Unit 4 Value for Customers and Customer Lifetime Value Flashcards
The concept of customer value
Value means different things to different people
Value can be measured by what a customer exchanges for various options that can satisfy a want or a need
For most customers, value is a function of the benefit relative to the price paid
What is the value equation
Value = benefits – price
What is the benefit and price in the value calculation
Benefit
- Functional – does the job
- Psychological – social status
- Economic – branded products at low prices
Price
- Monetary
- Perceived risk – what risk can happen
- Inconvenience – you have to make an effort to make a purchase (travel)
What is perceived risk
Performance risk – what if it doesn’t work
Financial risk – losing money if it doesn’t work
Social risk – what if friends or family does not like the product
Physiological risk – physically hurt
Psychological risk – you blame yourself if something was wrong
Hierarchy of Needs
Top:
self actualization
esteem needs
social needs
safety needs
physiological needs
bottom:
How is customer value measured?
objective measures: internal engineering assessment, indirect survey questions, field value-in-use assessment
Perceptual measures:
a) unconstrained measures (focus groups, direct survey questions, importance ratings)
b) constrained measures (conjoint analysis, benchmarking)
Behavioral measures: choice models, data mining
Objective Measurement: should-do measures
Internal engineering assessment
- Evaluations by selling firm’s own managers and engineers based on lab tests
- I.e. alpha tests and computer simulation
- Beta testing – think of computer games having a beta testing (outside testing)
Indirect survey questions
- Firms often query customers about the value they place on satisfying needs or resolving a problem
- Salespeople may ask company personnel about the effect of one or more changes in existing offerings on certain aspects of their needs or problems
Field value-in-use (VIU) assessment
- Customer and supplier to conduct a joint value assessment
- I.e. to investigate how much customers are willing to pay for a new product given the extra benefits that it offers
Perceptual customer value: plan-to-do measures (unconstrained)
Focus groups: five to ten customers convene for several hour discussion with a trained moderator about their perceptions, attitudes, preferences, and usage of a product or service
Direct survey questions: a sample of customers who agree to complete a questionnaire that includes a description of one or more potential product offerings or concepts
Importance ratings: the most popular approaches to measuring customer value (Respondents receive a set of attributes and describe a product offering and rate them according to their importance to them)
Perceptual customer value: plan-to-do measures (constrained)
Conjoint analysis: the most widely used approaches, employing a field research survey to ask respondents to provide their overall ratings for each set of potential offerings
Benchmarking: respondents receive descriptions of a product offering and represents the best available competitive product or service which thus serves as a benchmark
Behavioral Customer value: Have-done measures
Choice models
- Using past behavior to infer or estimate the value of product characteristics that might best explain or predict actual behavior
- Firms can observe choices and infer the value that best explains those choices
- Output is an estimate of importance weights and probabilities of each market alternative for each customer
Data mining
- Many organizations keep extensive records of customer purchases and these data can be cross-matched with other data pertaining to customer characteristics
- Organizations can analyze the information to product segments according to customer profitability, the range of products and services acquired, and so forth
- Used in 2 ways: Analyze data to create new products – what aspects are valued | Look at customers consumption behavior – customize promotion according to customer behavior
What is Customer lifetime value (CLV)
The lifetime value of a customer generally equals the total profit a firm can expect to earn from that customer during the time the firm continues to maintain an ongoing relationship with the customer
Total lifetime value includes Economic value (risk adjusted revenue flow minus cost to serve) and relationship value (reference, referral, learning, innovation, etc.)
CLV equation
CLV = (p * R1 - C1) + (p * R2 - C2)d + … (p * R - C)d^(n-1) - A
R - revenue from customer in a period
C - cost to acquire or serve customer in a period
d = 1/(1+r)
(r - discount rate of customer)
(n - anticipated lifetime of customer)
*could also include “p” which represents the likelihood of retaining the customer
*could also include “A” which is the initial acquisition cost
Economic Lifetime Value Calculation
expected revenue cash flow - expected cost to serve [loyalty lowers this] = expected profit cash flow
expected profit cash flow - risk adjustment [loyalty lowers this] = risk adjusted cash flow
Customer Relationship Value:
Reference accounts (give us prestige, high credibility): thought leaders in the medical field and provide the firm with credibility
Referral accounts (give us high-quality leads): accounts that can be strong recommendation
Learning accounts (Help us refine our offerings/beta testers): accounts are willing to provide valuable feedback and suggestions prior to full market launches
Innovation accounts (help us to develop new offerings): mostly university-based physicians
CLV objectives
Increase customer relations (costs/benefits of customers)
Improve customer selectivity
Meet competitive imperatives (drive or be driven)
Boost cost efficiency
