What Is Customer Value ?
In these times of saturated markets , unlimited choice of products, stiff competition and ever rising customer expectations and demand, how does a company manage to retain its customers and make new customers ? How does it offer more customer satisfaction and give a better customer experience every time?
To get answers to the above questions, one should be aware of what the perceived customer value (PV) is. PV depends on the cost of the product and the perceived benefits (PB) that the customers see in the product. It may have little to do with the market price of the product and depends on the ability of the product to satisfy the customer’s needs or requirements. The PV means the anticipated benefits of a product from the perspective of the customer. The PV stems from tangible, psychological and social benefits that a customer gets after buying the product. It is the product’s worth in the mind of the customer. Since the customer is ignorant about the cost of production of the product, they have an inner feeling of how much worth the product is to them. It is to be noted that cost refers to anything a customer must give in order to receive the desired benefits.
Using data on perceived value and the way customers perceive a business, helps marketers to get increased sales. Keeping in mind the market scenario, marketers can set desired prices for their products if they understand the PV the customers place on their products.
As we have seen, PV= PB-Cost.
This presents a challenge for marketers as the benefits and cost have tangible and intangible values both and the latter are hard to quantify. So proper estimation of PV is a must if marketers want to have increased profits from the market.
The Customer Value Chain
Marketing is defined as something that creates, communicates and delivers value to customers. The system of procuring raw materials, operations, processes, sales, marketing, and customer service all contribute towards the the creation of value by the company. So do the support operations such as Human Resource, Finance and Accounting. All of these components affect the company’s customers directly or indirectly in some way revealing the customers’ perception of the company. The customers’ perception of the value is directly proportional to the efforts a company puts in to create value.
How To Create Customer Value ?
The more value a company creates, the more successful will it be. When we provide more value to customers, we build competitive advantage. How do we create customer value? Michael Porter introduced the concept of value chain in 1985 which is a set of activities that a company does to create value for its customers. He proposed that the primary activities along with the supporting activities affect the customer value directly or indirectly. Every activity is linked to each other and the company should see how the activities are linked so that they can know the sources of value for their company. Further, if the activities are broken down to their sub-activities, the company can know where all to add value in the chain of activities and thus create value for its customers. This process also brings the costs down and improves the company’s profitability.Understanding how it creates value and looking for ways that add more value, the company gains competitive advantage.
Michael Porter’s Value Chain
Porter’s Value Chain is based on the company’s various activities regarding conversion of the inputs to outputs. Every sub-activity has an input and an output which then becomes an input for the next stage. These processes require resources such as labor, raw material, building, equipment, management and administration and all of these cost money.
Further, these activities can be classified as primary and support activities as shown below:
- Inbound Logistics– involve relationships with suppliers and include all the activities required to receive, store, and allocate inputs. Company’s supplier relationships are a key factor in creating value here.
- Operations– the activities required to convert inputs into outputs. The company’s operational systems create value here.
- Outbound Logistics– include the activities required to collect, store, and deliver the product or service to the customer.
- Marketing and Sales– to intimate customers about products and services, persuade them to purchase , and facilitate the sale. The benefits the company offers, and how well it communicate them, are sources of value here.
- Service– Refers to the after-sales service and includes the activities required to keep the product or service working smoothly.
These activities support the primary activities above. The diagram above shows that each support activity can play a role in each primary activity
1.Procurement– is the process of finding suppliers and purchasing of inputs from them at the best prices.
2.Human Resource management– consists of activities involved in recruiting, hiring, training, developing and if, required, laying off employees. People are a significant source of value, so the company can create a clear competitive advantage with good and acceptable HR practices.
3.Technological Development – pertains to the equipment, hardware, software, procedures and technical knowledge brought in to manage conversion of inputs into outputs. Minimizing the costs of information technology and keeping abreast with the current technological advances are sources of value creation here.
4.Infrastructure – These are a company’s support systems that allow it to keep the day to day operations running smoothly. It consists of functions such as accounting, finance, legal, planning, public relations and quality assurance.
To summarize, the company should look at every stage of the conversion of the inputs into outputs, understand at what stages in the process to add value and thus create a higher value for customers.