The Value of CustomerValue Analysis

Customer value analysis becomes the starting pointin marketing research

By Kevin T. Higgins

Since customer value analysis entered the management lexicon four years ago,this approach to quantifying the cost/benefit of customer retention has steadiiygained a following. Now researchers are tackling the issue of refining the tech-nique so top managers get a significant research ROI.

Before he wrote the business manage-ment book. Managing CustomerValue, Bradley T. Gale was aresearch professional. His resumeincludes the corporate planning oper-

ation of General Electric in the 1960s and theStrategic Planning Institute in the 1970s, where hemanaged the benchmarking Profit Impact ofMarket Strategy (PIMS) project.

Gale left academia behind long ago in pursuitof another goal: inciting management aetion basedon information trom marketing research. Itrequired an easy to grasp-erities would argue asimplistic-explanation of how to structure action-able research. It also resulted in some alienatedopinions. As the book has reaehed a wider andwider audience of executives, the outline it pre-sents on eustomer value analysis has become astarting point for an increasing amount of themarketing research being done.

"There were a lot of companies making a lotof money doing very simplistic satisfaetion stud-ies," recalls Gale, who heads Customer Value lne.,a Boston area consulting firm. "There's a lot ofgamesmanship, lethargy, and even outright sloth in

research, and many vendors were content to con-duet simple yes/no satisfaetion surveys or five-point .satisfaction scales using the client's customerlist." After top executives read ManagingCustomer Value, major companies began to ask themarket research consultants to conduet eustomervalue studies based on "Dr Gale's framework."

"Dr. Gale's value analysis" has demonstratedsome staying power, if book sales are any indica-tion. Managing Customer Value reeently had itslOth printing, and sales are approaching 40,000copies. It has been translated into Spanish andPortuguese, and executives at Coca Cola, IBM,and other leading corporations have placed bulkorders for their management teams. When hebegan this work, five companies-AT&T. AlliedSignal, DuPont, Johnson & Johnson, and PitneyBowes-collaborated with Gale to implement cus-tomer value management.

Today, 30 corporations on two continents arepart of his practitioner network. Although fouryears have passed sinee its first printing in sum-mer 1994, Managing Customer Vatue remains theonly published book on this methodology.

The inclusion of AT&T Corp. as a case study

39 Fall 1998 MARKETING RESEARCH 39

on the financial return from customer value analy-sis rescued the book from the remainder table ofmanagement tomes. The dramatic retelling of thetelecommunication giant's scrapping of decadesof customer satisfaction research in favor ofresearch that measures customer and noncustomerperceptions of value and price relative to the com-petition caught the attention of many managers.

"Competitive benchmarking had not been apart of customer-driven quality research untilBrad's book was published," points out D. RandallBrandt, senior vice president and founder of BurkeInc.'s Customer Satisfaction Associates division inCincinnati. "He offers some valuable tools for per-forming value analysis" and places value in thecontext of loyalty and repeat business.

"When Brad Gale's book came out, our peoplesaid, 'What's new here from a measurement stand-point?"' recalls Jeffrey G. Ellis, director of cus-tomer value assessment at Maritz MarketingResearch Inc., St. Louis. "As a business manage-ment tool, customer value management was newand exciting. When we began offering CVA, therewas a connection with the results by senior manage-ment that never happened with CSM," Ellis says."As a result, some companies have abandoned cus-tomer satisfaction in favor of value research."

Researchers at Princeton, N.J.-based TotalResearch Corp. point out there is a much sharperfocus on price relative to the competition in theCVA era. "Management's interest in actionabilityis certainly an element," says Terri Flanagan,president of Total's customer loyalty managementdivision. "There has also been more emphasis inthe last four years in linking the research to bot-tom-line profitability. That's a shift from cus-tomer satisfaction work."

In Managing Customer Value, Gale presentsa framework for measuring what he refers to asgenerally accepted strategic principles, a customervalue metric similar to the generally accepted

Exhibit 1

Customer value map: Chicken business

Higher

Relativeprice t.O

Lower

Worsecustomer value

Others i ^ ^ ^

Fair-valueline \ v ^> ^

^ ^ ^ f Perdue

Bettercustomer value

Inferior 1.0 Superior

Market-perceived quality ratio

Si.>urcc. FJra<ilc> T. <ijL', -Managing Cu'loim:.' Value"

accounting principles that guide financial manage-ment. Value is quality as defined by the customer,who evaluates that quality in the context of pricerelative to competing products.

