their factories but between ‘what they add to their factory output in the form of packaging, services, advertising, customer advice, financing, delivery arrangements, warehousing, and other things that people value’.2The value the customer attributes to these benefits is in proportion to the perceived ability of the offer to solve whatever customer problem prompted the purchase.
In this section we first review the nature of what the customer buys by explaining how the core and augmented product, relationships and brands all contribute to an enterprise’s value proposition. We then examine the nature of the value proposition and the value assessment.
The nature of value – what the customer buys
Customers do not really buy products or services – when they buy they expect benefits and value from the total offer the company pro- vides. This is not just a semantic point, it is an important distinction which can be strategically vital for the long-term survival of a firm.
There are many examples of companies who have taken a narrow view and considered their business purely in terms of the traditional products or services. As a result they were forced out of business when a competitor or competitors effectively reshaped the market by not only getting customers, but by keeping them!
and the other core basic physical components which make up the camera. For a banking service, the core elements might be safety and transactional utility in the form of deposits and withdrawals.
● Expected.This consists of the generic product together with the minimal purchase conditions which need to be met. When a customer buys a videocassette recorder they expect an instruction book which explains how to programme it, a warranty for a reasonable period should it break down and a service network so that it can be repaired.
● Augmented. This is the area that enables one offer to be differentiated from another. For example, IBM’s hardware has a reputation for excellent after sales service. Because of this high quality service it may be preferred by customers even though the core product – the hardware – may not be the most technologically advanced.They differen- tiate by ‘adding value’ to the core, in terms of service, reliability and responsiveness.
● Potential.This consists of all potential added features and benefits that are or may be of utility to some buyers.The potential for redefinition of the product gives advantages in attracting new users or enhancing relation- ships with existing customers. This could make it difficult or expensive for customers to switch to another supplier.
Thus a firm’s offer is a complex set of value-based promises and the offer that is developed by the enterprise often needs to be varied according to the target market being considered. People buy to solve problems and they attach value to any offer in proportion to this per- ception of its ability to achieve their particular ends. In other words, value is assigned by buyers in relationship to the perceived benefits they receive matched against their expectations.
This approach reconciles the company’s traditional view of the product, seen in the terms of various inputs and processes needed to produce it and the consumer’s view of the offer, as being a set of solutions and supporting benefits. Together these elements comprise the total value offer. An example of this is shown in Figure 3.1 based on the personal computer.
The core product for a computer is a machine that permits input, processing, storage and retrieval of data. This is the minimum require- ment. The expected product consists of not just the above but also service support, warranty, a recognizable brand name and attractive packaging. The augmented product may include the supply of free diagnostic software, a generous trade-in allowance, user clubs and other augmentations which are valuable to personal computer buyers.
The potential product may consist of future applications including a systems controller, facsimile machine or a music composer.
This concept has had a significant impact on thinking of man- agers. Its special contribution lies in a recognition that additional elements, beyond that of the product itself, have a profound impact on the value that can be added for customers. Its limitation has been that there has been no structured approach available for man- agers to use to identify which elements could be added to the core product. Thus the ‘total value offer’ highlights the importance of extending the core offer but does not provide much guidance on how to do it.
Potential Augmented
Expected Core
Total product is the sum of all four levels
Figure 3.1 The total value offer
Product Customer’s Marketer’s Personal computer
level view view example
Core Customer’s Basic benefits Data storage, product generic need which make processing,
which must product of speed of
be met interest processing,
retrieval
Expected Customer’s Marketer’s Brand name, product minimal set of product warranty,
expectations decisions on service tangible and support, the intangible computer components itself
Augmented Seller’s offering Marketer’s Diagnostic product over and above product software,trade-in
what customer decisions on allowance, expects or is tangible and base price plus accustomed to intangible options, dealer components network, user
clubs, personal selling Potential Everything that Marketer’s Use as a product potentially can actions to system controller,
be done with the attract and facsimile machine, product that is hold customers music composer, of utility to the regarding and other areas of customer changed application
conditions or new applications
Source: Adapted from Collins4
The supplementary services model
The ‘supplementary services’ model, developed by consultant and former Harvard professor Christopher Lovelock, operationalizes the total value offer by providing specific guidelines on where to seek value enhancement for customers. His model identifies eight key elements of supplementary services that can be used to add value to the core product or service. This provides a far more structured approach for considering the expected, augmented and potential elements of a product or service. He suggests there are potentially dozens of different supplementary services, but most can be classi- fied into the following eight clusters:
● information
● consultation
● order taking
● hospitality services
● safe keeping
● exceptions
● billing
● payment.
