L3 - Customer Value.pdf

B C O M 22353:
MARKETING
M A N A G E M E N T
Lesson III: Crafting Customer Value
Mr. Sachith Ranasinghe
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University of Kelaniya,Sri Lanka
Mr. Sachith Ranasinghe
B.Com (Special) Kelaniya
Lecturer (Probationary)
Department of Commerce And Financial Management
E-mail – sachithr@kln.ac.lk
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L E A R N I N G OBJECTIVES
1. Define Customer Perceived Value and explain the Customer Value Analysis
2. Explain value chain and identify application of value chain to an industry
3. Describe customer profitability and customer lifetime value
4. Define the marketing funnel and explain the concept of loyalty
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C u s t o m e r V a l u e , S a t i s f a c t i o n & L o y a l t y
• Managers who believe the customer is the company’s only true “profit
center” consider the traditional organization chart.
• Successful marketing companies invert the chart to look like Figure 5.1(b).
Managers at every level must be personally engaged in knowing, meeting,
and serving customers
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C u s t o m e r V a l u e , S a t i s f a c t i o n & L o y a l t y
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C u s t o m e r P e r c e i v e d V a l u e
Customer-perceived value (CPV) is the difference between the prospective
customer’s evaluation of all the benefits and costs of an offering and the
perceived alternatives.
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CPV
TCB
TCC

• Total Customer Benefit is the perceived monetary value of the bundle of
economic, functional, and psychological benefits customers expect from a
given market offering because of the product, service, people, and
image.
• Total Customer Cost is the perceived bundle of costs customers expect to
incur in evaluating, obtaining, using, and disposing of the given market
offering, including monetary, time, energy, and psychological costs.
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1. Total Customer Cost
a. Monetary Cost
b. Time Cost
c. Energy Cost
d. Psychological Cost
2. Total Customer Benefit
a. Product Benefit
b. Services Benefit
c. Personnel Benefit
d. Image Cost

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Total Customer Cost
a) Monetary Cost - the price paid for the product or service by the
customer.
b) Time Cost – the cost to the customer in time spent in the decision
making and buying process such as searching, evaluating, purchasing and
delivery lead times.
c) Energy Cost - the degree of physical effort expended by the customer
while searching for, evaluating, buying, installing, using and receiving
delivery of the product.
d) Psychological Cost - the cost related to any dissatisfaction and
frustration experienced by the customer during the evaluation and
purchasing journey.

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Total Customer Benefit
a) Product Benefit - the basic attributes of the product such as quality,
design, functionality, packaging and cost savings.
b) Services Benefit – the support services offered alongside the product.
These may include pre-sales and post-sales customer services such as
delivery, installation, warranties, servicing and guarantees.
c) Personnel Benefit - the value added by company representatives during
the sales process to overcome customer objections and facilitate a sale.
d) Image Benefit - the perceived value to a customer of increased image and
reputation achieved by being seen to own and use the product.