A market-perceived quality profile is devel-oped by identifying the key buying factors for theproduct, then asking respondents to weight theattributes by distributing 100 points betweenthem. Respondents then rate on a 10-point scalehow well the client's product and those of itscompetitors deliver on each quality attribute. Theratio between the two scores is determined, andthat ratio is multiplied by the weight establishedfor that particular attribute. The resulting weighttimes the ratio score for each attribute are used todetermine the market-perceived quality ratio foreach firm serving the market.

Similarly, a market-perceived price profile iscreated. The two profiles form the X and Y axesof a value map on which each competitor's quali-ty ratio is plotted. Dissecting the map diagonallyis the fair-value line, where quality is balancedagainst price. Companies that fall in the upperright quadrant of the map and below the fair-valueline are in the best position to increase sharewhile maintaining price.

A simplified version of Gale's value mapappears in Exhibit 1. The map was used to demon-strate how Perdue chicken applied the principles ofvalue anaiysi.s to create perceived value and achievehigh-margin, high-volume sales. The key point isthat, although consumers perceived the price ofPerdue's product to be higher than the competi-tion's prices, they also rated the product more high-ly in terms of the benefits it delivered. As a result,plotting of Perdue's value placed the firm below thevalue line and in the upper right quadrant of thevalue map, the preferred position. As eompetitorsresponded. Perdue consistently redefined the upper-end position, enabling it to migrate deeper into thehigh-value quadrant while competitors receded intoa share-losing and, because of price discounting,less profitable position.

Gale uses a respondent self-defined weightsmethodology in his example, with respondents allo-cating 100 points among the key buying factors thathave been identified. This constant sum approachcan provide clues to what features customers willwant in the future. The drawback is that the result-ing data tend to be somewhat simplified and notconducive to more rigorous statistical analyses thathave been developed. The alternative is to usederived weights, which can be derived from regres-sion analysis, conjoint analysis, and other method-ologies. In fact, AT&T and many other corporationsthat are conducting value analysis use both derivedand stated weights on the value axis.

Exhibit 2 presents an example of a value map

40 Winter 1998/Spring 1999

that results from another value analysis approach.The map, developed by Raymond E. Kordupleskiof Customer Value Management Inc., Randolph,N.J., plots the relative scores for price and quality,expressed as satisfaction with products and ser-vices. Unlike Gale's map, the fair-value line doesnot dichotomize value and price at a 45-degreeangle; instead, it is skewed toward price.

The axes are precise scales. A 10-pointmbvement on one axis is the same distance as a10-point movement on the other axis. The amountof improvement needed to reach a better competi-tive position can be calibrated, allowing analyststo determine fhe delta required in quality and thechange needed in price satisfaction.

Kordupieski also employs a price free andvalue tree to assist in determining what actionsshould be faken. Once a firm's present position onfhe map is ploffed and it is determined where itshould be positioned, the frees are employed todetermine which competitive decisions, or"levers," need to be pulled. For example, if billingis the area targeted for improvement on the quah-ty tree, the factors influencing billing and theirrelafive imponance are clearly defined.

Satisfaction with price is as much a matter ofperception as satisfaction with quality, Kordupleskimaintains. Surveyed respondents will exhibit awide range of responses when asked how muchmore their vendor charges compared to another.Plotting actual differences in price on fhe valuemap does not reflecf this variance.

Marketing Strategies Inc. and Michael J.Ryan, marketing deparfment chairman af theUniversity of Michigan and a principal af MSI,have developed another approach to customervalue analysis. Ryan likens his value map to "afishbone diagram," similar to those popularizedby quality researchers, after the dimensions ofprice and value thaf extend beyond the productitself are overlaid. The resulting map is a usefulstaning point in helping reshape customer percep-tions of a client's performance along variousproduct and service dimensions.

Onee fhe componenfs of producf and priceare plofted, researchers need to prioritize fheirrespective atfribute groupings and detenninewhieh have the greatest impact on perceived ben-efits and priee. The impacts of these key driversare used fo weigh qualify and priee to determinewhich has fhe greatest impact on perceived value.Finally, gap analysis is performed fo detenninewhere competitors line up on fhe map.

