CREATING VALUE FOR

CUSTOMERS
Chapter 7
 Chapter 7 Outline
 Understanding Value
 Total Cost of Ownership
 Sources of Customer Value
 Value from Products
 Value from Services
 Value from Processes
 Value from People
 Value from Physical
Evidence
 Value from Customer
Communication
 Value from Channels
 Understanding Value
 The term ‘ value ’ is used in a number of different
ways.
 When it relates to CRM, value is defined as:
 The customer’s perception of the balance between
benefits received from a product or service and the
sacrifices made to experience those benefits.
 It is possible to represent this definition in the form
of an equation:
 Value= Benefits / Sacrifices
 Understanding Value
 The equation in the previous slide indicates that
companies can enhance the customer’s perceived
value in two main ways:
 1) Increase the benefits that customers experience.
 2) Decrease the sacrifices that customers make.
 Understanding Value
 Customers make several types of sacrifices when
in the process of obtaining products and
services: They are:
 1) Money
 2) Search Costs

 3) Psychic Costs
 Understanding Value

 1) Money: the price of the product or service,

which may or may not be the listed price.
 Customers may incur additional costs such as credit
card surcharges, interest charges on extended
payments or warranty costs.
 Discounts may be applied for relationship customers,
early payment, or volume purchases.
 Understanding Value

 2) Search Costs: the purchasing process

may include extensive prepurchase work in
searching for solutions and comparing alternatives.
 In a B2B environment, a purchaser’s time may
have a real monetary cost.
 For example: When purchasing involves many
different people, these costs may be very high
indeed. Example: buying airplanes for an airline
carrier or an IT system for an accounting firm.
 Understanding Value
 Search costs is one of the reasons that B2B customers are
motivated to stay with existing suppliers and solutions.
 Furthermore, there may be travel and accommodation costs
as buyers visit reference customers to see solutions onsite.
 Transaction costs are usually lower when search costs are
removed and purchasing processes are routinized.
 Some suppliers are willing to remove the costs of managing
inventory for important customers to make sure that these
customers do not look for other suppliers.
 Understanding Value
 3) Psychic Costs: Buying can be a very
stressful and frustrating experience for many customers.
 For example: For some customers, holiday shopping at
Christmas means trying to come up with gift ideas for
relatives they do not see very often, travelling on crowded
public transport, pushing through a large crowd of
shoppers, dealing with temporary sales staff who don’t
have enough product knowledge, paying high prices,
carrying all the gifts, and doing all these in bad weather!
 Understanding Value
 Psychic costs can be so great that some customers
delay purchases until a better time while others
simply cancel their purchases.
 Customers also consider perceived risk when
evaluating psychic cost.
 Understanding Value
 The following are the types of perceived risks that
customers consider:
 1) Performance risk: This type of risk occurs when
customers are not completely sure that the product will
do what is required.
 2) Physical risk: occurs when a customer feels that
the product may cause some bodily harm.
 3) Financial risk: occurs when a customer believes
that there is danger of economic loss from the
purchase.
 Understanding Value
 4) Social risk: is felt when a customer feels that their
social standing or reputation is at risk due to the
purchase of a product.
 5) Psychological risk: is felt when the customer’s self-
esteem or self-image is threatened by an act of purchase
or consumption.
 6) Time risk: The failure of the product results in an
opportunity cost of finding another satisfactory product.
 The higher the perceived risk, the higher the psychic
cost will be.
 Total Cost of Ownership
 Total Cost of Ownership (TCO) not only
considers the costs of obtaining products but also
the full costs of using, and servicing the product
throughout its life, and, disposing of the product.
 TCO is an attempts to come up with clear
estimates of lifetime costs of products across all
these stages.
 The stages include search, purchase, ownership,
use, consumption, and disposal of a product.
 Sources of Customer Value
 It is the job of marketers to create the offers that
make up their company’s value proposition.
 A value proposition is the promise made by a
company to its customers that it will deliver a
specific bundle of value-creating benefits.
 Michael Treacey and Fred Wiersema have
identified three core types of value proposition that
are delivered by successful companies.
 Sources of Customer Value
 The three value delivery strategies are:
 1) Operational Excellence
 2) Product Leadership

