Editor’s note: Vince Farace, president, and Jeri Meola, vice president, client services, are co-founders of Satisfaction Management Systems, Inc., Minneapolis.
More and more market research firms are adding customer value measurement (CVM) to their repertoire. Once CVM data are accumulated, however, the real value of the exercise is in deriving business strategies that guide clients to stronger market positions. Obviously, from the client’s perspective, it is the market insight that makes the investment worthwhile, not the data. This article outlines some of the essential lessons learned in our five years of specialization in customer value measurement and management. We have found that if these steps are followed in the CVM process, the client gets excellent value for their investment. We also provide some anecdotes to illustrate these lessons.
1. Adopt a comprehensive customer value perspective. It is tempting to say "This value stuff isn’t new, we’ve been asking customers about value for years." But in the customer value arena, only a few authors (see references below for Gale, Kordupleski, Naumann, Slywotzky, Treacy) have presented a comprehensive approach to measuring customer value and linking it to business performance. The most compelling presentation is given in Bradley Gale’s 1994 book, Measuring Customer Value, where he defines key concepts and metrics, provides worked examples, and discusses how an increasing number of organizations use CVM to guide strategic business decisions.
And choose the products and services that offer the best overall benefit-to-cost ratio.
Companies that routinely offer greater relative value in the marketplace grow their revenues and capture market share. These outcomes in turn lead to increased profitability and more loyal customers.
CVM is applicable in both consumer and business-to-business markets, although it is more challenging to implement in complex, multi-step business situations. Through Gale’s extensive speaking and consulting efforts, plus CVM councils in the U.S. and Europe, some 50+ organizations have implemented this approach. There is an emerging set of standard practices and approaches that, while subject to continued development, provide a common basis for CVM practitioners to share important lessons learned. As of today, implementing CVM in an "all new way" runs the risk of non-comparability with the results of other market research processes and, more to the point, runs counter to the direct experience of many senior managers (and potential clients). Nevertheless, in the CVM arena as well as other emerging areas of market research, good new ideas can still rise to dominant positions.
2. Understand your client’s strategic business objectives. The purpose of CVM is to provide input and guidance to a client’s strategic business objectives. It can provide a critical source of strategic guidance in reaching those objectives. It is imperative to understand where the client organization is going and how the client expects to get there. This requires exposure to the strategic thinking of senior management. The most useful vehicle for obtaining this information is a series of well-planned and professionally conducted face-to-face management interviews. These interviews offer an opportunity to communicate CVM concepts and potentials to senior management, to help them begin thinking in CVM terms, and to clarify their expectations for the overall process.
Here’s a conversation between interviewer (I) and manager (M):
M: So, is this all about improving our sales process?
I: Well, that and more. It’s about offering better value in the marketplace, better value than the competition. Sales plays a role, but what counts in the end is what you deliver.
M: So, what do I get from this process?
I: A detailed understanding of how purchase decisions are made in your markets…a metric that quantifies where you stand vis a vis the com-petition…and some clear product/ service/ marketing/ strategies for getting ahead of the competition.
3. Begin with a clearly defined market segment. Most discussions of CVM assume that the client already has well-defined market segments, and a process for tracking market share in each segment. This may not be the case. But the success of CVM depends on "providing superior market value" and "taking market share from the competition," and consequently CVM initiatives often must begin by developing a workable definition of both the market segment and an appropriate share measure. Failure to accomplish these objectives can doom any subsequent CVM results as "meaningless."
Market segments
Resolving the issue of market segmentation is a significant task. In the absence of clear market segmentation, the following questions should be answered:
1. Which of your products and services are we focusing on?
2. What distribution channels are used to deliver these products and services?
3. What are the characteristics of the consumers or businesses that purchase these items?
4. What type of individual has the primary role in the purchase decision? Who influences it?
5. What is the geographical spread of the market?
6. What is the total available market?
7. What portion of the market do you own?
Develop a working definition of the market segment that will answer the paramount question: Who is in the market and who isn’t? This definition should be approved by the client and referenced throughout the process.
Establish market share
Some clients assess their performance based on whether their revenues are up or down from a previous time. Otherwise, the client has no formal measure of how well they are performing against the competition. Developing and gaining consensus on a market share measure can also be a laborious process, but given that market share is the key outcome measure of CVM, it must be done.
It may be necessary to measure market share as part of the survey process. In one case, lacking a market share measure, SMS estimated it five different ways in the survey, took the modal result and said, "Here’s the benchmark." This triggered a yearlong program by the client to develop, implement and track a more formally defined measure of market share, independent of any survey process.