In fhe customer value maps, presented inExhibifs 3 and 3A (see page 42), fhe quality orbenefit component is a weighted average of othercomponents. The components driving customerbenefits include produet values, service values.

Exhibit 2

Using customer data to map strategy

• Your company

-I Your competitor

100 105 110

Relative satisfaction with products & services

Quality tree helps determineleverage points

Customer need

30% Product

Quality tree

20% Sales

5% Installation

20% Repair

2S% Biilrng

ReliableContinuous

Stable

Responsive

FollQW-Up

Status report

Installed when promised

No repeat troubleFixed fast

Kept infomied

Accuracy, no surprise

Resolve on first call

Easy to understand

(20%(30%

(30%

(25%

(10%

(30%

(25%

(107o

(30%(25%

(10%

145%)

135%

(10%

.as does price treeInitial price (3SS)

Product ;70%l

Price satisfaction

Inatallgtkin (30% I

Payment plans (10%)

Management savings (15%)

Easy to upgrade (15%)

Justifiable prices (20%)

Saivage vaiue (5%)

technical values, and cotnmitment value.Components driving cost fall into two categories:those that relate to the price paid, and those repre-senting the internal costs incurred by the customer.

These components can be unbundled intosalient attributes. Commitment to value, for exam-ple, includes tenure, investment, personnel, anddependence. Internal cost might reflect set up timeand expense, maintenance, training, and energy.

All actual cost and benefit items, both attributesand components, included in the map are determinedthrough qualitative marketing research techtiiques,such as one-on-one interviews and focus groups.

MARKETING RESEARCH 41

42 Winter 1998/Spring 1999

Exhibit 3

Customer value mapping

CQ

Aboveaverage

ndustryaverage

Below

Letters

c

designate competitors

D

F

AB

E

average Industry Ahoveaverage average

Exhibit 3a

Customers view value as benefitsminus costs

Value components

Productvalues

Servicevalues

Tectinicalvalues

Commitmentvalue

Totalcustomerbenefits

Cost components

Totalcustomer

value

Paid tosupplier

tntema!cost

Totaleustomer

costs

Exhibit 3b

Impact scores (improvement effectson overall benefits)

Telephone features

1 nstallniion/Rtpai r

Optional strvites

Warranty

rdcphmic appeal aiicc

i) 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8

1.1 1.0 iiw^rmtac. I f i iii'i Qimp™iii'.,jilnj impmtd bj (ivj |«inri.Ovi

The aetual groupings are specified conceptually,after which they are subjected to quantitative testing.

Customers are asked to rate all attributes in theconceptual model. The value of components is thendetermined and compared to those of eompetitors.

Finally, an impact score is ealculated to assistmanagement in determining the value of boostingratings for speeifie components. An impact scoreof 1.0, for example, suggests that a five-pointimprovement in the rating for a speeifie benefitcomponent would boost overall benefits by onepoint. This helps management compare the eost ofimproving a partieular benefit with the likelyfinancial payback. (See Exhibit 3B)

The evolution of customer value analysis nec-essarily ineludes criticism of the models andmethodologies originally advanced. In that vein,Kordupleski notes a misstatement in the originalGale book that suggests any business that is posi-tioned on the value map's fair-value line willretain market share. 'That's not true at all," hesays. "It all depends on your position in the mar-ket." For a new entry, average quality and priceratings would result in share gain until equilibri-um was reaehed. For a market leader like AT&T,it would mean declining share.

Additionally, a scaling probletn exists in thevalue mapping outlined in the book. In a workingpaper on comparative service quality and eompeti-tive decisions, Roland T. Rust of VanderhiltUniversity, Nashville, Tenn., notes the use ofratios or geometrie means requires ratio scale data.However, Gale's book proposes taking ratios ofinterval scale data and simply dividing one firm'saverage quality rating by a competitor's averagequality rating. The resulting ratios are, therefore,arbitrary and dependent on the subjective choiee ofthe ranges employed. Instead, ratio seales for qual-ity, price, and value are the appropriate measure.

