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12 ways to create customer value

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29th Aug 2006
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Introduction

The value of investments in CRM applications stand or fall on the ability to attract, keep and develop profitable customers. Firms which resolutely stick to the old tried and tested product centric approaches to value creation are likely to fail on two counts:

  • An inability to differentiate resulting in low profit margins and competitive disadvantage.
  • Institutional myopia leading to long term decline.

We will take a brief look at traditional approaches - Marketing’s 7 P’s and why these are running out of steam. We will also contrast these with 5 emerging 'value creators' that offer far greater promise in the pursuit of the twin goals, superior customer value and as a result: competitive advantage.

Firms which persist with product centric approaches to value creation, are unlikely to be able to exploit any of these new and more powerful means. After all, it is difficult to plot a successful future when the only means to strategy development are the rear-view mirror and the shadows cast by past experience. These new levers also demand greater cross company collaboration to work.

The easy bit - what is superior value?

Professor Francis Buttle came up with a rather neat little equation to describe 'value' taken from the customer’s perspective.

(source: Mid-Market CRM Buttle & Cox 2004)

This means that if you can either increase the benefits or decrease the customer's sacrifice then he or she will experience 'value'. Superior value then, is doing this better than your competitors.

The 7 P’s

Originally there were four ‘P’s in the marketing mix:

  • Product
  • Price
  • Promotion
  • Place

The idea was to develop an optimum combination, based on the needs of those within target segments, which would either accelerate market share growth or profits or whatever the overall business objective might have been at the time. In product centric firms when markets were expanding, this often meant increasing prices or the sacrifice that the customer had to make in order to have the honour of owning one of your products. The artful combination of these four was considered sufficient to create differentiation and as a result win more business.
Three other 'P's were thrown into the mix during the 1990’s, the first of which was aided by technology:

  • Process
    • outbound - e.g. logistics, sales, production, supply chain
    • inbound – search for information, enquiries, complaints, returns

  • People (we will come back to this)
  • Physical evidence - packaging, premises, the look and feel that supports the brand image.

5 Emerging Value Creators

The rise of the internet, global competition, maturing markets, rising customer expectations and new e-business models, have changed the competitive landscape. The old-school world of the marketing mix, is still with us, but is no longer sufficient to make the desired difference. So what are customer focused firms doing that is different, and where might firms wishing to adapt to these new conditions focus their efforts?

  • A Solutions orientation
  • The Total Customer Experience
  • Value Network collaboration
  • Innovation
  • Customer Co-creation

Each of these is worthy of a study in itself. It can also be argued that there is often considerable overlap between them. Innovation for example can lead from any of the others, however for clarity it is worth considering them as distinct areas of focus.

Based on judgement, the emerging value creators are where the focus of attention is likely to be most rewarding – for customers and the business results. Different firms will reach different conclusions, but as the ability to differentiate and create value wanes amongst the former 7 'P's (with the notable exception of the 6th P, 'people'), these more complex and difficult - to-do value creators, are likely to increase in importance. We will now take a brief look at each one to see why.

A Solution Orientation

The somewhat hackneyed term 'solution' as opposed to 'product' suggests that the customer's actual need is being satisfied. In complex B2B transactions this usually implies some wrap-around service in order to deliver the benefit the customer is seeking. Professor Merlin Stone’s article Account management in a solutions world explores this in depth and provides many examples from a wide variety of industries. There are two underlying reasons for the rise in this product-augmenting strategy:

  • Customers are a finite resource – capturing their attention and gaining their trust requires a deeper understanding of their real needs and the ability to adapt offerings to fit them more closely. Increasingly they are coming to expect this. Merlin cited the CIO at the Dunlop Tire Company as an example, who said that uppermost in their decision on supplier selection is a deep understanding of their real business needs. You won’t get that from your standard photo-copier salesman.

  • Most products are becoming commoditised and services offer a means of improving profit margins.
    Whilst this makes sense, the problem is that competitive advantage is soon lost if competitors follow the same strategy or poach each others best salesmen. Nevertheless, this is one of those strategies that most firms will need as a price of entry.

