attracting, selling to and servicing that customer. EXAMPLE Estimated customer Revenue p.a.= Rs. 20 000 Estimated no. of loyal years of the customer= 25 Total estimated revenue from the customer= Rs.500000 The profit margin= 20%The CLV= 500 000 X 20%= Rs. 100000 *******************************************************************************
Definition of customer value:- *******************************************************************************
Value is the customer’s perception of the balance between benefits received from a product or service and the sacrifices made to experience those benefits. The equation shows that you can increase the customer’s perceived value in two main ways: increase the benefits they experience, or decrease the sacrifices they make. Let’s look at sacrifices. Customers make several types of sacrifice. Money: the price of the product or service, which may or may not be the listed price. There may be additional costs such as credit card surcharges, interest charges on extended payments or warranty costs. There may be discounts applied for relationship customers, early payment or volume purchases. Search costs: the purchasing process may include exhaustive pre purchase work in searching for solutions and comparing alternatives. This can take considerable time. In a B2B context, a purchaser’s time may have a real monetary cost. When purchasing involves several people these costs may be very high indeed. This is one of the reasons that customers are motivated to remain with existing suppliers and solutions. There may also be travel and accommodation costs as buyers visit reference customers to see solutions onsite. Transaction Costs are normally lower when search costs are eliminated and purchasing processes are routinized. Some suppliers are prepared to take on the costs of managing inventory for important customers, so that they are less tempted to search for alternative solutions. Known as vendor managed inventory (VMI), it reduces search and reorder costs for customers. *******************************************************************************
Psychic costs : *******************************************************************************
Purchasing can be a very stressful and frustrating experience. For some customers, holiday shopping at Christmas and other festivals means struggling to come up with gift ideas for relatives they rarely see, travelling on crowded public transport, pushing through throngs of shoppers, dealing with temporary sales staff who don’t have enough product knowledge, paying inflated prices, carrying home arms full of heavy packages, and doing all these in bad weather! *******************************************************************************
Psychic costs can be so great for some customers that they postpone purchases until a better time. Others cancel purchasing completely. Perceived risk is also a consideration in assessing psychic cost. Perceived risk takes a variety of forms: performance, physical, financial, social and psychological. Performance risk occurs when the customer is not fully sure that the product will do what is required. Physical risk is when the customer feels that there may be some bodily harm done by the product. Financial risk is felt when there is danger of economic loss from the purchase. Social risk is felt when customers feel that their social standing or reputation is at risk. Psychological risk is felt when the customer’s self-esteem or self-image is endangered by an act of purchase or consumption. *******************************************************************************
When perceived risk is high, psychic cost is correspondingly high. Customers often feel uncomfortable at higher levels of perceived risk and may try to reduce risk in a number of ways, as indicated in When customers try to reduce perceived risk, they are in effect trying to reduce the denominator of the value equation, thereby improving value. Suppliers can help customers reduce their levels of perceived risk in a number of ways. For example, performance risk is Creating value for customers Why would a customer buy a printer for $300 when an identically specified machine is available for $100? Perhaps the answer lies in search and psychic costs. *******************************************************************************
There is more to the benefit component than quality alone There is a trend towards considering costs from the perspective of ‘ total cost of ownership ’or TCO. TCO looks not only at the costs of acquiring products, but also at the full costs of using, and servicing the product throughout its life, and ultimately disposing of the product. What is thought of as ‘ consumption ’ can be broken down into a number of activities or stages, including search, purchase, ownership, use, consumption and disposal. TCO is an attempt to come up with meaningful estimates of lifetime costs across all these stages. When customers take a TCO view of purchasing, suppliers can respond through a form of pricing called economic value to the customer (EVC). In a B2B context, EVC works by proving to customers that the value proposition being presented improves the profitability of the customer, by increasing sales, reducing costs or otherwise improving productivity. EVC computes for customers the value that the solution will deliver over the lifetime of ownership and use. Suppliers can apply EVC thinking to each stage of the ‘ consumption ’ process described above. For example, 190 Customer Relationship Management a computer supplier may agree to provide free service and to collect and dispose of unwanted machines after four years. Customers performing these tasks themselves would incur tangible costs. This is therefore the value that these activities have for customers. EVC encourages suppliers to customize price for customers on the basis of their particular value requirements. In a well-regulated economy, most companies compete by trying to deliver consistently better value than competitors. This means understanding customers ’ requirements fully and creating and delivering better solutions than competitors. It is the job of professional marketers to develop the offers that create value for customers: the so-called value proposition. We can define value proposition as follows: A value proposition is the explicit or implicit promise made by a company to its customers that it will deliver a particular bundle of value-creating benefits. Michael Treacey and Fred Wiersema have identifed three fundamental types of value proposition that are delivered by successful companies. Indeed, these authors say that companies cannot be all things to all customers and need to concentrate on one of these three value delivery strategies. The strategies are characterized by product leadership, customer intimacy and operational excellence, and are summarized in Table Operational excellence : Companies that pursue this strategy do a limited number of things very effi ciently, at very low cost, and