CUSTOMER VALUE HIERARCHY

Let’s get a bit academic. According to Karl Albrecht, a leading thinker in the services marketing area, customer value is best thought of as a hierarchy. This hierarchy is going to determine the perceived value of a certain product or service in terms of what the consumer expects and does not expect from the purchase experience. I will use a hotel as an example to explain each level of customer value.

1.       Basic customer value

It encompass all the requirements of doing business. In other words, it is the fundamental component of your value proposition to be in business. At the basic level, a company provides essential core attributes that customers need. If this basic level is not provided, customers will not buy the product. However delivering it will not generate competitiveness in the market.

In our hotel example, a clean bed is part of the basic value that the company can offer.

2.       Expected customer value

At this level the company provides attributes that customers take for granted. A company providing attributes at the expected level is only providing an average standard service; there is nothing better about the service offer compared to the competition. Customers may only be moderately satisfied, and there is no incentive to return or recommend this company.

Expected attributes of a mid-scale hotel might be an efficient check-in or availability of a bar/restaurant.

3.       Desired customer value

Involves what the customer would like to have from the purchase and service experience. According to Destination Marketing's website, desired value presents the first opportunity for a small business to move ahead of competitors by giving the customer desirable add-on features to the purchase and service experience. Companies providing the desirable offer are competing more effectively than most of their competitors.

The friendliness of the staff, the quality of the food and the efficiency of the service are examples of attributes that customers know, but do not always expect.

4.       Unanticipated customer value

At the unanticipated level companies offer customers ‘delightful and surprising’ attributes that demonstrate outstanding service quality. These features can help a small business win consumer loyalty over the competition and generate repeat sales over time. Companies operating at the unanticipated level can be said to delight their customers with memorable experiences, and are achieving a significant advantage over their competitors. The difficulty with providing unanticipated levels of service all the time is that customers begin to expect these delightful surprises, and competitors copy them.

Examples might include imaginative decor and fittings, staff who perform exceptional service, or cuisine with unforgettable taste sensations.  

As we can see the marketing implication should go beyond the basics and expectations and strive to offer truly superior customer value by providing desired or unanticipated values.

Albrecht, K., 1994. Customer value, Executive Excellence. Sept. pp. 14-15.

PROVIDING EVIDENCE OF YOUR CUSTOMER VALUE

We understand how important is to deliver high customer value but this will mean nothing if our customers are not aware of it. A critical factor is being able to prove your value. Potential customers require evidence of your capability and value. As stated by Barnes et al (2009) in a “world made cynical by hype, your word is simply not enough”.

It is essential to provide a reason to choose you through credible evidence to prove your claims. The authors propose the following tools; case studies, write a book and become a thought leader, develop articles or use on- and off-line, publish customer testimonials and a value calculator. This last point relates to the need to adopt formal measurement techniques to measure and track the impact of your value proposition.

British Airways represents a good example of how a company can create a value calculator to materialise customer value. They are using EasyJet and Ryanair to demonstrate how BA’s customer value is higher than their competitors. This tool enable users to select how they are choosing to travel; checking at the airport or online, selection seat 24 hours before they fly, taking a bag or even opting for food and drinks on board. Once all the options are selected it will calculate what Ryanair, EasyJet and BA will charge for those options.

The objective of the calculator is to highlight the customer value delivered by BA in comparison to what their closest competitors are offering for a higher price. BA head of UK and Ireland sales Richard Tams said: ‘Some no-frills carriers charge for a range of ‘extras’ that we consider to be part of our core service, from checking in a bag to food and drinks on board. On a round trip customers can be paying up to £375 on Ryanair and £79 on EasyJet for these ‘extras’ in addition to their fare. The no frills airlines claim they’re always cheaper. Our calculator shows they are not.’

As we can see, providing evidence of your value is critical for your ongoing success. Any company must decide which measures to use and implement them, communicating the results to help them growing sales and keep the business focused on value.

Barnes C., Blake H. and Pinder D., 2009. Creating & delivering your value proposition: managing customer experience for profit. London. Kogan Page.

