Customer value creation has various meanings, some may consider it as the price of a commodity, whereas, others may consider value as a benefit or utility that is achieved after consumption (Buttle, 2013). In order to attract customers and acquire a large market size, industrialists focus more on the needs of the customers. Customer value is the perception of what a product or service is worth to a Customer versus the possible alternatives.
Understanding customer value creation
Customer valuation is based upon the 80/20 rule in marketing, whereby a company spends the majority of its time working with its best customers. Any business first creates value for its customers through its offerings, and in the process derives value from its customers in the form of profit (Kumar, 2018). The duality of roles performed by the businesses and customers comprising of deriving and delivering value that best summarizes the business-customer relationship from a value standpoint. However, this value remains distributed heterogeneously across customers. As it is the business’ decision to allocate resources to markets, customers, and products, the challenge in this context for the businesses is to dynamically align resources spent on customers and products in order to simultaneously generate both values to customers and value from customers (McFarlane, 2013).
However, businesses use three fundamental types of value creation through:
- operational excellence,
- product leadership and,
- customer intimacy.
Using operational excellence for customer value creation businesses do a limited number of things very efficiently, at very low cost, and pass on those savings to customers (Shanker, 2012). Businesses using product leadership aligns aim to provide the best products, services or solutions to customers. Continuous innovation underpins this strategy. Lastly, businesses that pursue customer intimacy are able to adapt their offers to meet the needs of individual customers. Customer intimacy is based on customer insight and deep understanding of customer requirements.
Theoretical aspect of customer valuation
Customer Valuation Theory is a convenient customer valuation approach (Kumar, 2018). The theory is based on three main concepts. The first is that customer valuation is a direct economic value contribution. The second is based on the depth of the direct economic value contribution and lastly the breadth of the indirect economic value contribution by accounting for volatility and vulnerability of customer cash flows.
As for the direct economic value, contribution indicates the customer relationship to the business, expressed as a contribution margin or net profit. A business can both measure and optimize its marketing efforts by incorporating customer value at the core of its decision-making process. The metrics comprise of computing future profitability of a customer, allocation marketing resources and assessing the return on marketing investments (Flint and Woodruff, 2014).
The depth of direct economic value contribution refers to the intensity and inclusiveness of customers’ direct value contributions to the firm through their own purchases that have produced significant financial results for the implementing firms. Lastly, breadth of the indirect economic value contribution comprises of customers’ indirect value contributions to the firm through their referral behaviour, online influence on prospects’ and other customer purchases, and feedbacks (Flint and Woodruff, 2014; Kumar, 2018). These indirect measures also contribute significantly to cash flow contributions.
The need for customer valuation
The need for customer valuations is mainly based on the fact that customers are the reason that businesses survive. Therefore, it is important in designing and providing superior customer values. They are the keys to a successful business strategy in the 21st century (McFarlane, 2013). In addition, businesses also need to understand that value reigns supreme in today’s marketplace. Designing and delivering superior customer value will help businesses to develop winning and retention strategies in an environment where competition has eroded other bases for differentiation and market leadership.
Customer valuations are also important because customers are smart and sophisticated and are looking for organizations that create maximum value for their needs and wants (Flint and Woodruff, 2014). It is also imperative to create value because customers will not pay more than a product is worth and will reward excellence. Hence, to increase this prospect, customer valuation or as here product valuation remains needed.
Strategies for creating a customer valuation
All customer value creation strategies are based on the following flowchart
The most conventional methods and strategies of creating valuation other than using the customer valuation theory comprise of providing goods and services at a price where customers believe they are getting more benefits than what they are paying, that is, benefits are higher than the price (Kumar, 2018). Businesses may reduce the prices of goods and services or may provide various other services and rebates while keeping prices constant. These services and rebate could be a discount on goods and services, paying more attention to customer’s problems. Businesses may also provide goods and services to diversified customers at their convenience.
Creating customer value mainly comprises of certain dimensions, mainly in a business-to-business context, which are:
- product quality,
- service support,
- delivery performance,
- supplier know-how,
- personal interaction,
- price, and process costs (Flint and Woodruff, 2014).
Similarly, these dimensions are based on the customer-value creation framework. This tool remains used for marketing to develop creative product concepts and recognize new product opportunities.
Another strategy is named as business’ pre-emptive value-creation strategy that has a performance value associated with the product attributes and the attributes’ performance (McFarlane, 2013). It also has pricing valuation based on fair price lead customers to believe they are paying a fair price for a product or service; the value price refers to a price that justifies the benefits of purchasing a product. The third part is relationship value creation and is the business’ efforts to create and deliver a hassle-free purchase and consumption experience. The last component of the strategic framework is co-creation value where customers find it beneficial to influence various parts of the business system to co-create or co-produce their own unique purchase and consumption experience.
- Buttle, F. 2013. Customer Relationship Management Concepts and Technologies. 2nd edn. Burlington: Elsevier.
- Flint, D.J. and Woodruff, R.B., 2014. Marketing’s service-dominant logic and customer value. In The Service-Dominant Logic of Marketing (pp. 201-213). Routledge.
- Kumar, V., 2018. A theory of customer valuation: Concepts, metrics, strategy, and implementation. Journal of Marketing, 82(1), pp.1-19.
- McFarlane, D.A., 2013. The strategic importance of customer value. Atlantic Marketing Journal, 2(1), p.5.
- Shanker, A., 2012. A customer value creation framework for businesses that generate revenue with open source software. Technology Innovation Management Review, 2(3).