Lovelock views these eight supplementary service elements as
‘a flower of service’ as shown at the top of Figure 3.2. A brief descrip- tion of these eight clusters and the elements within them, based on his pioneering work,5now follows.
1. Information: To obtain full value from any service or good, customers need relevant information about it especially if they are first time users.
Information elements include directions to the site, hours of opening, pricing and instructions for use. The enterprise may be able to attract and keep many more customers if everybody knows about your product, its capabilities, where to get it and how to obtain maximum value from it.
2. Consultation: Providing information suggests a simple response to customers’ questions. Consultation, by contrast, involves a dialogue to probe customer requirements and then develop a tailored solution. In B2B markets,‘solution selling’, used with expensive industrial equipment and services, is a good example of consultation. Here the sales engineer researches the customer’s situation and offers objective advice about the particular package of equipment and systems and service which will yield the best results for the customer.
Core product Payment
Inf ormation
Consultation Order-taking Hospitality
Saf ek
eeping Exceptions
Billing
Figure 3.2 Using the ‘Lovelock supplementary services’ checklist – a personal lines insurance example
1. Information element
• Easy recognizible phone number
• 24-hour service
• Clear pricing policy
• ‘Plain English’ wording
• Simple claims handling
• Brochure with full details of product range and features
• Clear details of who we are and where we are
• Easy methods of contact (phone, reply paid form, letter, internet)
• Contact name(s)/team
• Train staff and have systems (e.g. CTI) to deliver
• Mambers’ magazine
• Service guarantee
2. Consultation element
• Information dafabase & CTI
• Quick response
• Technically competent
• ‘Customer-freindly’ help desk and call centre
• Inventory pro-forma
• Exploit cross-selling oppurtunities
• Internet advice (detailed)
• Add on benefits (for specifc segments or customers)
• Security calculations of sum assured
• Legal advice services
3. Order taking element
• Make it easy for different customer segments – mail
– phone – fax – Internet
– partially pre-completed forms
• Offer alternative payment mechanism – credit card
– instalment – payment timings
• Cooling down period
• Add on benefits
• Use of clubs and special programmes
• Generate additional customer information for event- driven marketing
4. Hospitality element
• Toll free claims number
• Telephone number
• Empathy
• Fast replacement system
• Immediate assisstance
• Empowered claims staff
• Dedicated client team
• Free gifts (on 2nd anniversary)
• Add on benefits (car hire, towing)
5. Safe-keeping element
• Data security/protection
• Security advice
• Photocopying items
• Anti-theft devices at free or heavily discounted prices
• Help line for emergencies
• Personal alarms
6. Exceptions element
• Specialist help desks for – high sums assured – high risk items – high risk areas
• Bad claims record
• Antiques special cover
• Complaints hot line
• Unconditional service guarantee
• Quality control on repairers
• Customer feedback surveys
• Publicize advocacy
7. Billing element
• No claims discount structure
• Offer of other insurance at discounted rates
• Bonus on second anniversary of policy
• Tips of value /other product offers
• Offers at highly attractive terms for customer e.g. AMEX
8. Payment element
• Loyalty discount
• Continuous collection
• Monthly payments
• Credit card only
• Use as cross-sale opportunity
• No renewals
3. Order taking: Once customers are ready to buy, a key supplementary serv- ice element – order taking – comes into play, which involves accepting applications, orders and reservations. Clear and accurate order taking is essential. Some companies like banks and insurance companies and utili- ties establish a formal relationship with customers and screen out those who do not need basic enrolment criteria. However, is this policing func- tion excessively bureaucratic involving lengthy forms and delays? There is a risk that the effort to get rid of poor prospects will turn off good ones.
4. Hospitality services: Hospitality involves taking care of the customer. It finds its full expression in face-to-face encounters with the customer.
The enterprise should show pleasure at meeting new customers and rec- ognizing existing ones when they return. It may include elements such as offer of transport to and from the service site, availability of drinks and other amenities, customer recognition systems, etc. Here there is a need to adopt the Disney philosophy and treat all customers as guests.
5. Safe keeping: The list of potential safe-keeping supplementary services is a long one, but many of these will only be relevant to a given enter- prise. For example, customers who purchase computers, motor cars or cameras will be greatly interested in supplementary services such as repair and maintenance services and if they can purchase contracts as a form of insurance against breakdown or damage. Some safe-keeping services add value to physical products and may include packaging, pick up and delivery, assembly, installation, cleaning and inspection.
6. Exceptions: Exceptions involve a group of supplementary services that fall outside the routine of normal service delivery. Exceptions include special requests for customized treatment that require a departure from normal operating procedures, problem solving when normal service delivery fails to run smoothly as a result of accidents or delays, equipment failures or customers experiencing a difficulty using the product. Complaints, sug- gestions or compliments should be developed through well-defined pro- cedures that make it easy for employees to respond. Restitution in compensating customers for performance failures may involve refunds;
compensation or free repair should also be addressed.
7. Billing: Billing is common to most transactions. Inaccurate, illegible or incomplete bills are very likely to disappoint customers who, up to that point, may have been quite satisfied with the service. Billing should be timely because it will probably result in faster payment. Customers value well presented billing information. American Express is excellent at doing this. Some companies help customers view their bills at their con- venience at an earlier stage than normal. For example, by having billing information on an Internet or Extranet site.
8. Payment: In most cases billing and payment are still separate activities.
A bill usually requires the customer to take action on payment which may take a lot of time.A challenge is to balance the needs of the organi- zation for security and efficiency with the customer’s own preference for convenience and credit. One element within payment is verification and control. Here organizations need to ensure appropriate controls are in place to ensure correct payment is made without alienating customers through unduly intrusive processes.
The eight supplementary services act as a checklist in a search for new ways to augment existing core products as well as to help to design new offerings. Companies wishing to use this framework should start with a workshop with relevant managers to undertake the following tasks:
1. Review generic elements for each of the eight areas of supplementary serv- ice and determine which elements are relevant to your business. Service blueprints or flowcharts are useful here to identify the current service activities which will consist of a combination of elements of the core product and supplementary services.
2. Determine if all eight areas are important for your team/business. (Not all products have eight clusters and the nature of the product helps determine which of the supplementary services must be offered and which might be used to enhance customer value.) Identify any new areas and delete those which are not relevant.
3. For each of the important areas selected, identify the key elements that:
(a) exist at present
(b) should be improved or enhanced
(c) should be added to enhance customer value
4. Design an improved offer, subgrouping elements where appropriate.
The text under each heading in Figure 3.2 from an example of an exer- cise undertaken for a major general insurance company for their ‘per- sonal lines’ business. This is a disguised summary of the output of several workshops held to identify a new enhanced insurance product.
Lovelock points out that over time core products become com- moditized, so competition shifts to the supplementary services. It is these supplementary services that differentiate successful firms from the less than successful ones. Major new product/service develop- ment often takes years to implement and is very costly. Improvement to supplementary services can be more modest in cost and scope but can have a dramatic impact on the customer.
However, creating a superior offer is not enough. It needs to be leveraged by building lasting relationships with those customer groups the enterprise has chosen to do business with plus brand leveraging to develop greater value for customers.