CREATING, COMMUNICATING, AND DISTRIBUTING CUSTOMER VALUE

Timothy M. Smith

BBE 3503-5503

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Market Sensing (Finding the Value…)

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VALUE-IN-USE

Vinyl Siding WCC Siding

Est. Installed Sales $10,000 Est. Installed Sales $11,000

Est. Callback Expense $300 Est. Callback Expense $150

Est. Labor Expense $3,000 Est. Labor Expense $2,550

Price $5,000 Price ???

Contractor Gross Margin $1,700 Contractor Gross Margin ???

• How much value do the two products create for the contractor?

• How would you price the WCC siding product? What impacts this decision?

New Product Scenario:• Opportunity to carry a new innovative Wood-Cement Composite siding product.• In part, due to lower energy costs in production, the new product is offered to you at a lower

cost than the current vinyl siding option (Your Cost of Goods Sold for an average WCC siding job is estimated to be $3,900 versus $4,250 for the average vinyl job).

• Superior strength, stiffness, and wood-like appearance of the WCC product is expected to result in higher installed sales to the homeowner.

• Improved durability and fastener system is expected to reduce callback expenses by 50%.• The improved fastener system is also expected to decrease labor expenses associated with

installation by approximately 15%.

Summary Table:

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CUSTOMER VALUE

Two sides of Value:

A customer perceived quality-price relationship of company’s offerings. more demanding customers increased global competition improved access/speed of communications superior customer value: the next major source of

competitive advantage. (Day 1994, Woodruff 1997)

A measure of worth attributed to a customer, realized by a company Delivering customer perceived value profitably

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CUSTOMER VALUE

Two Focal Questions Impacting Customer Value:

What dimensions of value do customers care about?

How do competing offerings fare along these dimensions?

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PRODUCT ATTRITUTES AND VALUE

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CUSTOMER VALUE

Two Focal Questions Impacting Customer Value:

What dimensions of value do customers care about?

How do competing offerings fare along these dimensions?

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Value

Fundamental Value Equation:

(Valuef – Pricef) > (Valuea – Pricea)

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THE VALUE SALAMI: A CONCEPTUAL FRAMEWORK

Total Value Created

Total Costs (Value to the

Supply Chain)

Profit Margin

Customer Value

Price

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CUSTOMER VALUE: A CONCEPTUAL FRAMEWORK

Compete against other value offerings distributed to customers!

Value Captured by

the Firm(Margin)

Value Distributed to Customer

ProductQuality

ServiceQuality

Total Costs(Value to the

Supply Chain)

Value Captured by

the Firm(Margin)

Pricet

Total Value

Created

ServiceQualityt

Value Distributed to Customer

Added CV

PricesPricet

Total Costs(Value to the

Supply Chain)

Value Captured by

the Firm(Margin)

PricetPricec

Traditional Supplier Service StrategyCost Leadership

Added CV

CostcCostt

Service Qualitys

CosttCosts

ProductQuality

ServiceQuality

ProductQuality

Total Costs(Value to the

Supply Chain)

Value Distributed to Customer

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Quality and Price

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

-1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2

Competitive Price

Overall Quality

Owens Forest P roducts St. Croix Valley Metro HardwoodsC Baumgarten Woodland Forest P roducts Kretz LumberBanks Midwest North WestGeorgia P acific Shannon Wolf RiverIndustrial Timberland (ITL) Bennet Hardwoods Northern P acificBaillie Lumber Rajala

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THE IMPORTANCE AND NATURE OF CUSTOMER VALUE

Value

Loy

alty

/Pur

chas

e V

olum

e

3 4 5

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THE IMPORTANCE AND NATURE OF CUSTOMER VALUE

Value

Loy

alty

/Pur

chas

e

3 4 5

High

Low

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CUSTOMER VALUE – HARDWOOD LUMBER CASE

Top 3 Suppliers by VolumeSuppliers

Ranked #1Suppliers

Ranked #2 Suppliers

Ranked #3Percent of Purchases 52.67

(n=75)26.78(n=75)

20.55(n=75)

Relationship (years) 7.95(n=80)

7.43(n=75)

5.88(n=62)

Perceived Value Delivered 4.39(n=94)

4.13(n=90)

3.96(n=82)

Significant differences were detected between each supplier category for all variables (except for Relationship - S1:S2).

Ten percent reduction in perceived value, corresponds with a 61% reduction in purchase volume and a 26% reduction in customer tenure.

Customer Value is ALL or NOTHING?

*

* Percent of top-3 suppliers only; 33%, 16%, 13% of total company purchases, respectively.

Evidence from the Hardwood Lumber Industry

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SEGMENTATION

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SEGMENTATION

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Segmentation Variables

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CUSTOMER VALUE – HARDWOOD LUMBER CASE

Segments Matter!

Dependent Variable: High Value (High Value = 1, Average/Low Value= 0)

Furniture/Cabinet Segment (n=48) Variable B Wald Sig Exp(B) Consistent color 1.332 5.778 0.016 3.789 Packaging 1.640 4.907 0.027 5.154 Availability of desired species 2.858 4.878 0.027 17.428 Constant -25.204 8.191 0.004

Distribution Segment (n=74) Variable B Wald Sig Exp(B) Packaging 1.235 8.882 0.003 3.437 Availability of desired species 0.960 7.852 0.005 2.611 Ability to place orders electronically 0.714 6.370 0.012 2.043 Constant -10.869 17.124 0.000

Millwork/Flooring/Component Segment (n=55) Variable B Wald Sig Exp(B) Availability of desired species 1.407 9.630 0.002 4.085 Constant -6.033 10.134 0.002

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COMMUNICATING VALUE

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ADDING VALUE – COOPERATIVE ADVERTISING

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INSTALLATION SOLUTIONS – Stock Building Supply

Direct to the Builder Installed Service Program.

We take the worry off of your hands and do the installation while you continue to build more homes! What could be easier?

You never have to deal with another subcontractor...we do it all for you. All of the materials and service applied to your account...one less invoice for you to deal with! We stand behind the quality workmanship and the product. Our installers are professionals. They work

quickly and efficiently.

We offer the Professional Advantage in Quality Service and Installation on:

Framing Siding -- Vinyl, Fiber Cement, and Cedar Windows -- PORTRAIT Convertible, Wood and Vinyl Insulation Sheetrock Garage Doors Exterior/Interior Doors -- PORTRAIT Distinction, Fiberclassic, and Classic Craft Locks and Hardware Custom Stairs Specialty Millwork Full line of Moulding and Interior Products Cabinets -- Most Brand Name Cabinets Countertops -- Solid Surface, Granite and Custom Laminate Countertops Flooring & Carpet Decks, Porches, & Fences -- Treated Pine, Chain Link, PVC, and Aluminum

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SO, WHAT DOES THIS MEAN?

If customer value is something consciously left on the table by a supplier, this value proposition must be DISTINQUISHABLE from competitors and of a MAGNITUDE sufficient to affect behavior.

The factors determining “high value” can be very different between segments – value is determined by the customer.

Important attributes in the buying decision are not necessarily “value-adding” attributes (typically thought of as adding further processing to the product). The most important attributes in purchasing hardwood lumber -

consistent thickness and price - did little to influence customer perceptions of high value.

Ability to transact on-line plays a very small role in hardwood lumber purchase decisions, even among distributors, but significantly impacted this segment’s value perceptions of suppliers.