Monday, September 14, 2015

A Definition of Customer Value?

There is a business axiom, “You can’t manage what you can’t measure.”  Managers need to know if their decisions are having the desired effect.  Otherwise, they are flying blind.  This means they need data, and the closer that data can be to real-time, the better.  Otherwise, they are making business decisions based upon hopes and fears.
A concept gaining traction is to manage and maximize Customer Value within the offered products and services.  By providing a high level of Customer Value, customers will be more successful.  This increased success by customers will then lead to loyal customers and increased customer demand.   Everyone wins. This concept makes good business sense, but it has a weakness.  That is the measure of Customer Value.    
The weakness starts with the precise definition of Customer Value.  It remains murky.  There are numerous perspectives on the definition of Customer Value.  I have been conducting a non-scientific survey on the definition of Customer Value with executives and managers from a number of companies in the USA (that means I have talked with them about this over lunch). I have found that the practical definition for the measure of Customer Value is often based upon the individual’s functional discipline.  For instance:
Finance: Uses cost and price as surrogates for value – the ration of the money a customer pays for the product or service divided by the cost to create and deliver the product or service is the measure of Customer Value. But this is an internal measure that does not consider how the customer uses the product.  The actual value to the customer is unknown.
Operations: Focuses on internal efficiency measures – especially those associated with manufacturing cycle time and quality.  They measure Customer Value use measures such as on-time delivery and Ppk or an equivalent quality measure.  But these are also internal measures that do not consider how the customer uses the product.  Again the actual value to the customer is unknown.   
Research & Development: Sees value in features and technology that are “presumed” to be of benefit to the customer.  Essentially “more” of whatever features is being considered is presumed to have value.  They measure Customer Value in terms of product benchmark comparisons. But often these measures are not correlated with customer applications that increase customer success.  Some of these measures may be irrelevant, or even worse, may detract from actual Customer Value.
Marketing: Focuses on brand awareness and brand affinity. They see products as commodities and the Customer Value is based upon the confidence that the customer has in the product brand.  Brand positioning in the minds of the customers is the primary driver of value.  But this approach ignores the internal cost and effort required to develop and sustain the image associated with the brand.  And to the customer, the brand is a promise.  If the actual product or service does not live up to the promise, the value of the brand is lost and may actually become a strong negative value in the mind of the customer.     
Sales: Focuses on customer behavior in the market and infers Customer Value based upon that behavior.  Measures include market price, market share, customer retention and customer conversion.  But these are lagging measures.  This information reflects the result of the customer’s actions.  Managers can’t proactively manage from these measures; they can only manage reactively.   
Each function’s perspective is limited and out of balance, yet each function has something important to contribute to a comprehensive solution. For something to be valuable, it must provide some type of benefit.   The Operations and Research and Development perspectives definitely provide some insight on the potential benefits of the product or service.  And if something is valuable, there is presumed to be some price or valuation of that value.  Finance and Sales are attempting to capture that perspective.  However, Marketing rightly acknowledges that until a real customer is aware of the benefits and the price and has confidence in both, an expression of Customer Value is presumptuous. 
If all of those can be combined into a comprehensive set of measures, then the managers can begin to make the trade-offs between maximizing the Customer Value and minimizing internal costs.  They can proactively manage the business to select a specific Customer Value level that is aligned with their product line strategy and then becomes a business target.  The managers will then optimize the business processes and systems to deliver that value in an efficient and effective manner.
An obvious challenge when creating the comprehensive set of measures is that many of these attributes are customer attributes, not company attributes.  It is highly unlikely that a customer will be able to set up a measurement system inside their customer’s operations or that the customers will voluntarily agree to setup the measurement systems and provide data to their suppliers. A company must then infer these measures based upon a customer’s actions, or non-actions.  To do this, a company must focus on customer relationship management and apply metrics to customer actions and activities.

Measure Customer Relationship
So the first step in measuring customer value is to measure the customer relationship.  What is the frequency of interaction?  What types of interactions are occurring? What levels in each organization are involved in these interactions?  Is there a pattern of interactions that represent those customers who place a high Customer Value on our products and services?  Is there a pattern of interactions that represent those customers who place a low Customer Value on our products and services? Is this interaction data available real-time, or near real-time? What is the customer saying about this relationship on social media and industry forums?  Are we capturing all of the interactions between the company and customer, at all levels and with all interaction media?
There are some efforts to begin to understand customer interactions and measure them.  The Customer Experience movement is a step in the right direction.  The proliferation of “big data” applications makes this collection of information much more practical.  One organization that I am familiar with, Religence, has proposed an interaction management framework that I think holds lots of promise.  This is an area and technology that is rapidly maturing.

The addition of this interaction metric with the existing internal cost, price, and efficiency metrics should provide the comprehensive set of measures needed to proactively manage Customer Value.  

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