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4.1 Customer Value Basics

Sometimes, customers’ choices are difficult for a firm to understand. Consider Chris, a consumer evaluating two brands of aspirin side-by-side. One brand, the national brand, costs $5.99. The other brand, a store brand, costs $3.19 for a package that contains more than twice the quantity in the national brand’s package. Chris winces when she sees the price difference, as she is managing her household under an end-of-the-month budget constraint, so even a couple of dollars really matter. In addition, Chris has a high degree of confidence—based on research evidence and the reported conclusions of the U.S. Food and Drug Administration (FDA)—that one unit of the generic brand provides essentially the same performance and benefits as one unit of the national brand. Yet, after brief consideration, Chris grabs the national brand and puts it in her shopping cart.

Observing such a decision would be extremely disheartening to two people: (a) a classical economist, and (b) the category manager for the retailer who wishes to build their store brands. The decision would not make sense to the economist, who assumes that consumers are utility maximizing. The economist knows that, given full knowledge of the brands, Chris should choose the best value for the money. Similarly, the store category manager might be equally disappointed over Chris’s choice, as the manager is seeking to build the private label brand’s sales performance.

But Chris’s decision makes sense when one considers the reality that she sees. She is buying the aspirin for her husband, who was just advised by his doctor after a check-up to take one aspirin a day for circulation. This decision is linked to a very important concern for her: the health and safety of her spouse, which motivates her to manage risk. Further, the national brand was always in the medicine cabinet at her home when she was a little girl. She has a deep and abiding trust in the brand, as her mother was always a loyal purchaser. Although dressed in packaging with similar colors and design, the store’s private label brand, positioned right next to the popular national brand, has plainer and less informative packaging. Yet Chris remembers reading an FDA conclusion that generics can be expected to produce the same benefits as the brand-name equivalent provided they have gone through the same approval process. So with a very high level of confidence, she assumes these two brands are very similar in the basic benefits they deliver.

In the end, though, this is not a decision where she wants to take the chance that the private label manufacturer did not “go through the approval process.” This will be a product her husband will be taking regularly, for a long period of time, to keep him healthy. In addition, although her husband has never had a stomach problem from using aspirin, she notes that the national brand has a coating, which may help in everyday consumption, just in case. For a brand with which she is more assured, Chris is happy to pay $2.80 more for a package containing less than half the number of aspirin tablets. From different perspectives, this decision may not make sense to people, yet it makes complete sense to Chris.

Customer Value: Some Basic Concepts

As we have discussed, a common representation of customer choice is to summarize key reasons for purchase as benefits or costs, and to suggest that the customer makes an overall evaluation of each choice option, comparing these concepts.This notion is standard to many conceptualizations in the disciplines of marketing and in the trade literature on measuring customer value and satisfaction. See Zeithaml (1988); Kordupleski (2003); and Gale (1994). The benefits represent what the customer gets from the purchase. This “get” can be broken down into component parts, often identified as attributes. Recall that in Chapter 2 "Introduction to 3-Circle Analysis", we defined attribute to be an inherent characteristic or a quality of some object. In Chris’s decision, she considered attributes such as effectiveness, package size, familiarity with the brand, and whether the aspirin is easy on the stomach. What is the “give”? This is Chris’s perceptions of the costs of the purchase, represented most predominantly by the price in this case. Two issues briefly bear further discussion.

First, somehow, Chris obviously combines this information to come to a choice. We know that she considered price and package size trade-offs, for example, and further integrated her trust in the brand. There is no one particular method by which customers choose—some people may be completely price driven (i.e., “always choose the lowest price”), while others may be totally driven by a perceived benefit (e.g., “always choose the most effective”).To see a basic accounting of the types of choice rules that consumers may use in decision making, see Bettman (1979); Wilkie (1994). For our purposes in this book, we will get enough information in knowing that (a) customers make choices, (b) those choices involve evaluating different options on particular attributes, and (c) those attributes vary in importance.