"It sounds a little esoteric, but it's important;otherwise, you eould come up with whateveranswer you wanted," points out Rust, professor ofmanagement and director of the university's Centerfor Service Marketing. "Gale's general approach isgood, but using interval seales in this analysis isflat-out wrong." Psyehometrie theory supportsRust's point. Depending on where interval pointsare situated on the map, an infinite number of out-comes could result. To avoid this problem, ratioseales that are the same between two points areneeded to ensure that results are eonsistent.

A larger issue Rust raises is the generalabsence of critica! review of value analysis todate. Books on related topics and a few papershave been published (see the Additional Readingsseetion), but little in the way of criticism thatadvances the concept has been offered.

On the other hand, the concept's evolution is

clear. Kordupleski was the customer satisfactiondirector at AT&T who worked to shift AT&T fromcustomer satisfaetion measurement to customervalue management. That process is discussed inGale's book. Kordupleski says the telecommunica-tion giant used both derived technique and statedtechnique to ascertain whieh produet features areimportant and the extent of their importance.Derived technique requires extensive surveying,and questions must be presented in a hierarehiealmanner, but the result can be significandy differentthan with stated technique.

"They might tell us products and servicesaccounted for 70 points, but analysis might showthat products and services were 30 and priee was70," Kordupleski recalls. "By comparing the dif-ferent scores, you eould get a fuller pieture ofwhat eustomers really wanted."

AT&T eonducted 150 to 200 interviews for agiven market segment to provide enough datapoints to allow computer programs to perfonn sta-tistical matching. The company also conducted timeseries analyses, surveying perhaps 50 eustomerseaeh month and asking questions about billing ser-vices and other serviee dimensions. Beeause thesurveying had been going on since the mid 1960s,significant amounts of data were available forregression analysis and time series analysis.

The width and depth of data available toAT&T analysts was unusually rich. But deep cor-porate pockets alone don"t ensure that extensivesegmentation and eomplex modeling can be done."Sample size isn't a question of ean a companyafford it; it's a matter of how many people are inthe market set," points out Kordupleski. If CFOsare the main purchase deeision makers for a prod-uct, for example, it may be impossible to questionenough of them to do any computer modeling.

"CVA means different things to different peo-ple,'" he eontinues; indeed, at AT&T the acronymstands for customer value-added. "What is importantis that it's a way to go beyond classic marketingresearch and gain an understanding of not just satis-faetion but relative satisfaction and to understand notjust value, but value relative to the competition."

The task of shifting a major corporation'sreseareh objeetive from satisfaction to a eustomervalue orientation took years for Kordupleski toeffect. "In trying to understand customer value, Ikept running into marketing resetu'chers at AT&T,"he recalls. "Some wanted nothing to do with me; Iwas a threat to their paradigm. Others were delight-ed to see that a manager finally recognized the pre-dictive power of the data they had been gathering.

"There's a science and an art to this. Weteach the science in our seminars," eontinuesKordupleski. "The art is guiding people throughthe three levels of involvement: understanding.

acceptance, and, finally, passion."He invited other companies to benchmark

AT&T in an effort to build momentum for quality-oriented researeh. Individual executives' compensa-tion and bonuses were based partly on their busi-ness units' seores in the satisfaction research thatKordupleski proposed scrapping, so there wasunderstandable resistance to researeh that measuredvalue relative to the competition, as it might bemore difficult to boost. Nonetheless, all 19 busi-ness-unit presidents eventually accepted the ehange.

"Until all 19 presidents signed off, we couldnot issue the quarterly reports on customer value;that process alone took six months and requiredspeaking directly with each president at loeationsaround the world," Kordupleski says. "Then wemade sure the results of those reports were deliv-ered at the exact same time as the financial data tocreate a linkage to financial measures. If it eameout two weeks later, managers would have viewedthe results as unimportant strategically."

While the value principles and managementapproaches advanced in Managing CustomerValue have undeniably influenced scores of cor-porations, some question if the book breaks newground in marketing researeh. '"Academies aregoing to see this as perceptual mapping, and thereare a lot of models that are quite sophisticated foraeeomphshing that," suggests Ryan.

