CUSTOMER VALUE &IDENTIFYING OPPORTUNITIES BUSINESS MARKETING

Dr. Dawne MartinOctober 4, 2011

Learning Objectives

Part I of Paper Due: Friday, October 8, 5:00 p.m.

Customer Value To determine how business customer value

propositions are and should be developed. To investigate the role of and use for these value

propositions in business markets. Identifying Business Opportunities

Outline methods of finding new opportunities Determine where and how to gather data for

analysis Determine which opportunities are most promising

Market segment identification Criteria for a good segment Analysis of opportunity Total Cost of Ownership

Customer Value Propositions

Statement of the benefits the customer will derive from a product/service

How value propositions are used: Positioning relative to competitors Advertising Method of focusing on what offerings are

really worth to customers

Anderson, Narus, van Rossum, “Customer Value Propositions in Business Marketing, HBR, March 2006

Types of Value Propositions

All benefits all benefits received

Favorable Points of Difference all favorable points of difference value to

competitor Resonating Focus

One or two points of difference whose improvement will deliver greatest value to customer

Building Blocks of Value Proposition Points of Parity Points of Difference Points of Contention

Identifying and Demonstrating Customer Value Customer value analysis and “Value

word equations” using industry terminology Power reductions cost savings = kW spent

X no. of operating hours/yr X no. of years of operation – Rockwell Automation

Demostrate Customer Value ---Value Case Histories – IBM Success Stories

Document Customer Value - GE

Qualities of a Value Proposition Distinctive Measurable Sustainable

Examples of Value Propositions iPod vs. Other MP3 Players - As early as

1996 MP3 players were available to the public for purchase. For the first few years the only real value aside from price comparisons were the amount of music they could store. This all changed when Apple Inc. burst on the scene with the iPod and iTunes, the software paired with its new MP3 player to manage the music through a computer program to organize and rename the music on consumer computers.

Examples of Value Propositions BMW vs. Other Luxury Car

Manufacturers - BMW, "the ultimate driving machine". This is a key value proposition for BMW or Bavarian Motor Works.. When other luxury companies started making vehicles in direct competition to BMWs, BMW had to differentiate itself once again. In North America it did this via a customer value added proposition through their “No Cost Maintenance” program. The “No Cost Maintenance” plan comes with the purchase of a new BMW vehicle and provides the owner with no cost maintenance for the first 4 years/50,000 miles of use. Neither Audi, Lexus nor Mercedes offer a comparable program

Examples of Value Propositions iPhone vs. Palm Pre - The Apple iPhone was

introduced in 2007 and was almost immediately successful. As time passed the added value of the iPhone was equal and exceeded as other smart phones came to market. The Palm Pre was introduced with the ability to perform multiple tasks concurrently while the iPhone was only able to run a single application at a time. The multiapplication capability of the Palm Pre gave it a significant advantage over the iPhone.

Managing Customers for Profit

• All customers do not create equal profit

• Focus on account profitability, selection and management (Shapiro, Rangan, Moriarty & Ross,”Managing Customers for Profit, Not Just Sales, HBR, Sept-Oct. 1987).

• Cost to Suppliers– Presales Costs– Production Costs– Distribution Costs– Post Sales Service Costs

Managing Customer Profitability

• Customer Behavior & Price Sensitivity– Carriage Trade: Low price

sensitivity, high service– Bargain Basement: High price

sensitivity, low service– Passive Customer: Low price

sensitivity, low service– Aggressive Customer: High

price sensitivity, high service• Customer Situation

– Economic Power– Decision Making Unit– Customer Relationships

Demand for Service

Pri

ce S

en

siti

vit

y H

L

H L

Carriage Trade

Aggressive Customer

Bargain Basement Customer

Passive Customer

Life Time Value of a Customer• Estimate of the net present value of

stream of benefits from a customer• What’s needed

– Average life time of a customer (retention rate)– Costs

• Level of service• Acquisition costs• Retention costs

– Revenues• Purchases• Joint programs• Referrals

Life Time Value of a Customer

Cost $250 to acquire a new customer 1st year – customer produces $150 in

revenue, margin of $50, costs $50 2nd & 3rd years – satisfied customers

produces $400 in revenue, $250 margin, costs $50

4th year – dissatisfied, revenues $200, margin $100, retention $100

Net Present Value of a Customer

0 1 2 3 4

-$250

$50

$50

$250

$250

$100

$50 $50

-$100

Gross Profit Per Customer

Retention Costs per CustomerNPV = (-250 X 1.0) + ($ 0 X .893) + ($200

X .797) = ($200 X .712) + ($0 X .636) = $51.80

Gleason Printing

Analysis of Metro Alliance for Wellness Account potential $600,000 Account wants a partner in communications Investment

$400,000 - $800,000 in equipment, installation, training and set-up

What is the Net Present Customer value of the Metro account?

Total Cost of Ownership Roger Best: Market-Based Management, Prentice Hall, 1997

Fig. 8.4 © 1997 Prentice-Hall, Inc.

Competitor’sProduct

Business’sProduct

EconomicValue

PricePrice

Use

Maintenance

Acquisition

RelativeBenefits

RelativeCost

PerceivedValue

PricePriceServiceBenefits

ProductBenefits

BrandBenefits

Total Life Cycle Cost ($) Perceived Benefits vs. Costs

Price

MaintenanceMaintenance

UseUse

AcquisitionAcquisition

$

Non-PriceNon-PriceCostsCosts

Pe

rce

pti

on

25

.