The second point is to distinguish between attributes and benefits, but then to suggest that we will often refer to them in the same breath. While an attribute is an inherent quality or characteristic of a product or service, a benefitA result or outcome associated with consuming that product or service. is a result or outcome associated with consuming that product or service. So while effectiveness (measured by amount of pain killer in the aspirin) could be considered a feature or attribute of aspirin, the associated benefit of consuming the aspirin is that “I feel better quickly.” Alternatively, the benefit attached to a larger package size is that “I don’t have to go to the store as often.” Very often, measurement of customer beliefs is made at the attribute level because attributes are concrete and easy to envision. We will soon see that the consumer’s translation of attributes to benefits (and then even deeper values) becomes critically important for creating distinctive value around which growth strategy can be built. Before we get there, though, let us consider attributes as dimensions of value in more depth.

Attributes and Competition: Six Lessons

In the preceding analysis, the attribute is the key unit of analysis—it might be thought of as the DNA of customer choice. Let us first consider some basic principles underlying the evolution of competition in a given market. In his book Strategic Marketing Management: A Means-End Approach,Parry (2002). Mark Parry provides an excellent illustration of the principles described here in his analysis of a seemingly simple product category—toothpaste. Beginning with Pepsodent in the 1920s, and its appeal to white teeth and attractiveness, and carrying through to developments of fluoride, health, and good parenting (e.g., Crest, in 1956), packaging (e.g., first pump in 1984 by a brand called Check-Up), and baking soda (Arm & Hammer, in 1986) as examples, Parry’s work illustrates the story of competitive dynamics in the market as a story of attributes and benefits. This historical review provides a helpful context in which to highlight the following key principles regarding customer-value dynamics and competition.The six lessons described here are based upon a variety of sources, each source reflecting an important contribution to the literature on strategy. These include Peter Dickson’s (1992) work on competitive rationality and market dynamics, Theodore Levitt’s (1980) work on differentiation and associated dynamics, Chan Kim and Renee Mauborgne’s (1997, January–February) work on value innovation, and Tom Reynolds’s work on laddering and values (Reynolds and Gutman 1988).

Lesson 1: Every choice option—particularly products and services in the marketplace—can be broken down into attributes and benefits. Figure 4.2 "How Many Attributes?" is a picture of a contemporary package of Crest toothpaste. How many attributes and benefits are reflected on the label? A quick count shows at least seven—tartar control, whitening, with Scope, minty fresh, liquid gel, fluoride anticavity, and strengthens enamel. Note that the attributes are presented as factual statements of product features (e.g., “contains fluoride”), while benefits reflect outcomes of using the product (e.g., “strengthens enamel”).

Lesson 2: Certain attributes and benefits are required just to be in the game. Some attributes and benefits in a category are “stakes of the game”—your brand needs to have them just to play. So competing automobile manufacturers make vehicles with four wheels and a steel or aluminum chassis that run (largely) on gasoline and get people from point A to point B. These attributes represent the “core” product. For toothpaste, the core product is simply having an agent of some form (the choices now include paste, liquid, or gel) designed to clean teeth and made available in easy-to-use packaging, conveniently distributed in high-frequency locations.

Lesson 3: Other attributes and benefits provide differentiation. A fundamental law of the marketplace, however, is that competitors seek growth by differentiation. That is, in order to motivate and incentivize customer choice of their brand, the firm seeks to make it different from the competition in a way that is important to customers. So, for example, Crest was the first to introduce fluoride as an ingredient (an attribute) in 1955. That introduction created the modern era of competition in the toothpaste market. In the intervening 40 years, the innovation and product development in this category has been fast and furious.

Figure 4.2 How Many Attributes?