CUSTOMER VALUE: RESIDES ON COMPANIES OR ON CUSTOMERS?

So far, I have analysed customer value as a group of characteristics attached to a company’s offering. It looks like the company can play with them to increase customer value. From my point of view, I wonder whether customer value is in the company’s hands. It seems to me that customers have the power to decide whether a company is delivering customer value or not depending on what they value the most.

The Customer and Leadership Blog, states that value does not reside in the product or service a company offer. Value is in customer’s mind. Each individual will perceive it in a different way. For example, a supermarket introducing home delivery service, will be much appreciated by a housebound customer than someone who enjoys visiting the establishment.

Well… Let’s say that customer value is in customer’s hands. Now we need to distinguish what kind of elements create customer value. Continuing with the previous blog, they describe 5 elements in customer value:

1.       Benefit.

The closer you offer is to the perfect solution for the job and the desired outcomes, the more benefit it deliver and the more value you create for your customer. As we have said above, each customer will have a different perceptions of customer value. To manage this situation it is important to detect different segments among the customer base.

2.       Effort

This element goes beyond the product benefits and focus on the ease and convenience of using a certain product. It is essential that the company pays attention to more than just product and service, in this case, we are talking about distribution channels and the whole usage process of the product as a key to increase customer value.

As stated by Fifield “Generally, there will be greater customer value attached to those offerings, where the organisation has spent time, research, effort and insight into finding new ways of making the old jobs easier”.

3.       Risk

The perceived value will be diminished when a great level of risk is attached to a certain product. The perceived risk is much higher when the customer has a lack of knowledge and prior experience in how best to get his job done.  And in particular how to judge the expertise of the supplier and the quality of the offer. Since we are risk averse, it is in the company’s hand to minimize this element.

4.       Price

Undoubtedly this is the most complex component of the customer value equation. There are innumerable variables to take into account when determining the price of a product or service. It is not a simple formula and depending on the price we decide for our product it will have multiple connotations. For example, we may think that a cheap product is always better from a customer’s point of view but they may link this with a low quality and prefer to buy something more expensive.

5.       Treatment

The last element of perceived customer value makes reference to service. Customers will always prefer to do business with organizations that leave them feeling “valued”.  Again we see how important customer service is.

STORYTELLING AS CUSTOMER VALUE ENHANCING TOOL

One of the most recommended tools to create customer value around your product offer is to use storytelling. Joshua Glenn and Rob Walker designed the Significant Object Project, to empirically demonstrate how adding a fictional story to an insignificant object can turn it into a significant one.

“Stories are such a powerful driver of emotional value that their effect on any given object’s subjective value can actually be measured objectively.” — Joshua Glenn and Rob Walker

The idea was tested on eBay. A writer is paired with an object purchased from thrift stores and garage sales and he or she writes a fictional story about the object. Each object is listed for sale on eBay, but instead of using a factual description the newly written story is used. After 5 months, they sold $128.74 worth of thrift-store trinkets for an amount of $3.612,51. Their hypothesis was validated. The “value in trade” of the thrift-store objects was increased by the use of engaging stories attached to them.

The take-away message from the Significant Object Project is that stories increase not only the objective value of your offering but also the subjective value, which leads to willingness to pay a price premium.

Okay, now we know the importance of storytelling, but the next step will be to distinguish what kind of stories are the most successful to enhance customer value of your offering.

Heidi Cohen, president of the Actionable Marketing Guide, presents in her website 5 value enhancing stories every business can tell:

1.  Focus the story on your business history. Link your product to how the business started. This kind of strategy seems to work very well for family owned businesses.

2. Focus the story on your product’s secret ingredient. Enhance whatever is core to your total offering that makes it different.

3. Focus the story on the location of the business. Find something special of the place where the business is located and attach special stories of the place to your offering.

4.  Focus the story on the behind the scenes of your company. Bring attention to show the way people create the product. It can be done by interviewing different members of the team and letting them tell the story.

