The 7 Foundational Characteristics of Customer Value by Sara Leroi-Werelds * [30]

 

“There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.” Sam Walton, founder of Walmart

This quote nicely shows the link between value for the customer and value for the firm. Put simply, if there is no value for the customer, there is no value for the firm. For this reason, customer value has been recognized as one of the most fundamental concepts in marketing. Based on recent work (Leroi-Werelds 2019), we can discern seven key characteristics of customer value:

1. Customer value implies an interaction between a subject and an object

Customer value involves a customer (i.e. the subject) interacting with an object. The object can be a product, a service, a technology, an activity, a store, …

2. Customer value involves a trade-off between the benefits and costs of an object

One of the most often cited definitions of customer value is the one offered by Zeithaml (1988, p. 14) defining it as “the consumer’s overall assessment of the utility of a product based on perceptions of what is received and what is given.” This means that customer value involves a cost-benefit analysis made by the customer. The benefits are the positive consequences of using a product, encountering a service, visiting a store, using a technology, performing an activity, … The costs are the negative consequences.

3. Customer value is not inherent in an object, but in the customer’s experiences derived from the object

Customer value is experiential and is thus not embedded in the object. This is in line with the notion of ‘value-in-use’: “value is not created and delivered by the supplier but emerges during usage in the customer’s process of value creation” (Grönroos and Ravald 2011, p. 8).

4. Customer value is personal since it is subjectively determined by the customer

It is the customer and not the supplier who determines if an object is valuable. This implies that customer value is subjective and personal. Each customer has his/her own value perceptions based on personal characteristics such as knowledge, needs, skills, previous experience and financial resources.

5. Customer value is situation-specific

Customer value depends on the situation and is thus context-specific. For instance, if you are in a hurry, the efficiency of a store visit will be more valuable than when you are ‘fun shopping’.

6. Customer value is multi-dimensional

Considerable agreement exists on the multi-dimensional nature of customer value given that the concept is too complex to be conceptualized and operationalized in a one-dimensional way. Hence, customer value consists of multiple value types. A recent update on customer value (Leroi-Werelds 2019) proposed 24 potential value types (see below). However, it is important to note that not all value types are relevant for each object.

BENEFITS +	COSTS -
Convenience	Price
Excellence	Time
Status	Effort
Self-esteem	Privacy risk
Enjoyment	Security risk
Aesthetics	Performance risk
Escapism	Financial risk
Personalization	Physical risk
Control	Ecological costs
Novelty	Societal costs
Relational benefits
Social benefits
Ecological benefits
Societal benefits

 

7. Customer value is created by the customer by means of resource integration

By means of resource integration, the customer transforms the potential value of the object into real value. The customer thus integrates the resources provided by the firm (e.g. products, services, information) with other resources and skills to create real value. For instance, the value of a car is created by the customer when he/she integrates and combines this car with other resources (such as fuel, public roads, car insurance, maintenance/repair service), but also his/her own driving skills. Without these other resources and the needed skills, the customer cannot create value.

References 

Key Reading: Leroi-Werelds, S. (2019), "An Update on Customer Value: State of the Art, Revised Typology, and Research Agenda," Journal of Service Management, Vol. 30, No. 5, 650-680.

Gronroos, C. and Ravald, A. (2011), "Service as Business Logic: Implications for Value Creation and Marketing," Journal of Service Management, Vol. 22, No. 1, 5-22.

Zeithaml, Z. (1988), "Consumer Perceptions of  Price, Quality, and Value:  A Means-End Model and Synthesis of Evidence, Journal of Marketing, Vol. 52, July, 2-22.

* Dr. Sara Leroi-Werelds is an Assistant Professor of Marketing at Hasselt University, Belgium. She may be reached at sara.leroiwerelds@uhasselt.be 

 

Perceived Value in Business Relationships - It's Not Always Rational by Maja Arslanagic-Kalajdzic * [29]

When we think about the perception of value in business relationships, we usually regard business customers as rational entities that are driven by functional motives. Namely, as the main mantra of  businesses is usually to increase profit, either by increasing the sales or by lowering the costs, we often believe that this is the case with business customers, too. Hence, value propositions in B2B markets are functional in their essence, meaning that they aim at demonstrating benefits (e.g., quality) and/or sacrifices (e.g., costs). However, is this always the case? Is there anything more to the functional value dimension in B2B relationships?

