Praise for Customer Value Investment Mahajan’s Customer Guru is the classic must-read for all executives. It’s a work that will endure as a classic, thanks to its storytelling and problemsolving approach to convey the fundamentals of Customer Value Management. — Patricia Seybold, CEO, The Patricia Seybold Group Gautam Mahajan has written a powerful, practical guide to make a business of any size successful by truly placing customers at the center of its strategy. He has taken a complex subject and rendered it easy to read. His practical, powerful content is freshly presented as a case study that involves “live characters” with whom a reader from virtually any sized business can easily relate and demonstrates how to develop and implement a customer-focused strategy. Unique. — Harvey Thompson, Former Global Executive for Customer Value Management Consulting at IBM Gautam Mahajan’s extremely user friendly book on Customer Value goes beyond merely defining and explaining the potential of this relatively new management tool. It is a step-by-step working manual that will be useful for both experienced managers as well as aspiring students. — Tara Sinha, Tara Sinha Associates, was head of Clarion Advertising and McCann-Erickson (then Tara Sinha McCann), and IIT Delhi Advisory Board
This book systematically develops the concepts of Customer Value and not only provides insights into the processes whereby customers buy competitive products and services but provides the means to measure and manage these and so create competitive advantage. Mahajan’s passionate championship of CVM is an invaluable addition to the thinking manager’s library. — Larry Malarkar, Regional Director Sales and Marketing, Starwood Hotels South Asia Written in a very readable style with many live examples to which most readers will easily relate, Gautam Mahajan’s book on Customer Value will be very useful to corporates in India, and provide a very powerful basis for understanding and implementing Customer Value as an effective support for top management. Would also be of value to students of management as a tool that is likely to be increasingly used in the future, as markets and products become more competitive. — Arvind Pande, Former Chairman, Steel Authority of India Ltd I have always believed that organizations exist for their customers. In that context, every company endeavors to bring out the customer focus in each of its managers. Often, this is not an easy transformation especially in large organizations, for the very systems and processes that are so necessary in running these corporations become road blocks that need to be overcome in the pursuit of customer excellence. The book, written in a storybook style, captures the case of a company and its people who work with a Customer Guru to implement Customer Value Management and Customer Value Added concepts. Customercentricity is one of the most talked about subjects in corporations today and perhaps the most elusive. The book comes across as a breath of fresh air, systematically describing useful concepts and new metrics for measurement that would allow managers to reflect on how they can create value for customers and make organizations customer–centric, in a lucid manner. — B. Muthuraman, Managing Director, Tata Steel. Conferred the ‘CEO of the Year’ Award by Asia Brand Summit 2007
Customer Value Investment
Customer Value Investment Formula for Sustained Business Success
Gautam Mahajan
Response Books Business books from SAGE Los Angeles London New Delhi Singapore www.sagepublications.com
Copyright © Gautam Mahajan, 2007
All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval system, without permission in writing from the publisher.
First published in 2007 by Response Books A division of SAGE Publications India Pvt Ltd B1/I1, Mohan Cooperative Industrial Area Mathura Road, New Delhi 110 044 www.sagepub.india SAGE Publications Inc 2455 Teller Road Thousand Oaks, California 91320 USA SAGE Publications Ltd 1 Oliver’s Yard, 55 City Road London EC1Y 1SP, United Kindom SAGE Publications Asia-Pacific Pte Ltd 33 Pekin Street #02-01 Far East Square Singapore 048763
Published by Vivek Mehra for Sage Publications India Pvt Ltd, typeset in Book Antiqua 10.5/13 by Innovative Processors, New Delhi, and printed at Chaman Enterprises, New Delhi.
ISBN: 978-0-7619-3604-6 (India-PB) Sage Production Team: Sugata Ghosh, Anita Kakar, Amita Saha Swati Sahi, Sanjeev Sharma and Santosh Rawat
The soul of this book belongs to those I love the most, my wife and sons, whose support I cherish. The book is dedicated to all my friends who have assisted and encouraged me with Customer Value Management.
Contents
Foreword Introduction
xiii xv 1
1.
The Awakening Prologue 1 Customer Value Management: Building Competitive Advantage 3 What is a Customer? 6 How Many Customers do You Have? 9 Anonymous vs Known Customers 11 Key Points 14
2.
The Focusing Customers as Assets 15 Customer Strategy 18 The Customer-in-Center© Approach 19 Organization Structures 19 Suppliers: An Example 22 Key Points 22
15
3.
The Touching Customer Touching 26 Customer-Circles©/Customer-Centric-Circles© 29 Customer Champion/Chief Customer Officer 31 Key Points 37
24
4.
The Understanding Customer Value 40 Measuring Customer Value Added 50 Price or Quality 51 Key Points 54
40
x Customer Value Investment: Formula for Sustained Business Success
5.
The Creating Creating Customer Value 58 Customer Metrics 61 Why do Customers Defect? 63 Customer Experience 65 Commodity Hell 69 Key Points 71
58
6.
The Encircling Customer-Circles© in a Corporate Environment 73 The Corporate Customer-Circle© 77 Customer DNA 82 Customer-Circle© at the Retailers 83 Key Points 91
73
7.
The Comparing What is Customer Value? 93 Moving Ahead from CRM to CVM 95 Value Creation/Customer Value Management 97 Customer Value Added 105 Stated vs Implied Weights 112 Customer Satisfaction vs CVA 113 People Value Added 119 Key Points 121
93
8.
The Strategizing Value Maps 126 Using CVA for Pricing Decisions 127 Using CVA for Business Decisions: Product and Technology 132 Passion for the Customer 135 Processes, Service, Customer Value, and Customer Perception 135 Co-creating the Customer Experience 137 A Customer Value Strategy Session 138 The Tools of Customer Value Management 142 Key Points 144
125
Contents xi
9.
The Reckoning CVA Design 150 CVA Results 152 Key Points 167
146
10. The Implementing Customer-focused Organization 174 Effective Executive Report 174 Key Points 177
169
11. The Concluding Epilogue 180
180
Index
183
About the Author
188
Foreword
Ever since I discovered that satisfaction did not lead to loyalty, which led to the concept of Customer Value Management (CVM), I have been interested in promoting CVM, its art, and science. It has been proven that creating a competitive advantage through Customer Value leads to increased market share, profitability, and shareholder value, all of utmost concern to companies. CVM has come a long way since I postulated the concept while working for AT&T in the 1980s. Since then, through CVM Inc.’s global network, we have worked with many companies around the world. Gautam Mahajan is CVM Inc.’s associate in India. He is also one of the finest consultants in the field. He has great ideas and practical advice. He delivers what he promises. He has worked with CVM clients in America and Asia. I have worked with him in the US and in India over the last few years. He has done a lot to promote the successful use of CVM. I believe his new book, Customer Value Investment: Formula for Sustained Business Success will make a great contribution to the field. It is easy to read and understand, told in a story format. Gautam’s book tells why CVM is important. But its main focus is on implementation. He shows how a company transforms itself into a customer-centric organization and what happens as a result thereof. I recommend this book to all management practitioners, not just marketing people and operation executives. Finance, R&D, HRD and other executives have found the art and science of CVM to their own benefit. Vodafone’s Managing Director for Australia, Graham Maher, who is quoted in the book said: The CVM score was a leading indicator of Vodafone’s market share. We were able to predict market share, a quarter out using CVM data to within 1 per cent accuracy! And it predicted churn
xiv Customer Value Investment: Formula for Sustained Business Success
(loss of Customers) accurately. In fact our Financial Director said, “the CVM score is more rigid and correct than any of our financial scores.” Read Gautam’s book and see why for yourself. Ray Kordupleski President CVM Inc. USA
Introduction
Customer Value is an investment by companies like yours on making Customers happy. But really, this outlay is for your own sustained business success, generating a huge return on investment (ROI), and improving the value of your company for its stakeholders. The Customer juggernaut gets right behind you to get you success.
Total CustomerValue Management© I have been developing and consulting in Total CustomerValue Management (TCM), to help companies become Customer focused and measure what Customers want . For this to happen we consult with companies to help all levels of company employees, dealers, and retailers become customer sensitive. We use Customer-CentricCircles©, and train CEOs, CFOs and other CXOs,* front line staff such as retail clerks, and service people to be truly customer sensitive, and even certify them. We encourage companies to hire Chief Customer Officers, Ombudsmen, and be rated for Customer friendliness. We conduct these ratings and Customer Value Added strategies. We welcome you to join us in making the Customer Revolution a reality. This book describes the steps required to reach TCM,© and the investments required to obtain sustained business success, building on Total Quality Management programs. TCM has been started and developed by us and is being popularized worldwide by us. Note:
*
CXO is generic for the various Chief Officers, CEO, CFO, CIO, CTO, Chief Quality Officer, etc.
This book explains the different ways in which you can invest in a Customer. Most investments are inexpensive and just about doing the right thing from a Customer’s viewpoint. This book also
xvi Customer Value Investment: Formula for Sustained Business Success
answers many other business questions: why do Customers decide to buy one product over another, or do business with one company or another? What makes them loyal? How do companies achieve market growth and leadership? How do executives increase the value of the company? Customer Value provides easy-toimplement answers to these questions. Valuei is what Customers get for what they pay. While the product/service and its price may remain the same, its value varies from one supplier to another. Customers figure out what the product is worth to them, based on cost and quality (of product, brand, relationship, service, and so on) and buy what they perceive gives them the most value. Till recently, value was an intuitive term for most companies, but now there is an art and a science to measuring it. Increasingly, it is becoming evident that satisfaction and brand do not necessarily lead to loyalty. This book shows how superior Customer Value ensures loyalty and creates an emotional bond with the brand, thus leading to increased market share and profitability. Through examples, you will experience a learning process that highlights the importance of the Customer as an asset. It explains how using a Customer-in-Center© approach to drive business builds shareholder capital and shareholder value. Many companies believe they are doing everything for a Customer and from a Customer’s perspective. But, because companies are broken up into neat functional units, each vying to enhance the value of its specific function, they end up looking at the market from the company’s viewpoint rather than the Customer’s. Using Customer Relationship Management (CRM) and Customer satisfaction to track and understand Customers is not enough in today’s competitive world. A different view of the
i
Peter Drucker states the following: Only one valid definition of Business: – To create a Customer The Customer determines what the business is What the business thinks it produces is not of primary importance, especially not to the future of the business and its success What the Customer thinks he is buying and considers Value is decisive. It determines what a business is, what it produces, and whether it will prosper!
Introduction xvii
market and competitors often exists in the Customer’s mind and must be understood in formulating business strategies. Customer Value Management (CVM) helps companies to focus and be driven by the Customer. Implementing CVM has helped the world’s leading companies in the following manner: 1. Building a Customer-driven strategy across all functions 2. Moving beyond Customer Management and Customer Satisfaction 3. Determining what the Customer considers value and measuring it 4. Discerning why people buy from your competitors and not from you, and vice versa 5. Predicting market share and improving business results 6. Improving service quality and loyalty, and making employees Customer centric 7. Getting better prices and business returns 8. Making pricing, product and technology decisions 9. Avoiding the commodity trap 10. Setting up Customer-Circles © and building Customer Conduits© 11. Understanding competitive strategies and pre-empting competitive moves 12. Measuring Customer capital 13. Using Customer Value for valuation in mergers and acquisitions 14. Using People Value to reduce churn in organizations 15. Understanding the deterioration in touching and Customer Value in the delivery chain 16. Increasing Value to your stakeholders In spite of the advantages to be gained from CVM, it is practiced in bits and pieces in most organizations. It reminds me of where quality was twenty years ago. Everyone knew quality was important, but the new concepts expounded by Crosby and others were not well understood and practiced. Take my own example. About twenty-five years ago, I was heading up a business unit of a Fortune 50 company in the US. The president of the company called us (his direct reports) and asked
xviii Customer Value Investment: Formula for Sustained Business Success
us what we were doing about quality. We unanimously responded, everything. Actually, we were only conducting quality control and bickering with the Customer on Acceptable Quality Limits (AQLs). Little did we realize we were at the start of the Quality revolution and there was something called Total Quality Management (TQM). Today, we are at the start of the Customer revolution, and soon executives saying ‘we are doing everything’ will learn that their definition of ‘everything’ is going to change dramatically and lead to Total Customer Value Management. Recognizing the importance of Customers, organizations have Chief Quality Officers (and other traditional CXOs).ii But since the Customer revolution has yet to take off, you hardly ever see a Chief Customer Officer (CCO) or a Chief Value Creator! Customer Value Management was made into a science in America by Ray Kordupleski. I have worked with him and his worldwide associates, globally, and have found that very few companies really understand and practice CVM in India. There were a few notable exceptions, but even these companies were measuring satisfaction, a surrogate for Customer Value. Customer Value Foundation has successfully worked with these Indian companies on how to measure and create value. Recently, a leading Indian company instituted a Customer Value Desk to help their various divisions with using the CVM concepts to increase market leadership and brand value. Companies ranging from the Tatas and Birlas, in India, to Disney and Vodafone, outside, along with other businesses in sectors such as finance (banks, credit cards, mortgage, and insurance), white goods, retail, airlines, automobiles, oil, steel, fertilizers, telecom, medical services, and equipment (the list is endless) are finding that creating value for Customers helps them create value for their other stakeholders. This book, written in an easy-to-read story format, will provide executives in all functional areas knowledge on how to institute a holistic approach to dealing with the Customer and implement the concepts of Customer Value within their companies. Executives will be able to make their companies more Customer-aligned, ii
CXO is generic for the various Chief Officers, CEO, CFO, CIO, CTO, etc.
Introduction
xix
leading to a much wider spectrum of competitive advantage. Customer capital will eventually be reported on balance sheets of companies. This book will, therefore, benefit even the more Customer-savvy companies in not only improving business results, but also stakeholder value. You will note that I have deliberately used the capital C for the Customer. This is to remind the reader that the Customer is allimportant at all times! The names of key characters and companies referred to in this book have been changed to protect their identity. I am always happy to receive your feedback and comments at
[email protected], so that I can make the book more focused on the needs of you, my Customer! I am sure this book will help you and others become part of the Customer revolution and increase the value of your company. CVI = Higher ROI
©
Gautam Mahajan Customer Value Foundation
The Awakening
CHAPTER
1
1
The Awakening Prologue It is a Friday evening. Most people at Glacier Products, a company selling ready-to-eat foods, processed fruits and vegetables, among other food items, have started their weekend. Except for the likes of Doug Evert, responsible for the sales of ready-to-eat foods in Ohio. He has been working on a sales plan for his product lines, in preparation for a meeting with his boss, Earl Green. Doug Evert graduated summa cum laude from Ohio State University, earned an MBA from Northwestern’s Kellogg School of Management in marketing, and had worked on strategies for attracting new Customers in his MBA internship with Procter & Gamble. With Glacier Products, he increased sales beyond his market targets by attracting new Customers, primarily through using promotional schemes, such as coupons and discounts, and by introducing new products developed by Glacier. Doug collects his papers to meet with Earl Green, the sales director for Glacier Products. After exchanging pleasantries, Earl tells him that he has asked Rita Timko, Glacier’s marketing manager, to join him. Rita and Doug greet each other. Rita has been helpful to Doug in acquiring new Customers. Earl asks Doug to present his plan for increasing sales revenues in his territory. Doug runs through his plan, premised on acquiring new Customers. It is a detailed plan with a high marketing and
2 Customer Value Investment: Formula for Sustained Business Success
promotion budget, and a timeline extending over two years. He hands over the plan, saying, “This should address the requirement of increasing sales.” Rita seems to feel comfortable with the plan, because it was close to what she had expected and it followed conventional wisdom. After looking at the papers, Earl asks, “Your plan doesn’t seem to have a strategy for increasing sales to existing Customers.” “Not to any great extent,” agrees Doug. “However, whatever we do to acquire new Customers will help us with existing Customers. I am aiming to get competitor’s Customers to leave their brand and buy ours.” “Why don’t we plan something for existing Customers?” asks Earl. “I really haven’t developed any special plan or strategy for them,” says Doug. “It’s not easy to do much for them at the retailers, except via promotions. We have little to offer beyond our competitors!” Earl remarks, “I think we need to work on increasing sales to existing Customers. Also, you seem to feel we are in a commodity trap. We need to get out of it.” Rita remarks, “Earl, we need a continuous effort for increasing our Customer base.” Earl looks at her and says, “Rita, I agree. But our company needs an effort to get increased wallet share from existing Customers. We have to not only find new Customers but also cultivate existing ones!” Earl realizes that part of the problem is that Doug and Rita either do not have an easy way to increase market share with existing Customers, or they do not think working with the existing Customer would yield them the same results as increasing the Customer base. Earl starts to feel a new way of thinking is necessary. He wonders how to accomplish this and remembers Krish Kumar, who is also called the Customer Guru, a recent consultant to the company, with a proven track record of understanding Customers’ buying behavior and thought processes. Earl decides that Krish’s input and experiences could be useful. Earl therefore asks Doug to meet with Krish Kumar, the Customer Guru.
The Awakening
3
Doug’s Dilemma Doug walks away, muttering to himself. “He didn’t even look at what I had to say in my proposal… Customer Guru... bah! Why do I need a Customer Guru? Why didn’t Earl send me to a Marketing Guru! What a waste of time! I could be out there selling! Rita seemed to agree with me.” Anyway, being a good corporate employee, Doug calls Madge, Earl’s assistant, on Monday morning and asks for the Customer Guru’s number. Madge gives him the number and says, “Young man, you’re lucky to have been picked to meet the Customer Guru. Krish is super! I think Earl is recognizing your marketing talent.” “Marketing talent, all humbug,” Doug mumbles under his breath. He calls the Customer Guru and asks to see him. “Can we meet tomorrow?” The Customer Guru is available in the morning.
Customer Value Management: Building Competitive Advantage Krish Kumar, the Customer Guru, is a middle-aged consultant with over thirty years work experience, who has worked in sales and marketing, and subsequently as a general manager. He had been a marketing manager for a steel company before going on to work for a large multinational watch company. He had spent time with sales campaigns, business development, pricing and the other Ps (product, promotion, place, packaging), and ran a large sales force before he discovered the Customer. An understanding of the Customer encouraged him to become a consultant, and his business generated work with companies as diverse as hotels, power, telecommunications, retail, and white goods, among others. Doug rings the bell and is surprised to see the rather disheveled, bearded, casually dressed man who opens the door. “I’m looking for the Customer Guru,” says Doug. The man grins, “That must be me. Won’t you come in?” They walk together to the Customer Guru’s study.
4 Customer Value Investment: Formula for Sustained Business Success
After sitting down, Doug starts, “I really don’t know what I’m doing here. I should be out there increasing sales for my company. Why does the Customer need a guru? Can you help me get new Customers?” The Customer Guru tells Doug that he will help him understand how important a Customer really is, how to determine what creates value for the Customer, and what is really crucial to the Customer. He believes that understanding the perceptions and needs of a Customer and triggering strategies based on Customer feedback are extremely important. Not only will it lead to better business results, but will change management philosophy. He says to Doug: “Much of what I am going to talk about, you probably already know. Most is common sense and fundamental. What happens is that in business, we get tied up with many initiatives and our functional goals, and sometimes lose track of the things that are truly important to a Customer. If you already know what I am saying, or if I make a point too strongly, do not get the impression I am talking down at you. Remember, I am trying to reinforce what is important. So, bear with me. “Doug, I want to work together with you on increasing Customer loyalty for your company, Glacier, and also its market share. Much of what we’ll try to do together is based on the experiences of experts, and my own experiences in the field of Customer Value. I’ll explain the terms as we go along, but what is really relevant is that the concept works in all kinds of industries, and in companies ranging from Disney and Vodafone to Whirlpool, State Farm Insurance, and GE. Customer Value works for service, for loyalty, for market share, for profits, and so on.” He points to Doug’s shirt: “Let’s think about how you bought this shirt. You went to a store, looked at a number of shirts, and then took out a few from the rack and laid them side by side. You then tried on two or three shirts, saw how you looked wearing them, felt the fabric, selected the colors, noticed the way the sales clerk serviced you, and listened to his recommendation. You had in your mind what makes up the quality of a shirt. Maybe it is the fabric, the style, the color, the way you perceived it would look on you, or how it would match your wardrobe. And then you looked at the price, and maybe bought one. And perhaps, it wasn’t the cheapest shirt! “So, what did you do? You, consciously or unconsciously, bought the shirt which you perceived gave you the most value, or was worth the most to you over competing products (in this case other shirts).
The Awakening
5
“Customers buy or re-buy products they perceive give them better value than competing products. “So, in our work together, we will focus on how to add value to a Customer and how to increase market share. Part of increasing value to a Customer is a science and part of it is an art. Moreover, we want to understand why you bought what you did more scientifically. So there is much to learn in the next few meetings. “I am going to give you this sheet that tells you what advantages will accrue by increasing value to a Customer.” The sheet read: Customer Value Management: Building Competitive Advantage Most companies are satisfied by measuring Customer satisfaction. It has been proven that Customer satisfaction does not correlate with Customer loyalty. Customer Value has been proven to be a leading indicator of market share. Companies with high Customer Value scores have higher profitability. We help companies in building Customer Value worldwide. Using Customer Value Management techniques will improve your business results. Customer Value Management Leads Companies to Market Leadership and Improved Business Results 1. Building a Customer-driven strategy across all functions 2. Moving beyond Customer management and Customer satisfaction 3. Determining what the Customer considers value and measuring it 4. Discerning why people buy from your competitors and not from you and vice versa 5. Predicting market share and improving business results 6. Improving service quality and loyalty, and making employees Customer centric 7. Getting better prices and business returns 8. Making pricing, product and technology decisions 9. Avoiding the commodity trap 10. Setting up Customer-Circles © and building Customer Conduits©
6 Customer Value Investment: Formula for Sustained Business Success
11. Understanding competitive strategies and pre-empting competitive moves 12. Measuring Customer capital 13. Using Customer Value for valuation in Mergers and Acquisitions 14. Using People Value to reduce churn in organizations 15. Understanding the deterioration in touching and Customer Value in the delivery chain 16. Increasing Value to your stakeholders
What is a Customer?1 Doug looks at the sheet and seems a little less skeptical. The Customer Guru asks, “Can we move forward? May I ask you: what is a Customer?” “Oh, that’s easy, a person to whom we sell our goods.” “But,” interjected the Customer Guru, “What is your Customer?” They begin to discuss the issue, with Doug insisting it is the person he and his company sell to, and it is someone whom they believe needs their products. The Customer Guru says, “Yes, a Customer is someone we sell to (that’s an answer to ‘who is your Customer?’). “The Customer is the reason for our being a company, because without him or her we have no one to sell to and will have no revenues. “Doug, I want you to go back and think about the various functions in the company such as manufacturing, sales, research and development, government liaison, finance, etc., and review them vis-à-vis your business, your investor, and your Customer. Then decide what function you can afford not to have in-house.” Doug thanks the Customer Guru for his time and heads back to his office. He starts to note what he sees as indispensable functions: Sales and Marketing: without them there is no business Manufacturing: without them there is no product to sell Logistics: without them the product won’t get to the Customer Finance: without money to run the business we are nowhere Investors: they are really taking the risk 1
This section can be skipped by experienced executives.
The Awakening
7
Government liaison: probably can be outsourced R&D: maybe we can buy technology He goes home and looks up ‘Customer’ in the dictionary. Cus•tom•er: One who trades regularly at a particular shop; a patron; a purchaser or buyer. Thinking of the list he had prepared, he realizes that his company could outsource marketing, logistics, and almost all other functions. But he cannot outsource his Customers. So, the Customer is indispensable.
Shopping with Pam That evening he goes to the local Sears store with Pam Khattar, his fiancée. Pam is a psychologist and a social worker, whose opinions and common sense Doug values. As she shops, he tells her about the Customer Guru and his question on indispensable functions in a company. “I got so used to looking at business the way we run it. Sometimes one needs to look at things differently.” Pam is busy examining a cashmere pullover. “How lovely this is.” “Oh yes,” says Doug, looking at the label. It reads, “Made in Scotland.” He states, “Sears doesn’t manufacture this cashmere but sells it. So you really don’t need manufacturing. Here’s an example of outsourcing manufacturing!” Doug and Pam start to discuss dinner plans.
Back to the Customer Guru Doug goes back for a second session with the Customer Guru. “Have you found out what a Customer is?” “Yes,” says Doug, “The Customer is that indispensable part of our business, without whom there is no reason for our business to exist.” “Great,” says the Customer Guru, grinning widely. The Customer Guru says, “Not only that, the Customer is the basis of the business. He is the one who motivates our business and is the source of our revenues and profits. You know all this.
8 Customer Value Investment: Formula for Sustained Business Success
“But who really is our Customer?” asks the Customer Guru. “We can sell to anyone, but does that person become a Customer or is he merely someone we sell to?” “The Customer is someone,” says Doug, “who has a need for our product and whose need we satisfy.” The Customer Guru says, “You’re on the right track. In essence, everyone we deal with is a Customer in one form or another. Normally, the end purchaser is referred to as a consumer by companies who sell through channels, but in reality he is the Customer. And of course, you can’t truly answer the question of who Glacier’s Customers are, since they are mostly anonymous! “In spite of their anonymity, we need to satisfy their needs. That does not mean we satisfy their needs entirely. Sometimes we find there are companies which sell products and services that people don’t want or only partially want, or who sell a product that fulfills a need only partially. “For example, if you fly on business for a company, the price of the ticket may not be that important. But if you own a small business, the price is very important. You’d look for deals, and same-day returns so that you don’t have to stay in a hotel. So, airlines that wish to attract this kind of traveler have to think about discount or apex (advance purchase) fares and same-day returns. A normal ticket is only a partial fulfillment of his needs. “A traveler on a family holiday is not only concerned about fares, but also with baggage allowance, kiddy give-aways, and so on. “The travel agent also has a need to do business with the airlines. So the airlines have to treat him as a Customer as well. “The Customer is someone whose needs we understand and fulfill (or exceed) to give him satisfaction. He is someone we recognize as having a right to dictate our product offerings, and the way we do business. We think of B2C (Business to Customer). It should really be C2B (Customer to Business), and as we better understand our Customers’ needs, C2C, where we build a community of Customers and facilitate their talking to or even blogging with one another. “Further, if we can understand the end-use experience the Customer is looking for, and provide the Customer with the products and services that give him the experience he wants, we will be truly providing the right products and services to the Customer. “One example of this is the ATM machine that lets a bank’s Customer withdraw money at any time, even away from the bank branch (rather
The Awakening
9
than wait for banking hours). Another is the iPod. That’s an example of a product that provides the Customer with the experience of having the music he wants, when and where he wants it. “Remember, the Customer is the reason for our being.” “The Customer who comes to a store regularly to buy our products!” thinks Doug, remembering the dictionary definition of a Customer, “The Customer cannot be treated as a sale.” He realizes, “I knew all this, but now I understand the significance of a Customer much better.” The Customer Guru continues, “What is the purpose of a company? In reality, it has a dual purpose: “The primary purpose (as most people think) is to satisfy the shareholder and to satisfy the Customer. But, more than that it is to create value for both of them.”
How Many Customers do You Have? “I understand you’ve developed a detailed marketing plan to attract more new Customers. Before we get into that, can you tell me how many Customers you actually have?” “I have, mm...mm…maybe twenty in my territory,” replies Doug. “That must be the number of grocery store chains and distributors you sell through.” “Correct. We sell through distributors to the stores. We deal with about 2,000 stores in Ohio.” “But who really is your Customer. You sell through a distributor. Is he your Customer? Is the person who pays for the product the Customer? What if the store takes title to the product? Is the store the Customer?” Krish answers his own question. “The Customer is one who eventually pays for a product and uses it (most companies refer to him as the consumer). We may sell to a distributor or through them to a store, but the Customer is the one who uses our products, or gets use out of our products. The store may not use our products, but derives revenue from selling them. We have to treat everyone in the chain as a Customer; but the true Customer, on whom all of us in the chain have to focus, is the end consumer. “Sometimes this becomes difficult. Who is the end consumer of a greeting card? The person who buys and sends the card, or the one who receives it?
10 Customer Value Investment: Formula for Sustained Business Success
“Just to clarify this concept, the word ‘consumer’ is used generically for a category: consumers of cars, consumers of Safeway. A Customer is something more (remember, the dictionary called him a patron), someone you build a relationship with. Often it is a brand relationship!” Continuing, the Customer Guru asks, “Then, how many Customers do you actually have? “And who are these people, Do you know them? Try to answer this question. We’ll discuss the Customer at greater length when we meet next.”
Dinner with Pam Over dinner that evening, Pam asks, “Why do you have that sheepish look on your face?” “Well, I had another session with Krish, the Customer Guru, and he told me that the Customer is the only indispensable part of our business. He emphasized the fact that our business rotates around the customer.” “That makes sense to me. Everyone knows this, but in practice, the Customer is not always in the center!” says Pam. “Sometimes it may seem difficult to define a Customer. In a college, is the student the Customer? Is the parent, for whom the teachers and the college are processing the students, a Customer? Or is the college board of trustees the Customer?” “Good question.” Rather than answer the question, Doug quips, “Well, at least once you decide the student is your Customer, you know how many you have and who they are.” “The Customer Guru asked me how many Customers I actually have and who they are. I’ve been selling to and through distributors and really don’t know how many Customers I have, let alone know them.” Pam says, “I would imagine you can at least estimate the number of Customers you have, based on your sales volume.” “I suppose so,” says the young sales executive. “Let’s say I sell a million packages of ready-to-eat ethnic foods through distributors every month and eventually to stores in my territory, and someone buys them, maybe, four times a month, on average. So, I have about 250,000 Customers spread over 2,000 stores. That’s 125 per store per month, or four Customers per day per store. Of course, bigger
The Awakening
11
stores will sell more. And we probably have ten times as many Customers for all our ready-to-eat foods.” “Right,” says Pam, “but I think you’d better talk to one of your store managers before you go any further.”
Anonymous vs Known Customers At the Store Doug decides to visit one of the stores of Grocery World, a store chain that carries Glacier’s product line, to see if he can get a more accurate picture. This particular Grocery World is located in Newark, Ohio, a city with a population lower than 50,000. Doug knows the store manager of this Newark store well. “What is your Customer?” Doug asks Ron Casey, the store manager. “Someone who buys from me,” is his prompt reply. The expected answer, thinks Doug. “And who buys from you?” “Oh, mostly people from the neighborhood, whom I’ve found to be quite price-sensitive.” “How many Customers do you have?” “I really don’t know, although some of them shop here on a consistent basis and I recognize their faces.” How different from a ‘mom and pop’ store owner who probably knows most of his Customers. Is this because of size, or interest, or what? asks Doug to himself. Suddenly, Doug remembers the store where he buys his eyeglasses. He’s hooked on this particular store and buys there because the store manager greets him, takes his glasses, cleans them, and has the screws tightened. Sometimes he gives him free lens cleaning fluid. They give him a free eye test whenever he wants one. The manager even asks about his latest softball game. And to top it all, he gets a 10 percent discount (even with that he is sure he’s not getting a bargain). Doug thinks he can’t switch eyeglass stores easily! He’s not an anonymous Customer in that store! Then he remembers Barney, the Hotel Manager of the Regent Beverly in the movie, Pretty Woman, telling Vivian (Julia Roberts) that they think of Customers like Edward (Richard Gere) as special
12 Customer Value Investment: Formula for Sustained Business Success
friends (while initially Barney won’t extend any courtesy to Vivian, eventually, he takes a special interest in helping to make her socially acceptable). In the movie, Vivian tells Edward that call girls like her don’t get emotionally involved with Customers. Edward, a businessman, responds that he and Vivian are alike, they both ‘screw Customers for money.’ Knowing the Customers, treating them as special friends, taking a special interest in them, getting emotionally involved, not taking them for a ride, and not merely trying to make a fast buck, all seem to be ways of differentiating yourself in the eyes of the Customer. Doug knows this, but his focus has been the store not the end Customer! Aloud, he says, “Great, do you know who these people are? Do you know their names?” “Not most. However, I know a few.” “Your store has been in business with us for twenty years, and maybe longer in this neighborhood. You must have a relationship with these people.” “Remember, many of us managers are transferred from store to store. Still, with some I do have a relationship. Sometimes I have to extend them credit and sometimes I deliver to their homes.” “Do they always buy their groceries from you?” “Not always. A lot depends on price. Sometimes, they come because it’s convenient to buy from us because of our location.” “So they don’t always come back to you.” They don’t seem to be committed to you, thinks Doug. Most of the store’s Customers are truly anonymous. We must get to know more about these Customers.
Back Again to the Customer Guru “I’m sorry to say we can only estimate how many Customers we have, and even sorrier to admit that most of them are not known Customers. They are anonymous,” remarks Doug. “Aha,” says the Customer Guru. He doesn’t sound surprised. “They are anonymous Customers. Thus you really don’t know who your Customers are, though you might know approximately to what segment or locality they belong.