5.  Focus on the people behind the company. The idea is to gather content from your workers regarding why they chose to work for the firm, what they like about the product or their co-workers. This approach makes your offering more personal, creating a real connection between employees and potential customers.

6.  FOCUS ON YOUR CUSTOMERS! Gathering stories from your customers, showing how they discovered the company, how they use the product and why is this helpful in their lives.

As we can see, putting the customer as the creator of the story is a very effective strategy to be followed by companies. Having your story told by a trusted person seems to be crucial to introduce your product to the audience you intend to reach. 

An example of a success story is Kleenex. They wanted to shift the perception of their product from snot to style. In order to do so, they contacted hundreds of bloggers reaching an interior decorating and fashion audience, and offered them to own the first three pages of Google search results for the words "Kleenex style", this idea gave them 400% greater engagement on their blogs and at the same time the story was shared among the audience in a trusted way. Mother Overload was one of those storytellers.

CUSTOMER SERVICE TO INCREASE CUSTOMER VALUE: BEST PRACTICE EXAMPLES

Customer service is another source of competitive differentiation for businesses and therefore, it should be enhanced to increase customer value. Consumers have access to an increasing number of customer service touchpoints; traditional telephone support, email, digital channels like live chat, social media and mobile. 

Delivering good customer service does not necessarily come cheap but as stated by eMarketer, consumers have demonstrated they are willing to pay more if a retailer acts in their best interest, helps them to get more value out of the products they purchase, creates convenient new ways to shop, and let them know when to expect delivery of an order.

As stated by SkillsYouNeed, we tend to remember positive and negative experiences more vividly than average day-to-day ones. It is essential to make every customer’s experience a positive one that they’ll remember and talk to others about. Nothing is more powerful than going out of your way to give a customer something that they were not expecting or anticipating from you. Every contact between customer and company is a new opportunity to create an unforgettable experience.

It is important to know which are the preferred touchpoints and improve them to deliver the best customer service. According to a study from eDigital’s Customer Service Benchmark, from all the customer service touchpoints available within a company, live chat has the highest satisfaction levels (73%), followed by email (61%) and app (53%). SMS (41%) and phone (44%) can be found at the bottom of this list. 

Given that customers appreciate it, and it has shown to be helpful as a sales driver, I can see the use of live chat becoming more popular in order to increase customer value.

As we can see, those companies that understand how to use the latest digital channels to help customers will be rewarded with loyal customers who spend more and advocate for the brand. No matter the size of your business, if you wish to increase customer value, it is important to provide good customer service to all types of customers, including potential, new and existing customers.

PERSONALIZATION TO INCREASE CUSTOMER VALUE: BEST PRACTICE EXAMPLES

As we saw in the previous post, one of the most recommended tools to create customer value around your product offer is to make use of personalization. I will tackle personalization from an online perspective.

In a study by Janrain, it was found that 73% of consumers were fed up with being presented with irrelevant content. According to US marketers, the value of marketing automation goes beyond the top of the funnel. It also improves the performance of almost every other stage of the buyer’s journey. The infographic below, from Marketing Automation:Popular Tools & Trends, explains additional benefits associated with personalized marketing automation and customer relations.

As stated by Jose Perez in his post: How personalized marketing can increase your eCommerce sales, the key to personalized marketing is to create messages and actions tailored to the visitor based on their previous viewing and purchasing behaviour.

Having all this reasons to implement personalization in our company in order to increase customer value, how can we deliver personalized messages to our customers?

-       1. Requesting an email address after the visitor has displayed some intent to buy. It can be used to send them an automated email inviting them to look at the items they have in their shopping cart or email them with top sellers based on their last transaction. According to Experian’s 2013, personalized emails generate on average 6x more revenue than non-personalized email and recommended products automatically generate 46% more revenue than products that we select.

-     2. Personalized product recommendation engines. Amazon is making use of this tool in a very effective way. One option is to show items that have been frequently viewed, considered, or purchased with the one the customer is currently considering, but they also employ a method based on browsing history.