Total Customer Experience

The emergence of Customer Experience Management over the last year or so, demonstrates that power has shifted inexorably to the customer. It is now not enough to offer a good product, service or solution. A look at the effort and work in the two case studies Why Ariba succeeds in customer driven improvement, and Building customer bridges at Honeywell, demonstrates the importance of having a feedback loop to customers in order to identify those hidden irritants or opportunities for enhancing the customer experience. This goes beyond simple customer satisfaction surveys, and as both cases show, the results lead to specific actions and continuous improvement across the entire organisation. This implies active engagement by customers who feel it is worth providing the feedback as they trust these firms will act.

To help firms get started with this it is useful to consider the entire customer activity cycle and look at it from their perspective rather than just the sales process –from the initial seeking of information, through their entire buying journey, fulfilment and implementation services, training, post implementation support and the ongoing relationship experience.

Somewhere in all this are big levers which will create a positive impact and cement a longer term relationship.
This is not just a B2B phenomenon either, but is also highly relevant in consumer markets. The use of experience mapping techniques can help reveal those 'moments of truth' which can make or break a relationship. In our Any Answers section we have seen two complaints (Awful Experience with River Island Online Shopping by Melanie Hastings and Bad Customer Service From River Island Branch Manager by Marina Hoang) which suggest that this firm would benefit greatly from a thorough investigation into what it is like to be on the receiving end as a customer. Experience mapping is a simple and effective tool, as the following example illustrates:

Value Network Collaboration

Toyota is the World’s most successful car manufacturer based on revenue and profit. However, it makes less than 20% of each car that leaves its factories and is served by some 50,000 suppliers. It doesn’t have a direct one-to-one relationship with each of them as that would be clearly impractical. Instead, it works directly with a small number of 'First Tier' suppliers, who each in turn look after several second tier suppliers and this relationship cascades all the way down to thousands of fifth tier suppliers. It is the total value creation network, that provides Toyota with its extraordinary position in the market – producing arguably ugly utilitarian cars, in hundreds of thousands, at low cost, high quality and a price that makes customers feel they are getting good value.

Giants like Toyota, Wal-Mart, IBM down to small firms like the Ludlow Sausage Company have recognised the vital importance of creating and managing a successful network, in order to deliver customer value. The Ludlow Sausage company side-stepped the impending competition from Tesco coming to the small Shropshire town of Ludlow. The mayor managed to get the local family butchers (who'd competed with each other for generations) to supply him with sausages and other provisions, which the company now sells far and wide over the internet.

In complex environments there are many intangibles such as relationships and knowledge which add value to customers. Verna Allee has pioneered a mapping technique to help firms visualise these often complex and hidden aspects:

(source: A Value Network Approach for Modelling and Measuring Intangibles © Verna Allee 2002)

In this example a pharmaceutical company has mapped out its entire value network which revealed hidden dependencies and areas for improvement.

Innovation

Few firms make a living on the back of innovation alone, but those which are able to innovate on a consistent basis create new value for customers and sometimes entirely new markets. Steve Jobs has done this with the creation of the iPod. Many electronics firms have attempted to copy Apple, but the real innovation of coupling iTunes to the iPod and considerable attention to ease of use, has ensured Apple’s continued leadership.

This is an example of a market making innovation. Most firms are unlikely to be so innovative. Nevertheless as firms develop deeper insights into how their products and services are being used by customers, and more importantly what problems customers are consciously or subconsciously seeking to solve, then innovations are likely to emerge. This leads us into co-creation, where the customer drives the innovation.

Last week David Gallagher of Prime Time explained how QEA –Quick Easy Admin system provides customers with a much simpler (reduces the sacrifice) process for hiring, time recording and administration of temporary staff. This innovation makes life easier for the customer and also provides them with real-time analysis of activity and performance, so they can see what they are getting for their money. (see How to build a £100m business in under 15 years)

Co-creation

If firms are successful in building trusting relationships with their customers, the opportunities for co-creating innovation and value for the customer grow significantly.

One firm which has succeeded in this is National Instruments (NI). This company provides lab testing equipment to scientists and engineers. Their customers are highly skilled and knowledgeable professionals in Aerospace, Medical, Scientific fields. The very nature of support requirements meant that considerable time and effort was required to meet the needs of their customers.

