Can the customer value proposition be saved by service dominant logic?

6th Oct 2010

'Value propositions' are over-hyped and under-utilised according to Adrian Payne. But could service dominant logic and cocreation change this?

Many organisations spend too long thinking about the value that they receive from the customer and not long enough thinking about the value that they give to the customer. But if they spent a little more time thinking about the latter, they might just receive a little more of the former!
That was the message from professor Adrian Payne at Henley Business School last week as he weaved together topics including value creation, cocreation and service dominant logic to deliver a masterclass in customer strategy for attendees.
"’Value proposition’ is a highly over-hyped term - a lot of people talk about it yet there is very little substance in terms of what people are doing," he explained. "It is just about the most used term in management, but the most under-utilised in terms of people actually having value propositions."
To demonstrate this, Payne outlined the findings of a study that the University of New South Wales had undertaken across four countries, and with over 200+ companies, to determine whether the term ‘value proposition’ was regularly used in the organisation and in what sense it was used. The research found that while 65% of organisations used the term, 92% of these used it in a very general sense, with only 8% having a structured process and formal approach to the value proposition that was communicated throughout the organisation.
Value from the organisation to the customer
US textile manufacturer Milliken was highlighted as an example of a business with a structured approach to a value proposition, a company that is so successful with its proposition that it succeeds in selling its industrial towels to laundries for a 15% price premium over the competition in a commodity market – something that should be unheard of.
But Milliken really understands the issue of ‘value’ for the customer.
  • Laundries that sign up with Milliken get access to a computerised routing system enabling them to route their trucks much more efficiently. As a consequence, they can get rid of a few trucks, redeploy the drivers and eventually make a long-term cost saving.
  • Milliken has developed specialised software for accounting and finance that allows laundries to do a lot more in-house and not go to expensive accountants.
  • Milliken also has a system that can be put in place that enables laundries to do an internal laundry comparison, so that they can benchmark where their industrial laundry sits along hundreds of others and benchmark where they sit, as well as providing a profit improvement programme that enables laundries to establish what they need to do to move to higher profitability.
  • Laundries also get factory leads from Millken.
  • Milliken also provides free training for the salesforce.
"Milliken doesn’t sell towels," explained Payne. "Its value proposition is ‘partners for profit’. It sells business profitability to its clients. This is the paradigm that we should be moving towards, trying to understand things more from the customer’s side of the table."
Value from the customer to the organisation
However, instead of thinking about the value that they are delivering to the customer from a starting point, businesses predominantly focus on the value that they receive from the customer – viewing the customer as "some great fat cow you milk until it expires", as an "infinite replaceable source". This approach is dominated by ‘goods dominant logic’, Payne explained, picking up on a thread from an earlier presentation by the University of Arizona’s Bob Lusch.
Quoting Peter Drucker, Lusch had emphasised that "the greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic".
"I’m suggesting a change to service-dominant logic, where the customer is a cocreator of value, where you are in a partnership with the customer," added Payne. "The idea is that value propositions are a reciprocal thing that go on. It is not a question of doing something and delivering it – it is a question of working with the customer."
However, when it comes to trying to maximise value, businesses rarely factor this thinking into their strategies. Instead, most spend the majority of their time, money and effort on acquisition – even if they don’t realise they are doing it.
To demonstrate this, Payne suggested that firms break down their marketing budgets line item by line item, looking at the amount spent on every single activity, attributing it to either acquisition or retention, to establish how much is being spent on each.
In a study of 200 companies, Payne found that while many businesses were convinced they were spending significantly on retention, 90% of them found that they were spending too much on acquisition when they looked at the break down. The reasons for this "mind disturbance" are numerous:
  • A belief that existing customers are being or will be retained as a given.
  • A belief that their churn rate is high so they must “fill the leaking bucket”.
  • Customer acquisition is reported regularly to shareholders/analysts/senior management, but businesses don’t report churn rates.
  • Sales teams are rewarded for acquisitions but not for retention.
But organisations should abandon this "unsavoury" focus on acquisition, to adopt a more reciprocalview of value. An example of this perspective is: "Natwest private banking provides trusted advisors, accessible at your convenience to manage and control your banking and investing requirements on your behalf contributing to a secure and hassle-free lifestyle,” explained Payne. “And then the other side of the equation is what does Natwest private banking receive? It receives a long-term client, a broad range of services, providing assets for the bank, paying premium banking services, and fees."
However, there is also an "important piece in the middle that unites the customer and the firm", and links the two perspectives of value. This is cocreation, which focuses on the interplay between the value the customer receives and the value the organisation receives. Cocreation, Payne suggested, is a topic much talked about, but perhaps little understood. Nonetheless, it is of increasing importance.
"The key to creating value is to coproduce offerings that mobilise your customer base. And if your company doesn’t capture the intelligence to create more fulfilling experiences by cocreation activities, your competitors will.
"It involves moving and changing perspective from an audience being passive to being much more actively involved in the activity. It is an integrated process involving at least two resource integrating people - normally a firm and a customer but it could be other stakeholders as well – and that interaction provides the opportunity for value cocreation."
There are two main elements to cocreation, it was suggested: coproduction, which Evert Gummesson of Stockholm University had earlier demonstrated in his session on service systems with the example of Ikea’s build-it-yourself products; and other forms of cocreation. As of yet, no-one has deconstructed cocreation to break it up into its component parts to figure out what it means.
Payne, however, has proposed ’12 co’s’:
  • Coconception
  • Codesign
  • Coproduction
  • Copromotion
  • Copricing
  • Codistribution
  • Coconsumption
  • Coexperience
  • Cocreation
  • Cooutsourcing
  • Comaintenance
  • Codisposal
"I suggest this is a checklist or framework to think about where you might want to engage with the customer and lift your idea for cocreation from some mild things to a much more substantial form." However, he also added: "There is a tremendous opportunity and we haven’t even scratched the surface as to how we can actually engage in this."
In summary, Payne concluded that management application about the value proposition concept and its execution in a strategic and rigorous manner, is very under developed at present. Furthermore, with the growth in communities, value propositions also now need to be considered not only in terms of firm-stakeholder, but also stakeholder-stakeholder. However, cocreation could be a valuable signpost.
"I believe that it is very important to have a structured approach and be very clear what you stand for and share that right through the organisation," he concluded. "Cocreated value propositions have the potential to play a much more important role in developing robust long-term relationships."

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By dnic
06th Oct 2010 06:54

It is a bigger risk to "over-engineer" the development of an organisation's CVP (robust but takes too long) or to "fast track" it (get it into the business, impacting decisions, but not as robustly based on research and analysis)?

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By houstonone
08th Nov 2010 14:13

Good question to pose, but there can't be a single answer to this - some organisations might operate in a market where they have the time to build out their CVP in a comprehensive manner. For others, the risks of a half-baked CVP may be less damaging than taking too long to come to market.

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