Definition of customer value in the context of a value chain


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I work for a large complex company, I delibrately do not want to say, which business it is in, in order to make this discussion general. In this company, as in many others, there are lots of departments that deliver questionable value, and could be described as fat that could be cut away.

When trying to consider whether a department is delivering real customer value or not, I have to realize that I do not have a clear definition of customer value. My best guess so far is to define customer value as something the customer is willing to pay for. This is a very clear definition, which is quite measurable, by asking customers how much they are willing to pay for something. There are, however, several cases that I believe should be included in the definition as well. And I am looking for a definition, which enables the calculation of customer value also in these special cases.

  1. With the definition, basically all online news paper would be considered to deliver a so low value so they should be considered fat, and cut away. The reason for this is that there are so few customers that are willing to pay for online news.
  2. How does one calculate the value of making an advertising campaign, with the purpose of increasing brand recognition and image?
  3. How does one calculate the value of having very satisfied customers compared to just satisfied customers. In other words, what is the added value by offering a service, which customers are not willing to pay for, but makes them very happy (a stupid example is a free bottle of champaign in their new car).
  4. How does one calculate the value of a department, which only contributes to destroy the value of a competitor. Say, Oracle contributing to the development of OpenOffice in order to reduce the income of Microsoft (I know there could be other reasons for them supporting the development, but let's say that this was the only reason).

I believe all upper management are able to have an opinion about these issues, but I am not sure they have a clear conseptual way of thinking about the issue.

How can customer value be defined so that all these special cases are considered to deliver customer value. The definition should be so clear that one can make a calculation of customer value where the output will be money.

Strategy Strategic Management Value Add Customer Value

asked Feb 26 '11 at 23:19
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David
1,567 points

1 Answer


1

This is a complex question with multiple interwoven threads of inquiry. To do any of them justice in a simple post is impossible. Perhaps I could just throw out some points for consideration?

The customer is the person who pays the bill. In an online news site -- as in paper news sites -- the customer is not the reader, because the reader does not pay the bills. The advertiser does. The advertiser is the customer. The product is not news. The product is the reader. The news site uses inflamed retelling of daily happenings to aggregates a demographic profile of readers/watchers/gawkers that an advertiser is willing to pay for.

This is value triangulation and is seen in many industries. Let's go to the extreme -- so that we can tie back to the point about the calculation of customer value as the foundation for decisions about cost savings measures.

The extreme is in the non-profit sector. Who is the customer of the local youth service agency? It is not the youth -- they don't pay for the service. It is the philanthropic donor that pays the bills. In the best case scenario the demographic profile of the youth combined with the "great' work the nonprofit does is the product which is sold to the donor. Sophisticated donor acquisition (fundraising) departments understand the psycho-graphic profile of the prospective donor to know that often the donor really cares very little about the actual work-- what they are purchasing is pride, legacy, name, profile and often even guilt-alleviation. They design their product offering accordingly. The result is that we have fancy balls that masquerade as charity events to benefit this or that perceived or real victim of such and such injustice. If one believed that the youth were the customer, then clearly these balls would be cancelled. Unfortunately if they were -- or the dinner, or the fancy team or the . . . . - the funding would dry up.

The word that emerges out of the nonprofit sector in their attempt to deal with this triangulation is "Stakeholders" -- there are multiple stakeholders -- of which the "customer" or the person paying the bill has one.

For a complex multi-national company such as yours there is a complex network of internal and external customers -- and stakeholders. The investors are stakeholders. The vendors are stakeholders. The employees are stakeholders. Together those complex weave of relationships forms your company's community.

And for a community to survive -- there must be some level of value to all of the members of the community to stay engaged. End of the year bonuses and birthday parties may not deliver any value to the customer -- but they keep employee moral high, productivity high, turnover low, all of which can demonstrably impact the bottom-line for the investors. A strong brand protects margin on premium products and decreases cost of new product introductions. A healthy vendor network allows

I would propose that a "logic model" can be developed which ties evaluative assumptions together to connect an expense to the core value delivered to a stakeholder. The stronger those logic models, and the tighter the chains they construct the better. The key is to understand the true customer and to honor the value of all stakeholders of the "community."

I don't know if this provides any illumination or simply more confusion -- but I did appreciate the opportunity to articulate!

answered Mar 21 '11 at 13:52
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Joseph Barisonzi
12,141 points
  • Your answer turned my world upside-down, so I am deeply confused. This is of course only good and I believe I will process your points in the next days, and maybe come out in a shape where I can ask new questions. I will especially try to see if I am able to understand what such a "logic model" would look like. – David 8 years ago

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