4. Build a market database. To conduct a market study, you need a market database. Most clients, although not all, have a reasonably accessible, good-quality database of their own customers. Seldom do they have a database of competitor customers, although there may be a "lost prospect" database. Rarely do clients have information on first-time buyers in a market place. One solution is to take the best customer database the client can provide and merge it with a purchased database from a third-party source. Then, in the front end of the survey, qualification questions are used to verify that the respondents are legitimately part of the market segment. (Of course, it is not likely that the database will have customer names, so an investigative and referral process must be implemented during the interview process to reach the correct person.)
5. Inventory the competition. This seems straightforward, doesn’t it? Clients know who their competition is, don’t they? Well maybe, maybe not. In rapidly changing markets, new players may arrive on scene and take substantial business before they show up on the client’s competitor radar. Sometimes a client will be fixed on just one competitor while an assortment of other competitors is making real headway. So, be prepared to do your own exploration of the competitive landscape. For SMS, the best early warning about the competitive landscape comes from the reports of competitors sent back during the focus group screening process.
In one CVM study, the client spoke rather disparagingly of the "Mom and Pop" enterprises competing in their market, any one of which was a flyspeck on their competitive radar. However, we demonstrated that, as a group, these competitors accounted for 60 percent of market share. Further, these competitors were very successful competing on price (lower cost structure) and service (faster, more attentive) against our client, one of the industry giants. Since the client was not ready to abandon 60 percent of the market, their thinking about the competition and how to position themselves against them went through major change.
6. Pay close attention to purchase decision attributes. The heart of a CVM initiative lies in well-defined set of benefits and costs that define the purchase decision process in a market segment. (For consistency with Gale’s formulation of CVM, we will typically use quality in place of benefits, and price in place of costs. Clients seem to prefer one set of terms or the other. "Attribute" refers to each price or quality decision factor.)
For a visual portrayal of purchase decision attributes, see Figure 1. Identifying attributes in a new market is always enlightening and sometimes surprising. SMS finds it very useful to simulate the attribute definition process with a client team, prior to actually involving client customers, competitor customers or prospects. This process provides a point of comparison to use once the process has been carried out with the client’s customers.
Attributes have the following properties, best arrived at through qualitative, customer-defined processes:
1. Attributes are either price or quality. As part of the attribute definition process, customers will tell you whether a purchase decision attribute is a quality or a price — a benefit or a cost. This assignment is not always obvious. For example, we conducted focus groups with heating and air conditioning contractors about thermostats. Below, "F" is the facilitator, "C" is the contractor:
F: OK, one of the attributes you’ve mentioned is the features of the thermostat, like displays and programmability. Is that a price or a quality?
C: Price.
F: Price? Help me understand this. When you think about the features a ’stat has, you think about price? Not quality? Why is that?
C: Let me help you out here. When we see features, we know that the homeowner won’t understand how to work them. So they’ll think the ’stat is broken. And that it’s our fault. They’ll call us and we’ll have to make a service call. We don’t get paid for that. So, features are a price.
2. Attributes are hierarchical and exclusive. Customers arrange purchase decision attributes in a hierarchy. The top-level categories — primary attributes — such as service, for example, or maintenance costs — are built on secondary attributes.
Secondary attributes are descriptors of primary attributes. In the example (see Figure 1), service is comprised of accessibility, professionalism, accuracy, efficiency and systems. Each of these is a secondary attribute under the primary attribute, service.
In turn, each secondary attribute is comprised of tertiary attributes. At the tertiary or third level, standards for performance are defined. For example, the percentage of customers who report that service reps "are willing to help" can be identified and compared with the performance of the competition on this same attribute. The market can define standards in this way, gaps can be identified, and corrective actions can be put in place. (In some cases, these third-level attributes can be expressed in metrics such as time or distance.)
Qualitative techniques — focus groups or one-on-one interviews — provide an efficient way to identify attributes and place them in a hierarchical order. In particular, focus groups allow clients to observe the emergence of purchase decision attributes during the focus group process. This experience can go a long way toward building credibility for the entire CVM process.
CVM attributes should also be exclusive, in the sense that they are uniquely placed in the overall attribute hierarchy. If service is a primary attribute, it cannot also be a tertiary attribute under some other attribute.
7. Be careful what you measure. In executing a CVM project, there is considerable pressure to measure attribute performance and client/competitor performance as economically and quickly as possible. One way to accomplish this is to use derived attribute importance weights, rather than stated importance weights. To obtain derived weights, one can use satisfaction scores on individual attributes to predict an aggregate measure of value, and let the regression weights represent relative importance. After all, isn’t predicting what people do more valuable than simply reporting what they say?