Research findings indicate that perceived value complements business customers’ satisfaction and plays a vital role in various behavioral outcomes. However, most evidence are still made on the functional value dimension only. By focusing on the professional services industry, it can be shown that other dimensions of perceived value exist in business relationships and that they are indeed relevant for relationship outcomes.

Relying on the theory of consumption values that is predominantly used in B2C research, functional, emotional, and social value are defined. The functional value dimension assumes rational, economic and monetary benefits and costs. Utility of choice (taken from the field of economics) and means-end theory serve as justifications for this dimension. Two of the most prominent components of functional value are quality and price of goods/services. Functional value is the utility derived from perceived quality, a perceived reduction in short-and long-term costs, and the expected performance of service offers and processes.

Emotional value is often neglected in business research due to the underlying notion that organizations are rational formations that can only assess functional value elements. When talking about business services, purchase units are operated by people, and service providers need to work with people from client firms. In the context of professional services, people are the key element on both sides. On the side of the provider, they are the key “ingredient” of the services provided. On the side of the client, without expressing needs and conceptions, and without close cooperation with people, the provider will hardly understand the client’s expectations. Emotional value in business relationships is the utility derived from the feelings or affective states that the service generated for the buying-center participants of the client firm.

The third dimension, social value is explained through social self-concept in the theory of consumption values. It has already been researched in the business relationship context, mostly pertaining to the social bonds between a provider and a client. The assessment of the social value of a provider’s services may differ in terms of its relevance to either the client’s products/services or the client’s firm. In terms of professional business services, a client’s product/service may be socially perceived in a certain way since a specific service provider is engaged (e.g., if an advertising agency is known in the market for  highly rated video production, a client’s products/services can be more highly valued if they are using that agency’s services in their new ad campaign). Yet, professional business services may also have a social value in terms of business references for the client’s firm in general, so that a firm is valued more highly (e.g. working with a specific provider may boost the credibility of the client itself). Social value is the utility derived from the acceptance, positive impression and social approval of the business client firm and its products/services that the service relationship generated. Social approval encompasses the approval of different stakeholders (e.g., owners, clients, industry partners).

Research results of the study with ad agencies and their clients show that all three dimensions of value indeed exist and that they have differential effects on relevant outcomes – satisfaction and loyalty. A strong link between perceived functional value and satisfaction is confirmed. However, it is also shown that satisfaction is further explained by perceived social value. Surprisingly, emotional value does not have a direct effect on satisfaction, but it directly influences loyalty. On the one hand, this finding can be interpreted through the view that emotional value has a particular role for loyalty, which is defined as deeply held long-term commitment, and that for that reason, emotional value serves as an argument for continuance or termination of a relationship with a provider. On the other hand, functional and social values primarily elicit satisfaction as an immediate outcome, and influence loyalty only indirectly.

These findings show that service providers cannot solely rely on functional value, and that developing  positive emotional and social value notions in their value proposition should also be considered. By building and sustaining a good corporate reputation, making investments to improve credibility and by ensuring high relationship quality, service providers could improve different facets of perceived value and through them positively impact their clients’ attitudinal and behavioral outcomes. We start with perception of ad agencies as providers of professional services. However, probably similar conclusions could be derived for other professional services industries (e.g., IT services, consultancy services, accounting services, banking and insurance services) and they should also yield consistent results. When it comes to other industries, especially if we talk about manufacturing industries or supply chain relationships, we are of the opinion evidence for emotional and social value existence could be found, too. However, their relevance would probably depend upon various factors, such as the level of knowledge/expertise the provider offers, the length of the purchase phase, the general intensity of the relationship with the provider and the role of the decision-making unit in more complex purchase situations.

* Maja Arslanagić-Kalajdžić, Ph.D. is an Associate Professor of Marketing at the University of Sarajevo. She can be reached on maja.arslanagic@efsa.unsa.ba.

This blog is based on an article:

Arslanagic-Kalajdzic, M., & Zabkar, V. (2017). Is perceived value more than value for money in professional business services? Industrial Marketing Management, 65, 47–58. doi:10.1016/j.indmarman.2017.05.005  

  

Value Creation and Value Capture by Shekhar Misra * [28]

Value creation and value capture have been extensively studied in both management and marketing. Yet, as recent work in this area has grown, their meaning has become ambiguous. I believe that value creation and value capture are distinct yet interlinked constructs. Value creation is determined by customers’ subjective evaluations of a firm’s offerings while value capture is determined by the profits a firm is able to generate.

