Fundamentals of Customer Value
To create successful customer relationships, companies must understand what their customers care about and what value proposition appeals to them. by Mohanbir Sawhney Kellogg School of Management
uccessful customer relationships are built on the bedrock of superior customer value. To attract and retain your most important customers, you must understand what they care about and what value propositions will appeal to them. While “value” is an overused buzzword, we rarely pause to reflect if we really understand what value is. It is a natural human failing to question the concepts that we think we know well. As Marshall McLuhan said, “We don’t know who it was that discovered water, but we’re pretty sure it wasn’t a fish.” In my decade-long career as a teacher, researcher, and author, I have written extensively about different aspects of creating, delivering, and capturing customer value. But this is my first attempt to distill my understanding of customer value into seven fundamental lessons. I hope these lessons help you in your quest for profitable customer relationships.
This definition embodies seven fundamental lessons on customer value:
1. Value Is Customer-Defined
You don’t define value. Your customers do. As Peter Drucker, the patriarch of management theory, notes, “What the business thinks it produces is not of first importance. … What the customer thinks he is buying, what he considers value, is decisive. And what the customer buys and considers value is never a product. It is always utility, that is, what a product does for him.” So the first lesson on value is that what you sell (products and services) is not what your customers buy (utility and value). As Ted Levitt pointed out so eloquently in his classic article “Marketing Myopia,” you may grossly misunderstand what business you are in if you see your business through the product lens. It is a myth that “if you build a better mousetrap, the world will beat a path to your door.” Customers don’t want mousetraps. They want to get rid of mice. While you may be busy building a better mousetrap, the customers may simply get themselves a good house cat! To understand how customers define value, you must focus on the outcomes that customers want when they buy and use your products. This will help you understand what your real business is. Lorenzo Zambrano, the CEO of CEMEX, the world’s most innovative cement company, notes that “at CEMEX, we understand that our real business is helping our customers complete their construction projects. At the end of the day, no one wants to buy cement; they want to build a house or a bridge or a road.” The same idea was echoed by Charles Revson, the founder of Revlon, when he famously observed, “In the factories, we make cosmetics. In the department stores, we sell hope.” This thinking has led CEMEX to provide community micro-loans to finance construction projects and to create a service for Mexican immigrants in the United States to repatriate funds directly to contractors selected by CEMEX to build houses in Mexico.
What Value Is
The dictionary defines value as: “Worth in usefulness or importance to the possessor.” As this definition suggests, value is the assessment of “all that you get in return for all that you give” in an exchange. More formally, I define customer value as “the perceived worth of the set of benefits received by a customer in exchange for the total cost of an offering, taking into consideration available competitive offerings and prices.” Consider an example. When a customer buys a new BMW automobile, she gets a certain level of performance, comfort, safety, and entertainment benefits from the car. She also gets service benefits like financing, warranty, repair, scheduled maintenance, and roadside assistance. And she gets the social status of belonging to an exclusive club of BMW owners. In return, the customer invests money, time, and effort in...