The Awakening
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“A Customer is a person, and has a need to be known, and touched. He has to feel wanted. You must find a way to know your Customer, or if your Customer base is large, at least know them generically. If you don’t know your Customers, answering the question ‘Who is my Customer?’ is very difficult. “And if you don’t know your Customer, or how many Customers you have, you don’t know how many are leaving you, or not coming back to you, or making partial purchase of your products over the year. In addition, you won’t know who is leaving you! “Can you estimate how many permanent Customers you have? Permanent Customers are usually your loyal Customers, unless they have no other choice but to buy from you, or won’t shift because of sheer inertia.” “I can’t estimate that number, but I can call Ron Casey, the manager of the Grocery World in Newark, who may be able to help.” He gets on his cell phone and finds out that Ron does not have a good fix on this number, but guesstimates that 50 percent are permanent Customers and that there are more permanent Customers who come at the end of a workday to pick up a few items on their way home. The Customer Guru then says, “You came to see me with a plan to get more Customers. You’re willing to spend money to get new Customers. What do you plan to do about the Customers you already have? Are they satisfied? If yes, why do they leave you? If not, how can you increase their satisfaction? “For example, in a telephone company, some Customers remain with the company because of inertia, while others are open to change; yet there is little effort to cultivate them. A bigger effort is made to get new Customers. That’s where the marketing effort is. There is a cost to Customer acquisition. It often costs ten times more to acquire a new Customer than to retain an existing one! “It’s interesting to note that, in developing markets like China and India, telephone companies report only Customer adds. They rarely report Customers who leave them. Thus the net gains may be smaller than the new acquisitions they report!” Doug answers, “I am sure companies in developed countries quote gains in number of Customers, too. You raise an interesting question. Frankly, I never looked at the aspect of Customer
14 Customer Value Investment: Formula for Sustained Business Success
retention seriously, because I was somewhat removed from the Customer.” Krish tells Doug to think about increasing Customer loyalty and retention, and that they would discuss the Customer some more the next time they met.
Key Points What is a Customer?
An indispensable part of your business, without whom there is no reason for your business to exist.
Who is a Customer?
Someone who buys from you, A person, who may be anonymous, but who has a need to be known and touched, The true Customer, whom everyone in the chain has to focus on, is the end consumer, Many companies don’t know who their customers are nor do they know how many Customers they actually have.
How Do You Satisfy Your Customers?
Think in terms of C2B (Customer to Business), rather than B2C (Business to Customer), Then think of C2C (Customer to Customer), where you build a community of Customers, Understand the end-use experience your Customers are looking for, Provide your Customers with the products and services that provide value and give them the experience they want.
What is the Purpose of a Company?
To satisfy shareholders and Customers, To create value for both of them.
The Focusing
CHAPTER
15
2
The Focusing Customers as Assets Krish Kumar, the Customer Guru, says, “Let’s examine the question of what a Customer is more carefully: We know he’s indispensable, he needs to be touched. But why do we wish to retain him?” “Oh,” says Doug, “that’s to get repeat sales.” “Sure, but what is the Customer, what does he represent to you? If he gets you repeat sales, what is he?” “Mmmm??” mumbles Doug, quizzically. “Look at it this way. If you have a machine and it makes parts repeatedly, what do you call the machine?” “An asset.” Krish starts to smile. “Right, and a Customer is also an asset. Do you treat him as one? You value assets, and here you have an asset that can appreciate if he buys again in the future, and if he gets you sales or orders from others. If the Customer leaves or doesn’t buy from you in the future, the value of the asset is reduced or, in a sense, the asset is depreciated. “We need to understand this asset and how to treat it. The asset can show on our balance sheet and impact the way an investor looks at us. I suggest you take time to review what we’ve discussed and what you’ve learned when you get back to your office. “Finally, I said earlier that we need to satisfy and add value to both the shareholder and the Customer. This is a concept we’ll be talking about later when we discuss value and adding value to the Customer.” Doug returns to his office and pens down what he has learned. A few days later Doug shows Krish what he has written. Krish
16 Customer Value Investment: Formula for Sustained Business Success
says that he’s pretty much on target, but thinks it would be helpful to review the key points made earlier.
What is a Customer? The Customer Guru repeats his definition of a Customer: “The Customer is indispensable to our business. Without him, we have no business. “The Customer is an asset that can either appreciate or depreciate, depending on how we touch him. When a Customer leaves, the asset is diminished or is depreciated. “This asset can be shown on a balance sheet and helps in the valuation of a company. This, of course, benefits the shareholder in the long run. “This asset is important for the investors and shareholders to view.”
Customer as Assets: Examples “Sean Meehan,” 2 the Customer Guru continues, “gives an example of how this Customer focus can increase your assets from the point of view of investors. He compares the valuation of Orange and One2One, both telecom companies that had many similarities including numbers of Customers. One2One was sold for £6.9 bn, while Orange was sold for £20 bn in the same time frame. Both these companies had relatively equivalent physical assets. Orange, however, was closer to its Customers and catered to their needs. “Orange found out what mobile phone Customers wanted from their service providers in terms of factors, such as cost and network reliability. Orange was able to satisfy their needs more than One2One by providing reliable service, but also by offering per-second billing, a simpler rate plan, caller ID, itemized billing (free of charge), and a money back guarantee if the service failed. Orange was able to establish itself as a company that cared about Customers, and treated them as assets. “Now you can see that the Customer needs to be satisfied and touched, and…” Doug steps in. “He needs to be known and appreciated as someone who can give us repeat business. Just as a machine asset 2
Patrick Barwise and Sean Meehan, 2004. Simply Better: Winning and Keeping Customers by Delivering What Matters Most. Harvard Business School Press.
The Focusing
17
needs to be maintained, a Customer asset also needs to be maintained! You can see that maintenance of Customers is just as important as maintenance of machines. We all understand maintenance of machines.” The Customer Guru nods. “So why do all companies concentrate on sales and marketing? The thrust is mostly to get new Customers, deliver new products, and, hopefully, build a sustainable competitive advantage. Can you imagine a business where adding new machines is more important than maintaining existing ones? “Let me give you another example here. Take Cemex, a Mexico-based cement company which wished to understand the basics of what it is that Customers seek, want, and need. “Cemex, according to Meehan, grew by understanding Customers and competitors. Cemex was able to grow from a regional player to a world leader by focusing on basic Customer needs, not on nice-to-have extras. They found Customers wanted same-day delivery of ready mix, and since 1995 have guaranteed their Customers same-day delivery within twenty minutes of the scheduled delivery time in designated geographic markets, regardless of weather and traffic conditions. Cemex used satellite- and web-based vehicle dispatch technology. Not only did this system increase truck productivity by 35 percent, it wedded Customers firmly to the brand. “Another example is that of Veeder-Root in the UK that tracks levels of underground petrol tanks, allowing their Customers to service petrol pump clients effectively. These examples illustrate the necessity of understanding Customer needs.” “Later,” says Krish, “we will talk about the importance of understanding the Customer and his perceptions of you and your competition, which is an important tool to help build the Customer asset. “So, if you accept Customers are assets requiring nurturing, with needs to be fulfilled, then we have to ask who is responsible for the maintenance and growth of the existing Customer asset and the Customer experience? Traditionally, a company has a CEO and he has reporting to him (in the hierarchy) a VP or General Manager of Quality Control, a VP of Technology, a VP of Finance, etc., but no VP of Customers exists. The closest to this position is a Customer service department and maybe some
18 Customer Value Investment: Formula for Sustained Business Success
CRM or related processes. Where is the person or department with executive authority to oversee the needs of the Customer or his experience?” “Generally isn’t the sales department responsible for Customers?” asks Doug. “Yes, but the responsibility of the Customer rests with the entire organization. “Who in the company should be responsible for maintaining, developing, expanding and appreciating this valuable asset? Certainly a VP of Customers would help. He would have to coordinate a variety of functions with different end goals. “If we can find a way to expand the Customer asset, we will most certainly gain sustainable competitive advantage. “Some companies try to do some of this: One division of Nortel, a US telecom company, has developed a Customer Value and loyalty team reporting directly to the President of the Division, thereby ensuring measurement and follow-up of the implementation of Customer Value. The data collected is shared with employees to motivate them.” “Well,” says Doug, “we now do some of this. But, I can see that companies need to do more to treat Customers as assets.” “Ah, yes! This is the expected response of many executives. ‘We are doing everything for the Customer,’ they say. But often, whatever is done is for sales, and in bits and pieces. “What is the strategy for maintaining and growing the Customer asset? Just looking at Customer loyalty is not enough (it’s the result); the real cause is recognizing the Customer as an asset and then maintaining and growing that asset by increasing Customer Value.” Doug says, somewhat sheepishly, “I agree then that there is no focused Customer strategy in my marketing plan.”
Customer Strategy Krish adds, “What do we need to do to develop customer strategy? We have to start at the beginning.” “Of course,” agrees Doug. “We have to begin with the reason for our being a business. I guess we have to start with our vision and mission statements and then build a synergistic, holistic, focused strategy, driven by the needs of our Customers and the experience they’re seeking.”
The Focusing
19
“Right! But before we get to a plan, I want you to look at the way the business is structured. The vision and mission are placed in the center and everything revolves around them. The corporate strategy emanates from the vision and mission, and all the resources (including the Customer resource), both internal and external, are harnessed to achieve the goal.”
The Customer-in-Center© Approach “The way we ought to look at the business is to revolve our strategy and resources around the Customer. The strategy, as you said, emanates from the vision and mission statements, and therefore is synergistic with the goals. But the goals are to be achieved through putting the Customer in the center. We call this the Customer-in-Center© approach, and that is the foundation of a Customer-Centric business.”
Organization Structures The Customer Guru draws two charts that illustrate the difference between the traditional organizational structure and the Customerin-Center© approach (Figures 2.1 and 2.2).
Figure 2.1 Traditional Organizational Structure
20 Customer Value Investment: Formula for Sustained Business Success
Figure 2.2 The Customer-in-Center© Approach
“Wow!” exclaims Doug. “I never looked at an organization in this way. The indispensable asset is at the center.” “But what happens when you have retailers and distributors in between?” “Well, they form a layer around the Customers and all our resources flow through them to the Customer. It’s probably more desirable to flow some resources directly to the Customer if you have a retailer who is not exclusive to your product. It is better in such cases to touch the Customer directly rather than outsourcing the touching process entirely. “And let’s not forget employees?” says the Customer Guru. “I’ve got to assume that everything we’ve talked about should flow from the employees to the Customer, or from the employees to the retailers and distributors, and then to the Customer,” says Doug. “Great! Now you’re getting there. “And what do we have to do to keep the employees and retailers focused on the Customer?” “We have to treat them well, and add value to the employees and to the distribution chain. We have to build the Customer Value infrastructure in the company,” adds Doug. “Right! And we have to incentivize the employees, and then add value to them. When we add value to an employee, he or she becomes a value-added employee. Only a value-added employee can add value to the Customer.
The Focusing
21
“HP has recently adopted this. This is what they said at a recent Forrester Consumer Forum: Vyomesh Joshi of Hewlett-Packard indicates that Customercentricity requires a simple focus change from products to Customers. ‘Put Customers in the middle, and create the experience around them,’ said the EVP of the Imaging and Printing Group. ‘Technology isn’t the most important piece anymore. It’s how we can make it easier for Customers, with choice, control and convenience.’ He used HP’s Lightscribe printable CD discs as an example. Customers told the company they didn’t want to print separate labels or write on their CDs, so HP designed a new product that will use one laser to burn information to a disc and then print a label on it. This idea came from an engineer who thought first about solving a Customer need. He said the engineers and designers are encouraged to speak to consumers by attending ’demo days’ at retail stores and speaking to Customers after they’ve purchased a product. ‘Contrary to reputation, engineers would love to connect with3 Customers,’ Joshi said. ‘We can say we’re Customer-Centric, but we really need to know about Customer problems and then fix them from a product and marketing standpoint.’ “This is from Milind Lele and Jagdish Sheth’s research4 many years ago, which confirms that it is important to talk to customers. Winning companies were obsessive about knowing, even better than Customers themselves, what Customers want. They created and managed Customer expectations. They design their products, services and processes to maximize Customer satisfaction. They make Customer satisfaction everybody’s business. “I would comment they also have a business philosophy to add ever increasing value to the Customer, and a culture driven by a vision that creates strong Customer focus, together with what Lele and Sheth had suggested, will make companies real winners in the Customer marketplace. 3 4
Connect with and touching are similar in this context. Milind Lele and Jagdish Sheth, 1987. The Customer Is Key: Gaining an Unbeatable Advantage Through Customer Satisfaction. John Wiley & Sons Inc.
22 Customer Value Investment: Formula for Sustained Business Success
“Customer-focused organizations constantly ask if their proposed actions will benefit the Customer, or adversely affect them.” “Lastly,” continues Krish, “let us not forget the suppliers, who are just as important.”
Suppliers: An Example “Carlos Cordon of IMD International5 says that the crude reality is that he knows no company that measures whether it is an attractive Customer to its suppliers, although most companies measure and re-measure every single action of suppliers. Chief purchasing officers can provide information such as the ‘on-time delivery’ or ‘quality track record’ of a supplier. Chief purchasing officers, if asked about how attractive they are to their suppliers as a Customer, will probably answer, ‘Yeah, that’s important, but we do not measure it.’ Companies talk about ‘relationship’ and sometimes that meant ‘relation-shit’, or about ‘win–win’ and that meant the same guy (the Customer) winning twice. No wonder that some suppliers are now calling for revenge. “Thus it is important to treat a supplier like a Customer,” continues the Customer Guru, “and understand his needs, if you want to get him to work to your advantage. We want to control our Customers and our suppliers. Really, we should remember to understand their needs and treat them right. “Cordon gives the example of a steel outage at Nissan causing them to shut down for five days. He wonders if this happened because Nissan was too tough with suppliers. “Thus, business is all about getting to know the needs of Customers, employees and suppliers, and adding value to them. Consequently, they will tend to do their best for you. “I have another appointment coming up, but I’d like you to think about how to touch the Customers and how to effectively work with them.”
Key Points Customers as Assets
5
Customers are assets because, if treated properly, they can ensure an ongoing stream of revenue,
IMD International is a famous business schoool in Switzerland. Carlos, Cordon: www.cpoagenda.com, Spring, 2005.
The Focusing
23
The Customer asset can appreciate or depreciate, depending on how it is maintained and handled, The Customer asset can be shown on your balance sheet, which impacts the way an investor views you, Companies need a specific strategy to grow and nurture Customer assets, and The Customer is indispensable to our business, as without him, we have no business.
The Customer-in-Center© Approach
Customers should be in the center of your business strategy, Customers should drive your strategy rather than being used to fulfill your goals.
Managing Suppliers
Suppliers should be treated like Customers, You should develop a true relationship with your suppliers.
Traits of Winning Companies
Obsessive about knowing, even better than Customers themselves, what Customers want, Create and manage Customer expectations, Design their products, services and processes to maximize Customer satisfaction, Make Customer value everybody’s business, Maintain a business philosophy to add ever-increasing value to the Customer, Have a culture driven by a vision that creates strong Customer focus, Constantly ask if their proposed actions will benefit the Customer, or adversely impact them.
24 Customer Value Investment: Formula for Sustained Business Success
CHAPTER
3
The Touching Later that Evening with Pam They had just finished dinner, when Pam gives Doug an unexpected gift of an aftershave lotion. “Why, it isn’t my birthday, but I can really use this.” But he felt good… he felt special… he felt ‘touched’. And then he remembered comments from the Customer Guru. Of course, it came to him; we have to give the Customer a great experience. And before that, we have to touch him. We have to encircle him… hug, embrace, surround, cover, and understand him... this is important. And how do we touch the Customer? We have to contact him, and at every opportunity give him a great experience, especially the experience he wants, and exceed his expectations. That’s when Doug remembers reading about the Mitchells/ Richards Clothing Store in Westport and Greenwich, CT.6 The entire business is built around the Customer and the relationship with him. As a result, Mitchells has achieved the highest per square foot clothing sales in the United States. Their website home page7 reads: For those of you who have grown up with our family businesses, Mitchells of Westport and Richards of Greenwich, we truly appreciate your loyalty. We’re working hard to 6
7
Jack Mitchell, 2003. Hug Your Customer: The Proven Way to Personalize Sales and Achieve Outstanding Results. New York: Hyperion Books. www.mitchellsonline.com
The Touching 25
continually exceed your expectations. For new friends who might be less familiar with us, please use this site to acquaint yourselves with our stores, our fashions, and our philosophy. After you have taken a moment to look through these pages, come visit us in person at Mitchells and Richards. You’ll find yourself right at home. In their services section, they re-iterate their philosophy: Service is paramount at Mitchells of Westport and Richards of Greenwich. It impacts every facet of our business, from our ability to bring you world class fashions to the friendly, knowledgeable sales associates who help and guide you. You, our Customers and friends, are ultimately at the heart of all that we do, and we strive to constantly exceed your expectations. A philosophy that is indeed put into practice. They talk about treating the Customer as a friend, and exceeding the Customer’s expectations. The generic message is, thinks Doug: we’ll do what we said we would, when we said we would, at the price we said we would, and at the performance level we led you to expect. After all what is a relationship all about? It is about:
Accessibility Responsiveness Knowledgeable people (Competence) Promptness Promises kept Being kept informed Following up No surprises Doing it right
Relationship is all about building trust, confidence, and reliability based on integrity, credibility, courtesy, empathy, and fulfillment. Winning trust is very important for most companies. Forrester Research8 reported: 8
Forrester Research is an independent technology and market research company.
26 Customer Value Investment: Formula for Sustained Business Success
Trustworthiness occurs when companies are “trusted by their Customers to do what’s right for them, whether or not regulations, such as privacy laws, require it.” That means going above and beyond the call of duty to earn a Customer’s trust and the best way to do that is to see the situation from the Customer’s own perspective. We believe trust can be operationalized as well as communicated. Effectiveness lies in executing in both areas. American Express, for example, has been able to garner trust from their Customers and has been rated number one by the Ponemon Institute9 in their annual survey of the most trusted companies. Doug has just read award-winning journalist, Naomi Klein’s lament, in her article in the Guardian, 10 on the fact that the hugging11 culture is virtually non existent in most retail stores. Shoppers’ slogan should be ‘Take care of yourself!’ she quotes TBWA/Chiat/-Day’s Pat Pirisi.
Customer Touching Doug can’t think of how Glacier can impact the culture in a retail store. Doug decides to call the Customer Guru. He tells him about his thoughts on touching. “Yes, you touch through touch points. But, what are touch points and whom do we actually touch?” Doug thinks about it and then asks, “A touch point involves everyone who comes into direct contact with a Customer?” “Yes! Actually any employee is a touch point directly or indirectly. Each of them must get an opportunity and make an effort to or try to touch the Customer. Top management must touch Customers, and once in a while this touching should take place where the company actually 9
10 11
Annual TRUSTe & Ponemon Institute Most Trusted Companies for Privacy Award. http://www.guardian.co.uk/Columnists/Column/0.5673.498979.00.html. Hugging, encircling, touching are not used in a physical sense in this book, but to denote a thought process. Hugging, for example, means being especially nice, attentive, and helpful.
The Touching 27
transacts business with the Customer. For a retailer, this would be the actual store. For an insurance sales person, sometimes it is the Customer’s living room. “And all top managers should spend one day a week touching Customers. Studies have shown that successful managers spend 18 percent of their time with Customers, roughly one day a week. They spend this time in understanding if the Customer is happy with the quality of their offer and their service, and any suggestions Customers may have.” Krish gives an example, “Take someone like John Chambers, CEO of Cisco.12 He spends the bulk of his time with Customers and expects his executives to do the same.” “I doubt our CEO, Bob Ostrofsky, spends much time with the Customer,” remarks Doug. “In fact, people use ‘mystery’ Customers to check on their processes. Or, as Jan Carlzon13 suggests in Moments of Truth, you can even take a temporary employee (let’s say a receptionist) and make her a touch point. Employees pretend they are Customers, and they both learn and teach what a receptionist must learn for touching Customers. “Sometimes senior managers should play the role of front line touch points or at least accompany these touch points when they’re interacting with Customers. Much can be learned from this. “Tom Pritzker of the Hyatt insisted on putting his field management as doormen, food servers, and front desk attendants. This made them appreciate the difficulties of these jobs. “To understand competition, senior managers may want to try to buy competitive products and services! “Unfortunately, when you sell through a chain, the touching of the Customer is outsourced to the retailer. The retailer is often also touching your competitors’ Customers. In many cases he is the one who can help the Customer make a purchase decision. This is also true when we outsource to a call center. Tom Osenton of Customer Share Group14 tells us that, when he was made CEO of The Sporting News Publishing Company, he visited 12 13
14
Cisco Systems, Inc. is the worldwide leader in networking for the Internet. Jan Carlzon has spelled out his management and staff motivation philosophies in a best-selling book, Moments of Truth, Collins 1989, which has been translated into eighteen different languages. He turned around SAS Scandinavian Airlines. Tom Osenton, 2002. Customer Share Marketing: How the World’s Great Marketers Unlock Profits from Customer Loyalty. Upper Saddle River, N.J.: Prentice-Hall.
28 Customer Value Investment: Formula for Sustained Business Success
their call center. He found that none of his executives had ever been there and, more importantly, the information being provided was substandard and did not reflect knowledge of the company, its products, and services. “At We Energies,15 senior officers routinely answer Customer calls routed randomly to them from the call center. This achieves two things. First, the executive gets to feel the pulse of the Customer. Second, if the call center system does not allow them to solve the query, then the executive can have the system modified to make it easier to resolve the Customer’s problem in the future. The system can then also be made more Customer-friendly. “Yet another problem is that many companies believe that call centers are the solution to touching and solving Customers’ problems. I happen to think this is wrong. Generally, 80 percent of calls are for clarifications or for understanding the products and services of a company. Only 20 percent are for problem resolution. “The real effort has to be concentrated on eliminating call centers. To do so, we should target at taking away the source of the problem or rectifying it so that it ceases to be a problem. A senior Hewlett-Packard executive once told me that the call center is fine, because it allows HP to make a Customer happy by solving his problem. Would the Customer be happier if he had no problem and HP were to remind them of the hasslefree ownership? “What a great ad this would make: You’ve stopped calling us. That means you feel we are doing the right things for YOU! “Doug, let’s get back to you. You, at Glacier’s, also have to sell through retailers. How can you get some direct touching going?” “Just what I was thinking,” says Doug. “I really don’t know how to touch the Customers, without adding a great deal of expense. And we will have to work through the retailer and our efforts will help them more than us.” “Nevertheless, you have to improve the touching at the retailers’ or at the point of contact, and find ways of making primary contact (that is, with the company). First, we have to understand the Customer’s requirements, and to do so we need to form what I call Customer-Circles©. Let’s meet to discuss this concept.
15
We Energies: Wisconsin Energies, Milwaukee, Wisconsin, is a public energy utility company.
The Touching 29
“Your fear is that we will teach retailers about touching, when you know these retailers have divided loyalties between you and your competitors. So, what do you do? “The answer is simple. You have to learn what the retailer considers to be value, and then you have to provide him with better value than your competitors. It is too early for me to go into details, but later I will show you how this can be achieved.”
Customer-Circles©16/Customer-Centric-Circles© Doug decides to bring Rita Timko to the next meeting with Krish. Rita Timko is Glacier’s marketing manager, who was present in the meeting where Doug had presented his marketing plan to Glacier’s sales director, Earl Green. You will recall she was in agreement with Doug that the way to increased sales was through new Customer acquisition. She has been curious about Doug’s discussions with the Customer Guru. Doug introduces Rita to Krish. After some general talk, Krish tells them he wants to discuss Customer-Circles©. “The term ‘Customer-Circles©’ is really a misnomer, because it is a company-sponsored group of people who have regular contact with Customers, and may not necessarily have Customers in it, per se, but this group of people will focus on the Customer.” Rita says she doesn’t understand. “What use is it to have Customer-Circles© without Customers?” Krish responds, “Ideally, we would like to have Customers in the Customer-Circles©. But it is difficult to get the right type of analytical Customer who could commit the time to be in an ongoing initiative. In any event, the Customer-Circle© is a task force to run a Customer-Centric project with targets, responsibilities, and timetables. The first step is to raise the awareness on Customers. Rita, I am sure you will support this type of initiative.” “I’m not sure, till I hear more!” replies Rita. Doug asks, “Who should be in a Customer-Circle©?” The Customer Guru replies, “You should start with two CustomerCircles©, one within Glacier, and the other at a retailer of your choice. 16
Customer-Circles are Customer Value Foundation’s copyright. Also called Customer-Centric-Circles©.
30 Customer Value Investment: Formula for Sustained Business Success
“The Customer-Circle© at your company, Glacier, should have you, a corporate marketing person, and people from the manufacturing plant, logistics and distribution, IT, CRM, and so on. “In the retailer’s Customer-Circle©, we want the various touch points to be members. Let’s see, the retailer (store manager and someone from the corporate marketing team) and selected members of his staff at various levels, from the stocking clerk to the bagging person, and Glacier should have: a marketing person, a Customer service person, a plant person, a quality control person, a CRM person, and an IT expert. Together, they can form an ideal Customer-Circle© at the retailers. “I know a fertilizer company in India that has formed CustomerCircles© where they involve farmers in a cluster of villages. These have increased the rating on the perception of the company and the loyalty rate nearly five-fold (it’s gone up from 5 percent to 24 percent, as per a Customer Value Foundation study).17 “The Customer-Circle© starts to develop strategies for focusing on Customers at a local level. It devises ways and means to make it easier for the Customer to do business with the company and the retailer. The Customer-Circle© finds ways to touch the Customer and to give the Customer a great experience. Customer data, information, input, complaints, or plaudits, these should be provided to the CustomerCircle©, as and when available, or an effort should be made to collect such feedback. “What you’ll find is that the Customer-Circle© will discover and invent better ways to handle a Customer. Through this process, Customer awareness will invariably increase (and the Customer’s awareness of the company will also improve). “Basically, this is a bottom-up approach to energize an organization to become Customer-Centric. “Later, I’ll tell you about ‘Customer Conduits©’, which is a topdown approach, driven by the CEO to make the organization CustomerCentric.” “Yes,” says Doug excitedly, “and they must collect data on the Customer, plan on how to track every contact and experience, and plan future touches and experience, keeping the retailer at the 17
Customer Value Foundation study: Customer Value Management study in the rural market, Producer–Dealer–Retailer–Farmer, 2005.
The Touching 31
forefront. They must talk to the Customer, get feedback from the marketplace, and learn what they can about the competition in both formal and informal ways. “I guess Customer-Circles© are akin to level three empowerment described by Jan Carlzon, where employees are self-managing and can make decisions. They will take ownership of the Customer and the Customer initiatives, because these are their own ideas.” Rita grumbles, “This all assumes we don’t know what we need to do for Customers. We are doing everything.” “Well, here we are making the employees the owners for Customer focus,” says Krish. “What the employees propose is generally common sense. What they suggest is what the company would have wanted them to! For starters, you do not touch the Customers now, they are remote to you and anonymous, and just touching them will be very useful to your sales.” “And if we had a lot of money, we’d be able to do this. Our marketing budget is strained,” adds Rita. “We’ll work out costs for a pilot program, and the overall cost amortized over time.” Rita says she has to leave. Krish keeps going, “Thanks for coming.” And to Doug he says “Let’s move ahead.”
Customer Champion/Chief Customer Officer “You need a Customer Champion in the company. In fact, you need a Chief Customer Officer.” Doug says that the job of a Chief Customer Officer cannot be easy. “It means he has to get people of different departments, with differing goals to work towards a common Customer strategy. Jeanne Bliss,18 author of Chief Customer Officer: Getting Past Lip Service to Passionate Action, has written: ‘When the CEO says, ‘The Customer is our number-one priority,’ that’s all well and good. But nobody in the company takes it upon themselves to make that happen. The CEO will hand it to the VP of marketing or sales, who won’t have the resources’.” 18
Jeanne Bliss, 2006. Chief Customer Officer: Getting Past Lip Service to Passionate Action. Jossey-Bass Inc. Publishers.
32 Customer Value Investment: Formula for Sustained Business Success
The Customer Guru nods in agreement. “You’d be surprised that Home Depot, Pacific Gas and Electric, Activision, UAL Corp. (United Air Lines’ parent company), and Banta Corp (a technology and market leader in printing and supply-chain management) have created a Chief Customer Officer (CCO) function. Putting the CCO at the Board level has put strength into the function. In fact, recently the son of Samsung’s chairman has been designated CCO on his way to head the company. “Companies need what I refer to as ’farmers’. Most of the sales and marketing people are ‘hunters’, dedicated to finding new Customers. There’s a need for marketing people to ‘work the field’ as it were. And the Customer Champion or CCO can lead the way! “The Customer Champion has to be a very senior executive or manager, maybe a VP of Customers (You don’t have one at Glacier Products.) If you can have a VP of Quality or Technology, isn’t it natural to have a VP of Customers? But I can tell you that the Customer Champion must help you in enabling Customer-Circles© and touch points. So, it is better that he be a boardroom-level person.” Doug remarks, “I sure was a hunter, I can see the value of being a farmer, though it seems that farming cannot be as exciting as hunting! But now that I understand some of the reasons for farming, I can see that farming looks pedestrian because a fair amount of basic work has to be incorporated and made a way of doing business. That’s why you need Customer-Circles©, to effect these changes. “I am certain Rita thinks marketing people should be hunters. Farming is for Customer service.” “That’s expected,” remarks Krish. “When that’s all you are used to and that’s all you know. We need hunters, too. Remember, Customers are the business of everyone and this focus has to be led by the Customer Champion. I have another meeting scheduled, so my time’s short. Let’s get back to your marketing plan. Can you revise your plan and make a presentation to Earl incorporating some of your learnings?” Doug agrees that it’s time to meet with Earl Green again and update him on what he’s learned from the Customer Guru. He spends that evening reviewing and rethinking his marketing plan in preparation for the meeting.
The Touching 33
Meeting with the Sales Director “Earl,” says the young sales executive, “when I initially gave you my marketing plan, you asked me to meet with the Customer Guru. I’ve now had a number of productive meetings with him and have learned that a majority of organizations tend to focus on tasks and strategic goals, but not on the Customer. “They realize the importance of their Customers, but people in companies get so engrossed in their operational, day-to-day tasks that the Customer becomes incidental. In fact, the Customer is sometimes viewed as someone to be exploited as efforts are concentrated on building value for the company through conventional economic thinking! “In our current sales and marketing plan, we discuss means of increasing the business by basically increasing our Customer base. There’s virtually no discussion about looking after, maintaining and growing business with our existing Customers. “We don’t have a separate Customer department that focuses on both existing and recently acquired Customers, and also tracks Customer experience and well-being. We need such a department. We also need a Customer Champion, whose major task is focusing on our Customer assets. “I think I am ready to revise my marketing plan to include a focus on targeting existing Customers.” Doug then explains the Customer-in-Center© and CustomerCircles© concepts. Earl nods his head in agreement. “Go ahead. You’re definitely on the right track and I’d like to see your new plan. After we review and discuss it, we should meet with Bob Ostrofsky.” “Rita is not on board on all of this, but she will not work against us. She’ll be neutral, just in case we succeed,” Earl adds.
Meeting with the CEO Earl believes it’s time to carry the discussion to Bob Ostrofsky, the CEO. He is a hard-core marketing person, who’s obviously been very successful. However, after taking over as CEO, competition has intensified, and market shares have either stagnated or fallen. Earl relates Doug Evert’s interaction with the Customer Guru to Bob.
34 Customer Value Investment: Formula for Sustained Business Success
“As you know, we’ve been trying to increase sales by getting new Customers, but have been paying scant attention to our current Customers. We need a head of Customers and Customer experience, a Customer Champion who concentrates on the Customer, his well-being and the manner in which he’s treated and touched. “He should also keep track of Customers, improve experiences for the Customer (and in fact understand the Customer’s end-use experience), and incentivize employees and retailers to touch and form emotional bonds with the Customer. He should be charged with all Customer-related activities and would definitely help our people better manage and cultivate our Customer assets. “We ought to build a Customer-oriented strategy. I’d like to suggest we hold such a strategy session as a starting point. But, before that, let me show you what I mean when I mention the Customer-in-Center© approach to business.” He sketches a comparison of the existing organization chart and the Customer-in-Center© chart. Bob responds, “We have a number of programs focused on the Customer and do extensive Consumer surveying and Customer satisfaction studies. You know the new products to attract new Customers? At this time, we’re completely out of bandwidth. Although what you say is interesting, we’re too stretched at this time to consider new initiatives.” The meeting is over. Earl cannot believe that Bob is not willing to take a fresh look at the Customer. Change is going to be difficult. And without the CEO leading the charge, he realizes that change will be slow. Earl calls Krish and tells him about Bob’s comments. Krish says he’s not surprised. Bob has to be made to understand that Customer Value Management will integrate all the Customer efforts in a holistic manner, make the initiatives more efficient and Customerdriven, and lead to a wider spectrum of competitive advantage! Earl acknowledges that he does need to make Bob understand.
The Sales Director Calls the Young Sales Executive “Bob hasn’t directly said ‘no’ to holding a Customer strategy meeting but he feels we’re overstretched with all the programs we
The Touching 35
currently have,” says Earl to Doug on the phone. “Let’s think about how we can convince him of the value of a Customer strategy. One thing that’s important to the success of this session is to outline in specific terms the cost benefits of a Customer-Centric organization. Why don’t you work on that? Also, see what we can do about Customer experience. “Customer end-use experience is different from what companies are providing. I read recently about this hotel in New Delhi. Hotel people behave (I know they really think otherwise in their segmenting) as if Customers come to stay at their hotel, and the management thinks giving the traveler a comfortable and pleasant stay (experience?) is really all that is relevant. “However, as a business traveler I want a good business convenience experience. I read about lawyers visiting Delhi to appear before the Indian Supreme Court who, when asked about their needs, said they wanted gowns (these are difficult to carry) required for court appearance, legal size pads, a packed lunch (the Supreme Court canteen served greasy food), and a large canvas bag to carry books that local lawyers had left with them to study and drop off to the Court (which is convenient to the hotel). They didn’t need a law library (expensive for the hotel, and which the hotel thought was really important). “Larry Malarkar, who was then VP of Sales and Marketing of this hotel chain remarked, ‘The best definition of service is providing whatever makes it convenient for the Customer to achieve his end goal.’ For instance, a hotel must make it convenient for the Customer to achieve the purpose of travel, whether it is to conduct business or pursue leisure. No one travels to stay in a hotel. People stay because they have left their homes and don’t have a choice. And the hotel that makes it most convenient for the Customer to achieve his end goal is the one that has provided him with the best business/friendly experience.” Doug continued, “Look at Marriott. They got together with AT&T and Steelcase (the large office furniture manufacturer), to build ‘Rooms that Work’, by understanding what a business Customer wants of a room and wants to do in the room. Portable lighting, tables on wheels, abundant telephone jacks and electric points, and computer and broadband-wired rooms. Fax and printing access was important.”