According to a MyBuys study of more than 100 top Internet retailers, recommending products in the shopping cart based on a user’s purchasing or browsing behaviour resulted in a 915% increase in conversion rate.

3. Modify website on real time, based on customer behaviour. This tool, commonly known as behavioural targeting, allows to modify the website to target different types of users (new users, users who have completed more than 3 purchases in the last month, unregistered users, etc). After a certain behaviour has been observed we can modify the website in the following ways (display a pop-up with specific content for specific visitors, a pop-up to capture unregistered user mails, replace existing web content, add or delete items).

The brands that will truly personalize the customer’s experience are those that take a hybrid approach to the above solutions. The combined approach of predictive intelligence and customized customer journeys will definitely increase engagement and drive sales, making brands industry leaders.

BEST WAYS TO DELIVER HIGHER CUSTOMER VALUE

When the customer perceives that a product is of a great value the willingness to pay a price premium increases, and again, we are not just talking about money. After searching several sources I made my own list of the 3 best ways to deliver higher customer value:

1. Personalization

With personalization we mean that the more personalized the experience, the happier the customer. Personalized marketing are messages and actions tailored to the visitor based on their previous viewing and purchasing behaviour. 

According to a study from the University of Texas, with personalization we feel more in control because we are getting something tailored to us, but also personalization can help reduce our perception of information overload. For example, when we know that certain product features have been tailored to us, it provides a higher level of engagement as we will be presented with the characteristics we were looking for. In short, personalization is an effective tool to create a closer relation between the company and the customer, increasing therefore, customer value.

2. Efficient Customer Service

A study by Zendesk found that consumers rank customer service higher than price to stay loyal to a brand. Such a statement should make every company aware of the importance of coming up with consistent multichannel approach, incorporating email, social and a call centre, but being present is just not enough. It is essential to have a proactive approach on every channel and the main objective is solve customer’s problems delivering value. In an ideal situation customers should end the conversation with the customer service team thinking that what started as a problem ended as something beneficial.

Having an efficient customer service is one of the pending subjects for the majority of companies in the market. In a bid to reduce costs many companies make it extremely difficult for customers to speak to someone on the phone and instead force people to get in contact via email or a web form. This damages the overall customer experience, and therefore diminishes customer value.

3. Storytelling

According to Zideate, an online site where marketing concepts are explained, storytelling is a marketing tactic based on the premise that people remember information better when it is told as a story rather than presented as a list of facts. The main reason for it is that, stories evoke an emotional reaction on the audience. Marketing campaigns that arouse an emotion response are more likely to be remembered even when the public is not interested in the product. The perceived customer value can be enhanced by using storytelling as a less obvious form of persuasion. The audience will be willing to pay more for the product as they perceived it of a high value because of the story attached to it.

Conclusion

There are many more ways available to improve customer value. After researching several sources I detected the above forms of delivering a higher customer value as the most used ones. I would like to deepen my knowledge in the following posts, so I will try to find best practice industry examples for each one of them.

HOW CAN WE KNOW WHAT IS VALUABLE FOR OUR CUSTOMERS?

One of the most extended mistakes from a company’s point of view is to communicate a set of attributes linked to the commercialized product without researching whether their customers value those attributes or not. 

Understanding what they value seems to be the first step in delivering customer value. A company may think that its offering has a very attractive value to the consumer but they don’t perceive it like that. In this case, all their efforts will not produce a positive response from the consumer point of view. It is important to know the consumer profile and what characteristics are more valuable for them. As stated by the Marketing Donut, understanding customers is the key to giving them good service and therefore, deliver better customer value. They identify three main ways to better understand customers:

1.       Put yourself in your customer’s shoes.

This point requires to take a hard look at the main touchpoints between customers and your company. Customers expect you to deliver what has been promised but also surpass their expectations. Being able to do so will increase customer value and therefore word-of-mouth recommendations.

