Organizations must understand when, why and how customers react to products, services and price changes, and use that information to better manage their customers through value managing internal functions and processes. Unfortunately, many organizations' information systems have historically emphasized internal financial results. Few organizations have paid enough attention to truly understanding markets, channels, competitors and specific customers.

Defining Customer Value

The concept of value is ever present in the minds of most customers. Such phrases as "value for the money," "best value," and "you get what you pay for" are fairly commonplace. Customers have at least two different definitions of value.

Value is getting what I want in a product/service: buyers look at value in terms of the benefits they receive from the item or service. They focus on their own subjective estimate of the usefulness or amount of need satisfaction resulting from the product.

Value is low price: other buyers use the word "value" to refer to situations where they simply pay a relatively low price. The focus here is purely on what is given up monetarily.

Since the customer determines the anticipated benefits and costs, it is the customer's perception of each that is relevant. The customer's perceptions of expected benefits derive from product attributes and service attributes, each of which may be subdivided into greater detail. Different customers will probably place different priorities and emphases on the various product and service attributes. Expected costs consist of the specific purchase price or cost during the transaction, plus continuing life cycle costs of sustaining the product and service, plus a risk factor based on the life of the product and/or service and the relative uncertainty of the life cycle costs.

Customer Value Axioms

Five fundamental customer value axioms apply to virtually any business in any industry. Organizations in growing and changing industries must learn these axioms quickly; organizations in more stable industries have a little more time.

First, the customer defines the product quality, service quality and acceptable price. More important, it is possible to translate customers' expectations of benefits and costs into usable data. Organizations must implement organized systems to capture customers' expectations of product and service quality and reasonable price.

Second, customers form their expectations relative to competitive alternatives. Determining what customers think of an organization's products without referring to these alternatives is hollow. An organization can actually improve its product and service quality and reduce its price and still lose ground to its competitors. Relative performance can only be determined by both customer and competitive analysis.

Third, customer expectations change, usually upward. The rate of change is determined largely by competitive performance. As markets become more competitive, those competitors cause changes and offer alternatives, which in turn influence customer expectations. An organization must undergo a continuous process of determining customer expectations.

Fourth, product and service quality must extend throughout the value chain. Upstream suppliers must continually improve quality; all the downstream intermediaries must deliver maximum value to the end user.

Fifth, maximizing customer value requires that the whole organization be involved. Top management directives alone will have little effect. Delegating responsibility to functional departments such as marketing, sales or customer service will have little effect. To maximize customer value through product and service quality, all members of the organization must assume responsibility.

These five axioms constitute the core issues of customer value. Management must recognize and explicitly address all five. An organization that ignores any one of them in the handbook will probably not achieve outstanding customer value.

Download Full Text MAG