36 Customer Value Investment: Formula for Sustained Business Success
Doug says, “You’re right. That’s the way one has to design the business experience. I remember reading Carl Sewell’s book Customers for Life about his Cadillac dealership in Texas that found a way of giving the Customer a great experience. They were the first in giving loaner cars, dropping Customers off after they left their cars for servicing, bringing cars to the Customer for a test drive, and even opening a French restaurant at the dealership. The dealership also gave game tickets, etc., to Customers they truly valued. “When this dealership added a Hyundai showroom, they put in a coffee shop, as the Hyundai Customers were not necessarily inclined to use the French restaurant. “From their website19 you can see the focus on Customers and service (they now have a Saab dealership also): Sewell Cadillac Saab Hummer of Dallas is where we first began earning our reputation for superb Customer service. With our eye for detail and an unwavering commitment to quality, we have come to redefine Customer service in the automotive industry, first with Saturday service, then with free loan cars to Customers. Let our assistant service managers work with you to determine how best to meet your automotive service needs, whether you’re an existing Customer or new to the Sewell family of dealerships, whether you bought your vehicle at a Sewell dealership or elsewhere. “There are many such examples,” agrees Earl, “We have to find what we can do to provide the Customer with the right experiences. Let me finish by reading to you United Van Lines Customer Pledge.” Earl pulls out a sheet and reads aloud: United Van Line Customer Service Pledge Our goal is to develop and maintain permanent relationships with our Customers by providing outstanding service, move 19
www.sewellvillagecadillac.com Carl Sewell, 1998. Customers For Life: How To Turn That One Time Buyer Into A Lifelong Customer. Pocket.
The Touching 37
after move, with no exceptions. We plan to get the job done to the Customer’s satisfaction, no matter how great the challenge; to stand behind every service commitment; and to employ friendly, skilled, knowledgeable people who, in the event of a problem, will do whatever is necessary to make things right… right away. In short, we are dedicated to proving, through our performance, that United is the very best professional mover in the world, in the eyes of our most important critics—our Customers. Earl beams, “Don’t you think this is wonderful statement. There are no ifs, buts, or maybes. It describes the kind of people they have, and what their service pledge is. “Call me when you have thought about the next steps.”
Key Points Customer Hugging and Touching
Everyone in a company who comes into direct or indirect contact with a Customer is a touch point, ‘Hug’ your Customers, and care about them, Very often ‘touching’ is outsourced to call centers or downstream in the chain to retailers and agents, whereas companies need to find a way of touching Customers directly, CEOs should spend a day a week with their Customers discovering if they are meeting Customer’s expectations and how service and other offerings can be improved.
Keep your promises
Exceed Customers expectations and build trust and confidence
Remember Customer Satisfaction =
Build a relationship which is about:
Accessibility Responsiveness Knowledgeable people
Perceived Performance Customer Expectations
38 Customer Value Investment: Formula for Sustained Business Success
Promptness Promises kept Being kept informed Follow up No surprises Doing it right
General Company Beliefs
They are doing ‘everything’ for the Customer . That they have programs underway to impact the Customer. They have insufficient bandwidth or are too busy to start a Customer Value program.
Customer Value Management Programs
Integrate all Customer efforts in a holistic manner Make the initiatives more efficient and Customer-driven Lead to a wider spectrum of competitive advantage
Customer-Circles©/Customer-Centric-Circles©
Are company-sponsored groups of people who have regular contact with Customers, may not necessarily include Customers in them and will focus on the Customer. Develop strategies for dealing with Customers at a local level. Devise ways and means to make it easier for the Customer to do business with the company. Find ways to touch the Customer and give them a great experience. Customer data, information, input, complaints or plaudits should be provided to the Customer-Circle© as and when it is available, or an effort should be made to collect such feedback. Customer-Circles© will come up with better ways to handle a Customer. Through this process, Customer awareness will invariably increase (and the Customer’s awareness of the company will also improve). Since the initiative starts with and belongs to the members of the Customer-Circle©, they will take ownership of it and be more Customer focused.
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Customer Champion/Chief Customer Officer
Companies must have a Customer Champion or a Chief Customer Officer, Should cut across all functions to make the company, its processes and its Customer interaction customer-centric, Should be a Board level person.
Customer Service
One definition of service is that it is a convenience, Should build a relationship.
40 Customer Value Investment: Formula for Sustained Business Success
CHAPTER
4
The Understanding Customer Value Doug meets with the Customer Guru again. Doug begins the meeting by stating, “Our CEO wants us to go slowly in developing the Customer strategy. My boss wants me to think through the advantages of a Customer-Centric organization, especially in terms of the additional benefits it could bring to the company.” Krish strokes his beard, and nods his head. “I am not surprised. Many executives stop being Customers when they walk into their own offices! Yet a survey shows that 86 percent of them think they are Customer-Centric. “I think I understand what you need. Some of the steps you’ve looked at such as Customer-Circles© and Customer Conduits (the common Customer-focused initiative led by the CEO) will unquestionably move your company towards increased Customer-Centricity. But the quantum jump will come by understanding Customer Value. Much of this was pioneered by Bradley Gale and Ray Kordupleski in the 1980s and the early 1990s.” “I’ve heard you use the words Customer Value. I am not sure exactly what it means, but think I can intuitively understand what it is,” says Doug. “I’m sure you do,” grins the Customer Guru, “But there’s much more to Customer Value than meets the eye. I’ll explain Customer Value more fully later. “As a start, I’ll give you some terms and definitions, which you should be familiar with. Apart from Customer Assets, you need to know the
The Understanding 41
following terms,” as he pulls several printed sheets headed ‘Customer Value Definitions’ from his desk drawer. “Once you are familiar with and understand these terms, you’ll need to learn how to measure some of them, particularly the value you add to Customers. If you can measure the value you’re adding to your Customers and the value your competitors are adding to their Customers, you will know if you’re adding more or less value to your Customers than competitors are to theirs.
The term ‘value’ refers to the perceived worth of a product, service, process, asset, or function relative to the cost and relative to the possible alternatives ‘Value’ and ‘Satisfaction’ may be influenced by many factors throughout the Customer’s overall purchase, ownership, and service experiences
“Value is what a product or service is worth to a Customer. Value is the balance between price and quality (of products, services, brand/ relationship, etc.) that a Customer perceives. Value is a perception and is a mix of the economic, functional, and psychological factors important to a Customer. “This comparison, which is made in a ratio form, is called Customer Value Added, or CVA. CVA is a very important step in a program we call Customer Value Management (CVM). CVA was introduced by Ray Kordupleski. Simply put: To measure Relative Value Added we need to: 1. Measure market perceptions of the value we add 2. Measure market perceptions of value added by competitors 3. Define a relationship between the two Customer Value Added CVA =
Perceived worth of your offer Perceived worth of competitive offer
“Many companies recognize Customer Value Added as being important because it gives them both Customer information and competitive information, which then represents significant market data.
42 Customer Value Investment: Formula for Sustained Business Success
It tells them why people buy from them and why they buy from their competitors. Using this information sensibly leads to Customer-Centricity and competitive advantage. But most don’t know how to measure value or, if they do, don’t take the time to do so. Rather, they tend to concentrate on measuring Customer satisfaction. Results show that satisfaction does not correlate to loyalty. “A major group in India, the Tatas have a stated objective to measure value, but most of their companies measure satisfaction, because that is the conventionally known measurement, and because many executives do not know how to measure value. Customer Value Foundation has been helping certain Tata business units to measure value and use the results to improve business results. “Tata Steel’s Managing Director, B. Muthuraman, is one of the most Customer-focused executives I have ever met. Tata Steel has an effort of unlocking value through initiatives like Customer Value Management and Retail Value Management. The company has launched the Customer Value Management initiative with the objective of creating a complete understanding of Customer problems and finding solutions, jointly. “Tata Teleservices (Maharashtra), under the leadership of Charles Antony, Managing Director, had embarked on a vision, with a strong focus on providing Customer Value with care, trust, and innovation. “Charles Antony, Managing Director, Tata Teleservices (Maharashtra), said, We are overwhelmed by the response shown by the Customers to our services in Mumbai and the rest of Maharashtra and we would like to thank each of our Customers for having expressed their faith in us. This response is a testament to our belief in delivering value and a highly improved quality of service to all our Customers. While I feel humbled by the faith that our Customers have shown us in our quest for leadership, I am truly proud to be a part of a team that has helped us achieve the milestone. “Tata Fertilisers has studied the value they add to their dealers, to their retailers, and finally to the farmers. They have been able to validate the efficacy of recent programs and initiatives as creating superior Customer Value.
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“Tata is the first Indian company to establish a Customer Value Desk. “Much of this flowed from Tata’s Chairman, Ratan Tata’s passion for Customer loyalty: [Creating a unified brand]… calls for a new approach to recognizing what the marketplace wants, and how to establish not just Customer relations but Customer loyalty… The multinationals coming to India are showing that their Customer interface is dramatically different from what we find in major Indian companies. I would have wished that Tata companies would enjoy Customer trust and loyalty.20 Doug interjects, “That’s very interesting that an Indian company has such Customer-focused executives and CVM initiatives. “Glacier does some Customer satisfaction studies. Now that I know better, I’d like to see value studies. I think there will be resistance to change, first, because we have so much data and second, because the people carrying out satisfaction studies will not want to change and will defend their satisfaction work, although satisfaction measurements are a sub-set of value studies.” “Absolutely right,” says Krish, “and the data is voluminous, and very few people truly use the data. I’ll tell you more later. Let’s continue to talk about value. “Now, if you add more value, you will retain and gain Customers. If you’re adding less value than your competitors, you will inevitably lose Customers. It’s critical that you understand what the Customer is looking for, and what the Customer perceives as value. “Generally CVA is measured in terms of either products or Customer segments, and on a national, geographic, or regional basis. And often you’re surveying as many as or more of your competitors’ Customers than your own.” “If value and CVA are easy to measure and just an extension of satisfaction studies, why don’t we shift to value measurement?” asks Doug. “That’s a good question. 20
First, there is organizational inertia.
Ratan Tata, 2003 in-house Interview. http://www.tata.com/0_our_commitment/ corporate_governance/articles/20030305_ratan_tata.htm.
44 Customer Value Investment: Formula for Sustained Business Success
Second, there is a feeling among executives that they understand the Customer and the marketplace. Third, they feel satisfaction studies are adequate, because they are familiar with them. Fourth, they wonder if they can correlate the value data with past satisfaction results. Fifth, they feel they are into too many initiatives, and there will be a resource drain. Sixth, executives running satisfaction studies are afraid their bosses may ask them why they were not using a superior tool like value earlier. Lastly, value studies are not as widespread as satisfaction studies. Satisfaction studies are generally run by market research companies that push satisfaction. Value studies are done less often (maybe once a year or once in two years) and we do suggest a truncated, focused, and shorter satisfaction survey be done in between consecutive value studies.
“Thus top executives are not exposed to value. You know the quality movement faced the same resistance before it was embraced as an important subject. It took ten to twenty years for it to take hold. Early movers gained competitive advantage. “Since satisfaction is a subset of value and is used in value studies, you are just improving on what you are already doing. Satisfaction can be measured only after an event or after you have bought. Value tells you why you buy. Perceived value is the cause. Satisfaction is the result. Don’t you think it is better to understand the cause, rather than only the result?” “This makes a lot of sense. You’ve got me sold. But we still have resistance,” remarks Doug. “Often, when the CEO is not totally sold on a CVM approach, we launch an initiative locally to prove that we can add value to the Customer by making the Customer happy, putting the Customer in center, and incorporating Customer-Circles©. I suggest you take this approach. “You will quickly see the impact you can make at a local level, which will help both you and the CEO understand the value of both CVM and the Customer-Centric organization. You’ll find that you will synergize existing Customer efforts, and that everyone will be in sync on what to do. At the same time, company morale will also improve.”
The Understanding 45
“I think it’s understandable that the CEO has to look at this from a cost benefit point of view, and we thus need to clearly spell out the benefits. He also has to balance this with other priorities and initiatives already underway in the company,” says Doug. “Though, in reality, what can be more important than Customers to an organization?” thunders Krish. Krish continues, “You know what quality and Customer satisfaction are?” “I think so,” responds Doug. “Quality is whatever a Customer thinks it is. “Customer satisfaction is meeting or exceeding Customer expectations.” “Good,” says the Customer Guru. “Let’s discuss some more definitions.” The Customer Guru hands some papers to the young sales executive.
Customer Lifetime Value21 Customer Share Value of Customer Customer Capital Customer Franchise Customer Momentum
Customer Lifetime Value: The value of, or revenue from, a Customer in terms of the business potential he represents for a company over the life of its relationship with him, and from potential referrals. (Different people define this differently22.) Krish adds, “You also need to know the Customer’s full potential to buy your type of products from all sources. Generally, if you can achieve loyalty with Customers, you tend to find they are less price sensitive and more tolerant. 21
22
Many of these concepts are taken from others, notably Patricia Seybold, and Ray Kordupleski. Also see S. Gupta, and D.R. Lehman, 2005. Managing Customers as Investments. Pearson. I refer you to two different websites: http://www.advisor.com/Articles.nsf/aid/KINIE01; http://en.wikipedia.org/wiki/Customer_lifetime_value.
46 Customer Value Investment: Formula for Sustained Business Success
“You need to see how you can increase your share of the business with Customers. This is called Customer Share.” Customer Share: Your company’s share of the Customer’s purchase of your type of product or wallet share. “Generically, it can be your company’s share of the Customer’s spending in a given business segment,” says Krish, expanding on the definition. “For example, you may give one bank 75 percent of your savings account business. So they have 75 percent of your wallet share here. However, if you do not route your investments through them, their share of your financial transactions may be well below 75 percent.” Customer Share Marketing: The way you increase your company’s share of the Customer’s business. Krish adds, “With Customer Share Marketing you become a ‘farmer’. Conversely, ‘hunters’ focus on increasing the Customer base, which they equate to market share. As you increase your share of the Customer’s business, you’ll grow your business more effectively. It’s cheaper to retain a Customer and often to grow his share of business with you, rather than to acquire a new Customer. Heart share marketing is also another way of defining Customer Share Marketing. “This table I’ve provided shows what happens with Customer Share Marketing. “Imagine you have a base of 1,000 Customers, and the average annual Purchase per Customer is US$ 100, as is shown in this table (Table 4.1).”
Table 4.1 Market Share Management vs Customer Share Management Market Share Management Company
% of total Customers Number of Customers % Share of Customer Business (Wallet Share) Av. Sales/Customer (US$) Total Business (US$)
Customer Share Management Company
75 750 25
25 250 75
25 18,750
75 18,750
Krish explains the Table further: “Both companies have the same business share, but one has only 250 Customers and the other has 750
The Understanding 47
Customers. If the Customer Share Management approach company continues to perform well, new Customers will be attracted to it! If you get the Customer’s heart share, market share will follow! And soon you will be able to pick up more Customers.” Value of Customer: The value of your Customer relationship is measured by the following:
Revenue per Customer. Average duration of Customer relationship. Total number of referrals that became Customers divided by total number of Customers plus one (original Customer). Let’s call this number R. Multiply average spent per Customer per annum with relationship length and then with R (a measure of referrals). This is average value of each relationship.
“Value of Customer takes into account the cost of acquiring a new Customer and your eventual share of that Customer’s wallet,” adds the Customer Guru. “This translates into Customer Capital, which is the current asset value of the Customer and is the current Customer Capital. Remember that the Customer is an asset. “As an aside, sometimes people measure the Value of Customer by using profit per Customer (instead of revenue per Customer) and use a discounted profit flow for the measurement to get a net present value!” Customer Capital = Asset value of current Customers = Value of existing relationships (number of relationships × the average value of each relationship) + Value of potential future earnings (increasingly from existing Customers) + Value of referral power – Cost of retention Krish says that this could be looked at differently, “You could define it as the sum of:
value of existing Customer relationship, depth and quality of relationship (capacity to generate future earnings and duration of these relationships (Customer retention) and profitability of these relationships.
48 Customer Value Investment: Formula for Sustained Business Success
“In short, it is the net present value (using a discount rate) of the profits you can generate from your Customer relationship over the years. “Customer Capital is similar to Customer Equity. “Return on Customer is the Value of the Customer divided by Customer Capital. Don Peppers and Martha Rogers23 define this as the firm’s current cash flow plus change in equity over a period of time divided by the equity of the firm at the start of the period. “Customer Value is an investment, and Value to firm (Value of Customer) is the Return on Investment.” CVI = Higher ROI
©
Customer Franchise: Value of present and future Customer relationships or Customer Capital plus Customer Momentum, which is the ability to attract and sustain new Customers, and increase share of wallet for existing Customers. Krish exhorts Doug, “Think of what Investors want to learn about your company. They wish to know:
How many Customers do you have? What is the profitability per Customer? How well do you treat Customers? How fast are you growing Customer franchise?
“Remember, the valuation of AOL was based on the value of their Customers, and was much higher than Time Warner’s valuation. Today, most investors view companies on the basis of the asset value of their Customers. “For example, in 2000, Vodafone paid Airtouch US$ 7,000 per existing Customer. In terms of the value of potential Customers in the licensed territory, the figure was US$ 265 each. “Deutsche Telekom valued Voicetouch Customers at US$ 22,000 each. “More recently, Vodafone paid US$ 4,500 per Customer for purchase of a 2.18 percent stake in China Mobile. In India, Vodafone paid US$ 1,073 per Customer in their purchase of a 10 percent stake in Bharti a few years ago. “Value of Customer measures the value of your Customers, both now and in the future. Customer Capital tells you how much of an asset your 23
They head the famous Rogers and Peppers Group focusing on Customers. See their book: Return on Customer: Creating Maximum Value From Your Scarcest Resource, 2005, Currency.
The Understanding 49
present Customers represent. Customer Franchise helps you measure the Value of your present and future Customers. To measure this value in a meaningful way, you need to know how many new Customers you can attract in the future. “You must also increase the Customer Lifetime Value, the total potential of business that a Customer can conduct with your company over his lifetime. This also includes the referral business he can bring to you. “Domino’s Pizza estimates the lifetime value of each of its Customers to be US$ 2,804. “There is a thin difference between Value of Customer and Customer Lifetime Value. Generically, they are used interchangeably. Value of Customer takes into account the profitability of Customers, and whether you really want to keep them. “We should be able to estimate the Customer Lifetime Value. In Glacier’s case, we guesstimated that the typical Customer makes four purchases a month, and over the next ten years, he will make about 500 purchases. And if he influences another ten people to buy from us, the potential is increased tenfold. The ten new Customers represent 500 purchases per year. So our original Customer is worth ten times more to us if he gets us ten new Customers. We have earlier assumed we are getting 30 to 50 percent wallet share in the ready-to-eat food market.” Doug interrupts, “I think I can measure Customer Capital. And if I take into account new Customers coming in, I can get Customer franchise.” “OK, but let’s not get ahead of ourselves. Let’s spend some more time on Customer Value. Remember what Customer Value is? We talked about it earlier.” Doug says, “Well, that’s what we are trying to create for the Customer.” “But what exactly is it?” “Well. I think where the Customer feels he is getting value for money.” The Customer Guru grins again as he gets up to end the meeting. “Work on the definition of Customer Value some more. You’re close, but not quite there.”
Phone call to Pam Doug is bubbling with eagerness to talk about his newly found knowledge of Customers. He starts to tell Pam about Customer
50 Customer Value Investment: Formula for Sustained Business Success
Lifetime Value but Pam is in no mood to listen. Instead she wants to know what lifetime value Doug is going to provide her. “Haven’t thought that far ahead,” he mumbles. “That’s your problem, says Pam. “You only want to think of today and not tomorrow. Thankfully, the Customer Guru is making you think of the future and a variety of new concepts, other than what’s obvious and in front of your nose.” “By the way, Pam, do you know what Customer Value is?” She says, “What you are giving the Customer for what he pays. The more he gets for what he pays, the more value you’re creating.” Doug is very impressed. He tells Pam she should consider a career change to marketing! He’s sure value is a word more in use than properly understood. Customer Value means different things to different people and eventually these terminologies should have a common meaning!
Measuring Customer Value Added When he returns for the next meeting, Doug eagerly tells the Customer Guru, “Value is what you’re giving to the Customer for what he pays.” “But yesterday you said it was where the Customer feels he is getting value for his money. “Generally when we say a person is looking for value for money, we mean he is price conscious. And when we say he’s willing to pay money for value, we mean he is quality conscious. Such a person would buy a Sony TV over a Sears one.” “So,” says Doug, “You’re saying what I said. Value is what you’re giving to the Customer for what he pays. Value takes into account both price and quality. You buy something from a company over its competitors’ products because it represents higher value to you and is worth more for what you pay for it over competitive offers.” “That’s absolutely right,” says the Customer Guru, “Value is the perception of the quality you get for your perception of price. Look at your cell phone,” he instructs, pulling out his own. “You and I bought our cell phones because we felt these phones gave us value. We both looked at competing products and chose the phones we thought gave us the best value.
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“Yet your phone has more features and is more expensive. Both of our purchases were driven by value, even though the phones are entirely different in price and targeted at different market segments. “Irrespective of the price, whether you buy a Mont Blanc pen or a Bic, individuals buy on their perception of the value they get! “We look at both the price and the quality. Quality is the combination of the product itself, the service, the brand, the relationship, and the image among other attributes.” “What you’re saying is that people buy on value. If I can measure value, I can learn why people buy!” says Doug, excitedly. “Right. CVA is a leading indicator of market share, I’ll tell you more about value and how you measure it the next time we meet.”
Price or Quality Pulling out a chart (Figure 4.1), he adds, “This is a graphic way of understanding value. In your opinion, is price or quality more important?”
Figure 4.1 What is more important: Price or Quality?
“When you add more value, you can get a Customer to pay a premium. When your quality of products, services, and brand is higher, you get a higher price as price/quality is approximately a constant.
52 Customer Value Investment: Formula for Sustained Business Success
“For lower quality (products, services, relationship, image), you should expect a lower price. In fact, you can use the Customer Value concept and assess a dollar figure for each feature of a product you provide to a Customer. This is called Value Accounting and Value Scorecard.24 We’ll discuss this later in more detail. “Another interesting fact is that there are many people who say they’re price conscious (I buy on price!), and another bunch of people who claim they’re quality conscious (I buy on quality!). “Imagine you’re a price conscious person, and walk into a store, and you see three products of the same price. Which will you buy? You will buy the product that you perceive is highest in quality. And what if a quality conscious buyer walks into a store and finds three products of the same quality. His buying criteria will be to choose the one with the lowest price (purchase price and on going cost)! “And if you asked someone (say coming out of a fancy store on Fifth Avenue, or buying a Porsche) if price is important, guess what he’ll say, ‘Of course.’ Thus figuring out what is more important, price or quality, is just not a simple affair.” “And quality, I suppose, means the quality of the product, service, brand, image, relationship, etc.,” adds Doug.
Doug Reports to the Sales Director Doug explains the new concepts of Value of Customer, Capital, Franchise, Momentum, Lifetime Value, and Customer Value to Earl and Rita, and follows that with a summary of what he’s learned from the Customer Guru. He suggests a focus on existing Customers, and starts to give an example of how farming existing Customers can help the company. “My illustration is based on a typical Customer having the potential of purchasing four packages of ethnic ready-to-eat food each month, or around fifty packages a year, or 500 in the next ten years. If that Customer can influence ten additional people to buy from us, each with a potential to buy fifty packages per year for the next ten years, those new Customers are worth, conservatively,
24
Bradley T. Gale, 2002. How Much Is Your Product Really Worth? Boston: Customer Value, Inc.
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500 ethnic ready-to-eat packages to us per year. That would mean 5,000 over the next ten years! We’re now talking about 550 packages per year instead of 50 for the original Customer.” “Aren’t you being idealistic?” asks Rita. “Of course. But if we were able to realize even a fraction of this potential, we are ahead of the game,” replies Doug. “To get this business we’d have had to otherwise find ten new Customers. This way our existing Customer is getting us new Customers and their business. To do this we have to keep them happy and make them our evangelists. This of course is an illustrative example. The Customer could influence far less or far more people. “I truly believe we need to do something about the existing Customer.” He then explains the Value of a Customer, differentiating between a one-time versus an ongoing Customer. “Of course, you can use the net present value in calculating the value. When one measures this, one finds that there is much more value in keeping a Customer than acquiring a new Customer. “I believe you can dramatically add to sales by retaining Customers, and increasing Customer Share. This is called Customer Share Marketing.” “I agree with you,’ states Earl. “You’ve done a great job of pulling all of this together, but the next step is to develop this further into a formal plan.”
A Long Awaited Evening with Pam “So you’ve finally found time for me,” says Pam when Doug calls her. She reluctantly agrees to have an ice cream with him at his favorite parlor. “Why haven’t you called me?” asks Pam. “Pam, please believe me, I’ve missed you and I’ve meant to call. As you know, I’ve become deeply involved with the Customer project. I guess you’d say that I’ve been discovering the Customer. “I’m starting to see that there is definitely a technological aspect to understanding and measuring what Customers consider as value and the value of Customers. It just isn’t an art alone… and there is definitely a lot to learn.
54 Customer Value Investment: Formula for Sustained Business Success
“Actually I’ve already learned that I should have been spending at least some time taking care of my existing Customers, rather than devoting all my efforts trying to find new ones.” Pam interrupts, “Just as you should stick to me, buster, rather than trying to find more girlfriends. If you could keep me happy, I’d never leave you and I’d make you happy.” “Right on, baby… I’m finding this is also true for Customers.” “That’s called loyalty,” says Pam. “I really need to find out who our Customers are, what they want, why they buy our products, whether they’re satisfied with us, what they expect from us, and whether or not we’re meeting their expectations and making them loyal.” “And,” says Pam, “whether you’re exceeding their expectations and whether you’re giving them a good experience. You might try taking them out for an ice cream. I bet you they’d be dazzled.” “But the problem is that we don’t have direct contact with the Customers. They are basically anonymous.” “Yeah, but the retailer should know them,” interjects Pam. “Wow!” Says the young sales executive, “you just reminded me of something the Customer Guru mentioned. He used a term, Customer-in-Center©. We need to form a team of people around the Customer and the retailer is only one of them. That’s what we mean by Customer-Circles©!” Pam touches Doug’s hand. “You’re great”, he says. Pam says, “See how important it is to touch someone, especially your Customers; but it seems to me that you often outsource touching to a third party, such as a retailer.” Doug quickly adds, “I think I’ll go and spend time at one of our retailers.” Pam smiles. They start discussing other things.
Key Points Customer Lifetime Value
The value of, or revenue from a Customer in terms of the business potential he represents for you over the life of your relationship with them.
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The value from potential referrals from that Customer.
Customer Share
Your company’s share of your Customers purchases of your products. Also referred to as ‘wallet share’.
Customer Share Marketing
The way you increase your share of a Customer’s business. Increasing your share of the Customer’s wallet.
Value of Customer
The value of your relationship with your Customers. Average value of each relationship can be measured by the following:
Revenue per Customer. Average length of Customer relationship. Total number of referrals that became Customers divided by total number of Customers plus ones (the original Customer). Can be referred to as R. Average spent per Customer per annum multiplied by relationship length with R (a measure of referrals). Customer Value is an investment, and Value to firm (Value of Customer) is the Return on Investment. CVI = Increased ROI
©
Customer Capital
Asset value of current Customers Value of existing relationships (number of relationships times the average value of each relationship. + Value of potential future earnings from existing Customers + Value of referral power – Cost of retention
Customer Equity is similar to Customer Capital. Return on Customer is the Value of the Customer divided by Customer Capital. This is the firm’s current cash flow plus change
56 Customer Value Investment: Formula for Sustained Business Success
in equity divided by the equity of the firm at the start of the period. Customer Franchise
Value of present and future Customer relationships, or Customer Capital + Customer Momentum.
Customer Momentum
The ability to attract and sustain a new Customer. The ability to increase wallet share for existing Customers.
What Investors Want to Know?
How many Customers do you have? What is your profitability per Customer? How well do you treat your Customers? How fast you are growing Customer Franchise?
Customer Value
The Customer’s perception of the quality he gets for his perception of the price he pays. Value for money means the Customer is price conscious. Money for value means he is quality conscious. Value measures embedded perceptions. Customer Value is an investment, and Value to Firm (Value of Customer) is the return on investment.
Customer Value Added
The ratio of the value you add to your Customers versus the value your competitors add to their Customers. Providing higher value than your competition will lead to increased Customer loyalty. Relative Value wins market share and increases return on investment. CVA is a leading indicator of market share. If you get the ’heart share’ of your Customers by increasing the value you provide, market share will inevitably follow.
Customer Satisfaction
Is a necessary condition for loyalty but not a sufficient condition.
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Higher value than competition will lead to loyalty. Satisfaction is a subset of value.
Resistance to embracing Customer Value and CVA
Organizational inertia or executives feel they are doing enough for the Customer, or they are into too many initiatives, and there will be a resource drain. Executives feel they understand the Customer and the marketplace. Executives worry about correlating value data and satisfaction data. Value studies are not well-understood or that well-advertised or pushed as hard as satisfaction studies, which are generally run by market research companies that push satisfaction over value. Top executives are not exposed to value as globally as they are exposed to satisfaction.
58 Customer Value Investment: Formula for Sustained Business Success
CHAPTER
5
The Creating Creating Customer Value At the Retailers The young sales executive, Doug Evert, visits the Newark, Ohio, store of Grocery World, part of a retail chain that sells Glacier’s food products. He notices a Customer checking out with some of his products, including two packages of Glacier’s ready-to-eat Mexican foods. Doug approaches him and says, “Sir, I work for Glacier Products and am in charge of marketing their ready-to-eat foods. I notice you’ve purchased several of our food packages and would like to thank you. I hope you don’t mind answering a few questions that will help us provide better service to you. “Are you satisfied with our ready-to-eat foods? Do you buy other Glacier products? Do you have any complaints?” “Generally, I’m happy with your products. I use your ethnic foods most of the time. Sometimes, I purchase your canned vegetables.” “How many packages of ready-to-eat ethnic foods do you buy a year?” The Customer thinks, “About thirty or forty on average.” “And all from us?” “No, I buy from other companies as well.” “Do you buy all from this store?” “Mostly, because this store is convenient.” “If you have a second, can I ask a few more quick questions?” “Sure.”
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“Why don’t you buy our products all the time?” “Well, I don’t know. I guess no one has asked me this question. Basically, I’m indifferent as to which brand I buy. Sometimes I buy on price, sometimes I buy when I’m in a store and remember I need it. But I have no real preference, unless you have something special in your product line.” “What would be your reaction if we were to send you one of our canned good products on a complimentary basis once a month and give you an incentive if you buy eight ready-to-eat packages from us at a time? What if we sent you a list of different products we have? In some seasons, we may have a special product that you may find attractive.” “That would be great. And if you add a few more variations to your ready-to-eat foods, like Thai or Indian dishes, I might buy more.” “Would you like to have a cup of coffee with me and we can discuss your thoughts some more?” suggests Doug. “I’m sorry, some other time.” They shake hands and the Customer departs. Doug thinks about what the Customer said. He is looking for specialty ethnic foods (no surprise here!). We may have to expand our offerings. This will drive the production and logistics people nuts, but we need to be able to customize our offerings for different Customers. On the other hand, if the segment does not make sense, we may choose not to have that segment as Customers. We do not need to be all things to all Customers! He then notices an older lady examining ready-to-eat food packages. She picks up a competitor’s chicken cacciatore and places the package in her cart. “May I ask you a question, Ma’am? I work for this company,” pointing to one of Glacier’s packages on the shelf. “Sure.” “Why did you decide to buy this particular brand of ready-toeat chicken cacciatore?” “Well, I generally buy two or three packages a month, and normally this brand, though one time I did buy yours. After opening it, I felt that your chicken was somewhat different in taste compared to what I’m used to, and I tried to return the package.
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The store manager wouldn’t take it back because it was opened. But how was I to know it was unsatisfactory without opening it?” “What did you do when he refused?” “I tried to call your company,” said the Customer, “but your telephone number was different from the one on the box. I finally got the right number, but most of the time it was busy. And when I did get through, I got into a loop of options that led nowhere. So I gave up. Anyway, why should you worry about a small Customer like me?” “I’m really sorry. Why don’t you give us another chance? I’d like to see you enjoy our products. Can I buy you a cup of coffee, and I’ll also arrange for you to get a package of any ready-to-eat meal for free.” “Sure, but let me put this back if I’m getting a free one from you. I’m willing to try your product once again.” Doug hands her a package of Glacier’s Chicken Cacciatore. They go to the store’s coffee shop. “No one at this store has ever treated me as a ‘person’. I’m generally treated as a ‘sale’! I’m someone who spends money. I buy a product from anonymous people. I know they say they guarantee the product, but in reality I’ve found that’s only something they say.” “I hope we can correct this. What would happen if we sent you four packages of various ready-to-eat meals on the first of next month, and gave you a discount for buying four at a time after that, as well as a telephone number I promise will work? Would you buy only from us in the future?” “I would, especially from such a charming person like you. I really only need two packages a month but I could give the other two to Erica, my neighbor. I guess you want me to become a loyal Customer. For that, you will have to become a loyal supplier!” Doug supposes that this means having to be a consistent, reliable, trustworthy, and accessible supplier. Wait till I tell Pam and the Customer Guru this, thinks Doug. He starts thinking about this some more. There are different things that different people like or don’t like. This lady had a taste problem. Was it real? Was the store manager’s response too casual? Should we have tested the returned package in our labs? He’s sure tastes can vary in the different lots of production. There are so many variables to cope with.