2.       Collect and analyse data.

Understanding comes from constant refinement of data. A company’s database holds valuable information about customers that will enable to understand and anticipate their needs. CRM systems can help to identify customers’ needs by analysing their behaviour and preferences.

3.       Ask them what they think.

Not everyone complains, instead, they will tell their friends about their bad experience. It is essential to act proactively to discover what you are doing wrong. Conducting a customer satisfaction survey to gain valuable insights. It is important to tell them what the company has changed as a result of their feedback, it will make them feel valued.

To make things worse, knowing what your customers value the most is not enough, suppliers must have the capability to anticipate what customers will value in the future because it is constantly changing. The American Marketing Association identifies the following methods to anticipate customer's needs within a company’s offering:

1.       Direct measurement of needs and benefits: A survey research is conducted with large batteries of items, such as explicit indicators of current and future needs. Customers can be divided into groups according to the similarity of their profile of needs.

2.       Problem detection: Since it is easier that customers say what’s wrong with a company rather than what they want, this technique measures problems experienced instead of needs themselves.

3.       Information acceleration: This method tries to bring the future into the present. To understand customer response to a future environment they stimulate this alternative environment and measure response to them.

4.       Historic trend analysis/forecasting the future: Using knowledge of the past to bear to infer in the future. It uses customer behaviour of the past to build future business designs. The problem is that customers not always behave in the same way.

5.       Lead user analysis: They assume future reactions looking at people whose behaviour appears to be leading indicators of the future customers.



Okay, now that we know that customer value is constantly changing, what can a company do to overcome this situation? It looks like the solution is INNOVATION.

Customer Think presents innovation as a “New” Value Creation tool, it is described as a crucial process for any company to survive in a competitive market. To be truly innovative, the invention needs to create economic value, and it can be done in the following ways:

• Adding a new feature to a product (value = increase sales)
• Improving process to reduce waste (value = reduced costs)
• Creating a new product (value = penetrate new markets)

Until now, everything seems to be in the company’s hands, but I will analyse different sources to discover whether customer value resides on companies or customers.

MEASURING CUSTOMER VALUE

We know customer value is part of every business daily life, but the degree of this variable may vary depending on the company’s activities. Customer Champions, a team focused on converting customer feedback into profitable action has published valuable information about Customer Value Management (CVM), it helps to identify the elements of value which matter to customers, as well as assess the degree of significance each element holds within the overall value mix. 

This tool links customers to KPI’S by directly measuring the drivers of purchasing behaviour, and the impact it has on market share, profit and loss, recommendation, share of wallet and ROI amongst others. Using client’s data, Customer Champion has demonstrated how an increasing value has a positive impact on both willingness to recommend and the expected change in share of wallet for customers. 

How is CVM measured and interpreted?

Through surveys with predefined questions about customer’s perception of a product or service, and its competitors a ratio is created. Overall, a ratio higher than 1 means that the company has a relative competitive advantage in the market. If the ratio is lower than 1 the level of competitive weakness is high. And a score of 1 is direct parity with the competition. A more specific interpretation to different ratios is further explained in the graph below:

To change this ratio, it is essential to know which elements drive your customer’s perception of value. Data collection through surveys is the best way to shed light on this issue. In short, customer value can be improved by increasing relative perceive quality, by reducing relative perceived price or using a combination of both.

Delivering higher customer value should be a long term strategy. From my point of view, the idea of reducing relative perceived price can be an effective way to gain market share in the short term, however those customers that have once demonstrated a willingness to move for price will do so over and over again. The market will be doomed to operate on low margins with a customer base with propensity to constantly switch to the lowest-price operator.

After this analysis, we know how customer value can be measured and interpreted. I feel the need to discover which the best ways to improve this variable are. For my next post I will gather information about specific tools to increase customer value.

CREATING CUSTOMER VALUE

In order to be competitive in the market a company must deliver value to its customers. One of the most important questions a company has to formulate themselves is: how can a company create customer value to generate big profits? Many of us will suggest that the company has two options; either lower prices or increase quality of the product. But the truth is that there is much more behind the concept of customer value.