 3) Customer Intimacy
 Sources of Customer Value
 1) Operational Excellence: companies that follow this
strategy do a limited number of things very efficiently, at very low cost,
and pass on those savings to customers.
 Examples: Some of the companies that use this strategy are Wal-Mart,
Giordano and McDonald’s.
 Operational excellence is characterized by:
 Lean manufacturing
 Efficient supply chains
 Close cooperation with suppliers
 Tough quality and cost controls
 Process measurement and improvement
 Management of customer expectations
 Sources of Customer Value

 2) Product Leadership: companies

following this value delivery strategy try to provide the
best products, services or solutions to customers.
 Continuous innovation is the heart of this strategy.
 Examples: Companies using this strategy include
Microsoft, 3M, Intel, GSK, LG and Singapore Airlines.
 Product Leadership is characterized by a culture that
encourages innovation, a risk-oriented management
style, and investment in research and development.
 Sources of Customer Value
 3) Customer Intimacy: companies that use
this strategy are able to modify their offers to meet the
needs of individual customers.
 Customer intimacy is based on continuously gaining
better customer insight.
 Examples: Nordstrom, luxury department store chain,
organizes its store layout by fashion and lifestyle rather
than by merchandise categories.
 The company offers high quality products with
outstanding customer service.
 Sources of Customer Value
 Other companies that follow the customer intimacy
strategy include Amazon, DHL, and Ritz-Carlton,
Saatchi and Saatchi, and McKinsey.
 Adaptation and customization based on deep
understanding of customer requirements
characterize the customer intimacy strategy.
 Value from Products
 Product-based value is created for customers
through:
 1) Product Innovation
 2) Additional benefits
 3) Product–Service bundling
 4) Branding
 5) Product Synergies
 Value from Products
 1) Product Innovation: The majority of ‘ new ’ products are
modifications of existing products, cost reductions or line
extensions.
 Very few products are ‘ new to the world ’or create new product
categories.
 Occasionally, dramatic game changing inventions create great
improvement in customer value.
 Examples: Stephenson’s locomotive, Edison’s incandescent light
bulb, Hargreaves’s spinning jenny and Newcomen’s steam
engine.
 In recent times , we have had the Sony Walkman and Apple iPod.
 Value from Products
 2) Additional benefits: Companies can deliver
more value for customers by attaching more
benefits to their products.
 Examples: A lawnmower operates more quietly. A
car comes with a five-year warranty. A forklift
truck is supplied with a free options package.
 3) Product–Service bundling: occurs when
companies offer their customers a package of
goods and services at a single price.
 Value from Products
 Example: Tour operators regularly bundle many
elements of a vacation together: flights, transfers,
accommodation and meal plans.
 For the customer, bundling can decrease money,
search and psychic costs.
 4) Branding:
 A brand is any name, design, style, word or
symbol that differentiates a product from its
competitors.
 Value from Products
 Brands create value for customers in many ways, on both
sides of the value equation. Such as:
 1) Brands reduce search costs by clearly differentiating one
product as different from others.
 2) Brands can also reduce psychic costs: assign meanings to
brands.
 For example: If a person buys a Mercedes, it may be because
they understand that the brand attributes are excellence in
engineering, assured quality build, and high resale value.
 Customers who understands what a brand means are less at
risk than customers do not understand the brand.
 Value from Products
 3) Brands also offer assurance of a particular
customer experience:
 For example: when a customer buys any products
carrying the Samsung brand it may be because they
believe that Samsung’s brand values are service
excellence, innovation and good value.
 Value from Products
 5) Product Synergies: Firms can create value for
customers by finding synergies between products in
the company’s product portfolio.
 For example: If a customer buys Microsoft
software, the company will offer you
complementary software for related applications.
 Value from Services
 The following are a number of service-related
methods for creating value:
 1) Improving Service Quality
 2) Service Guarantees