There are two problems, however, in using a derived-weights approach to defining attribute importance. First, if the dependent measure of value lacks adequate variance, many of the regression coefficients will drop to zero and the attributes will appear to have "no" importance in the purchase decision process. This outcome will fail the face validity test in the client organization. Second, the use of regression coefficients to represent the relative importance of the attributes can face a tough sell on their own in the client organization. ("So, what exactly is a standardized beta coefficient, and how do I interpret these two numbers?"). This may not be a problem for the direct client, but to others in the organization who have to accept the results and act on them, making large-dollar business decisions based on measures unfamiliar to them can be difficult.
Consequently, our preference is to gather stated importance weights, but to also develop derived weights. We then use the two sets of information to further understand the purchase decision process. At the cost of a somewhat more involved research process, the client is ensured of having usable results that can be understood and accepted by a variety of individuals in the client organization.
8. Review the CVM table, point-by-point. A sample CVM summary chart is shown in Figure 2. In this example, the results for six quality attributes and three price attributes are presented, along with a comparison of "Client Company" and "Company A," the competitor.
Column 1: Identifies attributes measured at the primary level. Customers make purchase decisions based on attributes such as product quality or reputation or maintenance.
Column 2: The relative attribute importance weights, summing to 1.0 separately for price and quality. What’s the most important quality weight? (service = 0.27). Least important? (reliability = 0.05). The double asterisk (**) indicates that the quality weights differ significantly from one another. For the three price attributes, the weights don’t differ significantly.
Note that the table heading says "Company A Importance Weights." In this example, we have used the attribute weights of customers who primarily do business with the competition. This is the audience our client wants to win over. It’s a more challenging group than if we were to just use the client’s customers to provide the weights. Alternatively, we could use market weights, in which we use relative importance scores based on a weighted average of all the customers in the marketplace. (If the client has 40 percent market share and six other competitors have 10 percent each, then we construct composite scores reflecting the distribution of market share.)
Column 3: These scores are mean performance ratings on a 10-point scale (10 high) of the client company on each quality and price attribute. What do you see? Our client has great product quality (9.33) but mediocre service (6.11). Service and options are quality attributes where the client can improve. On price, there is room for performance improvement in all three attributes.
Column 4: These are the competitor’s scores. They range from a low for reliability (3.43) to a high for acquisition cost (8.57). Overall, not a great set of scores. Note that there are single asterisks (*) next to some of the attributes. This indicates whether the performance scores are significantly different between the client and competitor.
Column 5: This column presents the relative performance scores for the client and competitor. These results show, on an attribute-by-attribute basis, the percentage that client and competitor are better or worse than the other is. We obtain the percentage by dividing the client’s rating by the competitor’s rating. For reliability, the client is viewed in the market as 2.54 times as reliable. But the client performs 17 percent worse than the competitor on acquisition cost.
Column 6: Now we take the importance weights from Column 2 into consideration. We want to adjust the relative ratings in Column 5 by the attribute’s weight (if we didn’t take this step, we’re assuming that all the weights are equal).
We sum the values for the quality attributes and obtain a market-perceived quality (MPQ) of 1.20. In other words, customers view the benefits of the client’s products and services as 20 percent superior to those provided by the competition. For the price attributes, however, the client receives a price competitiveness ratio of 0.92 or 8 percent less than the competition.
There’s one more piece of data to present. As part of the survey process, customers are asked a question of the form "all things considered, do you give more emphasis to the benefits you receive or to the cost you pay?" These customers are somewhat more price-sensitive than quality-sensitive — they weight price at 55 percent and quality at 45 percent.
The formula for calculating a customer value ratio (CVR) is:
Market Perceived Quality x Overall Quality Weight + Price Competitiveness x Overall Price Weight = CVR
For this example, the CVR is 1.05. This is the summary number to focus on in the chart. Therefore, taking into account all the benefits and costs customers anticipate in a purchase decision, the client organization is perceived to offer about a 5 percent value advantage.
9. Identifying business strategy. There are two basic approaches to developing business strategy recommendations from CVM results. First, you can test the results against the client’s current or existing strategy and identify any gaps or complementarities. Hopefully, the two are in sync, but if not, this needs to be clarified. Second, you can develop new strategic directions and test them out hypothetically, using the CVM results as the starting point.
What are some of the business strategy implications of the results shown in Figure 2? Here is how to find them:
