● Johnson and Johnson responded immediately and with total integrity to the Tylenol incident
● Marriott Hotels put enormous emphasis on encouraging all guests to com- plete customer satisfaction forms on completion of a visit to their hotels
● Many companies are now offering unconditional service guarantees that signal a customer promise to both external customers and internal employees.
Such initiatives may not represent a high level of sophistication in terms of CRM but are as important to building customer value as advanced technology solutions.
perceptions about both product performance and their complete experience with the brand. Brands have become a major determining factor in repeat purchase and an important way of adding differenti- ation. Branding also has an important role in helping customers be assured of high and consistent quality.
Perceived quality is as dependent on factors such as reliability, responsiveness, assurance and empathy, as it is on tangibles. This means that managers should give increased attention to these fac- tors, which increase customer value as a means of brand building.
The American Express green card is a good example of a strong brand that is valued highly by customers as a result of association with these factors. Historically, in strict product terms, it has com- pared unfavourably with Visa or Mastercard:
● Until relatively recently American Express offered no convenient option to pay off its bill monthly. The entire balance had to be paid upon receipt of the statement
● Only a quarter of the number of merchants worldwide that take Visa/Mastercard accept American Express
● Emergency cash is available to American Express holders at only 20 per cent of locations at which it is available to the Visa or Mastercard holder
● The American Express yearly fee is typically more than any Visa or Mastercard, some of which do not charge any annual fees.
Despite these shortcomings, American Express green card is a highly successful brand. Many consumers are willing to pay more for a less useful, less convenient credit card. By positioning their card as a
‘travel and entertainment card’ and themselves as a customer- focused organization, American Express have created a distinctive set of perceived benefits that no other card has achieved. Among these is a high degree of responsiveness when the cardholder has a real problem such as a lost card. The author recently reflected on how, over 15 years ago, the American Express office in New York could replace a stolen card within two hours, while in the 2000s it took a major British bank over 15 days to accomplish the same task.
As a result of such experiences, the brand image is further enhanced or diminished in the eyes of the customer.
The importance of brand image
Examples of the value of brand image is apparent in all industries.
One of the best illustrations of this is the taste test for Coke and Pepsi,
shown in Figure 3.5. The column titled ‘open’ shows the results of a survey of an open taste where the two products were placed in front of the respondents. Apparently using their most discriminating taste sensitivities, 65 per cent of those surveyed preferred Coke, while 23 per cent preferred Pepsi and 12 per cent of them ranked them equally.
When a matched sample was subjected to a blind taste test (where the identity of the two colas was concealed – see column titled
‘blind’), there was a very different result. The blind taste test showed 44 per cent preferred Coke and 51 per cent preferred Pepsi, an increase in preference for Pepsi of over 120 per cent. Significantly dif- ferent results were obtained from the consumers in the two different controlled tests.
How can this great difference and resulting brand loyalty be explained? The answer is that customers ‘taste’ both the drink and its brand image. This brand image adds value to the consumer when they see the familiar Coke package and logo. While these ‘added values’ may relate to an emotional level they are, nevertheless, real for the customer perceiving them. The subsequent New Coke deba- cle when Coca-Cola introduced a new product that tasted better in blind taste tests, but was not acceptable to customers, taught them a painful lesson about their brand. Coke is not only seen as a drink by its consumers, but also in the light of what it represents in terms of Americana and its heritage and past relationship with them.
In the business-to-business sector, a similar form of trust and loyalty can be built with the brand. Many executives who have purchased from companies such as IBM and McKinsey & Company have heard such quotes as: ‘No purchasing manager in recorded history has ever been fired for buying IBM’; and ‘McKinsey is the safe option’. Brands such as these have historically been able to create customer value by positioning themselves as highly trusted partners.
Value for the customer is added through the creation of brand image. As a result, the owners of strong brand names can command
Figure 3.5 Brand image
Open Blind
Prefer Pepsi 23% 51%
Prefer Coke 65% 44%
Equal/Can’t Say 12% 5%
higher prices for their offerings as they are valued more by cus- tomers. The value embedded in brands can be profound, as Kevin Lane Keller, a professor at Amos Tuck School, has pointed out: ‘the relationship between brand and the consumer can be seen as a type of bond or pact. Consumers offer their trust and loyalty with the implicit understanding that the brand will behave in certain ways and provide them utility through consistent product performance and appropriate pricing, promotion and distribution programs and actions.’11
Building brand value through relationships
Don Peppers and Martha Rogers have noted that CRM is about persuading consumers to participate in a dialogue by establishing a relationship that helps bond the consumer to the brand. By building a relationship with customers, the organization can create real and tangi- ble value for them. A good example of this value creation can be seen in motorcycle manufacturer Harley-Davidson’s successful turnaround.
Harley’s success is closely tied to needs, aspirations and relationships with its customer base and they have played to that strength (see box).
Harley-Davidson: Building a relationship brand
The Harley-Davidson story is one that shows how a world-famous brand has used customer relationships to emerge from near extinction and reclaim its pre-eminent position in the market. It has delivered dou- ble digit growth in both turnover and profits over the last decade. In 1903, Harley-Davidson produced a total of three motorcycles. In 2003, they built more than 250 000 and shipped them with extensive lines of branded clothing, parts and accessories and collectibles, to more than 60 countries worldwide. Sales were over $4 billion. Gross profit over
$1 billion and net income more than $0.5 billion.
A well-established Harley Owners Group (HOG) holds regular rallies around the world. These are often attended by company executives so that they can meet customers and talk about the company’s vision and values.
Anyone who buys a Harley-Davidson motorcycle becomes a member of the Harley-Davidson Club. The clubs meet at the dealerships, where they can ride together and also buy the company’s branded clothing.
HOG is a sub-brand that represents a relationship to a community of people, an affinity group of motorcycle owners. With HOG clubhouses strategically located in the dealerships, owners consume their product as
The behaviour of employees also contributes greatly to the brand.
Singapore Airlines is known as one of the most successful airlines in the world and one of the best for customer service. It is a good example of an enterprise putting considerable emphasis on building a brand relationship through moments of truth. The brand, through its ‘Singapore Girl’ campaign, is closely associated with high quality service. It delivers this outstanding service by having a ratio of one flight attendant for every twenty-two passengers, the highest in the world and well above the industry average. Singapore Airlines’
branding places great emphasis on its staff. In a very real sense its staff are the brand.
Branding and the Internet
Two brand experts, Martin Lindstrom and Tim Andersen, use Procter & Gamble as an illustration of the increasing importance of branding on the Internet. In 1930 Procter & Gamble did not spend any media dollars on radio. All money was dedicated to the print media. By 1935, some 50 per cent of the total Procter & Gamble media budget was devoted to radio. In 1950, three per cent of Procter’s media spending went to television. By 1955, 80 per cent of their total media budget was devoted to television. In 1998 Procter &
Gamble established their first worldwide online centre. The pur- pose: to ensure that Procter & Gamble would be ready to move their television budget onto the Internet at the right time.13
By 1999 P&G Interactive were named Marketer of the Year by Advertising Age. They have led the way in gaining online consumer acceptance, standardizing measurement and defining advertising models and making online media easier to buy. They have also demonstrated considerable ingenuity in their Internet branding campaigns. For example, in an online campaign for Bounty paper towels, P&G created a new advertising format called ‘sequential part of a Harley-Davidson community. They have not only bought a Harley motorcycle, they have formed a relationship with other members of the owners club and identify with the group through wearing branded merchandise. Harley-Davidson owners place great value on the brand and are extremely loyal with a 95 per cent repurchase rate.12A good number of them demonstrate their relationship to the brand by having a Harley-Davidson tattoo on their arms – a unique and perma- nent symbol of loyalty to the brand!
messaging’ in which it broke down the message into four units and delivered them to the user at different areas of the site, based on their level of involvement with the company. P&G found that sequential messaging significantly increased purchase intent.14
At the time of writing, US consumers spend some $93 billion annu- ally on shopping directly online. A further $138 billion is spent by them on goods and services purchased offline after first seeking information online. This research, carried out by the Dieringer Research Group for the American Interactive Consumer Survey, underlines the importance of the Internet as a channel for the brand.
Overall, some 23 million Americans spend $500 or more, both online and offline, after first gathering product information online. When asked about the impact of the Internet on brand images, 45 per cent of all online adults, which equates to 25 per cent of all US consumers, said that their brand opinions had changed in one or more of the ten common product categories covered by the survey.15
However, despite this great shift to Internet activity, Lindstrom and Andersen point out that the future Internet generation does not trust the Internet as an information source. They cite a Time-CNN survey on young people that shows trust of information on the Internet is only one third the level that it is in other media such as newspapers and television. They conclude that brands will need to act as a trusted ‘consumer guide’ on the Internet, a development which will make much greater future demands on the online brand to create customer value.
Goodwill and trust cannot be bought; they are earned over time.
Considering no online brand can represent more than a five-year his- tory, there have been only a few online brands that have earned con- sumer trust, for example, Yahoo!, Amazon, AOL and Excite. It could be said that ‘real world’ trusted brands such as Disney have ‘free tickets’ to consumer web trust while the online brand market is still immature. However, established brands like Disney have realized they have to employ the same brand management respect for the customer that they would have in the real world to maintain and extend that ‘Disneyesque’ trust from real world to online world.
Disney takes all that is good about their company (family values, safe community and trust) and transfers it online.16
Value and branding in context
Three decades ago branding was mainly the domain of consumer goods. Now we see efforts to establish and sustain distinctive brands
in every sector. In the past, many companies have emphasized the brand name rather than brand equity. Brand equity represents the set of brand assets and liabilities that collectively add to or subtract from customer value and this has recently become a key area of focus for all enterprises. With a widespread acceptance of the importance of brands, there has been increasing recognition that the consumer’s choice depends less on evaluation of the functional benefits of a product or service and more on their assessment of the company and the people behind it.
In an offline environment, the relationship that customers have with a brand is frequently the result of their interactions with the staff of that organization and their perceptions of service quality. The brand relationship is the outcome of a series of brand contacts that the cus- tomer has with the organization. Over time these customer contacts or
‘moments of truth’ result in increased or decreased customer value.
In an online environment, the Internet creates major opportunities and threats for brands. The greatest opportunities relate to speed and cost. The great advantage the Internet has over more traditional media is its ability to manage customer relationships from aware- ness to buying action. It also potentially enables customer contact 24 hours per day at much lower cost. However, as noted above it is a much less trusted medium.
Overall, there are more similarities than differences when building a traditional versus an online brand. The key issue is to ensure that where customers use offline and online channels there is brand con- sistency and they have superior customer experiences. We will return to this issue in Chapter 4.
The value proposition
Having examined how product and service offers, relationships and brands can be utilized in order to create customer value, we now turn our attention to how these components of customer value can be utilized in a formal statement of value, or value proposition.
In recent years managers have started to use the term value proposi- tion increasingly frequently. This term is employed in two ways by organizations. First, in general terms it is used to describe the notion of creating value in a very broad sense. Second, in more specific terms, it is used to describe a detailed analytical approach to value creation.
However, the term is most frequently used in the general sense
without any analytical underpinnings. Discussions with many organi- zations suggest that relatively few attempts have been made by them to develop a structured approach to formulating value propositions.
Where they do have a formal statement of their value proposition, this is often not based on any analysis.
A value proposition defines the relationship between what a supplier offers and what a customer purchases by identifying how the supplier satisfies the customers’ needs across different customer activities (e.g. acquiring, using and disposing of a product).
Specifically, it defines the relationship between the performance attributes of a product or service, the fulfilment of needs and the total cost. The aim of all businesses is to create a value proposition for customers, be it implicit or explicit, which is superior to and more profitable than those of their competitors.
Value propositions explain the relationship between the perform- ance of the product, the fulfilment of the customer’s needs and the total cost to the customer over the customer relationship life-cycle (from acquisition of the product through to usage and ownership and eventual disposal). As every customer is different and has changing needs, it is crucial that the value proposition for each cus- tomer is clearly and individually articulated and cognizant of the customer’s lifetime value. Thus the economic value of customer segments to the organization informs decisions about the value proposition. This topic is addressed later in this chapter.
A structured method for developing value propositions, origi- nated by consulting firm McKinsey and Co. and further developed by others,17–21is comprised of two main parts: formulation of the value proposition and profitable delivery of this value proposition by means of a value delivery system.
Formulating the value proposition
Formulating the value proposition forms the first part of the value proposition concept. Some examples of value propositions, based on work by consultants Michael Lanning and Lynn Phillips,22 are shown in Figure 3.6. The approach followed in developing these value propositions involves determining:
● the target customers
● the benefits offered to these customers
● the price charged relative to the competition, and
● a formal statement of the value proposition.
The value proposition approach suggests companies should adopt a three-step sequence of:
● analysing and segmenting markets by the values customers desire
● rigorously assessing opportunities in each segment to deliver superior value
● explicitly choosing the value proposition that optimizes these opportunities.
Step 1: Analysing markets based on value
This first step involves understanding the price/benefit opportuni- ties that exist within the market and here the value map can prove a useful tool. Value maps provide a graphical presentation of the relative positions of different competitors in terms of the benefits and price attributes that relate to customer value.
Figure 3.7 shows a value map for the airline industry past and pres- ent based on a study undertaken by a group of New York University researchers.23 It depicts a value frontier that incorporates the price/benefit positions of the major carriers. If all competitors are in a similar position on such a map, commoditization and reduced prof- itability would probably result. This situation is apparent with many players in the airline industry. On the other hand, highly successful companies tend to establish differentiated positions on the value
Figure 3.6 Examples of value propositions for various industries
Company/ Target Benefits Price Value proposition
product customers
Perdue Quality- Tenderness 10 per cent More tender, golden
(chicken) conscious premium chicken at a moderate
consumers of price premium
chicken
Volvo Safety-conscious Durability 20 per cent The safest, most durable (estate ‘upscale’ and safety premium estate car your family
car) families can travel in at a
significant price premium Domino’s Convenience - Delivery 15 per cent A good pizza, delivered
(pizza) minded pizza speed and premium hot to your door within
lovers good quality 30 minutes of ordering, at
a moderate price premium
frontier. If companies fall consistently in the underperformer region of the map their future survival is questionable.
These researchers suggest three generic strategies for developing differentiated value propositions on the value map:24
1. Extend the value frontier towards the low end of the value map – the strat- egy adopted by Southwest Airlines in the USA and by easyJet and Go airlines in Europe.
2. Extend the value frontier towards the high end of the value map – this strategy was adopted by British Airways and Air France with their Concorde fleets before they were retired. Pursuit of this strategy is often based on technological innovation.
3. Shift the value frontier – the strategy adopted by Virgin Atlantic with its
‘upper class’ service, offers first class facilities and a highly distinctive personality based on a business class fare structure.
High-performance companies characteristically focus on the develop- ment of superior value propositions in order to take advantage of new growth opportunities and identifiable, premier customer groups.
Step 2: Assessing opportunities in each segment to deliver superior value When a critical review of any market is undertaken it soon becomes obvious that the idea of a single market for a given product or serv- ice is highly restrictive. As we discussed in the previous chapter, all
Cost
Performance
Virgin Atlantic The value
frontier
British Airways Concorde Air France Concorde (before discontinuation of service)
Southwest Airlines easyJet
Go Braniff Pan Am
Shifting the value frontier
Upward extension of value frontier
Major carriers:
American, British Airways, Cathay, KLM, Lufthansa, etc
Downward extension of value frontier
Figure 3.7 Value map for the airline industry (past and present)