C u s t o m e r V a l u e A n a l y s i s
• Managers conduct a customer value analysis to reveal the company’s
strengths and weaknesses relative to those of various competitors, a
systematic process with multiple steps.
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1. Identify the major attributes and benefits that customers value.
2. Assess the quantitative importance of the different attributes and benefit.
3. Assess the company’s and competitors’ performances on the different customer
values against their rated importance.
4. Examine how customers in a specific segment rate the company’s performance.
against a specific major competitor on an individual attribute or benefit basis.
5. Monitor customer values over time.
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1. Identify the major attributes and benefits that
customers value
Customers are asked what attributes, benefits, and performance levels they
look for in choosing a product and vendors. Attributes and benefits should be
defined broadly to encompass all the inputs to customers’ decisions.
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2. Assess the quantitative importance of the
different attributes and benefits
Customers are asked to rate the importance of different attributes and
benefits. If their ratings diverge too much, the marketer should cluster them
into different segments.
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3. Assess the company’s and competitors’
performances on the different customer values
against their rated importance.
Customers describe where they see the company’s and competitors’
performances on each attribute and benefit.
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4. Examine how customers in a specific segment
rate the company’s performance against a specific
major competitor on an individual attribute or
benefit basis
If the company’s offer exceeds the competitor’s offer on all important
attributes and benefits, the company can charge a higher price (thereby
earning higher profits), or it can charge the same price and gain more
market share.
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5. Monitor customer values over time
The company must periodically redo its studies of customer values and
competitors’ standings as the economy, technology, and product features
change.
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Choice Processes and Implications
• Some marketers might argue the process we have described is too
rational.
• TPB versus Impulse Buying.
• Buying only for Customer’s Personal Benefit.
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Choice Processes and Implications
1. The buyer might be under orders to buy at the lowest price.
2. The buyer will retire before the company realizes the competitive
product is more expensive to operate.
3. The buyer enjoys a long-term friendship with the competitive
organization’s salesperson.
Buyers operate under various constraints and occasionally make choices that give
more weight to their personal benefit than to the company’s benefit
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CPV - Conclusion
1. It suggests that the seller must assess the total customer benefit and
total customer cost associated with each competitor’s offer in order to
know how its own offer rates in the buyer’s mind.
2. It also implies that the seller at a disadvantage has two alternatives:
increase total customer benefit or decrease total customer cost.
3. The former calls for strengthening or augmenting the economical,
functional, and psychological benefits. The latter calls for reducing the
buyer’s costs.
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Delivering High Customer Value – Attaining Loyalty
• Loyalty has been defined as “a deeply
held commitment to rebuy or re-
patronize a preferred product or service
in the future despite situational
influences and marketing efforts having
the potential to cause switching
behavior.”
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Delivering High Customer Value – Attaining Loyalty
• Value Proposition consists of the whole cluster of benefits the company
promises to deliver; it is more than the core positioning of the offering.
• Value Delivery System includes all the experiences the customer will
have on the way to obtaining and using the offering. At the heart of a
good value delivery system is a set of core business processes that help
deliver distinctive consumer value.
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T h e V a l u e C h a i n
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T h e V a l u e C h a i n – V a l u e D e l i v e r y
N e t w o r k
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P a t h w a y s t o b u i l d C u s t o m e r L o y a l t y
1. Interact Closely with Customers - Connecting customers, clients, patients, and
others directly with company employees is highly motivating and informative.
2. Develop Loyalty Programs – e.g.: Frequency programs (FPs) are designed to
reward customers who buy frequently and in substantial amounts.
3. Build Brand Communities - A brand community is a specialized community of
consumers and employees whose identification and activities focus around the
brand.
a) A “consciousness of kind”,
b) Shared rituals, stories, and traditions that help convey the meaning of the
community,
c) A shared moral responsibility or duty to both the community as a whole and individual
community members
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P a t h w a y s t o b u i l d C u s t o m e r L o y a l t y
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Customer Profitability
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• A profitable customer is a person, household, or company that over time
yields a revenue stream exceeding by an acceptable amount the
company’s cost stream for attracting, selling, and serving that customer.
• Marketers can assess customer profitability individually, by market
segment, or by channel.
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Customer Profitability
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• Individual or Segmented? Common Approach
Many companies measure customer satisfaction, but few measure individual
customer profitability. Banks claim this is a difficult task because each customer
uses different banking services, and the transactions are logged in different
departments.
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Customer Profitability Analysis
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Customer profitability analysis (CPA) is best conducted with the tools of an
accounting technique called Activity Based Costing (ABC).
ABC accounting tries to identify the real costs associated with serving each
customer—the costs of products and services based on the resources they consume.
The company estimates all revenue coming from the customer, less all costs.
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Customer Profitability Analysis
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Each cell contains a symbol representing the profitability of selling that product to
that customer. Customer 1 is very profitable; he buys two profit-making products (P1
and P2). Customer 2 yields mixed profitability; she buys one profitable product (P1)
and one unprofitable product (P3). Customer 3 is a losing customer because he buys
one profitable product (P1) and two unprofitable products (P3 and P4).
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Customer Lifetime Value (CLV)
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Customer lifetime value (CLV) describes the net present value of the stream
of future profits expected over the customer’s lifetime purchases.
The company must subtract from its expected revenues the expected costs of
attracting, selling, and servicing the account of that customer, applying the
appropriate discount rate (depending on cost of capital and risk attitudes).
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Customer Churn (Defection)
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It is not enough to attract new customers; the company must also keep them
and increase their business.
To reduce the defection rate, the company must:
1. Define and measure its retention rate. (subscription rate, graduation rate, etc.)
2. Distinguish the causes of customer attrition and identify those that can be
managed better. (poor service, shoddy products, and high prices versus changing
geo area)
3. Compare the lost customer’s lifetime value to the costs of reducing the defection
rate.
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The Marketing Funnel
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• The marketing funnel identifies the percentage of the potential target
market at each stage in the decision process, from merely aware to highly
loyal.
• Consumers must move through each stage before becoming loyal
customers.
• Some marketers extend the funnel to include loyal customers who are
brand advocates or even partners with the firm.
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Contemporary Pathways to Cultivate Customer
Relationships
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• Customer Relationship Management (CRM) is the process of carefully managing
detailed information about individual customers and all customer “touch points” to
maximize loyalty.
• Customer Value Management (CVM), describes the company’s optimization of the
value of its customer base. CVM focuses on the analysis of individual data on
prospects and customers to develop marketing strategies to acquire and retain
customers and drive customer behavior.
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Contemporary Pathways to Cultivate Customer
Relationships
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• Personalizing Marketing is about making sure the brand and its marketing are as
personally relevant as possible to as many customers as possible.
• Customer Empowerment and Customer Reviews & Recommendations
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