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He thinks some more about the call centers, and the Customer’s inability to get through, and then to get into a telephone loop, with no real people to talk to. He also thinks of telemarketing, and irritating Customers with products they already own or do not want. With the inaccessible call center and the irritating telemarketing call, are we wooing Customers or turning them away? Do we marketing types really understand the Customer? What are the marketing people thinking when they unleash this type of telemarketing? A Gallup study had shown that employees (versus call centers) were three times more important than any other factor in influencing repeat business. Funny, he thinks, how a conversation with a Customer triggers so many thoughts!
Customer Metrics He calls Krish, the Customer Guru, and tells him about his observation that different people like some products and other people prefer other products. Krish congratulates him and tells him this is all about customer metrics and there is a need for them to discuss the topic. He continues, “On a very basic level, Customer Metrics should measure what Customers care about and what is important to them, and also the growth of Customers (increased spending from current Customers and an increase in the number of new Customers). So, first you have to understand what Customers want, and then you decide the metrics for measuring the Customer’s needs and buying pattern. Further, you measure Customer growth as you improve your performance on the metrics. “Unfortunately, many companies measure what they want to or think are important and call them Customer Metrics. True Customer Metrics measure what is important to Customers.” Doug adds, “And generally these metrics are the Customer Value parameters you talked about earlier.” “You’ll have to understand these before you can design a system to add value to the Customer. You need to segment the Customer, and then gather detailed information about him.
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To do this, you have to:
Collect information from a statistically significant sample of Customers, both directly and indirectly. On a local level, you need to collect as much data on as many Customers as you can. Determine what the individual Customer (or a majority of Customers) perceives as value, what he wants, and what are his needs. Then find out what he has experienced in the past and what experiences he’d like in the future. Have the Customer verify the segment you’ve put him into. Understand how your Customer’s behavior might change over time. This will change the segmentation model you’ve created. Ask what they’ve liked in the past, what has bothered them, and what they’d like to see. Determine what it will take to put the ‘Customer in Control’ Customers have a need to be in control of their suppliers (us!), just as much as we wish to control our suppliers.”
“You’re right,” says Doug. He hangs up and starts outlining the key points he’s just discussed with the Customer Guru: 1. Make it easy for a Customer to deal painlessly with us: Communicate with the company Find our telephone contact numbers, and executives’ names and contact details. Find address of nearest company office. Locate a Customer service representative. Be able to write to us or e-mail us with suggestions, problems. Be able to communicate through the store. Find information Access our website and find information about the company. Find our products and product offerings. Download coupon offers, get information on deals or other information from the company website. Get information in the store. Solve problems and disputes Report a problem needing resolution, and if possible have it resolved at the store.
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Get quick resolution. Make sure the Customer hears back from us!
2. Put the Customer in Control by: Providing him the ability to communicate directly with the company. Realizing that the Customer should have it his way (what Patricia Seybold of the Patricia Seybold Group25 calls ‘have-it-your-way offerings’). Allowing him to buy our products his way (if we sell in three packs, he may only want a two-pack). Design your products based on the value the Customer sees in them. Look at products, packaging and multi-packing and services from the point of view or convenience of the Customer not from viewpoint or convenience of the company viewpoint.
Building a community of Customers. Allowing them to communicate with one another and to blog or set up a message board where they can communicate their needs, complaints or ideas; share recipes with one another; feel they’re effectively communicating with the company; and feel they’re really being listened to.
Letting him get information on products, shipments, and specials. Looking at giving him delivery his way (maybe he can call in and his grocery bag is ready for pick up).
Why do Customers Defect? Doug continues his thought process. Why did the older lady almost not buy again from Glacier? Why did the young man sometimes buy and sometimes not? Why do Customers leave us? And he wrote: 25
Our products are either defective or not meeting expectations.
The Patricia Seybold Group consults on Customer-Centricity.
64 Customer Value Investment: Formula for Sustained Business Success
We don’t give him the service or the information he wants. We do not keep our promises. We ignore the Customer (later the Customer Guru will tell him that 68 percent of American Customers are lost by after sales apathy!). Customer apathy must be avoided. We fail to touch the Customer directly (very often touching is outsourced to a third party, such as a retailer or a call center). Customer perception can improve through positive touching and good experiences with the company. We don’t react promptly when the Customer complains (later the Customer Guru will tell him that only one out of ten dissatisfied Customers complains. And they tell fourteen to sixteen people about their poor experience, whether they complain to the company or not). We make it difficult for Customers to contact the company/ get answers. We have poor information flow to and from the Customer. We’ve failed to establish an emotional bond between the Customer and the company or our products. The Customer has had poor past experience with the Company or our products. We talk down to the Customer or tell him what he is saying simply cannot be true. Erosion touches like irritating telemarketing. Increased competition and Customer sophistication , as they think: I am sophisticated, sensitive, proud, and have an ego! I want perfection, and I am not loyal, I am fickle. Don’t forget my money feeds you.
Doug thinks about all this and then imagines the lady Customer saying to the company representative (probably she’d talked to an outsourced call center, if she could get through) that the Glacier ready-to-eat meal she purchased was somewhat off-taste. She would have been told that she is the only one who had this complaint! He remembers reading about a major can company that used to sell a few hundred million cans of pet food to M&M Mars’
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Kal Kan26 business. Kal Kan had complained about an off-taste problem with the cans. The supplier forgot the basics and told the Customer that their cans were perfect and the off-taste problems had to do with the Customer. Getting little support, finally Kal Kan threw out the supplier. It was years later when the Customer Guru got involved, that the can manufacturer was allowed to bid again for Kal Kan’s business! He also recalls reading an article by Marian Salzman, VP of JWT.27 She coins the expression ‘Brand sluts’. She talks about today’s aware Customers having no loyalty to a brand, but simply shifting to a brand with a better offer (or what we call value). She states that you cannot equate repeat purchase to loyalty. She goes on to state, “A few brands have what it takes to inspire real commitment and loyalty.” The rest have to be content with the realistic objective that brand marketing is for raising awareness and preference among brand sluts! Brand sluts are also called butterflies! It is Customer Value and what a product is worth that results in repeat purchase. During his next meeting with the Customer Guru, Doug discusses what he has written. Krish tells him about apathy towards Customers, and shares the statistics on complaints and Customer satisfaction as well as his thoughts on improving the Customer experience.
Customer Experience Krish starts, “The emotional bond is very important.” Doug tells Krish, “Do you remember the story of Netstat and Apple iPod?28 The Netstat brothers who were video artists found that their iPod’s battery died after eighteen months. When they called the Apple Helpline to enquire about the cost of a replacement battery and shipping, they were told that they were better off buying a new iPod. The Netstat brothers taped this call, and then 26 27
28
From Customer Value Foundation archives. Quoted in ‘Brand equity’ section, The Economic Times, India, 1 November 2006. JWT (old name: J. Walter Thompson) is a global advertising company. Story from ‘Brand equity’ The Economic Times, India, 1 November 2006.
66 Customer Value Investment: Formula for Sustained Business Success
put it on a video. They used this video to place a public service announcement on the web, talking about iPod’s irreplaceable battery which lasts only eighteen months. This video was downloaded over a million times in six months. They also spray painted iPod’s posters in New York with this information. “Apple countered with the fact that they were fixing this problem. “However, only a few Customers believed Apple. The reason is because Customers had formed an emotional bond with the brand, and were possessive of the brand and identified with it. And they felt betrayed! “Customers with emotional bonds are loyal and the company’s best evangelists—and the most dreaded enemies!” Krish continues, “Good example! “You have to create ‘Customer delight’. Studies have shown that Customer satisfaction does not necessarily lead to repeat sales. You have to go beyond satisfaction. “Give the Customer a great experience and he will come back to you. Go beyond selling products and services, and co-create the experience with the Customer. “Let the Customer have a choice. Remember when Henry Ford said the Customer could have any color he wanted as long as it was black? And look at today’s Customer-led customization! In fact, I’ll wager that you’ve probably customized your laptop computer. Dell did a great job in allowing Customers to choose the features they wanted. (I wish cell phone manufacturers would let me customize the phone to my liking and needs!). “Put the Customer in Control.” Doug adds, “We normally want to control our suppliers. But surprisingly we also want to control our Customers. If it is right for us to control our suppliers, isn’t it right for our Customers to want to control us, because we are their suppliers?” “Right,” grins Krish. “Putting the Customer in Control involves:
Listening to the Customer and making him feel his thoughts are important. Providing products and services that the Customer prefers and wants. Providing Customer Managed Systems! (not just Customer
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Relationship Management [CRM]). Remember, when FedEx gave Customers the opportunity to track their shipments? FedEx had to modify their systems to put the Customer in Control. “Autoglass, a leading vehicle glass repair and replacement service in the UK and part of the Belron® Group, the world’s largest automotive glass replacement company, found that Customers with shattered windshields had to get three quotes to get insurance claims. This meant their car was out of action for a few days. They talked to Customers and introduced the following innovations:
Worked with the insurance company to eliminate the stipulation of multiple quotes. Started 24×7 windshield replacement. Made house calls for on site replacement.
“Such initiatives provide the Customer with Control over windshield replacement and reduce the time that the car may not be used. “Realize that loyalty is the reward when the Customer feels he is in control (for example, by making it easy for the Customer to do business with you). This way, you also get the Customers’ hearts and minds, not just eyeballs (heart share versus market share). Make Customers Own the Relationship
Two-way communication is the start of a relationship. Customers want to tell the company about what they want and how they want it. At the very least, they want to be heard in terms of what they want and be part of the design of the system. Remember the FedEx example. FedEx went further—not only did they let Customers track the products ordered or packages shipped, but they also informed Customers about delivery scheduling and the number of packages to be delivered, allowing companies to plan for their people being available for the delivery. Actually, they let Customers track delivery at will, and change delivery schedules if not convenient! In fact, Fedex has a ‘no missed service level’ policy and no excuses are accepted for poor service. Call handle time at call centers ignored to improve service.
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Cisco29 saved over US$ 250 million by allowing Customers to access their purchasing information instantly on the Internet and to download software. Savings were in Customer support, recruitment and training, software distribution costs, and paperless information. Make it easy for them to buy from you. So often, Customers find it difficult to search for the right retailer or the right information on what to buy. A leading furniture manufacture had a bureaucratic way of billing and it deterred Customers from buying. The company has since changed the system to a simple billing process. Customers should have access not only to records of all transactions but also to a summary of interactions with suppliers. Customers should be able to update their buying profile. Co-create experiences with the Customer.
Make the Customer your Partner Or better still, let him make you his partner! For example:
Patient/Doctor Architect/Contractor Investor/Advisor Author/Editor Student/Teacher Athlete/Coach Customer/Supplier
Give the Customer a Worthwhile Experience
29
Understand and provide products that give the Customer the enduse experience he wants. Understand what a Customer experiences, both in becoming an owner (buying) and as an owner, and design your operations and processes around these experiences to improve subsequent experiences. Keep in mind the Customer’s time is important. Ensure that your brand has a distinct Customer-oriented personality. Make buying across channels and touch points easy.
Cisco Systems is the world’s largest networking company for the Internet.
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Truly care about Customers and their experience. Discover and measure what matters to Customers by conducting targeted surveying and understanding what he is getting from the competitors. Implement Customer DNA (do not annoy)30 as a part of all initiatives. Be knowledgeable about what you sell, and don’t forget the Customer knows less than you do about your products. So, be patient about explaining the features to him. I remember, my son went to an Apple store to ask about hooking up an iPod to speakers, which he also bought at an Apple store. He was told to go on the speaker company’s website! I wonder why he went to the store in the first place. The solution was simple, but not only was the sales person clueless, but unhelpful!
In short, co-create the Customer experience. “That’s a lot to mull about,” says Doug. “Didn’t you tell me about Avaya 31 India. Its Managing Director, Neeru Mehta, started a Customer Response program to focus on the Customer and to make their focus on the Customer a meaningful competitive advantage. Neeru has also started a CEO forum on Customer Response.” The Customer Guru says, “Yes, that’s a good example of a CEO with Customer focus. “Let’s get back to where we go from here. We generally expose people like you to all these concepts through a strategy session and several workshops. You’re lucky to learn this partly through discussions, partly through your own thought process, and partly by going into the actual marketplace. “You next need to talk to other employees in a Customer-Circle©. You also have to discover the difference between CRM and Customer Value Management (CVM).”
Commodity Hell Doug says, “I can give you an example of co-creating Customer experience. Most companies are going into the commodity hell syndrome. 30
31
Namrata Rana in http://www.imagesfashion.com/back/crm/crm_feb04.html. Also Patricia Seybold, 2001. Customer Revolution. Crown. A large telecom equipment company, an offshoot of the Bell Labs.
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“The term ‘commodity hell’ comes from a quote by GE’s Chief Executive, Jeffrey Inmelt, who said that managing innovation better may be the only way out of the ‘abyss called commodity hell’. New products quickly become commodities as competitors catch on. The trick is to get out of the commodity hell and avoid the death spiral. Thus it is imperative that marketers do the following:
Understand the key drivers of Customer business success. Discover new methods and opportunities of Customer benefit. Build these into strategy, implement it, and in effect, increase the value to Customers, thereby gaining market share, and getting out of the commodity hell syndrome.
An example is GE Healthcare that has entered the consulting business in an attempt to hold the Customer’s hand, and guide him towards better productivity and operational efficiency.32
Stolen Time with Pam Pam tells Doug about a child she has recently helped place in adoption and mentions that she’s been spending time with the new parents. They wanted a child because they wanted the experience of being parents. But what they got did not initially match the experience they thought they’d wanted! But Pam notes that their response to the child improves as their relationship with the child grows. She adds, “The point of this is that you shouldn’t forget to touch your Customers. The Customers respond to their experiences just as this child does. The new parents are also experiencing something different with their new child. Together they will co-create the experience that will stay with them for a long time!” “That’s exactly what we need to do with our Customers,” says Doug.
32
From an article by Professor Kamran Kashani of IMD, October 2006. Perspectives for Managers, Issue 137, October 2006. ‘Fighting Commoditization—Strategies for Creating Novel Customer Values’.
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Key Points Dealing with Customers
Talk to Customers because you learn a great deal by doing so. Try to get known by Customers, as often buy from anonymous people/suppliers. Make it easy for Customers to find you. Make them feel less anonymous. Companies should be loyal to Customers if they expect Customer loyalty. Take Customer complaints seriously and have a complaint resolution mechanism in place. Avoid erosion touches.
Customer Metrics
Measure what is important to Customers. Obtain information from him or on him, and ask him what is important to him, directly or indirectly, in order to measure what he deems important.
Put the Customer in Control
Provide him the ability to communicate directly and painlessly with the company. Realize that the Customer should have it his way. Build a community of Customers and allow them to communicate with one another and with your company, and to blog or set up a message board thereby: Letting him get easy information on products, shipments, and specials. Giving him delivery his way (maybe he can call in and his grocery bag is ready for pick up). Remember, that if we think it is right to want to control our suppliers, we should let our Customers control us, because we are their suppliers.
Eliminate Customer Defection
Meet their expectations
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Do not ignore the Customer. Improve touching by the company. React quickly to complaints. Make the process of registering a complaint easy for him. Make the company easy to contact. Build good knowledge of/information on Customer. Develop an emotional bond with Customer. Improve experience with company. Respect the Customer by not talking down to him.
Avoid Commodity Hell
Understand the key drivers of Customer business success. Discover new methods and opportunities of Customer benefit. Build these into strategy and implement the strategy. In effect, increase the value to Customers thus co-creating the Customer experience. Prevent your company from going into a death spiral.
Companies should Work on
Making Customers own the relationship. Building a partnership with the Customer. Giving the Customer a worthwhile experience. Co-creating the Customer experience. Developing Customer DNA (do not annoy) into design of processes and touching.
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CHAPTER
6
The Encircling Customer-Circles© in a Corporate Environment Selecting Members of the Customer-Circle© Earl Green, the sales director of Glacier Products, asks Doug and Rita (Glacier’s marketing manager) to join him in discussing how to build a true Customer focus that would both increase sales revenue and benefit the company itself in the long run. Doug starts the meeting with an update. “Based on what I’ve learned, we can definitely prove to Bob (Ostrofsky, the CEO) the value of building an ongoing Customer program that will generate not only direct referrals, an increase in wallet share, but also in Customer Lifetime Value. We can point out that the cost of preventing the defection of existing Customers (and the resultant underutilization of their buying power) is far less than the cost of acquiring new Customers. “The key point we need to make is the fact that we’re also increasing existing Customer share in the process, and thereby overall market share.” Earl quickly points out, “That and a cup of coffee will get us nowhere with Bob without some verifiable data.” Rita remarks that Glacier’s problem is Bugle Processors, which has a lower price, better quality, and is a brand recognized and respected in Ohio. “Our market share is lower than Bugle’s. We have to attract more Customers through promotions and price adjustments.” Doug disagrees. “We really don’t know why we are worse than Bugle. We have our own perceptions, but no real value perceptions
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of the marketplace and Customers. In any event, we should be pulling away Customers from General Farms. “Moreover, there are a finite number of Customers who can consume a finite amount of food. Do you remember Tom Osenton’s Death of Demand 33 where he espouses the merits of Customer Share Marketing when the growth rate of products is declining? We need to get more loyal Customers. To do that we have to try something different and special. We have to touch them better. And we can’t do this easily because the actual touching is at the retailers’. To us, at Glacier, these Customers are anonymous, and in a sense we are anonymous to the Customers. We have to get to be better known, not through ads, but by touching actions, and that is what we are proposing.” Earl steps in, “Didn’t you recently meet with a few actual Customers? “Also, what was the Customer Guru talking about when he mentioned, ‘encircling the Customer’? How does that apply to us?” “Oh! You mean Customer-Circles© and Customer-in-Center©?” Doug quickly draws a chart. Earl studies the chart and asks, “Why can’t you set up a Customer-Circle© for our company involving your various product lines (ready–to-eat foods) and let’s see what results we get?” “That’s a great idea,” says Doug. “Let’s try it. But before that, you should tell me what we can do to incentivize the employees as a group, especially those in the Customer-Circle©?” Earl smiles, “That’s easy. Let’s start with a performance assessment of how they’re adding the Customer Value you’ve mentioned. Each could be judged on how well he adds Customer Value by delighting the Customer.” Doug is a bit puzzled. “But I meant, how do we add value to the Employee?” Earl thinks for a minute. “First, in your Customer-Circles©, you must enable the employee, the retailer, and the distributor to do the right thing for the Customer.” “You mean empower them?” “Not quite. Enabling the employees helps them do the right thing, and gives them the tools. Empowering means just 33
Tom Osenton, 2004. Death of Demand. Financial Times, Prentice Hall.
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authorizing, and is therefore is not quite what we want. Anyway, you must make the employees aware of the Customer. They must discover the Customer. “As a starting point, they’ll have to understand the value of the Customer to the company. We’ll add value to these employees by challenging them to work on and be the prime movers of a true Customer focus program.” Rita says, “Then let’s develop a training program.” “Everyone feels the solution to dealing with a Customer-based initiative is training. I’ve always maintained that training is generally for dogs, education is for human beings,” replies Earl. “What we wish to achieve is not rocket science. Most of it is common sense. But we have to awaken employees and create awareness. We have to get the employees to truly understand the value of the Customer, and not simply teach them this in a classroom. We have to motivate them. “However, you might consider having an interactive workshop with the members of the Customer-Circle© you establish. I think you’ll find that if you allow the members of the Customer-Circle© to feel they’re running the program, they’ll come up with most of the ideas that will lead to Customer focus, on their own. “Many of these they’ll be able and anxious to implement themselves, primarily because they’re the authors of these initiatives, and because they’re motivated to make things happen.” He adds, “This is the beauty of Customer-Circles©, It is a bottomup approach to creating Customer awareness. Some initiatives will require action at the corporate level or in the marketing, IT, quality control, or product departments, and our job is to coordinate these initiatives and make them happen. “The greatest motivator is sharing with the frontline people the results of their efforts, and the Customer feedback that follows. When they learn they can make a real, tangible, measurable difference, they’ll really get excited and motivated. “Frontline people are generally the lowest on the totem pole, but the most important because they’re the ones who touch the Customer, and are closest to them!” “Great,” agrees Doug. “That makes sense. I suggest we have the ready-to-eat foods product manager, the quality control manager, the Customer service/CRM manager, the HR manager,
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the delivery manager, as well as a representative from IT in the Customer-Circle©.” “Isn’t this top heavy? What about representatives from the retailer you’ve been dealing with?” “Well,” answers Doug, “What I suggest is that we use only our own people for the first circle. This will be our corporate-level Customer-Circle ©. Their involvement will make them true believers, and they’ll be able to spread the C (Customer) word among their people. Then selected members can become part of the Customer-Circle© we start for the retailers. “I’ll invite Ron Casey, the Newark Grocery World store manager, whenever necessary.” Doug continues, “I’ll be a member in the retailers’ CustomerCircle© as well as ours, so that I can supervise their progress and thereby coordinate efforts of both Customer-Circles©. The goal, of course, is to draw people in both the circles closer to the Customer by touching and even pampering them.” “Isn’t this dangerous?” cautions Earl. “Won’t our retailers end up doing the same for other companies that are our direct competitors?” “Sure they will,” answers Doug. “But they’ll realize that this will increase sales in their stores, and that will be a great incentive for them. Our Customer-Circle© will have to come up with ideas that help the retailer sell more of our products.” Earl replies, “And I assume the Customer is in the center of these circles. How will he know this?” “I don’t know yet,” says Doug. “I think he’ll just become aware that he’s being touched and is being treated as a person rather as a sale. I experienced this when I had coffee with a Customer at Grocery World the other day. I have little doubt that she will become aware of the efforts of the Customer-Circle©.” After leaving the meeting, Doug calls the Customer Guru, who congratulates him for getting Earl’s support, and for starting the process of setting up of the Customer-Circles©. “I’ll be happy to help, and talk to the members of the circle, and perhaps host a workshop,” Krish offers. “Once you get everyone in the company focused on the Customer, you have a common thread that ties everyone together. This path or common thread is called the Customer Conduit©.
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“Customer Conduits© are generally top driven by the CEO and his staff, and are designed to have a common thought process in the company on the Customer. All people in the company need to be sensitized to the importance of the Customer, and be lead by a Customer mission statement. “A good example of this is Subaru America whose Customer mission statement reads: To satisfy the Customer, it means everybody in the company has to understand the total existence of a company depends upon the Customer, so if a Customer is not satisfied, he is not going to be a Customer tomorrow, and if he is not a Customer tomorrow, we don’t have a business tomorrow. “Another example is Virgin Mobile, where CEO Dan Schulman reviews Customer incident reports daily. This encourages other managers to analyze Customer data every morning. “One of the dozens of financial, organizational, and personnel reports delivered to Virgin Mobile US CEO Dan Schulman every week is a Customer incident report. It shows every Customer complaint tracked by the company’s contact center and sales force. Virgin Mobile’s senior managers all start their day by reviewing a data highlight report prepared by CIO Michael Parks’ department. “Schulman is part of a ‘Customer-obsessed culture’ that has made Virgin Mobile the fastest growing wireless company in America. He is also an excellent example of a CEO who is truly committed to Customers. “If the Customer initiative in firms is viewed as ‘useful,’ but not ‘critical’ and not top led, it often fails. According to an IBM study, such initiatives have a 50 to 75 percent chance of failure. “Dr Jim Goodnight, CEO of SAS, the largest privately-owned software company in the world, focuses on and meets Customers very often. Customer focus is key to SAS’ results.”
The Corporate Customer-Circle© The corporate Customer-Circle© meets for the first time. “What should we do?” turned out to be the first question on everyone’s mind. Krish and Doug run through the concepts of Customer-inCenter© and Customer focus. Krish gives examples of how other companies have succeeded using these concepts.
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“Let’s find out who our Customers are,” says Jill Larkin, the CRM head. “Great, that’s a logical starting point,” says Doug. “Let’s try to convert our anonymous Customers into known ones. A good starting point is trying to identify each retailer’s regular Customers who buy our category of food products. Let’s extend our CRM beyond the stores and distributors to our real Customer. “Further, I suggest we choose one pilot store to focus on. Earl and I think Grocery World’s Newark store should be chosen for this project.” “We’ll have to identify the Customers,” says the customer services manager, Jack O’Donnell, “and try to get all the information about them we can, including:
Buying patterns Nature of buying patterns random discount-, coupon- or promotion-based? Amount spent annually on our products Pertinent available demographic information Customers’ perception of improved Customer service and attention Customers’ actual feelings about our products”
Doug adds, “Or what does he want from our product and does he get it? What does he expect from us? Do we meet his expectations? Does he get the right experience while buying and using the product, whether it’s taste, convenience, or price? What experience would he want that he’s not currently getting?” “You’re right,” says Jill, “those should be on our list. But, let’s move ahead. “Who makes the purchase? Is it the Customer himself, or is it sometimes someone else from his family? Does the Customer come in specifically to buy a product or does he pick it up along with other purchases? Would he like to see home delivery? I know we think we know all this, but reconfirmation won’t hurt. “Furthermore, is he willing to pay a little more for convenience and improved service?” “Or,” says Linda Hardgren, the product manager, “is it time to stop talking discounts and start talking premiums?”
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“Good thoughts,” says Doug. “Going forward, we eventually need to determine how to put the Customer in Control. Do we want to let him contact us any way he wants… via our website, fax, home delivery, bulk purchase, or even buying directly from us?” Ron Casey, the manager of the Newark Grocery World store, who is a special invitee to the corporate Customer-Circle© meeting, interrupts. “But what will happen to us if you sell directly? Seems to me that would be a problem for us.” “That shouldn’t be a problem for two reasons,” replies Doug. “First, I believe the Customer wants to be touched by people like you, not by an impersonal machine. Second, I think when you touch Customers positively they’ll come back to you, and possibly mention your store to their friends. Furthermore, they’ll be able to buy from you by mail, fax, or from your website, if they like.” “I guess I buy that,” says Ron, “but my other question is how do we get all this information you’ve described?” “I think that’s possible,” Linda answers, “but before we get into that we’ll have to segment the Customer. I’ll have a Customer segmentation model prepared, based on what we already know, but we’ll eventually have to ask the Customer to validate which segment he belongs to.” Ashok Mishra, the IT manager, pitches in, “We can get much of the data by engaging Customers in direct, in-store interviews, but we should do this through informal conversations with them, rather than by a formal questionnaire process. “We can also conduct Customer research by telephonic or direct mail surveys conducted with identifiable Customers, as well as with people living in the neighborhood of key retailers. If we decide to do this, we may wish to also get similar information from Customers who frequent stores that belong to Grocery World’s competitors. “The single most important step is documenting the data we collect and building a database, which we can use for additional surveys, which will enable us to analyze the impact of our Customer-focused efforts.” Doug nods his head. “From what I’ve heard, I think we’re taking the first logical steps. We understand that we need information
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and we’re starting to list exactly what information we need and how we can get it. “And Ashok, you’re right about competitive information! Also, we should find non-users of our products and see if some of them can be persuaded by our current Customers to buy our products.” He continues, “We have to let the Customers know we’re not anonymous and that we’re vitally interested in improving the value we provide to them.” Jill smiles, “That’s a great idea. We know our Customers are mostly anonymous. But we don’t realize we are anonymous to the Customer!” “As a next step,” Doug continues, “let’s define the touch points, and let’s make it easier for the Customer to contact us.” He turns to Xavier Rodriguez, the quality control manager and asks that he put together what he sees as the key touch points and how the Customer can easily contact people in the company. “Be sure to include both visible and invisible touch points! “We should all be available one or two hours a week to work at the retail store, and we should put a sign up... something like ‘Meet your Glacier representative’.” “Lastly,” addressing Ashok, “we need to be able to supply information on all the touches and contacts we have with the Customers to all the other touch points. We need a system where either we or the retailer can send out mailers containing special offers or even make telephone contact. “We will use data mining techniques to get usable information. I remember reading that Capital One, the largest issuer of credit cards, had great data mining and data warehousing and could often have the answers at the time the call was received, thereby having fast resolution of queries. Radio Shack uses information effectively to improve Customer service, products, and improve channels of delivery to the Customer.” Looking at Ron, he says, “We should be starting a CustomerCircle© in your store. Your Customer-Circle© should address how to greet Customers, become friendly with them, understand them, and personally offer them a variety of choices. By doing this, you’ll definitely develop a better understanding of our Customers. “Wal-Mart and Target are great examples. Wal-Mart’s stores are convenient for the Customers, they provide value in most
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products, whether an economy one like a Bic pen or a premium product like a Mont Blanc pen. In fact, Wal-Mart strives to provide ‘ordinary folk the opportunity to buy the same things as rich people.’ “If you go to Target, when the Customer asks for information on where to find something, the sales person goes with him to help find the item and chats with him about his needs, rather than simply giving him directions.” Doug continues on Target. “Instead of competing in a niche market or on price, Target Vice Chairman, Gerry Storch, said his company’s strategy is to lead the pack in ‘uniqueness perceived by Customers’. That is done by integrating the Customer experience across all channels. “Storch also emphasized the importance of Customer data to improve its unique Customer experience,” says Doug. “I believe it will be imperative that we consider using a young researcher to help with the additional information load and I also expect we’ll invest some additional funds to retain the Customer, give him a great experience, and convert him into an evangelist. The returns will come with increased sales. The beauty of this is that it won’t cost much to touch a few Glacier Customers a day. “Also, we can consider a joint promotion highlighting Grocery World and Glacier working together for the Customer!” Ron interrupts, “I’ll buy that, but there will be more than five or ten Customers if we want information on your competition’s Customers as well.” “That’s right,” agrees Doug, “That’s why I think we should add a researcher. We’re looking for market information on how a Customer views us, but also information about our competitors!” Ron, the store manager, is not quite in agreement. “I’m not sure this touching will work at the store level. I haven’t heard you folks talk of any dramatic new thing like a new Glacier product or a big promotion that would drive the increase in sales.” Krish smiles, “I expected this. Let me give you an example of what happened at Wisconsin Energies (We Energies). Just a simple thing like reconfirming a planned Customer visit by the technician a couple of hours before the visit improved the Customers’ perception of We Energies and especially their perception of the price they were paying vis-à-vis the value
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received. When the technicians were shown the data, they were amazed at the impact they could make on the Customers and the perception of the company, and how important they were. “Naturally, we’ll have to find those attributes, processes, or touches that are most important to the Customer. “I’d like to discuss Customer DNA.” “DNA, of course. Customer’s Do Not Annoy?” asks Doug. “Absolutely,” continues Krish. “We must know what irritates a Customer. This is as important as putting the Customer in Control and making it easy for the Customer to deal with you. Why don’t you put a list of what you see as Customer DNAs together and circulate it to your corporate Customer-Circle© for discussion? But, you also need to understand what erosion touches are.” “Erosion touches,” Linda ponders. “Hmm! These must occur when you negatively touch someone and rub him the wrong way. You erode value rather than create it. Is that what you mean?” The Customer Guru nods in agreement. “I’ll send you an e-mail on Customer DNA.” Doug turns to Ron and asks if he agrees they could use his store at Newark for a pilot program. Ron tells the group. “I have already discussed this with my boss, and he’s willing to go along if I feel good about this program. Based on today’s discussion, I feel it is worth a try, and you can count on our support.” After some more discussion, the Customer-Circle© participants agree that what they have discussed should be put into action. They agree on the action steps, the timing, and who is responsible for each item.
Customer DNA34 A few days later Doug receives an e-mail from Krish outlining a list of Customer DNAs:
34
Not listening to the Customer (carefully). Ignoring the Customer when he wants your attention or is waiting for a response.
Patricia Seybold, 2001. Customer Revolution. Crown Publishing.
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Not acknowledging the Customer when he comes to you, or when he wants your attention. Not answering the questions he raises. Not giving the Customer a proper answer. If you can’t answer, find someone who can. If that person can’t give an adequate answer, promise the Customer you’ll find the right person to contact him. Let him talk to the supervisor or next in line, so that there is a prompt resolution. Not getting back to him promptly after having said you’ll do so. Assuming the Customer knows what you know about the product, the company and its services or the retailer; and the company/retailer policies. Treating him like a fool, talking down to him, and being supercilious. Not helping him if he comes for help. Not trying to do your best to satisfy his queries and needs (if you are enabled, this is easier). Promising what you cannot deliver. Not being knowledgeable. Not having good manners, especially on the phone. Making him repeat himself in playing telephone tag or talking to many people and having to tell them the same thing over and over again. Having more than one person attend to him, and then not making that person available. Not making it easy for him to get to you, as even after finding telephones busy and being made to wait, or go through lengthy, wasteful in time, choices on the phone, the Customer discovers he can’t get an answer, nor can he talk to a real person!
Doug e-mails the list to the corporate Customer-Circle© members and explains the concepts of Customer DNA and erosion touches. He asks them to expand on both and provide examples of erosion touches at the next meeting.
Customer-Circle© at the Retailers Before the initial meeting of the retailer Customer-Circle©, Doug and Krish discuss the Customer-Circle© concept with Ron Casey.
