Robert took every opportunity available to better understand his customers and provide them
with value. One way his business does this is by developing a personal relationship with its
customers. This may mean carefully looking at checks or credit cards, not for security reasons,
but to identify customers by name. Robert points out that he always pays careful attention to
what customers like and dislike; by doing so, they develop confidence in his suggestions. To
foster this confidence, he and his family actively engage their customers in conversations.
Customers, Robert, and the employees share stories, which is a key way to build better customer
relationships. By listening to his customers, Robert can identify what they are looking for and
assist him in knowing what new products he might offer.
In addition to this personalized level of service, the Cheshire Package Store also recognizes the
importance of other factors. Robert talks about the importance of maintaining a well-lit store
with spacious aisles, making it an inviting place in which to shop. He is careful about even minor
details, such as assuring that there are open parking spaces near the entrance to his store. He
recognizes that even walking short distances to or from the store might be a burden or deterrent
for his customers. Robert’s store possesses a cutting-edge inventory software package designed
specifically for liquor stores. It enables him to track inventory levels, which can provide
estimates for future inventory levels of different products; however, he sees this as a guide only.
As he puts it, “Your knowledge of your customers will be the key determinant for your success.”
Robert also strongly believes that the success of a small business depends on the owner being
there. Stores have their own personality, in his view, and that personality is created by the
owner. This personality imparted by the owner impacts all operational aspects of the business—
“Your employees will pick up on what you expect, and they will know what your customers
deserve.”
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2.1 Defining the Customer’s Concept of Value
LEARNING OBJECTIVES
1. Define customer value. 2. Understand the five sources of perceived customer benefits. 3. Understand the three sources of perceived costs.
Look beneath the surface; let not the several qualities of neither the thing, nor its worth escape
thee.
Marcus Aurelius Antoninus
In the previous chapter, Peter Drucker and W. Edward Deming placed the customer at the
center of their definitions of the purpose of a business. They used the customer as being at the
core of that purpose rather than focusing on financial measures such as profit, return on
investment (ROI), or shareholders’ wealth. Drucker’s logic was that if a business did not create a
sufficient number of customers, there never would be a profit with the business. Deming argued
that delighting customers would become the basis for them to consistently return, and loyalty
would ensure that the business would have a higher probability of surviving in the long term.
The clearest way of doing that is by focusing on providing your customers with a clear sense of
value. This emphasis on value will produce economic benefits. Gale Consulting explains the
notion of value this way, “If customers don’t get good value from you, they will shop around to
find a better deal.” [1] A recent study put it this way, “These firms have been successful…by
consistently creating superior customer value—and profiting handsomely from that customer
value.” [2]
Strong evidence indicates that this focus on making the customer central to defining the
business translates into economic success. It has been estimated that the cost of gaining a new
customer over retaining a current customer is a multiple of five. The costs of regaining a
dissatisfied customer over the cost of retaining a customer are ten times as much. [3] So a key
question for any business then becomes, “How does one then go about making the customer the
center of one’s business?”
What Is Value?
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It is essential to recognize that value is not just price. Value is a much richer concept.
Fundamentally, the notion of customer value is fairly basic and relatively simple to understand;
however, implementing this concept can prove to be tremendously challenging. It is a challenge
because customer value is highly dynamic and can change for a variety of reasons, including the
following: the business may change elements that are important to the customer value
calculation, customers’ preferences and perceptions may change over time, and competitors may
change what they offer to customers. One author states that the challenge is to “understand the
ever changing customer needs and innovate to gratify those needs.” [4]
The simple version of the concept of customer value is that individuals evaluate the perceived
benefits of some product or service and then compare that with their perceived cost of acquiring
that product or service. If the benefits outweigh the cost, the product or the service is then seen
as attractive (see Figure 2.1 “Perceived Cost versus Perceived Benefits”). This concept is often
expressed as a straightforward equation that measures the difference between these two values:
customer value = perceived benefits − perceived cost.
Figure 2.1 Perceived Cost versus Perceived Benefits
Some researchers express this idea of customer value not as a difference but as a ratio of these
two factors. [5] Either way, it needs to be understood that customers do not evaluate these factors
in isolation. They evaluate them with respect to their expectations and the competition.
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Firms that provide greater customer value relative to their competitors should expect to see
higher revenues and superior returns. Robert Buzzell and Bradley Gale, reporting on one finding
in the Profit Impact through Marketing Strategy study, a massive research project involving
2,800 businesses, showed that firms with superior customer value outperform their competitors
on ROI and market share gains. [6]
Given this importance, it is critical to understand what makes up the perceived benefits and the
perceived costs in the eyes of the consumer. These critical issues have produced a considerable
body of research. Some of the major themes in customer value are evolving, and there is no
universal consensus or agreement on all aspects of defining these two components. First, there
are approaches that provide richly detailed and academically flavored definitions; others provide
simpler and more practical definitions. These latter definitions tend to be ones that are closer to
the aforementioned equation approach, where customers evaluate the benefits they gain from
the purchase versus what it costs them to purchase. However, one is still left with the issue of
identifying the specific components of these benefits and costs. In looking at the benefits portion
of the value equation, most researchers find that customer needs define the benefits component
of value. But there still is no consensus as to what specific needs should be considered. Park,
Jaworski, and McGinnis (1986) specified three broad types of needs of consumers that
determine or impact value. [7] Seth, Newman, and Gross (1991) [8] provided five types of value, as
did Woodall (2003), although he did not identify the same five values. [9] To add to the
confusion, Heard (1993–94) [10] identified three factors, while Ulaga (2003) [11] specified eight
categories of value; and Gentile, Spiller, and Noci (2007) mentioned six components of
value. [12] Smith and Colgate (2007) attempted to place the discussion of customer value in a
pragmatic context that might aid practitioners. They identified four types of values and five
sources of value. Their purpose was to provide “a foundation for measuring or assessing value
creation strategies.” [13] In some of these works, the components or dimensions of value
singularly consider the benefits side of the equation, while others incorporate cost dimensions
as part of value.
From the standpoint of small businesses, what sense can be made of all this confusion? First, the
components of the benefits portion of customer value need to be identified in a way that has