Value creation is a central concept in marketing as customer perceptions of value are pivotal determinants of product choice and buying behavior. Customer value is based on the principle of utility maximization and is summarized as the customer’s overall assessment of the utility from a product based on her perceptions of what she “gets” in-return for what she must “give” up. The “get” aspect concerns the overall benefits customers derive (or expect to derive) from a product while the “give” aspect pertains to the overall costs customers incur (or expect to incur) to enjoy the product’s expected benefits. From this perspective, customer value can be defined as the “customers’ net valuation of the perceived benefits accrued from an offering that is based on the costs they are willing to give up for the needs they are seeking to satisfy”.

The “give” aspect of value creation is comprised of all the costs incurred by customers to obtain the benefits of product consumption. Customers sacrifice money and other resources such as time, energy, effort, etc. to find, buy and use products. These costs include those related to finding, acquiring, consuming, maintaining, and if necessary disposing of the product.

The “get” dimension of value creation includes the benefits customers derive from a product, which may be functional, experiential, and/or symbolic. Functional benefits are the intrinsic benefit customers derive from a product and are primarily based on its objective and perceived quality. Objective quality is the aggregate performance of all product attributes, while perceived quality is a customer’s subjective evaluation of the product’s overall superiority compared to other products in the customer’s evoked set. Experiential benefits capture customers’ personal experience using a product corresponding to product-related attributes, such as sensory pleasure, stimulation, variety, etc. For example, color is an important product attribute on which customers have varying preferences. Finally, symbolic benefits concern the extrinsic advantages of using the product. These benefits are generally linked to non-product related attribute benefits such as self-expression and social approval. Therefore, perceived value is the consumer's overall assessment of the utility of a product based on perceptions of what is received and what is given. This assessment is based on consumers’ idiosyncratic preferences and choices and as a result, varies from one consumer to another.

However, value creation for customers is only one element of the overall economic value process. The second critical element is the value captured by the firm in return—not least because in the absence of value capture a firm has limited incentives to create customer value. The concept of firm value capture is rooted in the economic principle of profit maximization, and similar to customer value creation, it implies a tradeoff between “give” and “get” elements from firm’s perspective.

The “give” aspect of value capture is the firm’s offering to the marketplace that creates customer value. To deliver a product to the market the firm has to incur various costs related to conceiving, creating, delivering, and communicating the benefits of the product to the market. Broadly, these costs can be broken down into R&D costs, manufacturing costs, distribution costs, and marketing and sales costs. R&D expenses are those operating expenses incurred in the process of searching for new solutions and products or seeking to update and improve existing products and services. Manufacturing costs cover materials, and labor and factory overhead expenses incurred in converting raw materials into finished products. Distribution costs are those incurred to transport and deliver the product from the producer to the end user. Marketing expenses include costs associated with advertising, promotion (such as on-shelf advertisements, floor ads, etc.), public relations, package design, and market research. Finally, selling expenditures includes sales force compensation (such as benefits, profit sharing, etc.), travel costs, consulting fees, etc.

The “get” aspect of firm value capture is the revenue the firm’s offerings generate in the marketplace. Revenues from the firm’s offerings are a function of the number of product units sold and the realized price of each unit. A firm therefore has only two primary mechanisms to increase its revenues—either by selling more units of the product or by selling them at a higher price. A firm can sell higher numbers of units by either attracting more customers to the product or by increasing the usage of the product by existing customers. Alternatively, firms can increase the revenue from a product by achieving a higher realized price for the product. Based on the above, firm value capture is the firm’s appropriation of financial resources based on the difference between the revenues and the total costs of delivering the firm’s offerings to the marketplace. Therefore, value capture can be defined as the firm’s ability to appropriate financial resources from the marketplace, i.e., how effectively a firm can convert the value present in the marketplace into profits.

The central premise is that value creation and value capture are distinct from each other but still interlinked. Value creation is the perceived value in customers’ minds resulting from the firms’ actions; and, value capture is the economic benefits a firm derives. This conceptualization of value creation and value capture enables us to independently look at the impact of firms’ resources and capabilities. Importantly, this view also demonstrates that value creation and value capture are not necessarily a zero-sum game. Both customers’ utility (value creation) and a firm’s profits from providing customer utility (value capture) can be simultaneously increased. Hence, a win-win results for the customer and the company.

* Shekhar Misra, Ph.D., is an Assistant Professor of Marketing at Grenoble Ecole de Management, France. He can be reached at: Shekhar.MISRA@grenoble-em.com