Lesson 4: Once-differentiating attributes eventually become common, competition evolves around the ebb and flow of new attributes and benefits, which accumulate over time. Parry follows the evolution of the toothpaste product category, beginning with initial value-added attributes around taste, whitening, and social benefits. But Crest’s introduction of fluoride protection and subsequent endorsement from the American Dental Association in 1960 turned the market on its head. This created a new subcategory called “therapeutic,” which gained 14.5% of the market by 1960 and 54.7% by 1965.Miskell (2005, January 17). Today, however, we find that nearly all toothpaste brands have fluoride. In other words, fluoride has gone from being a differentiating attribute for Crest to being a must-have. (This is an idea explored in more detail in the next chapter.) But there is a critical point here in understanding the dynamics of competition. The tendency to seek differentiation builds on itself. Firms produce a constant stream of new ideas when the power of the last idea to distinguish the brand has “worn out.” This leads to a situation in which attributes are added over time, each with an eye toward seeking a differential advantage for the brand and each urgent when competitors have copied the last new feature. Figure 4.3 "Benefits From Toothpaste" illustrates, for the toothpaste category, how those value-adding features or benefits accumulate. The product becomes much more complex than it was at the start and enormous variety ensues. The point here is that there may in fact be growth opportunity in understanding this accumulation—in part because some attributes that were once differentiators may in fact become expendable over time!

Lesson 5: While attributes reflect features, ingredients, or characteristics of a choice option, benefits represent the consequences or outcomes of using that choice option. One of the most often-repeated phrases in the discipline of marketing is that “people buy benefits, not attributes.” This is a significant point, one often lost in practice. Chris Wirthwein, an ad agency CEO, describes his recent desire to indulge a childhood passion and purchase a telescope to “explore the universe again.” When he began shopping, Wirthwein had a general idea about the benefits he sought but was essentially a novice beginning at square one. What he found were manufacturers’ websites that were very thorough at explaining the detailed technical features of their telescopes but extremely poor in making sense of them for potential buyers:

Figure 4.3 Benefits From Toothpaste

Everyone talked over my head. On every website I visited, the copy seemed to have been written not for humans but for some race of unemotional alien beings. I was promised diffraction-limited Schmidt-Newtonians, achromatic refraction, and German-type equatorial mounting. I was enticed with enhanced aluminum coatings and large aperture Dobsonians…[the dealers’ websites] were more muddled and confusing than the manufacturers’ sites.Wirthwein (2008), p. xvi.

In fact, there is a certain cause and effect for customers in choice and consumption behavior. We eat and that satiates our hunger. We drink and that satisfies our thirst. We look into a telescope and experience the thrill of exploring the stars. So when we buy, we do our best to estimate whether the attributes of the offering will get us to the outcomes we seek. The reason fluoride became such an important attribute for Crest to add was that it so clearly linked to higher-order, significant personal benefit for consumers (i.e., fluoride → cavity prevention → good health). As customers, we tend to think in terms of outcomes from using the product or service. In contrast, firms tend to think in terms of the features of the products or services that they have spent so much time developing, often without fully thinking through whether the product or service will do the job the customer would like to get done.

A key to building growth strategy is to think broadly and think deeply. Thinking broadlyBreaking outside of a current view of your product or service in terms of price, quality, and service. means breaking outside of a current view of your product or service just in terms of price, quality, and service. Your product or service, and the way you interact with customers, produces all sorts of outcomes or benefits for them, with many dimensions. It is important to put meaning on those benefits. Thinking deeplyRecognizing that there are deeper values or problems that drive customers’ decision making. means recognizing that there are deeper values or problems that drive customers’ decision making. Understanding this can literally be the difference between big success or failure of a new product. The idea of thinking broadly means to stop for a moment and consider the different potential dimensions on which customers may get value from your firm and your offering. So what are the types of benefits that customers might experience in purchasing and consuming products or services? As outlined here, there are many more than you may realize.