Total Cost of Ownership Exercise and Value in Use Dr. Benton is considering the use of a new

prosthesis for joint replacement surgery. The new prosthesis would reduce patient recovery time by six weeks, reduce hospital stays by three days, eliminate the need for physiotherapy for most patients and reduce by 75% the need for replacement in 10 years. The new prosthesis costs 50% more the existing one. In addition. Dr. Benton would have to attend a five day training program. What should Dr. Benton do?

Total Costs

Dr. Benton will not receive additional payment for the new surgery method.

How would you estimate the value (benefits-costs) of this new procedure to Dr. Benton?

Finding Business to Business Opportunities

NEW MARKET OPPORTUNITIES

ACQUIRENEWCUSTOMERS

DEVELOPA RESEARCHPROGRAM

FIND OPPORTUNITIES WITH EXISTING CUSTOMERS

DEVELOP MARKETS AMONG CURRENT CUSTOMERS

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New Opportunities Current Customers

Identify best customers Maximize business with existing customers Develop and introduce new products Other members of the value chain – Network

New Customers Identify potential customer’s with a high LTV (Life-

Time Value) Search for Look-A-Likes for current customers (and

best customers) New Markets

Geographic expansion Another industry Vertical or horizontal integration

DEVELOP MARKETSAMONG CURRENT CUSTOMERS

FOUR STEP PROCESS

1. RANK YOUR BEST CUSTOMERS

2. MAXIMIZE REVENUES THROUGH

COLLABORATION EFFORTS

3. DEVELOP SPECIFIC PRODUCTS FOR EACH

CUSTOMER

4. LEARN OF SPECIAL NEEDS FROM YOUR

CUSTOMER’S CUSTOMERS

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FIND OPPORTUNITIES WITHEXISTING CUSTOMERS

1. ESTABLISH A FORMAL FEEDBACK PROGRAM

WITH CUSTOMER CONTACT POINTS (SALES,

SUPPORT)

2. DEVELOP DATABASES

3. COMPILE DECILE REPORTS

4. DEVELOP CUSTOMER RESEARCH ASSISTANCE PROGRAM

FOUR STEP APPROACH

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What Do We Need to Know About Current Customers?

Who are the customers Ours, competitor’s,

non-users Customer

Characteristics Benefits, brands, use,

resale, product What do they buy? Where do they

buy? Distribution options

When do they buy? Seasonality, how

often, how long does it take?

How do they buy? Decision roles,

purchasing agent, process, information sources

Why do they buy? Value, importance,

application Will they buy

again? Satisfaction, loyalty

Sensitivity to Marketing Mix

Research Approaches• Existing Customers

– Data Warehousing and data-mining– Empathic dialogue – active listening and

identification with customers concerns – customer-centered communication and problem-solving – Voice of the Customer

– Decile report – orders customers from best to worse based on purchase volume

• New Customers– Focus groups– Survey research– Trade show data– Secondary research– Customer Visits

ACQUIRE NEW CUSTOMERS

1. Calculate your current customer’s lifetime value (CLV) to serve as yardstick for planning

2. Find customers in a new segment who “look like” your existing customers

3. Expand into new geographic territory

4. Transfer/modify existing products for other industries

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FINDING SEGMENTS

1. USE NAICS CODES TO ASSESS INDUSTRIES’ SIZE AND NEEDS

2. EVALUATE COMPANY CHARACTERISTICS SUCH AS SALES, NUMBER OF EMPLOYEES

3. DETERMINE A COMPANY’S BUYING PROCESSES AND HOW THEY BUY

4. MATCH PRODUCT OFFERINGS TO COMPANIES SEEKING WHAT PRODUCT DOES BEST

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Fundamental Forces That Drive B2B Customer Needs – Segmentation Approaches

Fundamental Forces That Drive B2B Customer Needs – Segmentation Approaches

© 1997 Prentice-Hall, Inc.

Business-to-BusinessBusiness-to-BusinessCustomer NeedsCustomer Needs

CompanyCulture

UsageBehaviors

FirmagraphicForces

Number of EmployeesSales VolumeNumber of LocationsYears in BusinessIndustry (SIC or NAICS)Financial Situation

Business SophisticationGrowth OrientationInnovativenessTechnologyCentralized DecisionMaking

ApplicationQuantityTime of PurchaseFrequency of PurchaseExperienceUsers

14Best, Market-Based Management, Prentice Hall, 1997

Helpful / informative

BRAND D

BRAND C

BRAND A

BRAND B

Order processefficiency & accuracy

Reasonable price

After-sale service Rapid delivery

Technicalperformance

Exhibit 5-10

PERCEPTUAL MAP

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SEGMENTATION ANDOPPORTUNITY ANALYSIS

IDENTIFY SEGMENTS THROUGH INDUSTRY CLASSIFICATION (SIC / NAICS)

CHOOSE YOUR INDUSTRY TARGETS

CHOOSE YOUR SPECIFIC COMPANY TARGETS BY:

1. HOW THEY BUY2. THE BENEFITS THEY SEEK3. MEMBERSHIPS IN PROFESSIONAL / TRADE

ORGANIZATIONS

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CRITERIA FOR SUCCESSFUL SEGMENTATION

• SEGMENT MUST BE IDENTIFIABLE-enumerated and evaluated

+• SEGMENT MUST BE ACCESSIBLE-

can be reached by marketing activity

+• SEGMENT MUST BE SUBSTANTIAL-

enough to justify efforts

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ESTIMATING SEGMENT SIZE

ANALYTICAL TOOLSFOR SEGMENT EVALUATION:

1. USE OF SCENARIOS - Articulate events and futures

2. BUILDUP APPROACH/FACTORING – Estimate product use in its applications

3. STATISTICAL SERIES – Use correlation between demand and economic activities

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