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“First, we need to incentivize all your employees. Should we offer them a bonus for every 10 percent increase in Glacier sales on a team basis, or on an individual basis based on proven performance? Second, we need to give them an award to give the Customer a great experience. They’re sure to ask what’s in it for them. “Glacier can also pay for some joint promotion on the Customer focus. In return, we would expect you to pay special attention to Glacier’s products.” This Customer-Circle© includes Ron Casey, the store manager, his key clerks and employees, a distributor, and several members of the corporate Customer-Circle© who will be dealing directly with Ron and his store. Starting the Customer-Circle© meeting, Doug introduces Krish and the Glacier executives and what they have discussed in the company’s Customer-Circle©. He says Krish will run through the concept of Customer Value as well as who and what a Customer actually is. After Krish’s talk on the Customer and Customer Value, Doug states that Glacier expects at least a 30 percent increase in sales for the company’s products in the next year. He details that this will come from existing Customers buying more, and from new Customers coming to their store by Customer referral, provided the employees did a good job. He tells them about the importance of touch points, of touching, of the Customer DNA, of avoiding erosion touches, and giving the Customer a great experience. “Treat the Customer as a person, not an ‘it!’ Hug him, embrace him, and encircle him.” Doug then describes the corporate Customer-Circle©, and how its members will interact with the retail Customer-Circle ©. Together, they will form the Customer team. The store manager, Ron Casey, then tells them about the importance of Customer information and provides tips on getting this information and engaging the Customer more effectively. The members of the retailer Customer-Circle© go into a huddle. After a couple of hours, a variety of ideas have surfaced:
Find a way to say “yes” if the Customer asks, “Can you…?” Be consistent. Smile, have good manners.
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Make it easy for Customers to complain and correct, as best you can, something that goes wrong. Add a coffee machine that makes the latest blends, and an upgraded Coffee shop (Sometimes offer free coffee from the store machine, or offer them a coffee at the coffee shop, or develop a coupon program that would provide free coffee with minimal purchases, and more with higher purchases). Allow phone or website ordering. Consider home delivery. Convert weekly purchases into monthly ones (discounts for larger purchases). Follow up with the Customer on the purchase of selected products. Ensure discussion on “did you know about the product and its features?” Assist a Customer to find a product. Don’t say Aisle 11, but walk him to it. Take the opportunity to discuss other products, and find out why he comes to Grocery World, and his problems with the store. Help Customers find an alternate should some product be out of stock, else inform them when they can get it conveniently. Update the Customer about special deals being offered. Consider offering a store-based credit card that would provide redeemable points, based on total purchases. Encourage each store personnel to ‘adopt’ a few Customers for special treatment. Let’s ensure each one of us does at least one great thing for one Customer a week. Doing great things like helping the Customer put his groceries on the checkout conveyor, and not just getting him a cup of coffee, won’t take a great deal of effort but will definitely improve your Customer focus. We can all learn from each other’s special actions! Find out the buying pattern of the regular Customers, and talk with them about new offerings, etc. For example, in the meat department, the clerk can tell the regular Customer who’s normally looking for a special cut about its availability. Keep a diary, if necessary.
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Ask Customers if they have their own special recipes for using Glacier’s Products and whether they would share them with other Customers. Have a recipe of the month prize, including free ready-to-eat products. Have the food service company supplying fresh cooked food to Customers use Glacier Products in specials, and promote these. Ask Customers about any comments they may have on Glacier’s Products. Can Customers try out our ready-to-eat food in the store? Should we add a microwave oven? What if the Customer wants to eat from a package at the food counter? Can we facilitate that? Can we add a person to get more data on Glacier’s Customers? Can there be ready data and easy to access data on Glacier’s foods? How can we become more knowledgeable on Glacier’s products? Try to understand the Customers’ needs and expectations, and what they would like to experience. Don’t hesitate to ask them, they’ll be happy to tell you. Try to give one Customer one great experience35 by the end of one month. A great experience is something the Customer will remember and cherish. Something unexpected. This action can be shared with members of the Customer-Circle© for emulating.
Krish warns, “It isn’t easy to give one great experience to a Customer. You’ll really have to work on this. Sending flowers or giving them coffee will not count as a great experience! Also, we have to remember that most Customers come to our store time after time. If you add up what they spend with us in one year or in ten years, you’ll find they spend a substantial amount. Many will spend over US$ 50,000 in ten years!” Doug asks, “Can’t we have the cash register clerk ask Customers buying Glacier Products if they wish to register with Glacier for specials (or a club we can start for our users). This registration 35
Thinking of a great experience for a Customer is not an easy task. Try doing this yourself for one of your Customers!
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should allow us to pick up purchase information if Ashok can hook into Grocery World’s system. “Alternatively, or additionally, we could have a display terminal (or monitor) in the store, playing videos of Glacier’s products, showing cooking lessons, recipes, ways to spice up the foods, etc., and inviting Customers to register. They could also give suggestions, file complaints, send in their recipes, ask for new food formulations or new preparations, etc. “I’m going to recommend we hire students or retirees to be present in the store at various times to greet shoppers, answer questions, pick up Customer information, etc.” Ron Casey interjects, “You’ll have to discuss some of this with my boss, the Midwest regional manager for Grocery World.” “Good idea,” says Doug. “I’ll ask Earl to meet with him.” Doug then tells them about his experience with the old lady and her complaint of a less than satisfactory package of ready-toeat meals. “Don’t you think we should have an understandable and prominently displayed Customers’ Bill of Rights and a guaranteed fair treatment policy for Customers? Krish has a sample bill for a luggage store, which he will hand out. “And to implement it, why not appoint an Ombudsperson, if the matter can’t be resolved at the store level? Why should the Customer have to go to a Consumer Forum or a Better Business Bureau when he doesn’t get satisfaction from the company people he contacts? Why can’t the company have an independent dispute resolution mechanism?” They all agree that these are great points and urge Doug to raise them within Glacier. Ashok says, “This information on complaint resolution can also be on the store website.” Doug responds that he has already initiated some of these steps, and that he will bring up their other concerns and ideas at the relevant forums as well. Suddenly, a senior clerk speaks up, “You know, many Customers come in after work for limited purchases. I think they find it irritating to stand in long lines even though they’re in express lanes. Why can’t they call in their purchases, and pick them up at a specific counter set up just for this?”
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Doug and Ron look up with interest. Doug says, “I’ll work with Ron on designing a system where people can e-mail or fax their requirements for Glacier Products. They can add eight other products, and give their credit card details. We can have the groceries packaged and have them placed in a Glacier pick-up counter.” Ashok says excitedly, “We could have a locker system with computer controlled combination locks. We can give the Customer the locker number, and the Customer can give a code for the lock. Then, we could have a screen with the Customer’s name and the locker number (so that the Customer does not have to remember the locker number), and we could key in the Customer’s code. When the Customer comes in, he finds his locker, keys in his code, and takes out the pre-paid groceries.” Doug agrees, “I’ll have Earl put this on his agenda to discuss with Ron’s boss at Grocery World. Also, a student or retiree can help bag these groceries and place them in the lockers. We should do this at peak hours, when the lines are long.” Ron is truly impressed. He’s now thinking about better ways of doing this. “You know, we could have a drive-up counter. My wife always tells me what a hassle it is to come into a store with two small kids just to buy milk. You park, you take the kids out, you find a cart, you put the kids in the cart, then you buy the milk, and then you reverse the process to get back into the car.” Doug says, “These are super thoughts. These go beyond me and I’ll need to talk with Earl about them.” He closes the meeting by asking that they meet on a weekly basis in the future and tells them they can call on members of the corporate Customer-Circle© at any time for help. They should feel free to share how they’ve provided true Customer delight to their Customers. Finally, he confirms that Glacier will process all the data it collects and will help with any follow up. “In the next meeting let’s prioritize actions, and set time frames and responsibilities.” He picks up the sample Customer Bill of Rights Krish has distributed. “I am showing you this as an example of a Customer Bill of Rights.
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We could use this to develop a Bill of Rights for our Customers. A Customer Bill of Rights for a Store Selling Luggage We guarantee
Clean, well displayed stores with knowledgeable salespeople A choice of which salesperson to use Prompt, courteous service, with no waiting Freedom to browse Be told of all specials If a special offer comes up within two weeks of your purchase, you can get that deal Provision of information about the benefits, drawback of each luggage that is of interest to the Customer Provision of information regarding guarantees and repair service Provision of information about return policy. If returned unused within 30 days to get full refund and not store coupons Provision of information about delivery time if item not in stock, and free delivery within 20 miles Confidentiality of all comments Response to all comments
Doug also gives an example of Whirlpool. According to Marise Kumar, Whirlpool’s VP, Whirlpool promotes its Customer Bill of Rights, which guarantees that Customers deserve professionalism, a representative that will take ownership of the Customer experience, and a fair resolution process if a problem arises.
An Industry Government Consumer Group Initiative Back in his office, Doug surfs the Internet and comes across an interesting concept. The Government of India (Department of Consumer Affairs) and some consumer groups have started an initiative with an Indian Chamber of Commerce, Federation of Indian Chambers of Commerce and Industry (FICCI), to jointly work on helping Customers in India.36 The idea is that this kind of a partnership will lead to a better Customer focus by Indian 36
October 2006.
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companies, and eventually to Customers Bill of Rights and Ombudspersons.
Driving Pam Home from Work Doug realizes he hasn’t seen Pam for some time. He calls her at work and asks her out to dinner, but she says she has a prior commitment. But, yes, he could drive her home. Pam is really interested in the progress in the search for the Customer. Doug tells her about the Customer-Circle© concept and the positive reaction on the retail Customer-Circle©. Pam asks if there are people from Glacier in a separate Customer-Circle©. “Why don’t you start a small Customer-Circle© in the company to talk about Customers and giving them value? Get the culture going. And be sure to communicate to the Customer what you’re trying to do. “I would imagine you want the Customer focus to be a common thread that exists throughout the organization.” “You’re right!” exclaims Doug. “That’s what Krish calls the Customer Conduit©. By the way, we do have a corporate level Customer-Circle©. But we still haven’t given enough thought to communicating with the Customer. The problem is that other initiatives are taking most of my time.” Pam suggests a time management approach and urges Doug to divide his work into:
Necessary and relevant Necessary and irrelevant Unnecessary and relevant Unnecessary and irrelevant
“In fact, concentrate on what is necessary and relevant to the Customer. Like what is necessary and relevant to me is your caring and your having time for me and touching me.” Doug smiles in agreement.
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Key Points Cost of Retaining Customers
Is far less than the cost of acquiring new Customers. This cost should be determined.
Add Value to the Employee
Educate and enable him. Share Customer data with him.
Frontline Employees/ Touch Points
Generally the lowest on the totem pole but the most important to the Customer. Face of the supplier.
Customer-Circles©
Members of Customer-Circles© are touch points, backend managers and other employees who can influence processes, systems and policies. Customer-Circles© initiate ideas on how to improve the Customer experience and how to implement those ideas.
Customer Conduits©
Are generally top driven by the CEO and his staff, and are designed to have a common thought process in the company on the Customer. All people in the company need to be sensitized to the importance of the Customer, and be led by a Customer mission statement.
What to do for Customers
Convert anonymous Customers into known ones. Understand and incorporate Customer Do Not Annoy (DNA) into any Customer initiative. Avoid erosion touches.
Customer Bill of Rights
Are important for the Customer and the employees, because they set a direction of what to expect.
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Should be visible and available to Customers. Should be implemented.
Ombudsperson
The concept of an Ombudsperson to resolve disputes will reduce complaints going outside the company. Should be easy to find, reach, and work with. Should resolve problems fast.
Relevance of Work Effort from a Customer’s Viewpoint
Divide your work into categories that the Customer would think of as: Necessary and relevant Necessary and irrelevant Unnecessary and relevant Unnecessary and irrelevant Concentrate on the necessary and relevant tasks.
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CHAPTER
7
The Comparing What is Customer Value? Doug receives the following e-mail memo from the Customer Guru: You’ve come a long way in thinking about and dealing with the Customer. I think it’s time to give you more vital information. Until now, many companies have been satisfied with installing Customer Relationship Management (CRM) programs and thereby feeling they’ve taken a major step in solving their Customer issues. However, CRM is turning out to be a process-oriented system, with little focus on the Customer, except to capture and play back information generated from and about him. That information is then used for Customer contacts and follow-up memos or promotional information. This is why we need to add value to the Customer in the process! Value, Doug remembers, is the balance between price and quality, and the more the Customer perceives he gets for his money, the higher his perception of the value. Value, then, is what a product is worth to the Customer, and how he perceives the benefits of that product, given what it costs him to buy or own it. Customer expectations of an organization may not be in sync with what the organization is delivering or wishing to deliver. If Customer expectations are low, meeting them may lead to Customer satisfaction, but this is not enough to get true Customer loyalty. If Customer expectations are substantially higher than the actual delivery, Customer
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loyalty disappears! You need the necessary condition of Customer satisfaction, but that alone is not sufficient. You need great value to ensure loyalty. Customer Value has to be seen through the Customer’s eyes in his dealings or interactions with the organization. Interaction, of course, is a two-way process, provided the Customer wishes to interact with the company. Organizations must be Customer-Centric. Value can be enhanced by co-creating Customer experience. Thus, the goal is to make a Customer want to interact with you under his terms and then build experiences with him. Customers see value when they are offered goods and services that complement their own value systems on physical, intellectual, and emotional planes (e.g. quality, value for money, and style). Synchronizing the organization’s products and strategies with the needs of a Customer will increase loyalty and market share, while maximizing profits and reducing stress. These are among the real values of Customer Value Management (CVM). Treating Customers as ‘Mentors’ allows you to understand which services are important to them and facilitates the adding of value at each Customer touch point, thus leading to Customer delight. Customer delight leads to Customer commitment, repeat business, and the creation of good-will ambassadors for the organization, thus leading to new business. This then leads to sharing and co-creating experiences with a Customer, rather than simply selling products or services to the Customer! This experience can be designed or co-created jointly by the company and its Customers. It is the collaboration of the Customer and the supplier in a partnership that creates the experiences the Customer is looking for. For example, a fishing lure manufacturer can think about selling lures to a Customer, or he can think about co-creating a great fishing experience for the Customer by helping him catch more fish. The lure manufacturer can think in terms of building a community of fishermen, from whom it can get feedback, and with whom it can establish a dialogue. It can also put together a community of other suppliers who can help the fisherman catch even more fish! And, the seller has to decide who has to be satisfied by the lure, the fisherman or the fish?
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Doug likes this example. It makes him re-think who the Customer is. In fact, in the most basic terms, Customer Value tells you why someone buys from you and why someone buys from your competitors. Customers buy products they perceive give them higher value.
Moving Ahead from CRM to CVM Krish and Doug are together again, talking over a cup of coffee. Doug thanks Krish for his e-mail and leans back. “I’ve learned a great deal about these concepts, and think I’m beginning to understand them. But it’s really good to be able to put everything together cogently, and not in bits and pieces. It will help in getting a holistic view of the Customer.” The Customer Guru nods his head in agreement. “‘Brand Loyalty’, as we once knew it, meant Customers being loyal to a specific brand. Patricia Seybold says things have changed 180 degrees in recent years. Today, the brand has to be loyal to the Customer! In other words, the brand must deliver on its promise and meet the Customer’s expectations and values if the organization is to expect loyalty and repeat purchases. The key to success is to build and maintain a brand that resonates with the Customer’s own values. Often, Customers want to know if the supplier is loyal to the Customer! “Remember that in a seller’s market or where there are shortages, Customers look for a supplier’s loyalty. Most suppliers forget this! I remember a major plastics resin supplier shutting off supply to a large Customer buying polystyrene for foamed cups and plates. Consequently, the Customer’s plant had to be shut down. Guess what, the Customer had a long memory and for many years refused to do business with the supplier. “Business is no longer Businesses selling to Consumers (B2C). Rather, it is Consumers buying from Businesses (C2B). How easy is it for the Customer to do business with the Business? “As I’ve mentioned previously, getting repeat and increased sales from existing Customers has generally been approached through various Customer Relationship Management programs. Companies usually think CRM means ‘Loyalty Programs.’ Customers consider loyalty programs for the reward and discount elements contained in the programs. However, these programs have little or no individual touching element.
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“In truth, most CRM programs are process-centric. Often the processes are designed from the point of view of the company and purely for the convenience of the company (not the Customer) and are not Customercentric (They don’t focus on the C). The majority of organizations treat loyalty programs as ‘Cost’ programs. For example, many hotel and airline companies feel their loyalty programs are not increasing loyalty, and that they are stuck with them and the consequential increased costs. Furthermore, they feel the need to match competitive offers without getting true loyalty from their passengers. “You must know people who stay in New Delhi with one hotel chain and in Bombay with another. Why aren’t they loyal to one hotel chain? “CRM should be led by CVM, which is akin to the Voice of Customer (and the Voice of Competitor), and complemented by Customer Share Marketing (CSM) and co-creating Customer experience. “CRM loyalty programs are usually the responsibility of sales and marketing and are generally administered by IT and call centers, while Customer touch points range throughout the organization. It is therefore imperative that the entire organization is energized to enhance and add value to the Customer. This is where CVM comes in. This is why we need to build a Customer Conduit © running throughout the organization. “Examples of Customer Conduits© exist. Lloyds Bank involved every employee from touch points to senior management to ‘Deliver Service Excellence’ and used teams such as the Customer-Circles© we have described. IBM uses a similar approach when they want to roll out a service excellence model in many countries. “Also, remember we normally outsource our touching (retailers, call centers, etc.). We must examine third party touching. And don’t forget Customers DNA and the need to avoid erosion touches. “By the way, it’s a proven fact that many companies have not achieved a return on their CRM investment.” He shows Doug a financial services article and says, “According to Fincentric, CRM is being replaced by a broader strategy of CVM, so that companies can better understand the Customer, and develop profitable lifetime relationships based on mutual value creation. “Financial institutions spent US$ 6.8 billion on CRM in 2002, yet very few have used CRM for sales force automation and making call centers perform better. Real and crucial information at their touch points (for example, the personal banker, who may not be in his job posting for long)
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is not available, reducing the ability of the institution to offer effective service to its most profitable Customers, or to grow business with lower profile Customers.”37 Krish urges Doug to consider what he has said and see how he can use this information at Glacier. Doug says there is a lot to absorb. “And remember, we Customer Guru types like to talk and give monologues. I’m not giving you much of a chance to speak,” quips Krish. “But it’s not your fault, there’s a lot to say and hear, and I don’t mind some long expositions from you!” says Doug in return. “By the way, I read about Customer Devotion.”
Beyond Customer Loyalty to Customer Devotion Ginger Conlon38 in 1 to 1 Weekly states that Customer Devotion can be built by: 1. Engagement: Listen to understand 2. Enlistment: Make customers feel like partners 3. Enlightenment: Integrate service and learning 4. Empowerment: Help customers feel confident and secure 5. Enchantment: Create a magical experience 6. Entrustment: Affirm that there is trust in the relationship 7. Endearment: Connect with passion
Value Creation/Customer Value Management Going back to the Customer Guru’s memo, Doug jots down the following benefits of CVM: 1. Organization a. Become truly Customer-driven. CVM is the Voice of Customer and the Voice of Competitor. b. Convert anonymous Customers to known ones. c. Measure Customer Lifetime Value, the revenue created from business generated by an existing Customer during his lifetime. 37
Fincentric article in American Banker, 2002. Fincentric provides flexible software solutions for banking. 38 Ginger Conlon, 1 to 1 Weekly, 11 December 2006.
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d. Reduce churn rate of employees and Customers. e. Realize the value of seamless touching through Customer Conduits©. f. Understand supplier value. 2. Marketing a. Understand why a Customer buys your competitor’s product and why he buys yours. b. Generate Customer Referral Value by utilizing the Customer’s extended family, as well as his personal and business contacts, to gain new business. c. Strive to get the Customer to be your company’s good-will ambassador. d. Implement CVM, which leads to viral marketing (that is word-of-mouth marketing, which leads to escalating sales) and secure unsolicited referrals made by satisfied Customers who talk about a company’s products, services, and their positive experiences. e. Attract the Customer to the corporate brand, and make him choose this brand across products for all his purchases. f. Understand that higher value brings you higher market share, and therefore higher revenues, which, along with improved efficiency (from improving Customer understanding and reducing mistakes), leads to higher profitability. g. Build a pricing model. h. Decide what products or technologies will truly add value to the Customer. 3. Business Results a. Higher market share and higher profitability. b. Increase in Customer retention, as there is a realization that there are savings from not losing a Customer and that the cost of finding new Customers is over ten times the cost of retaining an existing Customer. c. Increase in organization’s wallet share of a Customer and development of CSM. d. Building of Customer Capital, the measure of the value of a Customer relationship.
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e. Reduction of costs because you are doing fewer things wrong and are more efficient. f. Improvement in the price or value since quality divided by price is somewhat of a constant. Better Customer service and value should lead to a better price. g. Creation of competitive advantage through a Customercentric organization. 4. Customer a. Create a meaningful Customer experience. b. Make him feel that he is getting more from you than your competition. c. Ensure better touching. Customer-in-Center©, Customer-Circles©, and Customer Conduits© are Customer Value Foundation concepts and are copyrighted.
Doug thinks about all this and then leaves to begin the task of presenting what he’s learned, along with some common sense principles, to the two Customer-Circles©. He realizes full well that increasing focus on the Customer within the company was still a challenge, but was confident that the strategies he and the Customer Guru had laid out were sound and would work well in practice.
Six Months Later The Customer Guru, Earl, Rita, and Doug visit the Grocery World store in Newark, where the Customer-Circle © was first incorporated. The Customer Guru is truly amazed by what he sees. It is 5.30 p.m. and the store is full of shoppers. There is a computer with a large screen showing Glacier products, how to cook, change the flavor, spice-up ready-to-eat meals, new Glacier offerings, and a variety of recipes. He sees a Customer registering and sending an e-mail to herself with a recipe through the response form. She browses for recipes that others have pasted. There is another screen with Customer names and locker numbers. This is along the wall outside the store. People are parking in the spaces designated for Quick Pick-up, going to the lockers, looking for their name on the screen displaying their locker number,
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opening the one with their code, taking out the bagged groceries, and returning in a short time to their cars. This is truly unbelievable, thinks Krish. A large sign identifies this service as Quick Pick-up Customers and being ‘special’ for Glacier–Grocery World Customers. Krish goes up to a relaxed looking man in a business suit just returning to his car from the Quick Pick-up locker. “May I ask you a few questions?” The Customer nods. Krish asks, “You must find this really convenient!” “Yes, this is the best thing that has happened in a long time. I learned about it from a friend. I used to shop at a store a little closer to home, but the lines were too long at this time of day. I was a casual Glacier user, but now I order many of its products, sometimes canned foods, sometimes ready-to-eat meals, along with milk and other things I need urgently. “I e-mail Glacier about an hour before I leave work, and I have hassle-free purchases. I just charge to a credit card, and all I have to do is pick my order up. “I wish the store would add these features themselves, rather than make it a Glacier initiative!” “What do you think of Glacier’s foods?” “Well, I think they’re pretty good and well-priced as well.” “Thanks,” says Krish, as the Customer moves on. Doug excitedly tells Krish, “Our prices are not lower, sometimes they are higher!” Krish agrees, “Price is a perception. When you are positively touched, the price seems worthwhile and therefore reasonable!” Earl tells Krish, “I’m negotiating with Grocery World to extend this as a joint initiative with their other stores. We’ll ask for oneyear exclusivity, so that people must buy at least one Glacier product to use this service. After that we’d want Glacier’s name on the lockers, even though the Customer could buy our competitors’ product. “We would also ask to have a person at the store if we feel it necessary, and insist the store install a screen with a dedicated computer.” Krish, Earl, Rita, and Doug go into the store. There’s a young lady wearing a Glacier lab coat and a tag stating her name as June.
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She’s the Glacier help person for this store. She’s standing next to the ready-to-eat section and is putting some ready-to-eat foods into a grocery bag. Doug asks June if she is bagging for a Quick Pick-up Customer. June says she is. A Customer asks her if Glacier has Thai beef curry. “This is a new offering, and it’s just arrived at the store.” She picks up a package and hands it to the Customer. “If you like it spicier or hotter, I suggest you add this to the curry after heating it,” handing a small chili paste packet to the Customer. She shows the Customer where he can get more from a tear-off strip of chili flake and chili paste boxes next to the Glacier shelf. June then asks the Customer if he ever uses Glacier’s canned products. Has he become a member of the Glacier Food Club? Does he buy often? Are the Glacier packages sized right for him and his family? Krish, Earl, and Doug continue to walk through the store. They find the store clerks being helpful to the Customers. They note the butchers behind the meat counters pointing out special cuts to those Customers they recognize. At the checkout counters they find that the clerk is asking the Customer if she wants to be registered with Glacier’s Food Club. Earl says, “Ashok’s software must be capturing this.” Doug nods, “Yes!” They meet up with Ron Casey, the store manager. Ron tells Krish, “Sales have gone up. The perception is that we offer great, friendly service and competitive prices. People actually prefer to shop here. We’ve become more Customer-friendly. We’re fulfilling the Customers’ needs better than our competitors. We listen and talk to our Customers. We make them feel special like a Customer should. “Customers tend to come to our store more often than stores closer to them. We’re finding that more new Customers are coming through referrals. We now know quite a few Customers by name and have information on them that we’ve never had before. We’ve begun building a database that can be used for CRM and CVM. “We often know what a Customer’s preferences are, which products he buys more than others. Now at the meat counter, the butcher can tell the Customer of a particular cut that he knows the
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Customer prefers. Others alert him on specials on the products he normally buys. The baggers know which Customers need help in loading their cars, and how Customers prefer the bagging to be done. “Oh yes, in spite of more Customers, the lines at checkout are not longer, because of the Quick Pick-up facility Glacier has provided. This has saved space in the store, and compensates for the space taken by Glacier for their computer and desk. “Grocery World is studying this Quick Pick-up service for other stores. We’re testing the balance of increased Customers with loss of impulse purchase by people who come into the store (Impulse sale would have been lost if we were offering home delivery). Generally, the Quick Pick-up facility is for small daily purchases, and does not reduce the need for Customers to come into the store for their weekly purchases.” Doug mentions that his sales have gone up by 12 percent. About 70 percent of the increase has come from existing Customers, because of better information about the company and its products, better follow up with the Customer by the retailer and the company, and the easy availability of company managers and a focus on the Customers. Rita says, “This looks good. You seem to have picked up new Customers, too. But you haven’t talked about the costs.” Doug responds that he does not have precise costs for roll-out to other stores. However, he is developing the costs. This information will be shared with Rita and other executives. The Customer Guru tells Earl and Doug that this concept should be expanded to many more stores. Earl agrees and says he plans to follow up with Bob Ostrofsky, his boss. Later, Doug meets Earl and reviews with him detailed data about the dramatic impact on sales and revenue, and the cost-benefit. He suggests that a meeting of the Retail Customer-Circle© be held as quickly as possible. A few days later, the Sales Director addresses a meeting of the Retailer Customer-Circle©. “I’m here today,” says Earl, “because I want to compliment you on the tremendous increase in sales. "You’ve proved many things to me. You’ve begun to understand what a Customer is, and how farming an existing Customer is just
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as important as hunting for new ones. You’ve made your Customers happy and they’ve rewarded you with repeat sales, referrals and higher profitability. “I’m so impressed by what you’ve done that I’m now convinced we need to emulate your achievements in different stores. Your work is so spectacular that I’d like to have Customer-Circles© with Grocery World in their other stores. “I’m recommending we start more Customer-Circles© and will suggest that you become the new Customer gurus to help the Customer-Circles© there with your experiences.” Earl tells them that Doug had given him an example of doing something really great for the Customer. There was an old man who had not come in for a few days. He wanted to buy a cake for his niece’s birthday the following day, but could not do so because he was unwell. He had talked to Maggie, a senior clerk on the phone, who promised to deliver the cake in her free time. Grocery World had heard how pleased the old man and his niece were, and how they mentioned this to many of their friends! Earl then shares the data of increased sales with them and tells them they’re largely responsible for this increase in sales. He tells them now all can see how important their efforts are to Grocery World and to Glacier Products. There is a generous round of applause and a sense of accomplishment and recognition. They’re thrilled with the recognition, and the opportunity to do more! Ron Casey echoes Earl’s sentiments. “Your ideas have really worked and are transforming our store into being Customerfocused. Thanks!” Maggie stands up and says she is so happy that the results are being shared with them. She is fascinated at how their efforts have really been meaningful and worthwhile. “I feel important, and I really think I can improve things for Grocery World, by working with the Customer.” There is general agreement with this. The data and the compliments make them feel truly important. Doug can sense the morale improving, and that these touch points are getting proper motivation. On his way out, Earl tells Doug that they must bring Bob Ostrofsky up to speed on current developments.
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A Presentation to the CEO Bob looks up as Earl and Doug walk into his office. “I’ve been looking at our increased sales figures in Grocery World’s Newark store. Very impressive numbers. Tell me more about what you’ve done.” Earl talks about the Customer-Circles© formed within Glacier and Grocery World, the focus on the Customer, and the physical steps such as Quick Pick-up Counters. Earl tells Bob about his and Doug’s plan to extend the Customer-Circle© to other stores and throughout the company. “Great,” says the CEO. “I think we should do something at the company-level. Can you recommend a course of Customer-Centric action to me? And, let me have your latest Customer Satisfaction scores! “Also, do look at a roll-out program with costs.” Earl says, “Fine. We’re working on this.”
Earl and Doug meet with the Customer Guru “We did it,” exults Doug, “and Bob wants more. Plus, I’m charged with getting other Customer-Circles© going. Earl and I will be caucusing with you on how to approach future work.” The Customer Guru says, “Whoa, back up. What you did was good for actions focused on the Customer locally, but we need to do something more at the corporate level before you form more Customer-Circles©. “What I’ve told you so far is not the classical methodology for CVM. Generally for CVM to work in an organization, the entire organization has to be in sync with the Customer. To make this happen, the CEO must be 100 percent behind it. Plus, there needs to be a CVM champion who is a senior officer. In a perfect Customer-oriented world, you’ll need a Chief Customer Officer. He should be a very senior officer and responsible for Customers and their experience. “Sometimes the CEO doesn’t believe in CVM as a primary strategy. As was the case here, he has to be shown. You’ve made progress, but there’s more to be done. “Once he’s committed to at least a trial effort, we then start with a small contained part of the company and prove the concept. You’ve done this yourself. It’s great that the CEO has already asked you to do more,
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but we should talk about the classical way of implementing CVM. Let’s do that soon. “But for now, let’s continue with what we started. “Why are Customers coming back to you and Grocery World?” “They perceive they’re getting something better in the store,” avers Doug. “Right! They perceive they get better value and a great experience!” says the Customer Guru, “Remember these are all perceptions, and the touching and caring make the Customer perceive he’s getting a better product and price benefit, even though the price may be the same elsewhere. “And do we know how we stack up against competition? If they did exactly the same thing, on average we’d get no benefit higher than what they’d get! So, how do we figure out what the competition is doing versus what we’re doing?” “Oh, we do that all the time. We ask our Customers to rate us on satisfaction.” “Hmm! That’s a start. But it isn’t sufficient. I’ll explain that to you later. First, we need to discuss a concept called Customer Value Added.”
Customer Value Added “I understand you track your competitors’ efforts. What you have to assess is what value your Customers perceive they’re getting from you vis-à-vis what value your competitors’ Customers perceive they’re getting from the competitors. This is called Customer Value Added or CVA. “We can gain competitive advantage by understanding the value we create and the value our competition creates, and whether they create more or less value than us! We can tell why someone buys from us, and someone else buys from the competitor. “We measure pre-purchase propensity through CVA. If we only measure ourselves against ourselves, and we have a 25 percent market share, we will never know why 75 percent of the people buy elsewhere. That’s why we have to understand why potential Customers don’t buy from us and what value their suppliers are adding to them, and compare these with what our Customers are saying about us. “CVA is the value your Customers perceive they get from you divided by the value your competitors’ Customers perceive they get from your competitors or
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CVA =
Perceived worth of your offer Perceived worth of competitive offer
“And if CVA is computed to be one, you will neither gain nor lose Customers from or to the competition. And if it is less than one, you will lose Customers. If higher than one, you will gain Customers. “If you measure CVA over a period of time, it can accurately predict market share! You know most financial results are prepared after a given period (quarterly, annually). Given that, they’re lagging indicators of business performance. On the other hand, CVA is a business measure that is predictive and a leading indicator of business results. When I was running a business, a big issue was predicting the future, and CVA really helped me. “The ‘Market Share vs Value’ chart (Figure 7.1) shows that as value goes up and down, market share goes up and down, but there is a lag of four months. Thus, if there is a change in the value due to your or your competitor’s activities, the market share result is impacted after a lag time. The lag is different for different products, markets, etc.
Figure 7.1 Market Share vs Value
Source: Customer Value Foundation.
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“Other business results that are impacted are returns on investment (ROI). This came out of a PIMS39 study of over a 1,000 companies (Figure 7.2). Those having higher value ratings tended to have higher value.
Figure 7.2 ROI vs Relative Customer Value
“CVA, which was pioneered by Ray Kordupleski, is the Customer equivalent of Economic Value Added (EVA).40 “But what is this value we’re talking about? Basically, it’s the Customer’s perception of the worth of the products and services he receives. It’s the answer to the question: Are the products and services delivered worth what you paid for them? Are they better than what the competitors are giving to their Customers? This chart shows the financial marketplace and the Customer marketplace equations (Box 7.1).”
Competitive Profiles “The results of these computations are put together in what we call Competitive Profiles. For example, a cost profile would look like this. Scores 39
40
PIMS: Profit Improvement through Marketing Strategies (2003), from Ray Kordupleski. From Ray Kordupleski, 2003. Mastering Customer Value Management. Pinnaflex.
108 Customer Value Investment: Formula for Sustained Business Success
Box 7.1 The Financial Marketplace and the Customer Marketplace Equations
are on a ten-point scale. The impact weight is derived from regression analysis. When the ratio is higher than one you are better than the competition.” He shows Doug this example from the automobile industry (Table 7.1).
Table 7.1 Competitive Cost Profile Key Purchase Criteria
Cost of Servicing Access to Dealer Loaner car Free svcs/check ups Cost of parts Availability Repair options
Importance Weight %
Your Company
Competition
Ratio
10% 15% 5% 30%
7.4 9.0 8.5
7.2 8.6 8.5
1.03 1.05 1.00
10% 60% 70%
7.8 7.0
8.1 8.0
0.96 0.88
“Now, what items would you prioritize to work on?” “That’s obvious,” says Doug, “I’d work on cost of parts, because we are worse than competition. And first on repair options.”
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“Super,” says the Customer Guru. “And, I’d communicate to the Customers about Loaner Cars, because we have a competitive advantage there!”
Customer Waterfall of Needs Doug asks, “But how do you know what to ask the Customer?” “That’s a great question. Some of your touch points, including marketing and other people knowledgeable about the Customer and the marketplace, should meet. Through discussions, they can put together what’s known as the Customer Waterfall of Needs.41 “The Customer Waterfall of Needs defines the Customers’ needs at pre-purchase, purchase, and post-purchase stages and maps the attributes of ‘Transactional’ value. Sometimes you’ll see this being called a Staircase of Needs. “A simple example for an automobile would be like this,” showing Doug some charts (Figure 7.3). “You’ll notice that the waterfall walks you through the pre-purchase, purchase, and post-purchase needs of a Customer. It helps companies focus on whatever is important to the Customer in his ownership and the quest for ownership. “These charts are called waterfalls, because one step cascades to the next one.”
Attribute Trees “After we have done this, we put together attribute trees,” continues Krish. “The product attributes are derived from ‘Quality and Price Trees’. This takes the basic components of ‘Value’ = ‘What I pay’ vs ‘What I get’ and breaks them down to actionable attributes,” showing Doug the attribute tree charts (Figure 7.4). “Each branch is also assigned an importance weight by Customers. “Each attribute is further broken down into its core components and so on. An example for an automobile may look like this price tree,” laying a price tree in front of Doug (Figure 7.5).
41
Also called Staircase of Needs. Waterfall implies how each item leads (falls) to the next.
Figure 7.3 Automobile Customer Waterfall of Needs
110 Customer Value Investment: Formula for Sustained Business Success
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Figure 7.4 Attributes Stage 1
Figure 7.5 Price Tree
112 Customer Value Investment: Formula for Sustained Business Success
“Each branch is also assigned a weight by Customers, or more often regression analysis is used to get the derived or implied weights. They are implied because we do not directly ask Customers about them.”
Stated vs Implied Weights “Often Customers can be asked to assign a weight to a particular attribute, or to weigh various attributes (The way this is done is typically to assign an importance to the attributes so that the total of the weights is 100. Thus if there are three attributes, the Customer is asked to assign a weight to each of these three attributes, such that the total comes to 100). Sometimes, Customers can assign a weight to attributes, which may not really be important in the buying decisions. Weights assigned by the Customer are called stated weights. “An example of this is asking Customers how important airline safety is. Doug, if I asked you how important airline safety is, how would you respond?” “Oh, Customers would definitely say it is extremely important.” “And when was the last time you bought a ticket based on safety?” “You’re right. Safety is important but not important as a purchase criterion,” remarks Doug. “Most of the time, if we have enough responses, we do not directly ask Customers to assign weights. We derive these through statistical analysis. Most commonly, regression analysis is used. These are called implied weights. “Using statistical analysis to derive weights, we may find that airline safety, though truly important, is not a factor in selection of an airline (assuming there has been no recent crash, and we are looking at a major airline). So, the importance weight of safety in the buying decision (or selection of an airline) would be relatively low, unlike what would have come out in the stated response. “Another example is hotel courtesy. It is often uniformly good, and ceases to be a distinguishing factor in the purchase decision. However, if a hotel differentiates itself by unbelievable courtesy, either good or bad, it becomes important. In both cases, Customers will say, when asked to assign a direct weight, that courtesy is important!
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The relation between direct and implied weights is shown here.42” Shows Doug a chart (Figure 7.6).
Figure 7.6 Derived importance vs Stated importance
Customer Satisfaction vs CVA “You earlier said that you ask Customers to rate you.” “Yes,” says Earl. “Our Customer satisfaction rating is at 85 percent, which I think is quite good. This must be important since the CEO has asked us to measure the Customer Satisfaction rating again.” The Customer Guru is bemused. “You know, I have to tell you some more stuff about Customer satisfaction. “Of course, satisfaction is necessary and should not be discarded. Unfortunately, many companies around the world do not even measure satisfaction. Rama Bijapurkar, an Indian marketing consultant, wrote a few years ago about Indian companies: Who is the arbiter of value? For those who protest that Indian brands and options are not as value negative as they are made out to be, I would like to say: But have you asked the Customer? 42
From Ray Kordupleski, 2003. Mastering Customer Value Management. Pinnaflex.
114 Customer Value Investment: Formula for Sustained Business Success
It is his money after all and he should be the judge. I was recently at a conference organised by a premier industry association where the issue of 100% FDI in retailing was being discussed. Nowhere in any of the impassioned speeches did I hear the word ‘Customer’. When I did dare to speak and suggest that after having had shoddy service from retailers for a long time, the consumer deserved better value for his money, there was a huge outcry of denial. Nobody in the audience had seen a Customer satisfaction survey nor attended a focus group.43 “On the other hand,” adds Krish, “for too long in countries like India where competition was low, Customers were not demanding. In fact, this is what an industry magnate, Venu Srinivasan, had to say: I don’t think the Indian Customer is as demanding as he should be. He should be far more demanding. I feel the Indian Customers can bargain for better things. We would provide better things if they were a little more aggressive in their demands.”44 Krish continues, “Let’s get back to satisfaction. First let me tell you the difference between Customer Value and Customer Satisfaction.” He shows a table to Krish (Table 7.2). Doug interrupts, “I just came across a book written by Jeffrey Gitomer45 called Customer Satisfaction Is Worthless, Customer Loyalty Is Priceless that makes the same point!” “That is interesting, that a book has been written on this subject.” “Have you seen the book Dominating Markets with Value: Advances in Customer Value Management by R. Eric Reidenbach, Reginald W. Goeke, and Krish W. McClung, where they say: ... as we have seen time and again, it (the Customer satisfaction score) does not ensure greater satisfaction for the Customer! After all, how can it? If the system is only designed to provide a report card and has no linkage to those processes that actually 43
44
45
Rama Bijapurkar, Can Indian Brands Survive? http://www.india-seminar.com/ 2001/498/498%20rama%20bijapurkar.htm. Rama is a noted Indian marketing consultant. Venu Srinivasan, MD TVS Suzuki, to Rediff Business Interview: http://www.rediff.com/business/1999/jul/28venu.htm. Gitomer is a syndicated “sales” columnist in ninety-five business newspapers worldwide with four million weekly readers.
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Table 7.2 Customer Satisfaction vs Customer Value Added Customer Satisfaction studies Rate you against yourself. Absolute scores. How good is good? Primarily measures satisfaction with transactions Done soon after contact Limited ratings vs competition and these are against Transactions Features Comparisons are against industry averages C-Sat results are not directly linked with Business results Satisfied Customers are not necessarily Loyal Customers
Customer Value Management studies There is a direct linkage between perceived value received and long-term loyalty Customers rate you against competition Measures perceived value of products/services/relationship/price vs. competition Measures embedded feelings Assigns weights to attributes which enables prioritization of actionable items. Enables quantification via its working tools Scores co-relate with Business results
create and deliver Customer Value, how can you expect your value proposition to change?” Doug remembers, “In India, the largest car manufacturer is Maruti Suzuki. Jagdish Khatter, their Managing Director, is pleased that in the J.D. Power Auto Customer Satisfaction46 study in India, Maruti comes first. Apparently J.D. Power has told Maruti that India is the only country in the world where the market leader has the highest satisfaction rating. This is not true anywhere else in the world, proving that satisfaction is not related to market share.” “Doug, you will find this is true, case after case. It is Customer Value that correlates to market share. Increasing Customer Value increases market share. It is sad that so much credence is given to Customer satisfaction. “Sam Walter Foss wrote: For thus such reverence is lent to wellestablished precedent. 46
J.D. Power and Associates is a global marketing information firm that conducts independent and unbiased surveys of Customer satisfaction.
116 Customer Value Investment: Formula for Sustained Business Success
“And people cannot change that easily, because they are following the satisfaction precedent. “In fact, Bradley Gale thinks satisfaction is only an early step toward getting Customer Value. He shows this in this chart (Figure 7.7). He uses the term Strategic Navigation to mean the company is moving towards Strategic Management from financial reporting and Customer satisfaction.47 He believes that Customer Value Management is the ultimate goal.
Figure 7.7 The path to competitiveness
“In fact, Rama Bijapurkar48 echoes Gale and refers to Customer Value as the Mecca of all business! “Customer understanding is often thought of as something that the marketing department needs to do to figure out how to price better or advertise better or get feedback on product performance. The notion that Customer understanding is the gut of a business and will determine all aspects of business behavior is yet to get truly internalized. Top management needs to think of consumer understanding more as a religion than as an abstract piece of ritual, or a complex art form. It really is as 47 48
Bradley T. Gale, 1994. Managing Customer Value. New York: The Free Press. p. 53. Rama Bijapurkar is a noted Indian Market Strategy Consultant.
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prosaic as accounting. Very simply, no matter what the business is, aerospace or candy, the core of Customer understanding is to actually figure out how exactly people/buying units are behaving and why they are behaving the way they do. And the only way to define the canvas of people/business units is “everyone who could potentially value the benefit that you will provide”. The answers would lie in two places: One, what is happening to Customers in their lives/their businesses and how they are managing it? (Many B2B marketing companies confess to spending infinitely more time talking to Customers about their own products and how much of it the Customer wants to buy, rather than discuss in depth what is going on in their Customer’s business, and the Customer’s market strategies for his market). Two, how do Customers really process the value they derive from different options available to them? (Ironically, the stated Mecca of all businesses is to improve Customer perceived Value, but it is usually done without spending too much time on building a clear and robust Customer Value processing model!) And related to this, what do Customers think about value delivered by all possible options, not just those we believe are competition products, but all options available including the ‘do nothing’ or ‘do not buy’ option. “So you can see that forward thinking people are asking companies to discover Customer Value. “Doug, I recall you prefer to travel on United. Imagine, on a day you are traveling, their flight is late, they don’t have a meal for you, and your baggage gets lost. You are completely dissatisfied. Will you stop flying United? What you’d probably do is write to United, tell them you’re a frequent flyer and don’t expect this kind of service. “And let’s say a few days later you fly American. In flight crew members call you by name, they upgrade you at no cost and the flight is perfect. You are very satisfied! Would you abandon United and switch to American? Probably not!” “I agree with you,” says Doug. “When you have surveyed your Customers, have you asked them whether they would repurchase your products? Ray Kordupleski has plotted Customer Satisfaction versus Customer Repurchase intent, and he finds that Good is Bad.49
49
From Ray Kordupleski, Mastering Customer Value Management, Pinnaflex, 2003.
118 Customer Value Investment: Formula for Sustained Business Success
“A good rating of 85 percent could still mean you are losing Customers. If you wish to retain Customers you must have an excellent Customer satisfaction rating in excess of 90 or 95 percent. Read Ray’s book and see that this is called the slippery slope. It is called a slippery slope because you slide fast when your satisfaction goes below 95 percent, and any additional percent reduction in satisfaction results in a larger percent drop in market share.” The Customer Guru then shows them a graph (Figure 7.8) to illustrate what he means. “Ray loves to say Good is Bad in terms of retaining excellent Customer ratings.”
Figure 7.8 Good Isn’t Good Enough
“I want to show you this table (Table 7.3), which shows how many Customers you could be losing even when you have very satisfied ratings. In this example, if you have 100,000 Customers, you will lose almost 46 percent of your Customers, and they will have to be replaced for you to maintain the total number of Customers you have.”
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Table 7.3 Satisfaction Ratings Score on 5 pt Scale
5. 4. 3. 2. 1.
Average Retention Rate
Very satisfied Satisfied Neutral Dissatisfied Very dissatisfied
Total
95% 80% 60% 20% 2%
Customers Out of 100,000 Giving Score
10,000 20,000 40,000 20,000 10,000
Customers Lost
500 4,000 16,000 16,000 9,800 46,300
Doug looks at the data and says, “If our market share remains the same, then we must be gaining the same number of Customers that we lost to competition. Wow! If we could hold on to few more, our market share will increase!” Krish smiles in agreement.
People Value Added “Lastly, you need one other measure. We’re in agreement that you can’t achieve anything without adding value to your employees or people. You need to plot the People Performance Curve (PPC ). This is also called People or Employee Value Added. 50 PPC plots the response of employees to the question ‘I perform to my best’ versus their opinion of the value added to them at the company. A high PPC means a motivated work force, which is value added and can add value to the Customer. Again, it’s important to know if you are adding more value to the employee than the competitors are to their employees. “More importantly, when you plot Customer Value versus Employee Value, you find a correlation. It stands to reason that value-added people will inevitably add more value to your Customers! Right? “I know a branch of a major bank in India that had awful service and had very poor facilities. The clerks were clearly demotivated and it resulted in poor service. A new branch manager came in. She spent time in improving physical facilities, improving the air conditioning, toilets, coffee, and cafeteria services. The clerks’ attitude changed and service improved. It is because someone cared for them! 50
I refer you to Ray Kordupleski’s book, Mastering Customer Value Management.
120 Customer Value Investment: Formula for Sustained Business Success
“Vineet Nayar of HCL Technologies states, ‘I want to be the company that gives superior service to my employees compared to everybody else’s service.‘”51 The Customer Guru continues, “Likewise, you must have suppliers to whom you are adding more value than your competitors. And when you need them, they will always be there. I remember a resin company cutting off styrene supply to a major Customer during a resin shortage, causing their foamed plate plant to shut down. In this case, the supplier was not there when the Customer needed them. “Of course, the Customer never forgot. But if the Customer had an excellent relation with the supplier, chances are the supplier action would not have been catastrophic. “And when you do all of the steps I have discussed, you will find you improve your CVA and Customer retention. Simultaneously, your financial parameters will improve. These parameters include market share, wallet share, ROI, etc.” “This requires us to re-examine our Customer,” says Earl. He turns to the Customer Guru and says, “Do you mind if Doug continues to work with you in building a Customer strategy?” “Of course,” says the Customer Guru, “but you first have to align everyone to build a relationship with the Customer and also to design Customer-friendly processes; processes that incorporate the Customer’s perspective and not only the company’s convenience. “Finally, you have to move away from product and service differentiation to differentiation on Customer experience. “And yes, one more thing, you need to report Customer data to the investors. Investors want to know about future earnings, and these come from your Customers, i.e., Customer Capital/Franchise. “You can create an advantage for your investors by making them aware of the value of your Customer franchise. Investors should know the number of Customers you have, their present and future profitability, and how fast your Customer franchise is growing. “In fact, the Securities and Exchange Commission (SEC), USA, is currently considering putting Customer data on the balance sheet of companies.” He pulls out a cutting that reads: 51
David Kirkpatrick, Fortune Senior Editor, 14 April 2006. HCL is one of India’s largest software companies.
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Intangible assets are, by definition, hard to see and even harder to fix a precise value for. But a widening consensus is growing that the importance of such assets—from brand names and Customer lists to trademarks and patents—means that investors need to know more about them. …A task force appointed by the Securities and Exchange Commission will urge the S.E.C. today to find a way to encourage companies to provide more information regarding those assets. ...As an example of possible new disclosures… companies could provide estimates on the lifetime value, in terms of revenue and profit, of a Customer, as well as of the cost of acquiring new Customers.52
The Long Ignored Pam Doug finally calls Pam, who is understandably miffed. “I haven’t seen you in a long time. Don’t think there aren’t any other guys around.” Doug thinks, “I’m losing my competitive advantage by ignoring Pam. She has choices just as my Customers do. The marketplace is full of competitors. CVA helps in building competitive knowledge and advantage. I need to consolidate this advantage.” He invites Pam to join him for a weekend trip to the Niagara Falls.
Doug is Asked to Build a Customer Strategy Earl asks Doug to meet again with the Customer Guru to build an outline for a strategy session and then organize it. Doug tells him it will be a few days before he can get back to him with a plan.
Key Points Customer Relationship Management programs
52
Essentially process-oriented, passive and don’t touch Customers.
The New York Times, 22 May 2001.
122 Customer Value Investment: Formula for Sustained Business Success
Must move ahead to CVM. Often thought of as ‘loyalty programs’, which they aren’t.
Value
It is the balance between price and quality. The more the Customer perceives he gets for his money, the higher his perception of the value. It is what a product is worth to the Customer, and how he perceives the benefits of that product, given what it costs him to buy or own it.
Customers as Mentors
Customers can be used as Mentors. Seek Customers to learn more.
Concept of a Business
No longer Businesses selling to Consumers (B2C). Now, it is Consumers buying from Businesses (C2B). How easy is it for the Customer to interact with the Business?
Brand Loyalty
Initially meant Customers being loyal to a specific brand. Today, the brand has to be loyal to the Customer! The brand must deliver on its promise. The brand must meet the Customer’s expectations and values if the organization is to expect loyalty and repeat purchases.
Third Party Touching
Often touching is outsourced through retailers, call centers, etc. We must examine third party touching and see if our company can touch the Customer directly, or better.
Business Processes
Often designed from the point of view of the company and purely for their own convenience. Processes should be for the convenience of the Customer. Processes should be Customer-Centric.
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Voice of Customer and Voice of Competitor
CVM is akin to the Voice of Customer (and Voice of Competitor). Many companies use CVM studies for this purpose.
Customer Champion
Companies need a Customer champion who is a senior officer. In a perfect Customer-oriented world, you’ll have a Chief Customer Officer.
Customer Value Added
CVA is the value your Customers perceive they get from you divided by the value your competitors’ Customers perceive they get from your competitors. Higher CVA scores lead to increased market share, ROI, and wallet share.
Competitive Profiles
Facilitate tabulating the CVA scores on various attributes. Enable you to see where you are better or worse than your competition.
Customer Waterfall of Needs
Refers to the business processes that make up the Customer’s experience with the company. Are interconnected and sequenced.
Attribute Trees
These are developed after the Customer Waterfall of Needs, pinpointing attributes of importance to the Customer. Attribute trees have a Price branch (actual price, cost of doing business and cost of ownership) and a Quality branch (of goods, brands/relationship, and services).
Slippery Slopes
This is the graph of re-purchase intent versus value or satisfaction with price and quality.
124 Customer Value Investment: Formula for Sustained Business Success
It is called slippery because once you get past the very satisfied Customers, you tend to lose Customers very rapidly even with minor value score losses.
Stated vs Implied Weights
Stated weights are received directly by asking the Customer to rate attributes. Derived or implied weights are obtained by statistical means, and give a better idea of the importance of different attributes in the buying decision.
People Value Added
This is the ratio of what your company adds to the employee versus what your competitors are adding to their employees. You want this ratio to be greater than one to get a competitive edge.
Satisfaction vs Value
Satisfaction is measured soon after an event or transaction. Unlike value, satisfaction does not measure embedded feelings. Satisfaction is a necessary condition for loyalty but not a sufficient one whereas value is. Satisfaction does not equate to loyalty, unless you have competitive data. People buy because they perceive better value from your products.
The Path to Competitiveness
To achieve strategic management, companies and their executives have to embrace Customer Value and CustomerCentricity. These build competitive advantage.
Reporting Customer Data
Customer data should be reported on balance sheets. This is being mooted by the SEC. Investors wish to know your Customer assets.
The Strategizing 125
CHAPTER
8
The Strategizing Doug meets again with Krish Kumar, the Customer Guru, to get more help. “I need to understand more clearly what you’ve said and then put together an outline of a Customer Strategy session for Glacier.” Krish responds, “That’s great. Putting a Customer Strategy together and formalizing what we must do as a company to implement Customer Value Management will give the program longevity and protect it from the ‘executive toy’ syndrome. “Before you get into the Customer Strategy, I must share with you some more Customer Value concepts. You have to understand and develop the notion of Value Maps, and identify specifically what Customer Value you want to provide and how to achieve the value you are aiming for. “Remember that you could be selling a low-priced product that in its own segment provides the same value as a high-priced product does in its segment. Customers look for value whether they’re buying premium products or economy products.” “I think I understand this part,” says Doug. “You gave me the example of Wal-Mart. They did not position themselves as an economy store (like K Mart), or a premium store like Bloomingdale’s, nor an average store like Sears. They positioned themselves as a store that provides value, whatever products they are selling, premium or economy.” Krish responds, “You’re right. But to really understand this, we’ll need to discuss the concept of Value Maps.”
126 Customer Value Investment: Formula for Sustained Business Success
Value Maps “A Value Map positions your company and your competitors based on the Customers’ relative ratings on price and quality (which results in value), and helps you make sound strategic decisions,” explains Krish. Krish then draws a diagram (Figure 8.1) on the white board.
Figure 8.1 Value Map
Relative Ratings of Products, Service and Brand Relationship
“Your company and each of its competitors are mapped on the chart. By charting the value, potential directions for growth strategy can be more easily defined,” adds Krish. Doug says, “The chart shows what you meant. You can have premium, average or economy products, but they all have to provide value, which we have to measure.” “That’s correct. Companies have to decide what value they should provide to the Customer. For example, if your Customer Value Added (CVA) is very high, or if the quality rating versus competition is over
The Strategizing 127
1.1, the company should be asking if they are providing unnecessary quality, and perhaps can increase market share by reducing price and decreasing a product feature or an aspect of quality where the company’s rating is extremely high. “Companies can also decide where they want to position their products or services on the Value Map. From the CVA data analysis, the company can decide what areas to work on to change their value rating to the desired one, with the least amount of stress, effort and expense. “What is also important is that you can use CVA to price your products, and also measure the actual worth of the various features of your products as viewed by the Customer. I don’t want to go into details, but would refer you to Bradley Gale’s53 seminal article.” Doug remarks quizzically, “I thought value was what we provide to Customers.” “Yes, and if you can measure the value you provide to Customers, you can design your products and price them from a Customer’s perspective.”
Using CVA for Pricing Decisions “Bradley Gale studied pricing versus CVA for desktop computers. He took data from Consumer Reports Magazine on their rating of various computer features, and the price of each of the desktops reviewed. He then calculated the average rating of each feature, and their relative importance (or weight). Based on this, he was able to define the ‘average’ computer with the ‘average’ features and the ‘average’ price. Thus he drew up the price-performance profile for desktop computers (Table 8.1). “Next, using the actual scores for every feature for each desktop model and the importance weight for that feature, he was able to gauge the value the feature was creating for Customers, and what it was worth to them. To do so, he used the data to define an ‘average’ computer, and how an average computer ought to be priced. Above-average features were worth more (if the Customer truly wanted them, they were worth even more!), and below-average features meant a deterioration in price. Finally, using
53
Bradley T. Gale, 2002. How. Much Is Your Product Really Worth? Boston: Customer Value Inc., p. 9.
8.0 8.0 8.0 10.0 10.0 8.0 10.0 6.0 8.0 8.0 6.4 7.9
8.0 8.0 8.0 10.0 8.0 6.0 10.0 6.0 10.0 8.0 6.7 7.9
Sony
6.0 8.0 8.0 10.0 8.0 8.0 10.0 6.0 10.0 8.0 6.5 8.2
IBM
1,921 2.858 2,410 2,548 2,500 2,348 (++)
10.0 10.0 10.0 8.0 8.0 8.0 6.0 6.0 6.0 10.0 5.9 8.1
HP
Selling Price ($) D Market Share
10.0 8.0 8.0 8.0 10.0 8.0 10.0 8.0 10.0 8.0 6.7 8.7
Power Compaq Mac
8.0 10.0 10.0 8.0 8.0 10.0 8.0 8.0 8.0 8.0 7.6 9.0
Dell
Speed Multimedia Images Multimedia Sound Multimedia Features Other Features Expansion System Restore Manuals Power Display Technical Support Reliability
Benefit Attributes
Table 8.1 Price-Performance Profile for Desktop Computers
1,199
8.0 8.0 6.0 8.0 10.0 4.0 10.0 8.0 6.0 6.0 6.7 8.7
iMac
6.0 6.0 8.0 8.0 10.0 6.0 10.0 6.0 8.0 6.0 7.0 7.3
8.0 6.0 8.0 8.0 6.0 8.0 10.0 4.0 8.0 8.0 5.6 6.9
NEC
4.0 4.0 8.0 10.0 10.0 6.0 10.0 8.0 10.0 10.0 7.0 7.3
899
6.0 6.0 6.0 6.0 6.0 6.0 10.0 6.0 8.0 8.0 6.7 7.9
16.0 16.0 8.0 8.0 8.0 8.0 8.0 4.0 2.4 1.6 10.0 10.0 100.00
Gateway eMachines Weights Profile %
1,518 1,528 2,020 2,359
6.0 8.0 8.0 10.0 10.0 6.0 6.0 6.0 8.0 6.0 7.2 6.7
Essential
Micron Gateway
128 Customer Value Investment: Formula for Sustained Business Success
The Strategizing 129
this he could figure out which computer was worth more or less to the Customer compared to its actual selling price (Table 8.2).” “This is an exciting way to look at a company’s products and their features, and understanding what value they’re actually adding to the Customer,” remarks Doug. “Thus if you have a feature that a Customer does not want, the Customer has no desire to pay for it and thinks it is worthless! You recall the old Video Cassette Recorders (VCRs). They had a feature allowing thirty day recording. Most users found it useless and therefore would pay no extra for it, but had no choice as the feature came bundled with the VCR! Had these VCR companies known about or cared about the Customer viewpoint, they would have designed the features differently. You see this on cell phones. How I wish I could choose the features I really want on my cell phone! Krish continues, “This shows the versatility of Customer Value. It is analytical, it is focused, and it is strategic. It helps in improving processes, service, and pricing. It also makes all of these decisions more Customerdriven. Above all, it brings a passion for the Customer. “Another way to look at the price is to see the Economic Value Added to the Customer. A better way is to look at the Perceived Value Added to the Customer. “The conventional way is to figure out the cost differential between your product and competing products.
Cost of ownership of competitor’s product: Price plus cost of acquisition, maintenance, and ongoing costs
Cost of ownership of your product: Price plus cost of acquisition, maintenance, and ongoing costs
Economic value over competitor
“The economic value you provide to the Customer is the difference in your cost of ownership for a product versus competitor’s price. “The new way is to look at the value you add to a customer. “The Perceived Value Added is the difference between the total values the Customer perceives he gets from your product versus competitive
PowerMac
Dell
1,981 1,199 782
Fair-Value Price 2,781 2,723 2,496 2,409 2,208 2,095 Selling Price ($) 1,921 2,858 2,410 2,548 2,500 2,348 Total Value Advantage 860 –135 86 –139 –253 –253
199 –491 –292
–28 810 782
400 –539 –139
85 64 –128 –43 85 –192 53 48 –45 –23 3 64
86 –339 –253
487 –401 86
IBM
–171 64 0 85 –43 64 53 –16 32 2 –13 28
iMac
714 –849 –135
Sony
85 64 0 85 –43 –64 53 –16 32 2 0 0 –394 481 87
–171 –192 0 –43 85 –64 53 –16 –6 –23 27 –44 –624 –350 –974
–427 –448 0 85 85 –64 53 48 32 28 27 –44
1,557 1,385 2,02 2,359 –463 –974
–452 –11 –463
85 –192 0 –43 –171 64 53 –80 –6 2 –85 –80
0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
1,146 2,009 899 2,009 –247 0
–863 1,110 247
–171 –192 –128 –171 –171 –64 53 –16 –6 2 0 0
Average
1,711 1,615 1,518 1,528 193 87
–298 491 193
–171 64 0 85 85 –64 –203 –16 –6 –23 43 –92
Micron
772 88 860
HP
885 64 0 85 85 64 53 –16 –6 2 –21 4
Gateway Essential
Differential Worth Price Advantage Total Value Advantage
Compaq
341 320 128 –43 –43 64 –203 –16 –45 28 –61 16
NEC
341 64 0 –43 85 64 53 48 32 2 3 64
Gateway Profile
85 320 128 –43 –43 192 –75 48 –6 2 75 88
eMachines
Speed Multimedia images Multimedia sound Multimedia Features Other Features Expansion System Restore Manuals Power Display Technical Support Reliability
Benefit Attributes
Differential Worth of each model vs the average model ($)
Table 8.2 Value Scorecard for Desktop Computers
130 Customer Value Investment: Formula for Sustained Business Success
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offerings. And we need to increase the Perceived Value Added, not the Economic Value Added. In this example, the competitor’s benefits are higher, but their cost is also higher, reducing the Perceived Value Added. “The Customer looks at the price and the non-price costs, and compares these with the benefits he is getting. He perceives a value add when the benefits exceed the expected cost. “The company compares the total cost of acquisition by a Customer of its products with the Customer’s cost from a competitor. The difference is the value added to the Customer.” Doug remarks, “I think the Customer Value Management approach of looking at the perceived value added is how Customers buy.”
Perceived benefit of your product: Product, Service, Brand, Relationship, Selling (Retailer, etc.), Quality, and other benefits
Cost of ownership of your product: Price plus cost of acquisition, maintenance, and ongoing costs
Perceived value added of your product
Perceived Value Added of your Product
Perceived benefit of your competitor’s product: Product, Service, Brand, Relationship, Selling (Retailer, etc.), Quality, and other benefits
Cost of ownership of your competitor’s product: Price plus cost of acquisition, maintenance, and ongoing costs
Perceived value added of competitor’s product
Perceived Value Added of your Competitor’s Product
132 Customer Value Investment: Formula for Sustained Business Success
Using CVA for Business Decisions: Product and Technology “Effectively used, Customer Value Management is a way of looking at your entire business, including product and product design, technology, and other business functions from the point of view of the Customer, and taking competitive information into account. In effect, you start to look at your business through the eyes of the Customers. At the same time, you understand the relative value to competition is important to the success of your business or functional parts of your business. “Kao, a Japanese company, offers a more recent example of brand extension boldness. In late 2004, Kao introduced Healthya® Hot Green Tea with added value. Kao states that this tea was in response to requests from many consumers who ‘would like to drink a hot drink in the cold weather,’ Kao’s experience confirms that a product’s differentiation and perceived value are more important to consumers than any other factor. “Horlicks, in India, listened to Customers who told them they wanted something cold to drink. They re-positioned Horlicks as a cold drink, and increased sales. “Executives often believe that its takes years or decades to develop a brand. Not exactly true. Amazon.com, Google and eBay have been able to develop global brands within an incredibly short period of time simply because of the meaningful value of the products or services they offer Customers. “Thus it is important to use value in designing product offerings. Here are some more examples.”
Using CVM at Vodafone for technology, products, and systems “Consider how Vodafone, New Zealand, 54 discovered (with Ray Kordupleski’s help) that they did not have to play catch up with Telecom NZ in providing better connectivity in rural areas. Vodafone’s market share at that time was 19 percent. “Conventional studies would have you believe that calling quality and coverage meant better coverage, whether urban or rural. CVM studies 54
Ray Kordupleski, 2003. Mastering Customer Value Management. Pinnaflex. This work was done with Rodger Gallagher.
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showed Customers were relatively forgiving in rural areas, but were demanding about hassle-free, distortion-free calls, with no break-up or interruption in the city areas, and in the coverage area as promised. “Providing these features within the city was a relatively easy fix, and required minimal capital. What was required was fine tuning instead of massive capital expenditure to provide coverage in rural areas. “In addition, Vodafone started to focus on the Customer’s requirements, designed rates and billing based on what Customer’s needed. They used CVM for technology and product design and for focusing on the Customer. “Eventually, Vodafone was to take its market share to 70 percent in five years.” “Now I understand why you call Customer Value such a powerful tool,” says Doug, nodding his head. “Wow!”
Using CVM at Michelin for new products and technologies “Another example of using CVM for technology and product development is that of Michelin, a French company that was able to catapult to the number one position in the world, over American, German and Japanese companies. This story is told by Bradley Gale,55” continues Krish. “Tires came with bias cord for strength and features. Bias technology was dominated by the American, German and Japanese companies, where rayon, polyester or steel cord and fabric were laid, layer by layer, at a bias or diagonally, (and opposite in direction to the previous layer). “Michelin was focusing on radial tires and the market leaders in the tire industry were not in the least bothered about Michelin! “The Americans, such as Goodyear and Firestone, were focusing on increasing market share, reducing costs and on becoming quality leaders. They felt price was the most important feature. “Michelin figured the market was splitting into two, radials and bias. Radials were growing faster than the sluggish growth in bias tires. Michelin had close to 100% in radials, but their total market share was (according to the Americans, a measly) 3 percent. Not important enough to worry about. 55
Adapted from Bradley T. Gale, 1994. Managing Customer Value, New York: The Free Press, p. 178.
134 Customer Value Investment: Formula for Sustained Business Success
“Margins in bias tires were awful, but no one paid attention to or understood the margins in radials. “CVA studies showed that radials were rated poor in price versus bias tires, thereby getting a CVA score of 0.9.” Doug remarks, “It’s understandable why the Americans thought price was important and would throttle the radial push. But I suppose, they did not look at the quality from a Customer Value point of view, as Michelin did.” “Yes. The ratings, however, on safety, handling, and durability were 1.29, 1.5, and 1.5, respectively. Ride was rated poor at 0.86. “Using importance weight ratios, the relative quality score was 1.2 for radials over bias tires. “Michelin also discovered that for bias tires the price weight was 66 percent (and quality was 34 percent). “However, Michelin figured that radials would first enter the premium segment. To their surprise, the price weight for tires in the premium segment was 50 percent, because the product attributes were becoming more important. That meant overall value was (0.5*0.9, the CVA score for price) plus (0.5*1.2, the overall CVA score for quality). The overall value was therefore 1.05 versus bias tires!” "That’s higher value than bias tires,” interjects Doug. “You’re absolutely right. Michelin plotted fair value maps for bias and for radials, and found they were adding more value! “Eventually, Michelin introduced radials into the US to find that their designs were not compatible with American cars, and rode rough. With Ford, they were able to develop a compatible suspension, so that the ride was smooth. The relative rating on ride went from 0.86 to 1.2, also increasing the overall value of radials versus bias tires to 1.1. This is shown in this table (Table 8.3). “The rest is history. By ignoring Customer Value and the Voice of the Customer, American tire makers brought on their own downfall. A small Japanese company, Ishibashi (meaning stone bridge), bought Firestone and emulated Michelin in radials through their new company, Bridgestone! And Goodyear almost went bankrupt. Ignore the Customer at your own peril.” Doug nods his head. “I am not surprised that radials won out, when they were proven to give higher value.”
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Table 8.3 Product Decisions using CVM Profile: Radial vs Bias Tires Scores
Importance
Radial
Bias
Ratio
Weights (Pre-Radial)
7.2
8.0
0.9
Attributes
Price Relative Price Safety
Importance CVA
0.67
Weights (Post Radial)
0.50
1.11 9
7
Ride
7
8
Handling Durability Overall Quality
8 9
6 6
1.29 0.86 1.2 1.33 1.50
CVA
1.05 40 1.0
30
1.1
10 10 0.33
0.50
Source: Customer Value Foundation.
Passion for the Customer “I want to move forward. As people in a company become more Customerfocused, and when they realize how their Customer-focused efforts can lead to the Customer rewarding the company with repeat business, with loyalty, increased market share, and improved business results, they become passionate about the Customer. They are then truly Customerdriven. “Let’s look at Customer-driven processes.” Krish recalls visiting a GE Capital office in India, where they have installed a white board, where employees are encouraged to give ideas about how to deal with the Customer, what to do for him, and how to delight him—the starting point of Customer Passion, Customer experience and Responsiveness.
Processes, Service, Customer Value, and Customer Perception “Remember that many Customer-focused people feel that the three mantras to Customer satisfaction are Service, Service, and Service! “When we start to look at the transactional and service parameters, we also find what the correlations are with brand perception, as well as with product and price perception. Always remember that we’re dealing with Customer perceptions, which are often not exactly based on facts.
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“A great example is We Energies, where they’ve found that service parameters, such as doing the job right the first time, have a tremendous impact on price perception and the Customer’s general opinion of the company, as is illustrated (Box 8.1).”
Box 8.1 What a difference a job makes56 Survey Scores* show that if a new service situation is handled right the first time, Customer impressions about a number of aspects of service and the company overall are markedly higher than if the Customer calls a second time, or more. Did we handle the job right the first time? General opinion of WE Energies Interaction with the company representatives Satisfaction with the transaction Treating you as a valued Customer Keeping rates as low as possible Overall satisfaction with We Energies
Yes 7.9 9.2 9.1 9.0 6.0 7.9
No 6.0 7.0 5.6 6.7 4.2 5.9
*numbers based on a point scale.
“Elsewhere, companies such as GE, highly focused on process improvements using six-sigma procedures, found that even when they had six-sigma ‘black belts’, effectively zapping every process in sight, their market share was not improving. “Digging deeper, they found that they needed to add CVA studies to prioritize those processes that were most important to the Customer. They began to use CVA as the voice of the Customer and voice of the competitor, thus making the six-sigma process Customer–driven and more efficient. Finally, going beyond transactions and processes, one can look at co-creating Customer experience. “In fact, Jack Welch57 often comments on how six-sigma helped GE’s financial bottom line. Discussions on Customer satisfaction, Customer loyalty, and Customer retention are less common.”58 56
From Wisconsin Energies ”Energy Connections” issue no. 4, April 2005, in the article entitled ‘First Impressions’, with their permission. Robert Slater, 1998. Jack Welch and the GE Way. McGraw-Hill. 58 Steven H. Hoisington and SA Vaneswaran, 2005. Implementing Strategic Change, McGraw Hill. 57
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Co-creating the Customer Experience59 “As we’ve said before, what we wish to do is go beyond selling products and services. We want to give the Customer a good experience. But this experience is normally based on our perception of what the Customer actually wants. “Why not work with the Customer and co-create the experiences he is looking for. If, for example, your company is selling CDs, and the Customer wants to have a disc customized for him, and you’re not providing this, what is the Customer going to do? He’s going to leave you and go to a company like Napster.60 “What did iPod61 do? It catered to an experience requirement of the Customer by making it easy to record what he wanted. And, by aligning with a community of companies, it made it possible for Customers to download music legally for a nominal fee. And finally, by forming a community of Customers who could relate to one another and share experiences, iPod made it easier for the Customer to get what he wanted through the Internet and its community of Customers, without putting an overload on iPod. “iPod has fantastic technology, but they don’t harp on it. They talk about the ease of use, and indeed have developed cutting-edge technology for the iPod that can be used easily! Exactly what the Customer wanted!” Doug says he is really impressed by what Krish is revealing to him. “Further, an Indian fertilizer company I’m familiar with worked on CVA. They expanded their direct touching of farmers, and were able to create a community of Customers, suppliers and buyers for the farmers. “One such buyer was a company wishing to sell organic produce to Europe and America. They didn’t have the experience in agriculture nor contact with farmers (remember, in India, farmers have small land holdings, often less than a few acres!). The fertilizer company, through its community of Customers (farmers), was able to help the farmers improve their profitability by growing organic produce and growing valueadded produce and finding the farmers buyers for these products. 59
60 61
C.K. Prahalad and Venkat Ramaswamy, 2004. The Future of Competition: Co-creating Unique Value with Customers, Harvard Business School Press. Napster allowed free downloads of music. iPod was brought out by Apple Computers.
138 Customer Value Investment: Formula for Sustained Business Success
“So, the key is to understand what experiences a Customer wants, and then go beyond simply buying, selling and servicing! “I’m mentioning all this because we’ll need to decide how you’ll want to deal with transactions and processes in the strategy session.” Following this conversation, Doug and Krish put together an outline for the Customer Strategy session. Krish leaves Doug, telling him to finalize the outline.
A Customer Value Strategy Session62 Doug puts forth a proposal on building a Customer-in-Center© company strategy as follows.
Objectives The planned strategy session with Glacier Products’ key executives will identify and prioritize programs to achieve competitive advantage by creating Customer Value and building a Customerin-Center© Company that creates Customer franchise, co-creates Customer experience and builds a Customer Value infrastructure. Remembering that it costs ten times more to get a new Customer than to maintain a current one, creating Customer Value and building a Customer-in-Center© organization may be the best investment we can make. Identifying the most profitable Customers and their needs, and determining Customer Life Value and Customer Capital is a key to our future success. Delivering Customer Value combines Customer passion as well as an understanding of what Customers really value. All of these terms and concepts, including CVA and the imaginative use of technology will be discussed. In the strategy session, we’ll brainstorm on how to manage Glacier Products’ brand image, move Customer service beyond the passive process world of CRM, and build satisfying transactions into a true relationship that turns our Customers into evangelists for Glacier Products’ offerings and services. We’ll focus on eventually co-creating Customer Experiences through the Voice of the Customer. Simultaneously, we’ll prioritize the actions we need to take to accomplish this. 62
A number of companies including IBM have these tools.
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The strategy session may need to be preceded by market and Customer research (particularly CVA), including conversations with selected Glacier Products’ executives to determine their knowledge of existing Glacier Products’ value adds and Unique Selling Propositions (USPs). A workshop will be conducted by our Consultant, Krish Kumar, prior to building the strategy, to enable participants to understand the concept of CVM.
Expected End Results Glacier Products will be able to identify and define its Customers and develop retention, satisfaction and value strategies. Glacier Products will also develop strategies to:
Use Voice of Customer and Voice of Competitor to create competitive advantage. Develop and prioritize Customer Value opportunities, and establish an integrated Customer Value Management plan. Find ways of putting the Customer in control. Improve Customer Value and loyalty, and get Customers to sell for us. Focus on existing profitable Customers, create new profitable Customers, and leverage Customer development. Gain strategic advantage by using new techniques that enable us to know earlier and respond better to rapid changes in what Customers really want and value. Examine and improve upon price, services, transactions and processes using CVA. Improve employee development and employee value. Provide superior shareholder value by creating superior Customer Value. Measure Customer Assets and Customer Capital. Build a Customer-in-Center© Company. Create a Customer Value infrastructure.
Other Issues to Focus on
What is our Customer Value Vision and Mission? Is the Customer in center?
140 Customer Value Investment: Formula for Sustained Business Success
Is it a Customer Value- and shareholder value-driven organization? Is there a Chief Customer Officer? Do we need one? Why or why not? Is there a Guaranteed Fair Treatment Policy, a Customers’ Bill of Rights? Is there an Ombudsman? Is it easy for the Customer to contact and communicate with us? Is the Customer in Control?
Conducting Customer/Competitive Analysis using CVA
SWOT (strengths, weaknesses, opportunities, and threats) and Critical Success Factors. Business objectives. Definition of our Customers and how to segment them. Customer Value parameters.
Making Total Customer Experience and Customer Responsiveness a Glacier Products Value Proposition
Identify what touches, transactions and processes are important to the Customer and what impact they have on one another and on price perception. Prioritize touches, processes and service parameters using Customer feedback or CVA data. Manage all Customer touch points in a logical and systematic way. Use Customer-Circles©, and building Customer Conduits©. Examine third party and outsourced touch points. Building a list of Customer DNA Factors (Do Not Annoy), and how to implement them. Eliminate negative or erosion touches. Break the total experience down into manageable components. Co-create Customer experience with the Customer. Build a community of Customers and suppliers.
Identifying and Measuring Customer Value Added
Where and how should it be measured, and what Customer segments?
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Why it is the voice of Customer and voice of competitor? What is Customer Value and what is CVA? Quantification and identification of Customer Value drivers. Competitive profiles and the importance weights for various Customer important parameters. What are the important drivers and where do we need to improve? How will we use the results and deliver better Customer Value, improve Customer experience, and improve competitive advantage? Where are we on the value map versus competition and where do we want to be? Correlation between service, product, price and processes with each other and price perception. Prioritization and action steps. Process improvements. Are processes Customer driven? Communication of Customer Value. Delivering Customer Value efficiently.
Ensuring CVM Continuity
Measure Customer Assets and report them on the balance sheet. Ensure CVA scores are presented along with the quarterly financial results.
Using Customer-in-Center© to Augment Glacier Products’ Capabilities and Infrastructure
Build capabilities, processes and infrastructure required to deliver high-value ‘experiences’ and put the Customer in center. Identify the mechanisms needed to co-create Customer experience and build a community of Customers (including distributors and retailers) as well as a community of suppliers.
Delivering Customer Value
Build a Customer Conduit ©, the macro task: Building a Customer Value organization top down.
142 Customer Value Investment: Formula for Sustained Business Success
Customer-Circles©, the micro step: Building Customer Value organization bottom–up. Share our experiences within the company and at Grocery World with Customer-Circles©! Respond profitably to dynamically changing Customer preferences. Co-create Customer experience. Design the total Customer experience. Improve listening to the Customer and the market place and get better Customer feedback and data. Enable Glacier Products’ employees to deliver better value and experience.
A major result of the strategy session will be the understanding that when Glacier Products’ Customers, suppliers, and distributors are viewed in terms of Customer Value rather than product attributes, control increasingly shifts from the supplier to the Customer. We need to realize why cooperative strategies with Customers will become as important as competitive strategies against others. Finally, we need to build strategies to take advantage of these factors. Doug starts to put a handout together to explain the tools of CVM for the participants. He develops an outline, which he plans to distribute prior to the first strategy session.
The Tools of Customer Value Management While CVA will measure “Where are we?” at any point of time, the various tools of CVM will guide us to “ Where do we want to be?” and the “How do we get there?”
Where are we? Having identified CVA as a means of measuring Customer data that directly co-relates with financial data, we need to derive the attributes on which we want to compare ourselves with the competition. This is done using a variety of tools, which will be explained in detail during the strategy session.
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Qualitative Tools—What attributes are important to Customers?
The Customer Waterfall of Needs to derive Transactional attributes and Quality and Price Attribute Trees to derive Product/Price attributes
Quantitative Tools—Where do we stand versus the competition? After deriving the attributes for comparison, we analyze the measurements using:
Competitive Profiles Slippery Slopes
Where do we want to be? We define “where we want to be” using:
Competitive Profiles Slippery Slopes Value Map Prioritization and focus areas to build competitive advantage
How do we get there? And finally we help align the organization using:
Customer-Circles© Customer Conduit© Customer-in-Center philosophy Customer Champions Chief Customer Officer Reports of CVA and Customer Assets data
Pam Looks at Strategy Doug is telling Pam about the strategy session and the Customer as a focus. Pam listens carefully and then gives her viewpoint. “You know, today’s Customer is more sophisticated, knowledgeable, and demanding. He is used to better quality as well as improved service and information. “He has access to more information than ever before. He expects more. He is sensitive and proud. And why not? After all, his purchases feed people like you. He has an ego, and this has to be massaged, sometimes by just a friendly greeting.
144 Customer Value Investment: Formula for Sustained Business Success
“The Customer of today is also a perfectionist. He wants value. And you must understand his needs, and heed his criticism. He is also fickle. He has so many choices and he definitely has other options and competing offers.” She preens, “Look at me and the offers I’m getting from others.” Doug holds her tight and says he won’t let her go! Pam cuddles and says, “Don’t forget to explain the methodology or tools of Customer Value to the participants.” Doug nuzzles her, “I was already thinking of that. I’ve put together a handout.”
Key Points Value Maps
Position your company relative to the Customers’ rating your company and the competitors on price and quality. Help you make sound strategic decisions.
Using CVA for Pricing
CVA techniques can be used for pricing of products and services and for deciding on the various features to put into products. CVA pricing looks at costs from a Customer’s viewpoint.
Using CVA for Business Decisions: Product, Service and Technology
CVA is used for business decision on products, services, and technology offerings. CVA helps make business decisions using the Customer’s input and point of view.
Processes, Services, Customer Value, and Customer Perception
As the quality of processes, services, and products improve, Customer Value increases, and perception on price improves. The price perception improvement for improved service can be studied, putting a monetary value on service.
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Customer Strategy
Helps align the organization. Makes the organization Customer-driven and CustomerCentric.
The Tools of Customer Value Management
Where are we? Qualitative Tools—What attributes are important to Customers? The Customer Waterfall of Needs to derive Transactional attributes and Quality and Price Attribute Trees to derive Product/ Price attributes Quantitative Tools—Where do we stand versus competition? Competitive Profiles Slippery Slopes Where do we want to be? Value Map Prioritization and focus areas to build competitive advantage, How do we get there? © Customer-Circles © Customer Conduit © Customer-in-Center philosophy Have Customer Champions Reporting CVA and Customer Asset data
146 Customer Value Investment: Formula for Sustained Business Success
CHAPTER
9
The Reckoning Nearly a year has passed since the day of Doug’s initial market plan presentation to Earl Green. Doug remembers this plan was focused solely on the acquisition of new Customers. Earl had asked him to modify the plan and had sent him to the Customer Guru. Quite a guy, the Customer Guru! He had changed Doug’s thinking towards becoming more Customer-focused. The Customer-Circles© had borne fruit. Both the employees of the Newark Grocery World who were in the retail CustomerCircle© and Glacier’s people in the corporate Customer-Circle© had become really Customer-focused. They had, Doug felt, started to think like Customers. Funny, he thought, how much changes with such thinking. And mostly, it is the resistance to letting the Customer lead you (you tend to lead the Customer, in the course of normal business) and to putting him in control that prevents companies from becoming Customer-focused. And yet, most of what you have to do is common sense and requires no Customer Value Investment. Yes, certain programs like the Quick Pick-up counters required physical adjustments in the store. These had worked great for the Customer, for Glacier, and he was sure, for Grocery World as well. He remembered Bob Ostrofsky, the CEO, not considering the Customer as his number one priority. He had too many other focuses! And how Krish, Earl, and Doug had proved to him, through the Grocery World experience, the wonders that Customer focus can do.
The Reckoning 147
And how thrilled Doug was when Bob agreed to have a Customer strategy session involving Glacier senior managers. Earl and he had quite a public relations challenge selling the concept and Customer Value management and priming the other decision makers on what programs had been initiated in the Grocery World store, and the results. Krish Kumar had accomplished a great deal in his opening remarks and particularly in the workshop that proceeded the Customer strategy session. He had shown data from various other industries, such as auto, chicken business, insurance, white goods, etc. where CVM had been used successfully, and had improved business parameters such as market share, ROI, service, etc. The Customer strategy session had resulted in a general consensus that Glacier should be Customer-led, and should rely on Customers’ rating of Glacier and its competitors in the future. In addition, Glacier should focus on its touch points (its frontline people) who are in contact with the Customer. They should be initiated through Customer-Circles©, and through data sharing. Some would be exposed to the pilot program at the Grocery World store. This would lead to motivation of the touch points, and the initiation of a self-driven process for them to help Glacier embrace the Customer. Customer Value Added (CVA) studies were to be initiated. A roll-out schedule for other stores was to be worked out with Grocery World. Doug recalls that, while he was happy with the Customer strategy session, Earl had cautioned him about the minor skepticism he could sense among some of the participants. Some (such as the CFO, Don Graves) had a “show me” attitude, even though he had agreed with the general principles that had been expounded in the Customer strategy session. Krish had told Doug that he must get the CVA studies initiated as soon as possible. He also mentioned that he sensed that the feeling of the CFO was based on four factors: 1. This program at Grocery World may be a short-term fad. 2. Would the CVA data be really representative and repeatable? 3. Competitors would catch up with them, after all, what Glacier was doing wasn’t ‘rocket science.’ 4. Cost analysis was required for further roll-out.
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Krish had previously shared Ray Kordupleski’s case study on Vodafone,63 New Zealand, with Doug. Here, too, the CFO had been skeptical. He had resisted using CVA for determining bonuses, because it was a ‘soft’ score, unlike ‘hard’ financial data. But he had ultimately been converted and ended up stating that the CVA score was more rigid and correct than any of their financial scores! And Graham Maher, who was then the chief operating officer of Vodafone NZ and later was to become Managing Director of Vodafone, Australia, said the CVM score was a leading indicator of their market share. They were able to predict market share, a quarter out, using CVM data to within 1 percent accuracy! And it predicted churn (loss of Customers) accurately. Vodafone had increased its market share from 19 percent in 1997, to 30 percent in 1998, 42 percent in 1999, 60 percent in 2000, and over 70 percent in 2001. ’Impressive results for a company that has incorporated the concept of delivering Customer Value into how it does business,’ commented Ray Kordupleski in his book, Mastering Customer Value Management. Next, Krish predicted that product development and other departments at Glacier would become very Customer-focused, as was the case with Vodafone. Moreover, CVM would become a main driver at Glacier. New products would be truly Customer-focused. The supply chain and logistics people would drive their offerings to the Customer (retailer and consumer) per his real needs. Wal-Mart had proved they could gain real competitive advantage from supply chain management and a Customer focus. Production would be driven to provide the right product at the right time, and give the Customer a new definition of freshness for ready-to-eat-foods. Krish, in effect, was saying that Glacier’s competitive advantage would continue to increase, even when others started to play catch up. And yes, much is not “rocket science”, he agreed. It would be easier for competitors to see and follow physical changes. But it would be much more difficult for them to understand and 63
Discussed in Chapter 8. From Ray Kordupleski, 2003. Mastering Customer Value Management. Pinnaflex.
The Reckoning 149
incorporate the attitudinal changes that were required. Much of this was as much a science as an art. And remember, they need their officers and executives to be Customer-led, which wouldn’t be that easy, particularly if they thought they were already doing “everything” for the Customer, or if they had many other priorities. So, Krish said that the trick is to stay ahead and increase the lead. Krish’s advice was to keep your head down and keep moving towards closeness to the Customer. “I will show you how you can understand and anticipate your competition’s strategy through the CVA studies. “Remember, you’ve accomplished all this in a store where you represent a small proportion of a variety of products, and you normally have no contact with the end consumer. Recall your recent introduction of partially cooked, ready-to-eat foods that required only a few minutes of final cooking, stir frying, doctoring with spices, adding cheese, etc. The Customer wanted such a product to serve to family and guests, to make the food appear like and taste more like home-cooked meals. “Do you recall what Stew Leonard’s did to create Customer experience? Quite different thinking to conventional grocery store thinking, wasn’t it? “Stew Leonard’s is the famous grocery store in Connecticut where they have a milk filling line Customers can view, and fresh ice-cream made on the premises, among other innovations. This is what CNN.com Travel Pursuits has to say: Stew Leonard’s is the kind of grocery store where kids want to go, and if you aren’t a kid, it’s likely to make you one again. From its humble beginnings as a small dairy store founded in 1969, Stew Leonard’s has grown to become not only the World’s Largest Dairy Store, but one of the most renowned grocery stores, with annual sales of nearly $300 million. More than 300,000 shoppers visit Stew Leonard’s each week for the farm fresh foods combined in a country fair atmosphere, complete with costumed characters, entertainment, free samples throughout the store and unsurpassed Customer service. “Notice the focus on Customers, and free samples? They have special barbeque sauces, fresh tortillas, etc., all based on what the Customer desires. No wonder it’s the world’s largest grocery store!” adds Krish.
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“In stores like Tesco,64 online shopping has been introduced. Their website shows a list of the Customer’s frequently purchased items to aid selection. A computerized trolley picks up the order for the Customer. Grocery World will eventually move to this model! “Draeger’s supermarket near Stanford University 65 studied Customers’ eating habits and found that the high-income Customers wanted to buy gourmet food. Draeger’s focused on ‘the Pleasures of the Table’ and even arranged for culinary lessons (in their Culinary Center), all designed to give the Customer a great experience. In turn, it became the Customer’s favorite supermarket. “Kroger is trying to increase value to Customers, and Albertsons has made Customer focus one of the five important drivers of business. “And these leading stores are looking at Radio Frequency Identification (RFID), which will enable stores to identify and determine the preferences of Customers coming into the store, thereby facilitating the store to customize offerings to these Customers. This will also enable stores to add value to Customers who are shopping and whose preferences are known to the store. “These are all examples of Customer-led thinking. Not easy to catch up with!” Doug tells Krish that he understands this. In addition, he has been working on costs. The cost of the program and its roll-out had been worked out. They required US$ 5000 per store (if they amortized initial costs over all Ohio stores [not just Grocery World stores]), and money for a part-time researcher/Glacier person (a student or retired person) for six months. Customer-Circle© costs consisted of costs of meetings, and were considered an ongoing cost of doing business. Glacier’s market share had gone up in the ready-to-eat ethnic foods by 25 percent and all products by 21 percent.
CVA Design Doug remembers initiating the CVA study a few months earlier. The results were due soon. 64 65
Tesco is the major UK-headquartered grocery retail chain. At Palo Alto, California.
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Krish, Earl, and Doug had talked about what to do. They had a CVA design session with various marketing and touch point people. They had first decided the segment to study. They had chosen ready-to-eat foods. The first step was to look at what value companies, such as Glacier, were adding to their retailers. This would exclude data from the pilot Grocery World store in Newark, Ohio. Glacier’s data from the study would then be compared to the data from the target store in Newark, where the pilot program had been conducted. They would also study Customers in the ready-to-eat segment and what they had to say about the products and the retailer whom they bought from. Thus the CVA design was based on the following: 1. Geography: Ohio. 2. Stores: Mid size like the target Newark store, in towns with more than 20,000 inhabitants. 3. Other retailers to be studied: Tasty Foods, General Farms, and Bugle Processors. 4. Customers: People buying ready-to-eat foods from food companies such as Glacier Products, Tasty Foods, General Farms, and Bugle Processors will be studied. Customers also had to be the ones preparing (heating, cooking) these foods for consumption by themselves or for their families. 5. Regularity: Customers must be using the retail outlet on a regular basis, and buying ready to eat foods from one of the above companies. 6. Minimum purchase: There should be a minimum purchase of five ready-to-eat packages per month. 7. Minimum overall purchase: There should be a minimum overall purchase of over US$ 300 from the retail outlet, per month, by the interviewee. These will give us results regarding the perception of the Customers on: 1. Their preferred retail store chain, and the value it provides. 2. Why Customers prefer to buy, or not buy, from each of these stores, and what is important in their store selection process.
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3. The value each ready-to-eat supplier provides to its Customers, including the quality of ready-to-eat food products they regularly buy, the food company, and the cost of buying the ready-to-eat foods (all with sub-attributes). 4. The perception of the Newark Grocery World’s Customers buying ready-to-eat foods of various suppliers including Glacier, and the Newark store, versus the perceptions of the Customers shopping elsewhere of the ready-to-eat food companies and on the stores they frequent. 5. Why Customers buy one brand or another, and what is important in the buying decision. A separate study will be conducted on the value ready-to-eat food companies are providing to their dealers and another study on the value food companies and dealers are adding to their retailers. 1. The perception of retailers of the value, products, services, brand, and cost of doing business (with sub-attributes) with Glacier Products and their competitors. 2. The perception of the Newark Grocery World store of Glacier Products, versus the general perception of the other retail stores rating Glacier to see what value the new initiatives are adding to the retailer. The end result will be: 1. CVA of Glacier versus competition, as seen by the retail stores. 2. CVA of Glacier versus competition, as perceived by Customers. 3. The relative importance of various parameters. 4. The change in relative importance and the scores from the target store (Newark) versus the average ratings from all the other stores and Customers.
CVA Results Doug is expecting the results of the Customers survey. The retailers’ and dealers’ survey results will not be discussed in this book. However, the relationship and value flow from the company to the dealer to the retailer to the Customer will be displayed.
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Doug remembers that the CVA scores are comparative and are the ratio of the scores you get from your Customers divided by the score your competitors get from their Customers. If your score is greater than one, then you are being rated better than your competition. If your score is less than one, then you are being rated lower than your competitors. And if your score is one, you are at par with your competitors. He picks up the printout of the Customers Waterfall of Needs (Figure 9.1). This had been developed by the Glacier marketing people and touch points added after the workshop with Krish, and with his assistance. Based on this information, an attribute tree was formulated (Figure 9.2). Just then, Krish walks in with the CVA results (Table 9.1).66 First they examine the attribute tree. Marked on it are the following: 1. Importance weights for the attributes (Krish reminds Doug that these are determined through statistical analysis. They are not the stated weights a Customer might give). 2. CVA of Glacier Products versus competition. This includes the Customers perceptional rating of value, quality (quality of retailer, quality of ready-to-eat food products, quality of Glacier Products as a company), and price. Quality of retailer is broken further into sub-attributes. 3. Importance rating of various factors for the store where Glacier’s pilot Customer project was undertaken. 4. The CVA score for Glacier versus competition for the target Glacier World store in Newark.
66
Note, this data is taken from real-life studies, modified for this example.
Figure 9.1 Customer Waterfall of Needs
154 Customer Value Investment: Formula for Sustained Business Success
Source: Customer Value Foundation. Notes: Figures in bold are as seen afterb one year in Grocery World target store in Newark, Ohio. The rest are as seen after one year in Ohio stores.
Figure 9.2 Attribute Tree
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Table 9.1 Profile: Grocery World vs Competitors
156 Customer Value Investment: Formula for Sustained Business Success
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Attribute Trees and CVA Scores (CVA Scorecard) Krish is grinning. “The CVA scores prove that the Customers rate us higher where we touch them better. The absolute scores are shown in the attached attribute trees, and the CVA is calculated there.
Table 9.2 Value Scorecard Key Purchase Criteria/Value
Importance Weight %
Glacier
Competition
Ratio
7.58 7.49 7.68
Glacier vs Competitors 1.01 1.01 1.00
Customer Value Profile All Ohio Value Quality Price
100 25 75
7.66 7.56 7.70
Glacier Newark vs Glacier Ohio Newark Store Value Quality Price
100 75 25
8.27 8.16 8.31
Did not Measure in Newark
Customer Quality Profile All Ohio Quality Retailer Product Company
25 35 50 15
7.62 7.58 7.84
7.70 7.55 7.64
1.08 1.08 1.08 Glacier vs Competitors 1.01 0.99 1.00 1.02
Glacier Newark vs Glacier Ohio Newark Store Quality Retailer Product Company
75 35 50 15
8.25 8.15 8.64
Did not Measure in Newark
1.08 1.07 1.10
158 Customer Value Investment: Formula for Sustained Business Success
Key Purchase Criteria/Value
Importance Weight %
Glacier
Customer Price Profile All Ohio Price 75 Price of Product Discounts and Promotions Other Schemes Convenience: Time taken to shop
50 20
7.62 7.58
10 20
7.84 7.56
Ratio
Glacier vs Competitors 1.01 7.70 1.00 7.55 1.02 7.64
1.02 0.98 Glacier Newark vs Glacier Ohio
Newark Store Price 25 Price of Product 40 Discounts and 20 Promotions Other Schemes 20 Convenience: Time 20 taken to shop
Competition
8.28 8.17 8.64 8.72
Did not Measure in Newark
1.08 1.07 1.10 1.15
“Glacier’s ratings versus the ratings of the competition in Ohio are pretty average. In most cases, the CVA scores are between 0.98 and 1.02. The company, the retailer, and the products are not better or worse than the competition. Kind of a ‘ho-hum’ brand! “And the Customers are saying that there is not much to choose from in quality of retailer, ready-to-eat food products, and the company. So, price becomes more important. The importance weight on price is 75 percent and quality is 25 percent (Table 9.3). (The higher the weightage on price, the more the product is looked upon as a commodity.) Location of store is important. Also remember: “If all you can sell on is price, it means you have no other features to sell on “Or that means the purchaser sees nothing other than price to differentiate your product “But now look at the Glacier World Newark store where we initiated our CVM program. We are comparing the scores that Glacier’s Customers gave Glacier at this store versus what they gave Glacier throughout Ohio.
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(That is the value created in the Newark store divided by the value created generally by Glacier in all the stores Ohio.) We purposely did not measure competitions’ Customers at Newark, because we did not want to bias the data. We also did not include Glacier’s Newark Customers data in the all Ohio data to avoid any bias. “The scores on values and other attributes have gone up from a range of 0.98 to 1.02 to a range of 1.03 to 1.15. “Remember, a score of one means you are at par with competition. That’s what Ohio is telling Glacier. But then look at the data from the Newark store. “The overall value has gone up to 1.08 from 1.0. That’s a pretty steep increase. This means that Glacier’s Customers shopping in the Newark store are getting much higher value from Glacier versus Customers shopping elsewhere. This is a result of the programs Glacier initiated at the Newark store. It is a result of Customer focus, and of doing special things for Customers.” Doug agrees. “But, Krish, look at how the importance weights for quality and price have flip-flopped in the Newark store. Price has only 25 percent importance (compared to 75 percent in the average Ohio store), and quality has moved up to 75 percent. Doesn’t this mean that we are differentiating ourselves on quality? Quality is no longer ho-hum. The consumer has a choice! And quality perception has gone up from 1.01 to 1.08. “Doesn’t this mean we have moved our product from being a commodity on where price was important to being a noncommodity. We’ve escaped the commodity trap!” “And wait, price perception has gone up from 1 to 1.08. That means the Customer in Newark finds our price to be better than the Customer in the rest of Ohio. That’s an amazing increase given we haven’t changed our price. Why is this?” “That’s easy to explain. Look at the convenience factor in the price tree. A kind of cost to the Customer is the time needed to shop, to reach the store, to park, to browse, find a product, pay for the purchase, to load the car, and to return home. “Remember, you installed the Quick Pick-up lockers to enable people to pick up Glacier products along with up to eight or nine other items from the locker. A significant saving in time and reduction in the aggravation of waiting. Imagine you have to pick up your daughter from
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school, and can estimate your shopping time and when you can reach the school. A great convenience! “Customers have given you a score of 1.15 on convenience versus 0.98 you had in the average Ohio store. They really value this convenience and time. “Second, your rating on other schemes has gone up. Your attempt to get people involved with Glacier through the computer, sharing recipes, giving them spices, samples, and food that requires a little bit of doctoring before serving, all have paid off. Your rating there has gone up from 1.01 to 1.07. And look at the importance weight. It has moved up to 20 percent from 10 percent, saying this is a differentiator. “The price score has moved up from 1.0 to 1.04, even though your price has not really changed. The perception is your price is better! And there isn’t much change in the perception on discounts, even though you’ve reduced the discounts and their frequency.” Doug asks, “What about the convenience of the store in the retailer section? I remember we had this in the retail section, because it had to do with convenience of location, of store hours, of shopping etc. “That rating has gone up as well. I guess because Customers are finding store people to be more helpful and friendly. That’s amazing.” “And look at the rating of the retailer’s people and the increase in importance of this attribute. The importance weight was 5 percent, and the rating was 0.99. At Newark, the importance of the people jumped to 20 percent, and the score to 1.1. These are shown in the attribute tree. “Wait till you share this with the retailer’s people. They will be overjoyed to see the impact of their hard work. This will motivate them even further. “In fact, Grocery World will be thrilled with the result. They’d love to roll-out this program with you to other stores. “Just a point to remember, clerks in a store are important, but sometimes when there is little difference between competitors, that attribute (people, in this case) stops becoming a differentiator. “But should the people start to become discourteous, or conversely, become very Customer-focused, as in the Newark store, then the importance weight can go up. “Also, there is a difference between stated and derived importance weights. In our stores, if you were to ask Customers about store people, they would say very important. However, our data shows that intent to
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purchase in one store or the other is not dependent on the quality of the people. Of course, in the Newark store, people have become important!” “I agree with you!” Doug is excited. “Next are the Competitive Profiles,” continues Krish. “The first page shows the rating of the Customers on various competitors in the ready to eat products. You’ll notice that we’re comparing Glacier Products against the entire industry (which includes Glacier), and against the competitors as a whole. Here, Glacier is compared with all the other competitors. Each of the other competitors is also charted against their competitors. “We’ve also shown Glacier Products versus each individual competitor. Here we can see Glacier is about the same as Tasty on value, and much higher than General Farms. Unfortunately we rate poorly against Bugle. They have a great brand, wonderful reliability and consistency, and they seem to use the best homegrown produce for their ready-to-eat foods. Parents of today’s Customers were Customers of Bugle! We could, had we wanted to, seen data on, for example, Bugle versus Tasty too! “We could look at why this is so, and what Tasty would have to do to improve. We can then design pre-emptive strategies to prevent them from going ahead of us. You can look at the rest of the profiles later. “Which competitor would you target to fight for Customers? Your strong competitors or the weak ones?” “The weak one, of course, although ego would want us to go up against the leader. We’d go after General Farms’ Customers.”
