More than 35 years ago, Peter Drueker observed that a company's first task is :co create customers'. However, creating customers can be a difficult task. Todays customers face a vast array of product and brand choices, prices and suppliers. The company must answer a key question: How do customers make their choices?
The answer is that customers choose the marketing offer that gives them the most value. Customers are value-maximizers, within the bounds of search costs and limited knowledge, mobility and income. They form expectations of value and act upon them. Then they compare the actual value they receive in consuming the product to the value expected, and this affects their satisfaction and repurchase behaviour. We will now examine the concepts of customer value and customer satisfaction more carefully.
customer delivered value The difference between total customer value and total customer cose of a marketing offer- 'profit' to the customer.
Consumers buy from the firm that they believe offers the highest customer delivered value - the difference between total customer value and total customer cost (see Figure 11,1). For example, suppose that an Irish farmer wants to buy a tractor. lie can either buy the equipment from his usual supplier, Massey-Ferguson, or a cheaper east European product. The salespeople for the two companies carefully describe their respective offers to the farmer.
'Triumph communicate it specific benefits that target consumers.
The farmer evaluates the two competing tractors and judges that Massey-Ferguson's tractor provides higher reliability, durability and performance. The customer also decides that Massey-Ferguson has better accompanying services -delivery, training and maintenance - and views Massey-Ferguson personnel as more knowledgeable and responsive. Finally, the customer places higher value on Massey-Ferguson's reputation. The farmer adds all the values from these four sources - product, services, personnel and image - and decides that Massey-Ferguson offers more total customer value than does the east European tractor.
Does the farmer buy the Massey-Ferguson tractor? Not necessarily. The firm will also examine the total customer cost of buying the Massey-Ferguson tractor versus the east European tractor product. First, the buying firm will compare the prices it must pay for each of the competitors' products. The Massey-Ferguson tractor costs a lot more than the east European tractor does, so the higher price might offset the higher total customer value. Moreover, total customer cost consists of more than just monetary costs. As Adam Smith observed more than two centuries ago: The real price of anything is the toil and trouble of acquiring it.' Total customer cost also includes the buyer's anticipated time, energy and psychic costs. The farmer will evaluate these costs along with monetary costs to form a complete estimate of his costs.
The farmer compares total customer value to total customer cost and determines the total delivered value associated with Massey-Ferguson's tractor. In the same way, he assesses the total delivered value for the east European tractor. The farmer then will buy from the competitor that offers the highest delivered value.
How can Massey-Ferguson use this concept of buyer decision making to help it succeed in selling its tractor to this buyer? Massey-Ferguson can improve its offer in three ways. First, it can increase total customer value by improving product, services, personnel or image benefits. Second, it can reduce the buyer's non-monetary costs by lessening the buyer's time, energy and psychic costs. Third, it can reduce the buyer's monetary costs by lowering its price, providing easier terms of sale or, in the longer term, lowering its tractor's operating or maintenance costs.
total customer value
The total of all of the product, services, personnel and image values that a buyer receives from a marketing offer.
total customer cost The total of all the monetary, time, energy and psychic costs associated with a marketing offer.
Customer delivered value
Suppose Massey-Ferguson carries out a customer value assessment and concludes that buyers see M as sey- Fergus oil's offer as worth [£20,000. Further suppose that it costs Ma ssey-Fergus on I£14,000 to produce the tractor. This means that Massey-Fer^uson's offer potentially generates [£6,000 ([.£20,000 -1X14,000) of total added value. Ma ssey-Fergus on needs to price its tractor between I£14,000 and [£20,000. [f it charges less than [£14,000, it won't cover its costs, [f it charges more than [£20,000. the price will exceed the totai customer value. The price Masscy-Ferguson charges will determine how much of the total added value will be delivered to the buyer and how much will flow to Massey-Ferguson. For example, if Mas sey- Fergus on charges I£l 6,000, it will grant I£4,000of total added value to the customer and keep [&2.000 for itself as profit If Massey-Ferguson charges [£19,000, it will grant only 1£1,000 of total added value to the customer and keep [£5.000 for itself as profit. Naturally, the lower Massey-Ferguson's price, the higher the delivered value of its offer will he and, therefore, the higher the customer's incentive to purchase from Massey-Ferguson, Delivered value should be viewed as 'profit to the customer, Given that Massey-Ferguson wants to win the sale, it must offer more delivered value than the east European tractor does.3
Some marketers might rightly argue that this concept of how buyers choose among product alternatives is too rational. They might cite examples in which buyers did not choose the offer with an objectively measured highest delivered value, Consider the following situation;
The Mas sey-Fergus on salesperson convinces the fanner that, considering the benefits relative to the purchase price, M ass ey-Ferguson's tractor offers a higher delivered value. The salesperson also points out that the east European tractor uses more fuel and requires more frequent repairs. Still, the farmer decides to buy the east European tractor.
How cart we explain this appearance of non-value-maxhnizing behaviour? There are many possible explanations. For example, perhaps the farmer has a long-term friendship with the east European tractor salesperson. Or the farmer might have a policy of buying at the lowest price. Or perhaps the farmer is short of cash, and therefore chooses the cheaper east European tractor, even though the Massey-Ferguson machine will perform better and be less expensive to operate in the long run.
Clearly, buyers operate under various constraints and sometimes make choices that give more weight to tbeir personal benefit than to company benefit. However, the customer delivered value framework applies to many situations and yields rich insights. The framework suggests that sellers must first assess the total
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customer value and total customer cost associated with their own and competing marketing offers to determine how their own offers measure up in terms of customer delivered value. If a seller finds that competitors deliver greater value, it has two alternatives. It can try to increase customer value by strengthening or augmenting the product, services, personnel or image benefits of the offer. Or it can decrease total customer cost by reducing its price, simplifying the ordering and delivery process, or absorbing some buyer risk by offering a warranty.4
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