Following a eureka moment, the firm realised that many of its customers were enthusiastic experts in their own right, and could provide insightful support and expertise to each other. NI established the Developer Exchange, an online customer community where customers can post their queries and receive expert answers from other customers as well as from NI support staff. A reputation model helps individuals find the right expert, and customers can collaborate with each other to work on new problems together. This has resulted in a strong sense of peer-to-peer community, and whilst the NI support is always there, 40% of problems are now solved by the customers themselves. (source: Consortium for Service Innovation)

This form of customer co-creation has given NI a significant competitive advantage. The time and effort their customers have invested in the exchange, means that they are unlikely to want to make the same investment elsewhere.

A crucial element of co-creation is trust. And this brings us to the ultimate source of competitive advantage - people.

The People Advantage – Culture and Trust

Over the last few months I have had the good fortune to interview several people who have led or have contributed to their firms’ market leading success. Back in June it was Peter Simpson formerly of First Direct who said the reason for success was the culture of respect ingrained in everyone. Last week Lyell Strambi Chief Operating Officer at Virgin Atlantic talked about the Virgin Tribe, and how this (see Interview: Lyell Strambi, Chief Operating Officer at Virgin Atlantic) has given them a sustainable advantage. This is true in smaller firms too, as we saw in the David Gallagher interview. He said in a service economy, it is people that make the final difference. Don Peppers also echoed similar sentiments in the The philosophy of Key Account Management

In none of these cases is the focus on 'people' merely lip service. Ariba and Honeywell Building Solutions would not have succeeded in improving customer satisfaction by simply monitoring a feedback loop. Everyone in their firms feels a duty of care to their customers, and this is reflected in improvements in their customer satisfaction scores.

A mix of the old and the new

These dozen creators of value each have their place. It would be unwise to assume that good products or services were no longer needed or that loving your customers alone was sufficient. What is necessary in most firms will be a combination of levers which need to be pulled successfully if value is to be created and competitive advantage gained as a result.

It is up to each firm to decide on the right mix and part of the challenge is in unearthing opportunities to make a real difference. What is clear however, is that successful firms owe their continued success to the quality of their people, how they are treated and their sense of being involved in a common purpose. The final message then is choose your unique combination of value creators in order to differentiate, but always place a very high priority on 'people'.

By Jeremy Cox CMC Editor Business & Strategy
If you would like to contact me and share your own experience or opinion please contact me at [email protected]

Replies (2)

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By Jeremy Cox
31st Aug 2006 22:57

Graham, I agree with you - this is merely a start to identify some of those value creators that firms might like to think about. All I'm suggesting is that some are relatively easy to copy whereas others, require considerable cross organisational effort, visionary leadership and the right people and culture to implement. That makes them tough to do but also tough to copy. This is one reason I liked Lyell Strambi's approach at Virgin Atlantic.

Also with the fixation on CRM systems, many of these behind the scenes aspects are forgotten, but arguably give any CRM systems implementation real teeth. Conversely without them CRM is toothless.

There is still some merit in the old. It is easy to grab at the latest fad in CRM , but life is more complicated than that. What I hoped to suggest was that there is a lot more depth of thought behind the scenes that is necessary.

I also hesitate to promote a single framework (the consultant's stock in trade) as each company will be good at some things and weak in other areas. The degree of importance attached to each value creator will need to be assessed by each company on its own merits and based on their context and more importantly informed by their customers.

If you would like to posit a framework, I'd be very interested to see it, as I suspect would many of our fellow members.
all the best

Jeremy

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Dr. Graham Hill
By Dr. Graham Hill
31st Aug 2006 08:36

Jeremy

Your article makes a lot of sensible suggestions. For example, the focus on value, both from the company's and the customer's perspectives is highly relevant at the moment.

But the "value creators" list at the end of the article seems to be, well, a mish-mash of old and new ideas cobbled together into a wish list, rather than a coherent framework that integrates them into a larger whole and stretches our thinking about the evolution of CRM.

Having started the article talking about value (and the value definition you use was actually first popularised by Bradley Gale in his 1994 book "Managing Customer Value") you don't actually show how the items on your wish list actually contribute to value delivery, either singly, or as an integrated whole.

CRM is going through a phase change, driven in part by a renewed focus on mutual value creastion. But we owe it to ourselves to think through what this means with due care and attention, rather than just rushing to print with a wish list of unproven value creators.

Graham Hill
Independent CRM Consultant

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