What is Customer Value? A Customer-Centric View

Over the years when I’ve spoken at conferences and workshops, I’ve done a group exercise asking for a definition of “customer value.”

With rare exceptions, the majority of the time attendees will discuss what the customer is buying (revenue), how much money the company makes from the customer’s purchase (profit) or customer lifetime value (discounted value of profit stream).

In other words, customer value = what the customer is worth to the company.

Is that wrong? No. Just incomplete. It’s a decent reflection of what CRM has been about. IBM defined CRM as “the technology, the tool, the process of extracting value from customer relationships.”

Granted some CRM advocates will object to this, and I certainly never presented CRM as this one-sided approach during my early years in this industry. But this definition, sadly, reflects the majority view of the world about CRM: extracting value.

How Customers See “Value”

Ask customers what they consider valuable and you’ll get a completely different answer. At a high-level, they value a product or service for its:

  • Function: the job it performs for the customer
  • Experience: interactions with the company
  • Price: in the context of the function and experience received

In CustomerThink research we find that customers weigh function (the utility of the product/service) about equally with experiences (interactions during marketing, buying and service processes. Around 40% weight each. And price gets the remaining 20%.

Obviously this is a crude measure, and varies considerably by industry. Companies need to do good loyalty research to really understand what value customers really, um, value. Not all value is created equal!

But the larger point is simply that customers don’t see revenue/profit generation as value. Some companies seem to forget this. Like banks when they create new fees out of thin air. Or hotels that use “resort fees” to boost their margins. Or retailers that sell warranty extensions of dubious value to customers.

In the short term these tactics can work (to create value for the company), but when customers feel taken advantage of, they’ll seek greener pastures as soon as they can.

Co-Created Value

Some argue that for products, the usage experience is a key part of the value proposition. Is this function or experience? In the case of the iPhone, the answer is both — the user experience is very much part of what creates value for the customer. Would the iPhone “function” well if it didn’t offer a great experience? No.

Or, take my Weber grill, which I bought to fit a small space on a balcony in my condo. The size, design, quality and reputation of the Weber brand all factored into my decision to purchase the product. The experience using the grill has been excellent, too. “Bob’s Salmon” never disappoints!

Using an iPhone or a Weber grill are both examples of co-created value, meaning in part that value is created during the usage of the product. Proponents of this school of thought argue that value doesn’t reside in the product or service, but rather in the experience of using that product or service.

A related concept is service-dominant logic (SDL), which essentially argues that everything is a service. All firms are service firms, and the “customer is always a cocreator of value.”

Really? I’m always suspicious of “always,” especially when it comes to a discussion about business-customer relationships. There are exceptions to any rule. So while I agree that experiences and customer-company collaboration are immensely important, they don’t account for all forms of customer value, in my view.

For example, when I buy a shovel and store it in the garage for future use, part of the “value” is knowing it’s available for future use. A luxury car is valuable to me (gives me a good feeling) even when it’s parked. Insurance polices give me peace of mind even though rarely used. In none of these cases did I participate in the value creation via usage or collaborative development of the product or service.

Innovation as (New) Value Creation

In a competitive market, customer expectations are constantly being shaped by forces outside your direct control. By direct competitors, certainly. But leaders in seemingly unrelated industry can also influence customers. When Amazon.com delivers a great online shopping experience, it influences customers buying other products in other industries. Experiences using the iPhone influence the design of other products, like cars that are starting to incorporate new touchscreen designs in the console.

The point is that the customer’s perception of value is constantly changing. That’s why innovation is a crucial process for any company in a competitive market.

How to be more “innovative” is the subject of countless books, articles, and definitions. Everyone want to be like Apple, invent the next Post-It, etc. But if you really think about it, innovation is a very simple idea that’s part of any well-run business: create something new, or do something different, to creates value for the company.

The new/different part is what innovation experts call “invention.” But to be truly innovative, the invention needs to create economic value for the inventor (or in some cases, society). Value is the key differentiator, experts say.