  • Functional: Does the product or service provide some basic outcome or consequence that the customer values? This is truly the direct cause-effect type of instrumental benefit—for example, I drink a Red Bull, I feel energized (I have wiiings!). What are the outcomes your customers seek from consuming your product or service? Does your offering provide this value reliably and consistently?
  • Place: Is there value for the customer in the convenience and accessibility of location in acquiring this brand? This is about meeting customer needs regarding lot size, market decentralization, waiting time for orders, product variety, and service backup. Although cutting back on locations more recently, Starbucks has certainly gained enormous value in ubiquity over time, as have their customers. Procter & Gamble developed a distribution strategy aimed at reaching tens of thousands of small, high-frequency stores in areas outside larger Mexican cities that accounted for $16 billion in sales annually.Byron (2007, July 16).
  • Financial: Are there financial benefits associated with your offering? To some degree, this is associated with the firms that are positioned as low-cost leaders—such as Dell, McDonald’s, and Southwest Airlines. However, there is a literature in economics and marketing that identifies and explores a unique impact of the feeling of a “good deal.”Thaler (1985); Urbany et al. (1988); Compeau et al. (2002).
  • Information: Does the customer feel “informed” in consuming its products or services? There is enormous potential competitive advantage here in building more clarity into products and services. An example is Exempla Healthcare Systems, which was a pioneer in the publication of internal quality and performance, including mortality data for various conditions and procedures.
  • Time: Does the consumer perceive value in the speed of service and general timesaving in consuming this brand? Part of the issue here is saving time, which is a natural benefit in terms of “time for other things.” However, there are more subtle dimensions. For example, research has found that providing an explanation of waiting time gave consumers greater satisfaction with the experience because it provides a greater sense of control.Hui and Zhou (1996).
  • Relationship: Does the customer feel connected to this brand, past experiences, and employees? This is a close cousin to the symbolic factor still to be discussed. Apple is a good example of a brand with which customers feel a strong resonance and personal connection.
  • Experiential: Does the customer get particular enjoyment or satisfaction out of the consumption experience? Disney’s value is built around experience, as are Starbucks stores, through the music and ambience. But interestingly, almost all product and service consumption has some experiential dimensions, including Wal-Mart (Ever get greeted at the front door with a nice “hello” from a smiling senior citizen?).
  • Symbolic: Is the consumer proud to wear this brand on his or her sleeve? Rolex watches, Pierre Cardin clothing, and automobile brands like Lexus, Mercedes, and BMW are all quite visible representations of personal value for customers. The values may be related to success or achievement, or they may be related to affiliation with other reference people or groups. The same holds in business-to-business markets. For many years, IBM was the dominant supplier of PCs in the workplace: It was risky for corporate buyers not to buy the IBM brand. IBM was a symbol of success and smart, low-risk purchasing behavior within the firm.
  • Psychosocial: Does the consumer relate to other people through consuming our product? Product or service consumption experiences at times create benefits for us in how we relate to others. So purchasing those tickets for the NBA game not only leads to personal enjoyment but also to a chance to impress a client. Figure 4.3 "Benefits From Toothpaste"—which also organizes consumer benefits around several of the benefit categories mentioned previously—illustrates a psychosocial benefit through “attractiveness to others.” That is, one benefit of using a particular brand of toothpaste may be that your fresh breath and white teeth will help in making a positive impression on others.

Lesson 6: Attributes are only important because they produce outcomes relevant to the customer’s values. The story behind DuPont’s success with Teflon illustrates this point. Teflon was derived from a solid called polytetrafluoroethylene (PTFE) discovered in 1938, one of the most slippery materials in existence. A French engineer named Marc Gregoire later discovered how to bond the material to aluminum. Teflon-coated cookware became available in the United States in the 1960s. But DuPont’s early efforts to promote this new product around the functional benefit of “fat-free cooking” produced poor results. It was not until the product was repositioned around a different functional benefit, “fast clean up,” that sales took off. Why? Interestingly, it is the same attribute (Teflon coating) and the same benefit (stuff will not stick to it) in either case. Yet the real tale is told by customers’ deeper values and benefits sought—that is, what they actually get from consuming the product. Consumers in the 1960s—especially the late 1960s, as married women were moving back into the work force—put a much greater personal value on time saving than on healthy eating. The key point is that the value that people see in any given bundle of attributes depends upon their own personal values.

Who knew toothpaste could be so complicated? But understanding these tendencies is critical to competitive growth strategy development. Growth can be found in understanding these values more deeply, by both discovering new ways to connect with them and identifying where existing attributes no longer connect. To get to these insights, though, we need a process for exploring and uncovering customer value sought. That is where we head next.