Nils de Witte, an expert on marketing posted the following video on YouTube, explaining what is customer value and how can it be improved.

Nils starts describing customer value as the result of dividing benefits by costs. Having said that, customer value will increase when either benefits increase and/or costs decrease. In addition, Nils affirms that the essence of creating value is: trading something that is low cost to you for something that is of high value to the customer. Therefore if a company aims to increase customer value, can either increase the benefits related to the purchase or decrease the costs attached to it.

As shown in the video benefits and costs should be analysed as something else than just value per money. It involves also time, attention, reputation, privacy, status, comfort, ease of mind excitement, entertainment or effort amongst others…

At this stage, I am really interested in getting to know specific tools to increase customer value from a company’s point of view.

DEFINING CUSTOMER VALUE

The first thing we need to know before search for best practice examples about customer value is to fully understand its meaning and which are the main elements embedded in this concept.

As stated by the SEO agency Builtvisible the market has radically changed. We were used to have a few brands in a seller’s market, where the focus was on decreasing costs and increasing volume becoming more efficient. The communicative process was not as important as it is today.

Now everything has changed, we have an overwhelming abundance of offer, and the market is known by having a fierce competition. Customers have high expectations and little loyalty if they are not met. We are living in a buyers’ market. In this scenario companies have to communicate value in order to attract consumers. That is why we need to understand what value is and what is not.

CONCEPT: CUSTOMER VALUE 

According to a dictionary definition, customer value is the difference between what a customer pays for a product or service and the value they get from it

Following a post from Harvard Business Review, customer value is the worth in monetary terms of the technical, economic, service and social benefits a customer receives in exchange for the price it pays for a market offering.

I personally, find this definition quite limited since it is just taking into account money and benefits... I believe there is more costs of acquiring a product/service beyond money.

Supporting my point of view, Chron defines customer value as the satisfaction a consumer feels after making a purchase for goods or services relative to what she must give up to receive them. A consumer doesn't consider value just in terms of money spent, but can also consider the time it takes to obtain a purchased product and interactions with customer service personnel. In summary, "customer value" focuses on a buyer's evaluation at the time of a certain purchase. The higher the value the higher the probability of having loyal customers.

WiseGeek warn us that the term "customer value" is frequently confused with the value of customer to businesses. I will try to differentiate them so that I will not use them indistinctly in future posts.

CUSTOMER VALUE VS CUSTOMER LIFETIME VALUE

When looking for information about customer value, I found out that it is common to use customer value (CV) and customer lifetime value (CLV) indistinctly, but I realized that both concepts are extremely different and shouldn't be confused. 

As stated by Techtarget, Customer Lifetime Value is a metric that represents the total net profit a company makes from any given customer. CLV is a projection to estimate a customer's monetary worth to a business after factoring in the value of the relationship with a customer over time. CLV is an important metric for determining how much money a company wants to spend on acquiring new customers and how much repeat business a company can expect from certain consumers.

Customer lifetime value is a tool for companies to use but customer value is a perception that will vary depending on what the offering is.

Having understood both concepts and knowing the main differences between them, I am ready to dig into customer value and learn more about it.

WELCOME TO THE BLOG!

As an MSc Marketing student, I have created this blog to help me develop my understanding on a certain marketing management topic. I will critically analyse the importance of customer value, supporting my arguments on best practice trends.

As a customer I make purchase decisions based on how valuable I perceive the product or service in relation to the price I will have to pay for it. This means that the company who is delivering a higher customer value will get a higher market share.

I am really interested in analysing how this concept is currently driving the marketplace. In order to be competitive it seems crucial to deliver the highest customer value, but is it up to company? Or is the customer determining the level of customer value from a product or service? I haven´t got an answer for it yet…

This project will be focused on achieving the following learning objectives:
1. Understand the concept of customer value: how to create it and how to measure it.

2. Find best practice examples to deliver higher customer value.

3. To understand until what extent customer value is on the company´s hand

 I will use this e-portfolio to show my progress in this learning journey.