The document discusses customer value from both the customer and supplier perspectives. From the customer perspective, customer value is defined as benefits minus costs. Benefits can be functional, emotional or social, while costs can also be functional, emotional or social. Customer value is influenced by factors like quality, price, and perceptions that can change over time. From the supplier perspective, examining the customer experience through various processes can provide insights into improving customer value and reducing costs. Following a customer's full order cycle can help identify problems and opportunities to build value.

1. HBM525 – Session 5a. CUSTOMER VALUE (=Benefits-Costs) Dr. Bill Callaghan

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

3. 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.

4. Definitions- Customer Value- what is it? Sometimes called “VC” – value to the customer- when we are looking at the customers perspective.

5. CV=Benefits minus Costs Consider the purchase of a car and outline (1) the benefits and (2) the costs.

6. 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

7. 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.

8. 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?

9. PART 1 – THE CUSTOMER PERSPECTIVE

10. (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.

11. Table from Woodall(2003)

12. 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?

13. (2) The Kano way of looking at product attributes. Based on a product design view of customers assessment of features in terms of benefits.

14. 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!

15. (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.

16. Costs to the Customer – A product over its lifetime/lifecycle of the customer. e.g. …. Disposal costs e.g. risk if needs to be replaced because of breakdown, lease/rental costs, insurance costs etc Ownership Costs e.g. cost of repair, servicing Maintenance Costs e.g. covers installation, training and operator costs and running costs – e.g. consumerables. Usage Costs e.g. time and effort spent looking and placing order. Acquisition Costs e.g. capital cost. Price Paid Lifecycle of a product- areas of economic costs

17. Example – cars 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? Depreciation/trade in loss Depreciation/ trade in loss Disposal costs $5k $3k Ownership Costs $20k $15k Maintenance Costs $1k $1k Usage Costs $2k $2k Acquisition Costs $60k $50k Price Paid BMW Honda

18. 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

19. 4. Maintenance Costs 5. Ownership Costs e.g. financing terms - also might cover insurance/ warranty 6. Disposal Costs e.g. guaranteed pickup

20. (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.

21. From Woodall (2003)

22. 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

23. 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.

24. 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.

25. (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.

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

27. 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

28. (6) Woodall’s summary of CV components. Splitting Monetary and non monetary issues. See next slide.

29. From Woodall (2003)

30. 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?……………………..

31. PART 2 – THE SUPPLIER PERSPECTIVE

32. 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.

33. (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.

34. 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

35. 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 Potential problems/ opportunities to build value Stages in the customer cycle

36. After-Sale Services Product Usage Produ c t Problems Returns and c laims 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 Stages in the customer cycle Potential problems/ opportunities to build value

37. 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.

38. 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.

39. (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

40. 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.

43. 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

44. 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

45. 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!

46. 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

47. 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 ……………………… ..

48. (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 network s (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.

49. 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

50. Transformation Key areas Manufacturing Assorting e.g Dell Sorting – buying large quantities and selling smaller quantities Standardisation – grading into categories Storing

51. 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

52. 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

53. 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.

54. 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.

55. 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?

56. PART 3 – METRICS AND ANALYIC TOOLS FOR CV

57. 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.

58. 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.