 3) Service Level Agreements

 4) Service Recovery Programs

 Value from Services
 1) Improving service quality: There are
two main perspectives on service quality:
 1) Quality is conformance to specification: This
could mean:
 – producing error-free invoices
 – delivering on time, in full as promised to customers
 – acknowledging a customer complaint within 24
hours.
 Value from Services
 2) Quality is fitness for purpose: Joseph M. Juran
proposed that quality means developing products
that suit customer requirements, and therefore
meet their expectations.
 According to this perspective, the customer decides
whether quality is right not the company.
 Example: If a customer is an executive limousine
company, a Mercedes is the right quality vehicle.
 Value from Services
 2) Service Guarantees: From the customer’s
viewpoint, guarantees can be an effective method
to decrease risk and increase value.
 A service guarantee is an absolute promise to the
customer that a certain level of service will be
delivered.
 Service guarantees can be specific or general.
 Specific service guarantees relate to specific parts
of the customer experience.
Example of a Service Guarantee
 Value from Services
 For example: Sleep well or it’s a free night. We
guarantee it (Howard Johnson’s Hotels).
 General service guarantees relate to the entire
customer experience.
 For example: We guarantee to give perfect
satisfaction in every way (LL Bean).
 Value from Services
 3) Service Level Agreements (SLAs) : is a
contractual commitment between a service provider
and a customer that details the mutual responsibilities
of both parties regarding services that will be furnished
and the standards at which they will be performed.
 SLAs can apply to internal and external customer
relationships
 For example: it is very common for utility companies
to outsource their customer contact function to a third
party.
 Value from Services
 Several metrics are used to measure performance
of the supplier to ensure compliance with SLA
service standards. They are:
 1) Availability: the percentage of time that the service
is available over an agreed period of time.
 2) Usage: the number of service users that can be
served at the same time.
 3) Reliability: the percentage of time that the service
is cut off or fails in the time period
 Value from Services
 4) Responsiveness: the speed with which a
demand for service is completed.
 Responsiveness can be measured using turn-around
time or cycle-time.
 5) User satisfaction: this can be measured at the
time the service is supplied or periodically
throughout the agreed service period.
 Value from Services
 4) Service Recovery Programs: includes all
the actions taken by a company to fix a service failure.
 Services fail occur for many reasons such as technical
service quality fails; at other times the failure is in
functional service quality.
 Service fails are sometimes the fault of the company
and sometimes it is the fault of the customer.
 Customers do not care whose fault it ; they just want
the situation resolved.
 Value from Processes
 One important process that needs to be managed
effectively is the complaints management process.
 An effective complaints handling process allows
companies to capture customer complaints before
customers begin to spread negative word of-mouth
or take their business elsewhere.
 Xerox’s 14 Key
Business Processes
 Value from Processes
 Many unhappy customers don’t complain. Why? There are
a number reasons such as:
 1) The customers feel the company doesn’t care.
 2) The company or the industry has a reputation for treating
customers badly.
 3) It takes too much time and effort to complain.
 4) Customers are worried about retribution.
 5) Customers don’t know how to complain.
 Companies can deal with all of these issues by educating
their customers about their complaints policy and processes.
Improving the Complaints Management Process
 Value from People
 Many companies state people are their key
differentiators, and a main source of customer value.
 Example: In professional services such as counseling,
consulting and coaching, the people are the product.
 The UK-based home improvement retailer B & Q adds
value to their customers shopping experience by hiring
former building tradesmen such as carpenters,
electricians and plumbers to help customers determine
their problems and choose the right products in-store.
 Value from Physical
Evidence

 Physical evidence is made up of the tangible facilities,

equipment and materials that companies use to
communicate value to customers.
 Physical evidence includes a company’s:
 Buildings and other physical locations
 Their internal and external environments
 Print materials
 Websites
 Corporate uniforms
 Vehicle colors or symbols
 Value from Customer
Communication

 Companies can now create value for customers

from communication practices that were impossible
twenty or thirty years ago.
 A big change in communication is that companies
can facilitate multilateral communication:
company-to-customer, customer-to-company and
even customer-to-customer.
 Value from Customer
Communication

 Three processes are responsible for the

improved power of communication to create
value for customers: They are:
 1) Disintermediation: the development of new
technologies has lead to the development of many
direct-to-customer (DTC) communication tools
including e-mail, direct mail and SMS messaging
to mobile phones.
 Value from Customer
Communication

 2) Personalization: High-quality customer-related

data, CRM technologies and DTC channels, in
combination, allows companies to customize offers
and communications to individual customers.
 3) Interactivity: The Internet has revolutionized
the opportunity for interactivity through three
major technologies: e-mail, instant messaging and
the World Wide Web (WWW).
 Value from Channels
 E-Marketing channels has allowed many
companies to replace or add to their traditional
bricks-and-mortar channels.
 Many companies developed transactional websites
so that they can sell directly to customers
 Other companies developed brochureware sites
that direct interested prospects to traditional
channel members.
 Reference
 Buttle, F., & Maklan S. (2019). Customer
Relationship Management: Concepts &
Technologies, 4th edition, Routledge.