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.
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.