OK, I’m fine with that. But, still, such a broad concept leads to slapping the “innovative” label on just about anything that creates value:

  • Add a new feature to a software product (value = increase sales)
  • Improve process management to reduce waste (value = reduced costs)
  • Invent a new product (value = penetrate new markets)

That’s why innovation is a term I’ve come to love to hate. It’s hard to draw a line on what is innovative or not. Is a change big enough to qualify as “new” or “improved?” Does it create enough value, and over what time period?

For my money, I’ll take Jeff Bezos’ approach, which is all about leading for the long term at Amazon.com. Sometimes changes in the short term (e.g. Kindle) don’t obviously create value for the company, but are part of a longer-term approach to create loyal and profitable relationships.

Value Management is a Two-Way Street

Some have questioned customer-centricity as prudent business, because it means do what ever the customer wants, no matter what the consequences. Others position customer-centricity as mainly about focusing on customers (via targeting marketing/selling) to extract more value.

Between these two extreme views lies a more practical approach: A customer-centric business creates value for customers that eventually creates value for the company.

Use a coin as analogous to a customer-business relationship. One side represents the company’s value and the other the customer’s value. Over time, the value of that coin can only increase if both sides win.

What does “customer value” mean at your company? Ask around, you’ll find the answers enlightening about what really drives your organization’s behavior.

4 Responses to What is Customer Value? A Customer-Centric View

  1. maz iqbal April 11, 2013 at 3:08 am #

    Hello Bob
    I am glad that you wrote this. I enjoyed reading this piece of yours. I particularly like your suspicion around “always”. I want to add a couple of thoughts that have struck me.

    Amazon and Jeff Bezos
    In an ocean of companies focussed on making the short-term numbers Bezos approach of leading for the long term is a differentiator. Amazon can and does do what is out of the question to almost everyone else.

    You write “A customer-centric business creates value for customers that eventually creates value for the company.” I put this differently simply because this sounds too much like it is written for the finance guy or the engineer and not a customer. I say that a customer-centric business pursues a strategy that simplifies-enriches customer lives AND holds the promise of generating value for the organisation over the longer term.” I see it as the principle of reciprocity in action. And the promise does not always work out because we cannot look into the future and control it.

    SDLogic and Your Spade
    You make a great point. And it occurs to me that there is another way of looking at it. Imagine that the shovel maker makes and sells shovels to the retailer. The shovel maker, being paid by the retailer, thinks that the value resides in the shovel and the shovel making process and technologies. Right? Then you don’t turn up and buy the shovel. Nobody does. Now is there any intrinsic value in the shovel? No! So value is created by the customer using the shovel, using the insurance policy.

    The tricky part is in the way we make sense of the word use. You are using the verb “use ” to mean do something. But we don’t buy insurance policies hoping to have our house burn down and use it. We use the insurance policy to give us peace of mind. That is how we use the insurance policy. That is how value is co-created. The same applies to the shovel. Storing it in the garage and having it handy is a large part of how you use the shovel.

    Maz

  2. Bob Thompson April 11, 2013 at 10:17 am #

    Thanks for your comments.

    My central point is about “customer value.” Customer-centric businesses know it has a double meaning — value for customers and value from customers.

    Granted my statement about customer-centric businesses may not sound like it came from a customer, but the customer is not responsible for the business strategy. The company and its leaders are. If they don’t incorporate the concept of “value for customers” in some way, then it’s not customer-centric.

    Your definition is certainly is more uplifting, but it seems you’ve decided (for customers) to define value as “simplifies-enriches.” Honestly, for 90%+ of my purchases I wouldn’t say that’s what I consider valuable. Value = whatever the customer perceives to be valuable.

    As for SDLogic, perhaps you’re right that “use” means “own” or something like that. But as I read the 4 “foundational” principles at http://en.wikipedia.org/wiki/Service_dominant_logic_%28marketing%29, I see

    • Service is the fundamental basis of exchange.
      The application of operant resources (knowledge and skills), "service,” as defined in S-D logic, is the basis for all exchange. Service is exchanged for service.
    • The customer is always a cocreator of value.
      Implies value creation is interactional.
    • All social and economic actors are resource integrators.
      Implies the context of value creation is networks of networks (resource integrators).
    • Value is always uniquely and phenomenologically determined by the beneficiary
      Value is idiosyncratic, experiential, contextual, and meaning laden.