pass on those savings to customers. Companies renowned for this are Wal-Mart, Giordano and McDonald’s. Unexpectedly, Toyota might also fit this strategy. If customers take a total cost of ownership view of price, then Toyota, with its reputation for reliability, durability and competitive service costs, fits the operational excellence model well. Operational excellence is underpinned by lean manufacturing and efficient supply chains, close cooperation with suppliers, rigorous quality and cost controls, process measurement and improvement, and management of customer expectations. Product leadership: companies aligning with this value discipline aim to provide the best products, services or solutions to customers. Continuous innovation underpins this strategy. Companies renowned for this are 3 M, Intel, GSK, LG and Singapore Airlines. Product leadership is reflected in a culture that encourages innovation, a risk-oriented management style, and investment in research and development. *******************************************************************************
Customer intimacy : *******************************************************************************
companies that pursue this strategy are able to adapt their offers to meet the needs of individual customers. Customer intimacy is based on customer insight. Companies renowned for customer intimacy include Saatchi and Saatchi, McKinsey and the US department store, Nordstrom. Adaptation and customization based on deep understanding of customer requirements underpin this strategy. it is the responsibility of marketing people to develop value propositions. They use a toolkit known as the marketing mix. The term ‘ marketing mix ’is really a metaphor to describe the process of combining together various components to create value for customers. Eugene McCarthy grouped these components into a classification known as the 4Ps: product, price, promotion and place. *******************************************************************************
This approach is widely applied by goods manufacturers. *******************************************************************************
Customization *******************************************************************************
CRM aims to build mutually beneficial relationships with customers at segment, cohort or individual level. A fundamental approach to achieving this goal is to customize the value proposition in order to attract and retain targeted customers. CRM aims to fit the offer to the requirements of the customer; it is not a one-size-fits-all approach. Customization has both cost and revenue implications. It may make strategic sense because it generates competitive advantage and is appealing to customers, Dell Computer customizes production using a product configurator When Dell Computer’s customers are online, they are able to design their own computers. Customers interface with the front end of a technology called a configurator. This is a rule based system that enables or disables certain combinations of product features including chassis, hard disk capacity, memory, processor speed, software and connectivity. The technology is connected to back-office functions such as assembly and procurement. Each Dell Computer is made to order. Customization means that companies have to be aware of, and responsive to, customers ’ differing requirements. Product – Solvay Interox, a chemicals company, customizes its hydrogen peroxide product for textile industry customers Price – Dell Computer offers lower prices to its larger relationship customers than its small office-home office (SOHO) customers Promotion – Ford customizes communications to its dealership network Place – Procter and Gamble delivers direct to store for its major retail customers but not smaller independents People – Hewlett Packard creates dedicated virtual project groups for its consultancy clients Physical evidence – Thomson and other major tour operators overprint their point-of-sale material with travel agency details Process – Xerox customizes its service guarantee and recovery processes for individual customers Customizing the 7Ps ● Process : important manufacturing industry processes are the order fulfilment process and the new product development process. Manufacturers can customize these to suit the requirements of different customers. Major FMCG manufacturers have evolved twin new product development processes. They have their own in-house processes, as well as customized processes in which they co-develop new products in partnership with major retailers. ● People : Manufacturers can adjust the profi le and membership of account teams to ensure that customers get the service they deserve and can afford. Kraft, for example, has customer teams for major retail accounts that consist of a customer business manager (c.f. key account manager), category planner, retail sales manager, sales information specialist, retail space management and supply chain specialist. This customer-facing team can then draw on additional company expertise if needed, including brand managers and logistics specialists. *******************************************************************************
Creating value for customers :- Case *******************************************************************************
Tailored value propositions at Heineken Ireland Heineken, a major beer exporter, has been very successful in the Irish beer market, with brands collectively capturing around 17 per cent of the total market. This success has been attributed to a deep understanding of the market, a strong portfolio of brands and a commitment to customer satisfaction. To sustain its position, Heineken sought to focus on delivering superior service to its 9000 commercial customers, namely pubs, hotels and wholesalers. To accomplish this Heineken implemented a Siebel CRM system. For Heineken, one advantage of the Siebel software has been its ability to create single, comprehensive, profiles of customers which can be used to tailor product bundles and services, and to provide improved levels of customer service. *******************************************************************************
Heineken believes that the CRM:- *******************************************************************************
system provides the ability to build higher quality relationships with customers. For example, sales representatives are able to prioritize their interactions with key customers and instantly analyze historical data to identify sales trends and buying patterns of both individual customers and geographic areas, using their notebook computers while on the road. composition and membership of the team is agreed with each major retail account. Physical evidence: Manufacturers use many different forms of physical evidence, such as scale models, cut-away models, product samples and collateral materials. Kitchen manufacturers provide customized swatches of worktop and cabinet colours to their major retail distributors.