Slippery Slope “You’re right, Doug. The weaker competitor is easier to knock out. This is shown on the slippery slope or the loyalty predictor.” He takes out a chart showing the slippery slope (Figure 9.3). “You notice,” Krish explains, “that Glacier and Tasty are fairly close, and Bugle has a higher loyalty among its users. General Farms is the lowest on the loyalty slope, as expected, and the one to target for competitive action.” Doug is excited, “Look at the loyalty rate for our products at Newark. It has almost doubled. Same product, better touching, and improved Customer experience!” “Isn’t it easy to see? This is what will get Glacier’s executives turned on,” says Krish. He then shows the Value Maps (Figure 9.4).
162 Customer Value Investment: Formula for Sustained Business Success
Figure 9.3 Grocery Stores Slippery Slope
Figure 9.4 Value Map for Ready-to-eat Foods, various competitors
Note:
Position on Value Map Glacier may want to achieve in next 12 months WTR: Willingness to Recommend.
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“The value map is plotted, and you can see the increase of value for Glacier Products in the Newark store. And the willingness to recommend (WTR) has gone up from 5 percent to 24 percent. This shows how dramatic an increase you have made in the target store. “Thus the value Glacier added was fair, but at Newark it is excellent. The value map also shows where Glacier would like to be in twelve months time! “Bugle gives very good value to its Customers, but so does Glacier in Newark. Remember, we are dealing with perceptions of the Customers.”
Relationship Flow Krish takes out another chart. He tells Doug, “Using the data, we also get extremely important information on the relationship flow from the company to the dealer to the retailer to the Customer. Company
Dealer
Retailer
Customer
“These are shown in two charts, Relationship Flow I (Figure 9.5a) and Relationship Flow II (Figure 9.5b).” Doug examines the charts. He is truly impressed, “In all attributes, Glacier’s Newark store, Customers rate us higher than our Customers elsewhere in Ohio. We’ve done a good job in touching the Customer.” “That’s true,” comments the Customer Guru, stroking his beard. “However, what is of note is that in the first chart, we are comparing the rating of Glacier made by its dealers, its retailers, and its Customers. The dealers rate Glacier extremely well (1.10), and the retailers rate Glacier highly (but slightly less than the dealers at 1.07).” “But what happened to the Customers? They are rating us as an average company at 1.00,” says Doug. “True. What does it tell us? Glacier’s best touching is with the dealers/ distributors. Glacier works closely with them. Glacier has some touching at the retail level, with some visits by your personnel. But you hardly touch the Customers. They know of you from your products and your ads and promotions. Apart from that you are anonymous to them, and so they rate you lower than the people you are touching well. “The quality of service that reaches the end Customer is dependent on the ‘silent service’, the service each part of the chain receives from each other!
Note:
* All data versus competition.
Source: Customer Value Foundation.
Figure 9.5a Relationship Flow I
164 Customer Value Investment: Formula for Sustained Business Success
Source: Customer Value Fonudation.
Figure 9.5b Relationship Flow II
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166 Customer Value Investment: Formula for Sustained Business Success
“This shows that there is a deterioration of touching and perception as you go down the chain. That is why touching of and focus on Customers is important. “The dealers or distributors focus on billing and logistics, and some selling to the retailers. They don’t really care about the Customer. I know they care, but only from the point of how to make them buy. “The retailers are too busy with their hundreds of products to care about Glacier’s ready-to-eat-foods as an important item. They are generally trying to touch the Customer, but the focus is on efficiency, processes, preventing outages and spoilage, cost cutting, etc, and not on really touching the Customer except at the check-out counters. “Also, the way companies audit their chain partners and rate them is not based on Customer sensitivity: Jon Anton, director of research at Purdue University’s Center for Customer-Driven Quality, in his latest research, The Next Big Thing in Call Centers,67 claims that most companies use a ‘traditional’ model of evaluating agents, which randomly audits a set number of agents per month. This lacks real-time Customer insight. Instead, he calls for a transition to an ‘emerging’ model approach. The emerging model of agent monitoring involves a combination of direct and immediate feedback from Customers, real-time reporting, a comprehensive review of dissatisfied calls, and skills-based routing. ‘The true emerging model is to make caller satisfaction your number one metric for performance in the contact center,’ he says. ‘All of the existing key performance indicators, such as average handle time, are truly secondary and not the root cause of low Customer satisfaction.’ “This kind of audit modeling can be extended to the chain partners. “Let’s get back to our project. Look what happened at the Grocery World Newark store. You are touching the Customers more directly, and well. And they rate you very highly (1.08). “And this is true for all of Glacier’s products, ready-to-eat foods, and brand image. The deterioration down the chain is more pronounced in the minds of the Customers, but reversed at the Newark store. “The second relationship flow chart focuses on the dealer/distributor rating Glacier, the retailer rating the dealer, and Glacier’s Customers 67
www.ucn.net/portals/0/ArticlesWhitepapers/WP_NextBigThinkInCallCenters.pdf,
August 2005.
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rating the store they buy from, and profit (for dealers and retailer) and price for Customers. “Again, the Customer’s ratings are the lowest, except at Newark where they are high. The perception of price by Glacier’s Newark Customers is higher than at the other Ohio store (1.08 versus 1.00). That means the Newark Customers feel the price is more worthwhile than the Customers think elsewhere in Ohio.” ”This is really amazing. The ability to see what we have done, by measurement, makes everything fall into place.” “That’s true. Do take time to understand the data, and then we can present it to the team at Glacier and the Newark store people. “You will easily be able to prioritize action steps, since you know the scores, the relative scores versus competitors (CVA) and the importance weights. You can see what is important to the Customer, where you are doing well and where you are doing badly. “Happy reading, my friend. We have come a long way together on our journey to understand the Customer!”
Key Points Customer Value Management
Customer Value Management is a strategy to attract and retain Customers by building on the value they assign to goods and services. CVA score are comparative and are the ratio of the scores you get from your Customers divided by the score your competitors get from their Customers.
CVA Design68
68
The design of the CVA study starts with segmentation: by product, by geography, by Customer segment, etc. Your company’s targeted competitors are needed along with their market shares, which are used to normalize the data. A Waterfall of Needs, and attribute trees have to be developed. A questionnaire is developed on this basis and then vetted by the Customer through in-depth interviews or focus groups.
We recommend reading Ray Kordupleski’s book, Mastering Customer Value Management, 2003, Pinnaflex, for an in-depth understanding of survey design.
168 Customer Value Investment: Formula for Sustained Business Success
The sample size has to be selected: These are based on significance levels that one is aiming for and the confidence levels. Typically sample sizes of CVA are one-thirds to onefourths of sample sizes required for normal surveys where the frequencies of responses are compared. In CVA scores, we are comparing averages, which allow us to reduce sample sizes. Questions are normally based on a ten-point scale anchored at either end of the scale. Careful analysis of the data will yield the right results.
CVA Results
The results will yield the following: Individual scores for each of the attributes. Importance weight for each attribute. Competitive Profiles: The relative score of your company versus: The industry The competition (Competition is the industry minus yourself) Individual competitors You could get similar scores for your competitors. You can plot slippery slopes and Value Maps.
CVA Follow-up
Prioritization of action steps. “What if” analysis and an analysis of where we want to be What action steps to take and how. Who is responsible for the action and the time frame.
CVA and Customer Touching
Wherever you touch the Customer, you improve your scores. Scores improve not only for quality but also for price, as the same product appears cheaper to a Customer when he is being touched. Customer-focused actions can be used to change the importance (or weights) of various attributes.
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CHAPTER
10
The Implementing Six months after receiving the Customer Value Added (CVA) results and eighteen months after meeting the Customer Guru, Doug is quite pleased that Glacier has implemented many of the tools provided by Krish, including how to determine and measure what creates value for Customers. He’s especially gratified that this has led to Customer Value Management (CVM) being an important part of Glacier’s overall corporate strategy. He notes that during this period, Customer-Circles© have been initiated at some other Grocery World stores in Ohio. Krish has told him they are moving quite rapidly even though the retailer’s Customer-Circles © require the approval and involvement of Glacier’s and Grocery World’s executives. The product development and the logistics staff has been using CVM techniques to measure and understand the needs of the Customer, and then determine what Customers value. The product development team has been able to gauge the advantages that Glacier’s serious competitor, Bugle, has. Both brand and product consistency seem to be important, but taste and freshness also rank high. Glacier’s improved products, developed using Customer feedback, and understanding what Customers like about Bugle have caused Glacier’s product quality scores to increase. The study showed that Glacier’s other competitor, General Farms, has disadvantages such as bland presentation, looks, and a lack of freshness. Glacier also found that Customers want to customize the food, either themselves or through a wider choice of products. But
170 Customer Value Investment: Formula for Sustained Business Success
customizing the foods themselves in their own kitchens seems to add more value to them. Glacier is attempting to improve their own products and packaging focused on these traits, and the relative importance (or weights) of these attributes. In other words, Glacier is not just trying to improve the product across the board, but specifically where the Customer is telling them to through the CVA analysis. Krish has continued to work with Glacier, showing the relative value of each of their potential strategic choices, using the CVA pricing, product, and technology techniques discussed in Chapter 8 of this book. Similarly, the logistics team has been trying to build a competitive advantage by utilizing smaller delivery lots, leading to less time on the shelf. Their inventory has started to decrease, with consequent cost savings. With better management information systems, they are able to prevent stock outages at stores. The retail stores are pleased with the better delivery system and having the products on the shelf for a shorter time. Doug and Linda Hardgren, Glacier’s Product Manager, have been discussing how to communicate the fact that 98 percent of Glacier’s ready-to-eat offerings are sold within three weeks of being manufactured, thus giving the Customer a fresher taste. They’ve also discussed potential competitive moves (based on data from the CVA scores, and information from the grapevine) and what Glacier should do to pre-empt the effectiveness of such moves by competitors. Doug remembers using communication to the Customer as a tool, especially where you are better than the competition. He remembers that communication with the employees and members of the Customer-Circles© is equally important. He recalls how enthused the Newark Grocery World Customer-Circle© participants and employees were to see the CVA score, and understand the value and results of their Customer-focused efforts. He recalls the chart that Krish had shown him on communications, indicating how ineffectively communication is used (Figure 10.1). Also, how few companies really implement the data from their research.
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Figure 10.1 Maximizing the Value of Customer Feedback
Source: Customer Campions survey of 100 European companies.
Table 10.1 Steps for Implementing CVM CVM Action
CVM Tools
End Products
Identify drivers of Customer Value
- Identification of - Attribute Trees Hygienes, Satisfiers - Waterfall of Customer and Euphorisers to Needs be added. - Touch point charts - Identification of Customer DNA – Do Not Annoy factors - Identification of “Quick Wins”
Measure “where we are” against competition on each of the Customer Value Drivers
- Value Maps - Value surveys - Event or C-SAT surveys - Slippery Slopes to calibrate loyalty if required - Competitive Profiles with weights - Predictive indicators for marketing activity
(Contd.)
172 Customer Value Investment: Formula for Sustained Business Success
(Contd.) Prioritize actions for - Value Map “where we want - Slippery Slopes to be” - Competitive Profiles
Customer Value Management Strategy Plan with activity focused by direction, quality, and quantity
Implementation - Customer Value —“how we get there” Conduit internalize the Customer-centric concepts Circles communicate with Customer in the Customers Center People value Supplier value - Co-create Customer experience
- A truly CustomerCentric organization through internalization of the concepts. - Suggested corrective value-adding activity
Doug also puts together the various steps required for implementing CVM, including the action steps, and the CVM tools (Table 10.1). He realizes Glacier has previously incorporated many of these steps, but has a long way to go to become fully Customer-centric. At the same time, Glacier’s executives are realizing how Customers’ priorities often differ from their own perceptions and are now becoming Customer-driven. In addition, as Glacier’s employees synchronize with the Customer, everyone in the supply and selling chain is starting to work as a Customer-driven team. There is a commonality of purpose, and morale has improved significantly. The CVA data has certainly helped here. The gap between the perception of what Glacier’s executives thought Customers wanted and what the Customer really wanted was diminishing. As the number of Grocery World stores where CustomerCircles© are being incorporated continues to increase, Doug gets more occupied with the Customer programs and his efforts to transform Glacier Products into a Customer-centric organization.
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A recent Grocery World internal study had shown that their own primary Customers (those who buy 80 percent of their grocery needs from Grocery World) and secondary Customers (those who buy 30–80 percent of their needs from Grocery World) make up roughly 50 percent of the Customers in the neighborhood. Also 20 percent of their Customers left Grocery World every year. Doug knew, as a retail marketing person (and having worked this out with the Finance people), that if Grocery World could increase the number of Customers by 2 percent, and if these were all primary Customers, and if they could reduce turnover of Customers by 5 percent, they could improve earnings by 300 percent! And Grocery World was getting new Customers because of the Quick Pick-up program. Grocery World’s Customer focus had led to providing varying sizes of grocery carts. Providing oversized carts for large quantity buyers had resulted in an increase in such purchases. Meanwhile, CVA scores are being reported to Glacier’s CEO, and shared with key Glacier executives. Data showing the importance of frontline employees and touch points to the Customer are also communicated to these employees. They continue to be amazed at the impact they can have on the Customer, and the fact that, when they bond well with the Customer, how much Customer perception impacts positively on Glacier’s rating. Basking in this newly found importance, and noting their significant role in making the Customer happy, these frontline employees and touch points are energized to become Customer advocates. They tend to listen to the Customer more, go out of their way to help the Customer when possible, and try to make things convenient for the Customer. And Doug never fails to remind Glacier’s own touch points that the retailer and the distributor also are Customers! Market shares for Glacier’s products in Grocery World stores in Ohio have increased from 28 percent to 34 percent recently. That’s a 21 percent increase! The sales of the ready-to-eat category have also grown by about 10 percent in the stores. For Glacier, this increase was worth US$ 17,500 in the Newark store alone. If Glacier could duplicate this percentage increase throughout all the stores in Ohio (not just Grocery World stores),
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this would mean a US$ 35 million in increased sales, a significant amount based on Glacier’s current annual volume of US$ 150 million from all Ohio stores. In the specialty ready-to-eat segment, the increase in Ohio sales would be about US$ 3 million. Contribution to profit for all of Glacier’s products in Ohio would be approximately US$ 15 million. Not bad for a Customer-focused initiative! The cost to Glacier per store was estimated to be US$ 5,000 or a US$ 10 million investment for all 2,000 stores (including Glacier World stores) in Ohio that Glacier deals with. Pretty good returns on what they had invested in, based on the information they were getting. Doug is delighted that he’s received a promotion and been given added responsibilities by Earl, who’s been made the Chief Customer Officer. While everything’s still fresh in his mind, he decides to write down what he’s learned in the past eighteen months. The Customer is the reason for our being and our being in business. As an organization, Glacier must strive to:
Keep the Customer in Center. Put the Customer in Control, provide him convenience and choice. Give him a great experience. Understand from the Customer what creates value and then measure the value you’re adding to the Customer versus the value provided by the competition CVA. Understand why Customers buy and realize that Customer satisfaction is a necessary condition and relative value is the sufficient condition. Use this information to build a bottom-up Customer movement in the company by developing Customer-Circles© Make the touch points and frontline employees take Customer-centric initiatives and enable them to be Customerdriven. Build a top-driven Customer Conduit © throughout the organization.
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Improve Customer touching, build Customer do not annoy (DNA), and avoid erosion touches. Implement Customer Share marketing. Focus on Customer and employee retention as much as on new Customer acquisition. Add value to employees and suppliers. Measure Customer capital and assets and report these on the balance sheet.
Customer-focused Organization He makes more notes on his legal pad. When he finishes, he draws the following diagram, saying to himself, “This is what a really Customer-Centric organization should look like (Figure 10.2). In fact, Sunil Gupta and Donald Lehman69 state that Customer Value directly impacts the value of a firm. Hence, the CEO should combine building Customer Value and the firm value!” He calls the Customer Guru and updates him. Krish says, “You’re right. We need to add value to the Customer and to the Stakeholders. The person who leads that effort is the value creator.”
CVA Reporting “You know Bob Ostrofsky and I have been working on Customer data reporting. Bob has asked each division to send him a CVA report70 quarterly, along with an indication of whether the CVA score is moving up or down, or remaining static. It should have:
A page on corporate-level CVA trends, Two to three pages on business unit-level results, Brief executive summaries for each business unit.”
Effective Executive Report He hands Doug a CVA reporting chart. “This one is an example from an insurance company, where it has been used effectively.” (Figure 10.3) 69
Sunil Gupta and Donald Lehman, 2005. Managing Customers as Investments. Pearson, p. 99. 70 From Ray Kordupleski’s Mastering Customer Value, 2003, Pinnaflex.
Figure 10.2 Customer-focused Organization
176 Customer Value Investment: Formula for Sustained Business Success
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Figure 10.3 Sample of an Executive Report CVA Results Product Category
% of Product Revenue
1st Q 2000
2nd Q 2000
3rd Q 2000
4rd Q 2000
Trend (ØÆ≠)
Auto Insurance Age 16–24 Age 25–54 6–9 Years Ins. Co. Tenure Home Insurance Owners Age 35 or Younger Age 36 or Older Renters Age 35 or Younger Age 36 or Older Life Insurance Young Parents (Age 22–39) Single Mothers (Age 22–50) Mature (Age 55–62) Boomer Parents (Age 40–54) Overall Company (weighted avg. CVA)
“In addition, Bob has asked your CFO to work with me on how Customer data, such as Customer Capital can be included on Glacier’s balance sheet. “All these steps ensure the longevity of your Customer programs and ensure that Customer-centricity is the cornerstone of your strategy and philosophy. Remember, what gets measured gets done!”
A Customer-focused Move on Pam Doug has taken time off to buy champagne and take Pam on a picnic. She tells Doug how proud she is that he is now Customerfocused and has a promotion that gives him higher visibility at Glacier. Doug smiles. “I really have become Customer-focused. Now I want to treat you as a Customer, give you a good experience, and co-create with you. ”Let’s set a date to get married.”
178 Customer Value Investment: Formula for Sustained Business Success
Key Points CVA data Should be reported at CEO level. Should be communicated to key personnel, and selectively to Customers. Should lead to implementation of CVM. Should be used to inform measures that ensure longevity for program and Customer focus. Customer Value Management Proper Customer Value Management involves everyone in the organization. Product development and technology should flow from the Customer’s needs and desires often through competitive studies, i.e., a CVA for each function in the company such as product development is necessary. Customer Value-based pricing models should be followed. Should consider putting Customer assets or Customer capital on balance sheets. CVM Implementation It is important to understand the implementation of Customer Value Management:
Steps for Implementing CVM CVM Action
CVM Tools
End Products
Identify drivers of Customer Value
- Attribute Trees - Waterfall of Customer Needs - Touch point charts
- Identification of Hygienes, Satisfiers and Euphorisers to be added. - Identification of Customer DNA – Do Not Annoy factors - Identification of “Quick Wins”
(Contd.)
The Implementing 179
(Contd.) Measure “where we are” against competition on each of the Customer Value Drivers
- Value surveys - Value Maps - Event or C-SAT surveys - Slippery Slopes to if required calibrate loyalty - Competitive Profiles with weights - Predictive indicators for marketing activity
Prioritize actions for - Value Map “where we want - Slippery Slopes to be” - Competitive Profiles
Customer Value Management Strategy Plan with activity focused by direction, quality, and quantity
Implementation - Customer Value —“how we get there” Conduit internalize the Customer-centric concepts Circles communicate with Customer in the Customers Center People value Supplier value - Co-create Customer experience
- A truly CustomerCentric organization through internalization of the concepts. - Suggested corrective value-adding activity
Communication Communication of Customer data within the organization. Communication to employees and touch points is important for making them think through Customer issues and aligning them and motivating them to focus on the Customer. Communication of data to the Customer is important, particularly where you are better than competition. Business of a Company Eventually, the business of any corporation is to create value for its stakeholders, the investors and the Customers. The Customer Value Investment is the best outlay you can make for sustained business success and for increasing ROI. So, you need a Chief Customer Value creator and a Chief Investor Value creator reporting to the CEO. Thus you build a Customer-focused organization.
180 Customer Value Investment: Formula for Sustained Business Success
CHAPTER
11
The Concluding Epilogue Thank you for having shared with me Doug Evert’s journey to discover the Customer. Recall that he first had to understand who and what a Customer is, learn why Customer Value perceptions are critically important, determine what was necessary to add value to the Customer, and then overcome resistance in the form of companies that feel they have more important priorities than Customers. I am sure you will agree that Customer Value Investment is worthwhile and brings your company improved Return on Investment (ROI) and sustained business results. This investment is often just doing your work well. The investment is often in ensuring that the Customer Do Not Annoy factors are removed. It is servicing the Customer right. In short, doing things right is the best investment you can make. And if you can improve the touching, your investment will give a humongous return, and huge business success. Sometimes, there is a need for a cash or project investment to improve Customer Value as witnessed in the Ohio store. You have seen that investing in a true Customer-Centric approach to business and a variety of “tools” such as CustomerCircles©, Customer-in-Center©, Customer Conduits©, Customer Value Added lead to greater business success. Even improvements in basic services, often requiring no additional capital outlays, generally enhance business results by giving Customers greater value for the price paid.
The Concluding 181
Doug learned to build a Customer strategy, and with the support and leadership of Glacier Product’s CEO, Bob Ostrofsky, its sales manager, Earl Green, as well as the guidance of the Customer Guru, was able to help Glacier become a truly Customer-Centric company. You’ve witnessed that measurements made via the Customer Value Added initiative showed the improvement in Customers’ perception of Glacier at the Grocery World store at Newark, Ohio. The improved Customer perceptions led to both, improved market share and financial results. Customer and competitive information thus received was like the Voice of the Customer and Voice of the competitor. You’ve seen how Customer Value Management (CVM) can be implemented. You’ve learned that it runs through the entire organization: suppliers, employees, distribution and logistics chain, product development, technology, and pricing, among others. You’ve also learned that to get CVM longevity you need to report the data with your financial data, and even put Customer, data in your company’s balance sheet. You have also seen how current organizational structures can be modified to become Customer-focused structures. Thus Customer Investment equals increased ROI plus sustained business success. But, if all you picked up were the Customer-related ideas, without understanding the details of Customer Value Management, don’t worry. I wanted you to achieve just that. There are many other books you can read, many true Customer Gurus you can find, once you decide there is a need to do so! You can probably relate to Doug, Earl, or Bob. You’ve possibly asked yourself how you would have reacted in Doug’s place. And you probably have some skepticism as to how things played out. But as you study what others have been able to do, you will become a true believer in the power of Customers and how they can reward you if you make them happier and provide greater value than your competitors. On the other hand, if you have understood the value and importance of the Customer, and will focus even a wee bit more on the Customer, you’re embarking on a journey towards success. And if you embrace Customer Value Management, you will be
182 Customer Value Investment: Formula for Sustained Business Success
able to synergize your existing programs into a holistic view of the Customer—leading to a wider spectrum of competitive advantage. Lastly, Customer Value Foundation and Ray Kordupleski and his worldwide associates in Customer Value Management Inc. are working together to develop Customer certification programs. We envision that such certification will allow consumers to find out if basic Customer fundamentals, such as Customer Bills of Rights, dispute resolution mechanisms, Customer data and understanding, and programs that put the Customer in control are present in companies. In closing, I hope you’ve enjoyed the book and that it’s generated a few new ideas or strategies for dealing with your own Customers. I genuinely welcome any comments, questions, suggestions, or criticisms that you may have. We help companies measure and add value to Customers, and create competitive advantage. We also help companies in India and outside India to globalize and develop business.
Index [page numbers in italics depict tables, figures, or boxes] Activision 32 Airtouch 48 anonymous Customers 8, 11–12, 78, 91, 97 AOL 48 Apple 65, 66, 69, 137 AT&T 35 attribute trees 109, 123, 143, 155, 157, 160, 167 Autoglass 67 automobile 108, 109, 110 bank 96 Belron® Group 67 Bharti 48 Bic 51, 81 Bijapurkar, Rama 115, 116 Bliss, Jeanne 31 brand 41, 51, 52, 66, 95, 98, 122, 135 Brand sluts 65 Bridgestone 134 business of a company 179 Butterflies 65 Cadillac 36 Capital One 80 Carlzon, Jan 27, 31 Cemex 17
Chief Customer Officer 31–32, 39 China Mobile 48 Cisco 27, 68 commodity hell 69–70, 72 communication 67, 169, 177 competitive advantage 3, 5, 17, 18, 69, 138, 170, 181 competitive profiles 107, 123, 161 competitiveness 116, 124 Consumer Reports Magazine 127 Cordon, Carlos 22 CRM (see Customer Relationship Management) CSM (see Customer Share Marketing) Customer-Circle© at retailers 83–85 Customer Bill of Rights 88, 89, 91 Customer Champion 31–34, 39, 123 Customer DNA (do not annoy) 69, 82–83, 84 Customer Lifetime Value 45, 49, 54, 73 Customer Metrics 61, 71 Customer Relationship Management (CRM) 14, 93 financial institutions 96 programs 95
184 Customer Value Investment: Formula for Sustained Business Success
Customer satisfaction 5, 14, 21, 37, 42, 45, 56, 94, 135 vs customer value added 113– 119 Customer Share 27, 45, 46, 55 Customer Share Marketing (CSM) 46, 55, 74, 96 Customer Value 4, 5, 40, 46–50, 55– 57, 93, 94, 114, 116, 138, 140, 144 concepts 52, 124 creation 57 definitions 41 infrastructure 20, 138, 139 investment 146, 178, 179 perceptions 178 Strategy 138 versatility of 129 Customer Value Added (CVA) 41, 43, 56, 57, 105–07, 123, 127, 138, 140, 146 design 150, 151, 167 results 152, 168 scores 153 and Customer touching 168 data 177 follow-up 168 reporting 174 business decisions 132–35, 144 pricing 143 Customer Value Foundation (CVF) 30, 42, 181 Customer Value Management (CVM) 3, 34, 42, 96, 97, 98, 101, 104, 115, 131, 166, 168, 177, 179 benefits 5, 97, 98 continuity 141 implementation of 170 programs 38 tools 142–44 Customer Waterfall of Needs 109, 123, 153, 154 Customer-Centric approach 180
customer-centric organization 40 customer-centricity 21 Customer-Circles © 29–32, 38, 44, 54, 73–75, 91, 146, 168, 171 customer-competitive analysis 139 customer-focused organization 174, 175 customer-focused structures 181 Customer-in-Center© 14, 19, 23, 44, 54, 74, 77, 141, 278 Customer-in-Center© organization 138, 139 Customer-managed systems 66 Customer-oriented strategy 34 Customer 2–4, 6–10, 12, 14, 17, 21, 91 acquisition 13 adoption of 85 as assets 15–17, 22 as mentors 94, 122 as partners 68 asset 18 base 2 capital 47–49, 55 commitment 94 community 63 Conduits© 30, 76, 77, 90, 91, 96 data 81, 123 dealing with 71 defection 63, 71 definition 16 delight 66, 88, 94 devotion 97 end-use experience 35 equity 55 expectations 21, 93 experience 33, 35, 65, 69, 81, 94, 96, 120, 140 experience, co-creation of 136, 137 farming of 102 feedback 169, 171
Index 185
focus 21, 43, 73, 75, 77, 145, 147, 149, 176 franchise 48, 56, 120, 137 in control 62, 63, 66, 71, 79, 82 information on 61, 78 loyalty 4, 14, 42, 43, 93, 97 momentum 56 passion for 129, 135 perception 135–36, 144 program 73 referral value 84 relationship 67 research 79 responsibility of 18 responsiveness 135, 140 retention 47, 90, 98, 119, 120 revolution 13, 16, 17 service 39 special treatment for 85 strategy 18, 35, 40, 120, 143, 179 strategy session 138–39 touching 26, 28, 37 understanding 116 value added to 41 worthwhile experience to 68, 72 CVA (see Customer Value Added) CVM (see Customer Value Management) data mining techniques 80 Death of Demand 74 death spiral 70, 72 Dell computers 66 derived importance 113 Deutsche Telekom 48 Draeger’s supermarket 150 drive-up counter 88 Drucker, Peter 14
Economic Value Added (EVA) 107 emotional bond 14, 34, 65, 66, 72 employee value added 119 erosion touches 71, 82–84, 91, 140, 174 EVA (see Economic Value Added) FedEx 67 Firestone 134 Ford 134 Ford, Henry 66 Gale, Bradley 40, 116, 127 GE Capital 135 GE healthcare 70 Gupta, Sunil 174 have-it-your-way offerings 63 HCL Technologies 120 Healthya® Hot Green Tea 132 Hewlett-Packard 21, 28 Home Depot 32 Horlicks 132 hotel 3, 35, 96, 112 Hyatt 27 Hyundai 36 IBM 77, 96 importance weights 159, 160, 167 Inmelt, Jeffrey 70 iPod 65, 137 Joshi, Vyomesh 21 Kal Kan 65 Kao 132 Khatter, Jagdish 115 Klein, Naomi 26 known customers 11 Kordupleksi, Ray 40, 41, 107, 117, 132, 147, 180
186 Customer Value Investment: Formula for Sustained Business Success
Kroger 150 Kumar, Marise 89 Lehman, Donald 174 Lele, Milind 21 Lloyds Bank 96 loyalty programs 95, 96 Mehta, Neeru 69 Michelin 133, 134 Mitchells of Westport 24, 25 Moments of Truth 27 Mont Blanc pen 51, 81 Nayar, Vineet 120 Nortel 18 Ombudsperson 91 Osenton, Tom 27, 74 Pacific Gas and Electric 32 People Performance Curve (PPC) 119 People Value Added 119, 124 Peppers, Don 48, 55 Perceived Value Added 129, 131 Pirisi, Pat 26 Prahalad, C.K. 137 price consciousness 52 price perception 167 price tree 109, 111 price-performance profile 128 Pritzker, Tom 27 problems and disputes solution 62 product decisions using CVM 135 Profit Impact through Marketing Strategies (PIMS) 107 purpose of a company 9, 14 Quality and Price Trees 109, 143, 145
Radio Shack 80 Ramaswamy, Venkat 137 regression analysis 108, 112 relationship 25, 37, 163, 164, 165 relative value 131, 169 return on customer 48, 55 Rogers, Martha 48, 55 Saab 36 Schulman, Dan 77 service excellence 96 Sewell, Carl 36 Seybold, Patricia 63, 95 Sheth, Jagdish 21 slippery slopes 118, 123, 161, 162 Sporting News Publishing Company 28 Steelcase 35 Stew Leonard’s 149 Storch, Gerry 81 Subaru America 77 Target 81 Telecom NZ 132 Tesco 149 third party touching 54, 64, 96, 122 Time Warner 48 touch points 26, 27, 30, 32, 80, 84, 96, 103, 153, 172 touching and perception 166 travel agent 8 UAL Corp. 32 value value value value
41, 43, 44, 50, 93, 122 accounting 52 creation 97 creator 174, 178
Index 187
value maps 125, 126, 144, 161, 162 value of Customer value scorecard 52, 129, 156–57 Veeder-Root 17 Viral marketing 98 Virgin Mobile 77 Vodafone, New Zealand 132–33, 148 voice of competitor 96, 123, 139 voice of customer 96, 123, 139
Voicetouch 48 wallet share 2, 45, 55, 73, 98, 120, 123 Wal-Mart 80, 81, 125, 148 Wisconsin Energies 28, 81, 136 weights, stated vs implied 112, 113, 115, 124, 153, 170 Welch, Jack 136 Whirlpool 89
About The Author Gautam Mahajan is an internationally acclaimed expert in business strategy, management and globalization. President of Inter-Link Services Pvt. Ltd, an international consulting firm, he is former President of the Indo-American Chamber of Commerce. He helps companies, such as the Tata Group, and American companies implement Customer Value Management. With 18 US patents to his credit, he has been honored by the Illinois Institute of Technology with its Distinguished Alumni Award. He worked in the US for 17 years for a Fortune 50 company and also served as the CEO of a Division. He has a Master’s degree in Mechanics from IIT Madras, where he was an Institute Merit Scholar, and has completed his PhD coursework from the Illinois Institute of Technology. He also has an MBA from Suffolk University, and fellowships from the Harvard Business School and the Illinois Institute of Technology. Gautam Mahajan President, Customer Value Foundation and Inter-Link K 185 Sarai Jullena New Delhi 110025, India M +91 98100 60368 F +91 11 2692 9055 T +91 11 2683 1226 e-mail:
[email protected] [email protected] website: www.interlinkindia.net