    Seems pretty clear to me that value is in the context of interaction, not just ownership.

    I do like that last principle the best: “Value is always uniquely and phenomenologically determined by the beneficiary.” So I would say each business should define its customer-centric business strategy in language that makes sense to its own customers and employees, and not to impress others!

    The problem I see with SDLogic is much like CEM. Proponents try to turn everything into an experience. Sometimes, a product is just a product, and that’s enough. See The biggest danger to CX is simply this … HYPE.

    Thanks again for sharing your point of view.

  3. Wim Rampen April 15, 2013 at 1:55 pm #

    Hi Bob,

    Excellent post. I agree with most you’re saying, but for your caveat with the word “always” with respect to “value is always co-created in use”. And I do so for a couple of reasons:

    The 1st being a rather academic one, for Service Dominant Logic is just what it says it is: a Logic. Meaning it is a lense through which we can choose to see our world. And in a SDL-world value is ALWAYS co-created in use (or interaction). Of course you can choose to see the world differently. No problem, just not SDL, and that does not really matter does it..?

    2nd: I do think though the SDL-way is the superior way of looking at value creation. If you CAN see value as being always co-created, new opportunities arise. And the first step you need to take is to separate Value from the product or service you are hiring to get (part of) your job done. For a person to co-create value for himself usually needs to bring in a lot of products, services (= resources) and apply skills, knowledge etc.. This process of resource integration is the process of value co-creation. And if you understand what different kinds of resources, skills and knowledge a customer needs, to co-create value with or to get his/her job done, you are just one (two maybe) step(s) away from finding new/additional/better ways to help the Customer do a better job.

    E.g: the use value of an insurance is “peace of mind”, but for the Customer to create ‘her’ peace of mind she needs to also own the (insured) asset, because without the asset the insurance has no use value whatsoever. And most people use other resources as well to increase/extend/improve their peace of mind: they take precautionary measures for events to take place that could risk their asset etc etc.. See? The insurance does part of the job, not the whole job.. At least not for all people in all situations.

    3rd: experience does account for all kinds of Customer Value, for experience is not an act, but a state of mind, a feeling, an emotion. Per my previous example: one does not have a peace of mind, but experiences a peace of mind. But before one can experience , one does need to act (integrate resources) and maybe even buy something 😉

    Well, not sure this is helpful in any way, but it’s how I see ‘the world’. And like I said: we can all choose our own to see. I like what (opportunities) I’m seeing.

    Thx for the post Bob!

    Wim

  4. Bob Thompson April 15, 2013 at 2:45 pm #

    Thanks very much, Wim.

    I like SDL and agree that it’s a useful way to look at value creation. Also agree that looking a consumption/usage as an experience of getting a “job” done is extremely important.

    Not convinced it’s how customers see all forms of value, however. I think defining owning something as an experience because there’s an emotion (peace of mind) extends a good idea too far. The problem with theories that attempt to explain everything is that they get stretched past the point of clarity.

    As for experience = emotion, that’s another interesting nuance. On the one hand, if we don’t perceive something, it didn’t really happen. “Perception is reality” is one of my favorite sayings. Emotion is part of perception.

    But I could also argue that emotion is an outcome of the experience, not the experience itself. It doesn’t make a lot of sense to say my experience was “happiness” except in the context of something (an experience) that happened. The two ideas are intertwined.

    One last point, on my insurance example… I’ll bet a lot of insurance policies are never “used” — in the sense of giving a payout for a claim. You can buy “term life” insurance for 10 years, not die, and the insurance is void at the end of the term. But the feeling (peace of mind) is there for the full 10 years. Yes, I have to own the insurance policy, but I still have trouble calling that an experience, and I don’t see how it helps the customer see more/less value.

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