"The book's approaeh to value is a good one,and it's well presented in a way that managementcan grasp," adds Ryan. "But it's only one way,and it only complements satisfaetion and loyaltyresearch: it doesn't supplant it. Unfortunately,when you tell people you also have to considersatisfaction, corporate reputation, and other fae-tors, you necessarily create a mueh more eomplexpieture. Lots of people jumped on loyalty and said,'Drop satisfaction measurement,' but satisfaction,loyalty, and value are all linked,'" he notes.

At Burke, Brandt says Gale's book hasimpacted eustomer satisfaction work in threeways. First, research projects now routinely con-sider how value impacts loyalty and the bottom-line fmancial performance of clients. Seeondly,the book suggested certain research tools, notablyvalue mapping, that served as a starting point forproprietary approaehes. Finally, it promptedBurke to develop tools to analyze priee and valuechanges and their impaet on market share.

Plotting eaeh competitor's position on thequality axis, then plotting their plaee on the prieeaxis, provides a two dimensional snapshot of themarket, but "most of my elients also want to seethe third element of eustomer satisfaction, whiehis market share" says Brandt. That requires map-ping that yields many more dimensions.

At Total Research, customer value research is

MARKETING RE5EARCH 43

Kevin T. Higgins is abusiness journalist and fomier

Managing Editorof Marketing News.

combined with efforts to determine the cost ofincreasing value, thereby calculating the return oninvestment from value improvements, accordingto Joan Fredericks, senior vice president andsenior methodologist. Research typically includessegmentation of the customer base. The dataavailable and the research objectives dictate themethodologies used, adds Fredericks. The goal ismore eomprebensive research on value as itimpacts the bottom line.

Market share is the measuring stick in Gale'spresentation, but market share isn't always themost appropriate measure, Maritz's Ellis main-tains. "Market share is not necessarily the keyoutput for the measurement that we do."

By capturing the attention of the deeision-makers who commission corporate research.

Additional Readings

Gale, Bradley T., Managing Customer Value, FreePress, 1994

Giel, Kathleen and Earl Gnomon, CustomerSatisfaction Measurement and Management,Thomson Executive Press. 1995

Jones, Thomas O. And W. Earl Sasser Jr., "Why satis-tied customers defect," Harvard Business Review..(Nov./Dec.) 1995, 88.

Kordupleski, Raymond E. and Jukka Laitamaki,"Building and deploying profitable growth strate-

Gale's book cast marketing research in a newlight. The linkage between researeh spending andcorporate profitability changes the eost of thatresearch from an expense to an investment.

"In the past, companies looked at quality as acost; now they are looking at quality as a revenuegenerator," observes Rust. "In the corporate com-munity, there's doubt if it's worthwhile becauseof the inability to project market share change.That's where the rubber meets the road-if it does-n't improve the bottom line, how ean you justifyadditional spending to gather the data?"

Tying marketing research to economic out-eomes could be Bradley Gale's most enduringcontribution to the profession. Now it is up toresearch professionals to refine the methodologyto ensure their work delivers on that promise. •

gies based on the waterfall of customer valueadded," European Management Journal, (April1997), 158.

Kordupleski, Raymond E., Roland T. Rust and AnthonyJ. Zahorik, "Why improving quality doesn't improvequality (or whatever happened to marketing?),"California Management Re\'iew, (Spring 1993). 83.

Reichheld, Frederick F., The Loyalty Effect, HarvarcBusiness School Press, 1996

Rust, Roland T., Anthony J. Zahorik and TimothyKeiningham, Return on Quality, Probus PublishingCo., 1993

DATA COLLECTIOIM CUSTOMER SATISFACTION EMPLOYEE OPIIMIOIM

i

[I

HoAAf much time and moneydid you spend on data coiieo'tionand survey research last year?

'Too much money ,;HiiiiiiToo much time '""'Both. I should have called LAMISCORE

Uniscore is dedicated to working with you to findcost-effective solutions with rapia turnaround timefor ail data coliectton and survey research projects.

We are a leader in paper, Internet, and e-mailsurveys with over 10 years of data collectiaiiexperience. ly "'"'

Uniseore provides complete project managemerifrom survey design to reporting and everyuiing 'between: on time and within your budget.

For estimates, company information and free samples,please cati us at £ 8 0 0 ]

Visit our website www.uniscore.comor e-mail us at saies@uniscore.com

MARKET RESEARCH PERSOIMALIZATIOIM REPORTIIMC3 G. ANALYSIS