managing customer value in business-to-business markets

Managing Customer Value in Business-to-Business MarketsIncreased customer value can impact customer behaviors that drive company performance. As a result, firms must invest in the drivers of customer value. The authors describe a management tool that identifies the most relevant value creation activities, the satisfaction profit chain (SPC). As detailed in two case studies, the SPC is especially useful for B2B firms catering to small to medium-sized enterprises.

Vikas Mittal, Carly Frennea, Robert Westbrook

46 Marketing Review St. Gallen 3 | 2014

Schwerpunkt | Customer Value

Creating and sustaining customer value is a key competitive advantage for firms, because customers represent the largest source of cash flows for a com-pany. Firms must invest in the drivers – tangible and intangible – of custom-er value. Increased customer value – as measured via customer satisfaction – can impact key customer behaviors that drive financial metrics like reve-nues and profitability.

How can a firm understand its customer value creation activities? They can use the satisfaction profit chain (SPC) to (1) describe the components of customer value, (2) understand the relationship between customer value and business outcomes, and (3) articulate how drivers of customer value can be created, sustained and enhanced over time (Frennea et al. 2014; Kamaku-ra et al. 2002; Rust et al. 1995).

The SPC gives top management the ability to depict the complex interre-lationships among the drivers, components, and outcomes of customer val-ue. The SPC framework is especially useful for B2B firms catering to small and medium-sized enterprises (SMEs). SMEs have a diverse set of needs – the customer value proposition for an SME is likely to be varied and includes both product and service elements.

Elements of the Satisfaction Profit ChainThe SPC framework takes a systems perspective; the system consists of a set of inputs (drivers of customer value), throughputs (customer value and its components), and outputs (business outcomes of customer value) with their interrelationships defining the system (as shown in figure 1). These interre-lationships can evolve over time and may vary across different contexts.

Input: Operational Investments that Drive Components of Customer ValueOperational investments include factors such as employees, raw materials, technology, facilities, and infrastructure, as well as inputs designed to direct-ly affect customer perceptions (e.g., brand equity and communication).

Vikas MittalJ. Hugh Liedtke Professor of Marketing, Jesse H. Jones Graduate School of Business, Rice University, Adjunct Professor of Family and Community Medicine, Baylor College of Medicine, 6100 Main Street, Houston, TX 77005, USAE-mail: [email protected]

Carly FrenneaDoctoral Candidate in Marketing, Jesse H. Jones Graduate School of Business, Rice University, 6100 Main Street, Houston, TX 77005, USAE-mail: [email protected]

Robert A. WestbrookWilliam Alexander Kirkland Professor of Management, Jesse H. Jones Graduate School of Business, Rice University, 6100 Main Street, Houston TX 77005, USAE-mail: [email protected]

Definition and Impact of SMEs

In the European Union, SMEs are defined as enterprises which have fewer than 250 employees, with an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro. SMEs in the EU total 23 million (99% of all firms), pro-vide 67% of total employment, and 58% of gross value add (Europe-an Commission 2005; Ecorys 2012). In the United States, SMEs are typically defined as independent businesses with fewer than 500 em-ployees. They represent more than 99% of U.S. employer firms, pro-vide nearly half of all private-sector employment, and produce 46% of private nonfarm GDP (SBA Office of Advocacy 2012).

47Marketing Review St. Gallen 3 | 2014


These operational elements directly affect customers’ percep-tions of value-creating attributes associated with the service and product experience. Factors are specific and unique to each company. Firms should strategically allocate resources to enhance inputs that impact the most important value-cre-ating attributes, i.e., attributes that are most strongly linked to customers’ perceptions, evaluations, and behaviors.

Throughput: Components of Customer ValueComponents of customer value – customer perceptions at the attribute and overall level – are the mediating constructs through which operational inputs are transformed into out-puts. Management can determine which attributes have the largest impact on subsequent overall customer evaluations such as overall customer satisfaction and service quality (Mit-tal/Frennea 2010).

Output: Customer Behaviors and Company Perfor-mance OutcomesFinally, what is the relationship between overall customer val-ue, as measured by customer satisfaction, and key business outcomes? Key business outcomes include customer loyalty behaviors (e.g., repurchase, cross-purchase, word of mouth,

recommendations, and share of wallet) and financial out-comes (e.g., sales revenues, profits, and stock market out-comes). There is growing evidence supporting a positive as-sociation between several customer behaviors and company-level outcomes. Specifically, studies show that customer retention is associated with increased revenue, word of mouth is associated with stock performance, and increased recom-mendations can enhance sales performance.

Other ConsiderationsAn application of the SPC must address the context and/or external environment in which the chain of effects takes place. The external environment has various factors which may in-fluence aspects of the SPC, such as the technical, the social-cultural, the competitive, the regulatory, and the political as-

AttributePerformancePerceptions

OverallEvaluations/BahavioralIntentions

CustomerBehaviors

OPERATIONAL

INPUTS

FIRM

PERFORMANCE

B(+)

A(+)

C(+)

D(+)

E(-)

Fig. 1 The Satisfaction Profit Chain

Source: authors´ illustration

Note: Employee perceptions, attitudes and satisfaction are included as a form of operational input because we view both technological and

human factors as operational inputs.

“Increased customer value – as measured via customer satisfaction – can impact key customer behaviors that drive financial metrics like revenues and profitability.”



Source: authors´ illustration

Fig. 2 The Satisfaction Profit Chain for ABC Corporation

OverallSatisfaction

.33ª

.01

.08ª

.09ª

.18ª

.027ª

.088ª

.004ª

.08ª

.06

.14ª

.07

Dependability

Intentionsto RenewContract

ServicePersonnel

ServiceEquipment

CustomerSupport

Billing

SalesPersonnel

Value

Sustainability

Can rely on companyMissed service callsArrival on schedule

AppearanceResponsivenessSafety of operation

Working conditionMaintenanceAppearance

Ease of accessPleasant attitudeResponsiveness

Billing accuracyProblem solvingPleasant attitude

ProfessionalismKnowledgeResponsiveness

Competitive ratesRate increasesValue for money

RecyclingDisposalFacilities

Considerationof Competitors

Intentions to Recommend

BrandReputation

Customer CharacteristicsTenure 0.5

Annual revenue -.02

Statistically significant at p = .01 levela

The numeric values above the arrows leading to overall customer satisfaction indicate the strength of the relationship between each of the eight areas of customer experience and overall customer satisfaction, controlling for each other. Details of the analyses can

be found in Frennea et al. (2013)



pects. For example, a company that requires employees with specialized skills or a high level of customer proficiency in customer interactions is dependent on the quality of the labor market to deliver value to customers and returns to the busi-ness. They must also compete with competitors for the same resources. In the SPC, specialization should be incorporated as a moderator of the link between operational inputs and at-tribute performance.

Using the SPC to Enhance Customer Value for SMEs

Strategic ModelThe strategic model identifies the key links in the chain. For example, the strategic model identifies operational inputs that have the largest impact on customer perceptions of attribute performance. In B2B settings, performance perceptions of an attribute such as “salesperson responsiveness” can be affected by operational inputs such as an increase in the number of salespeople, updating customer contact information, and cre-ation of a dedicated phone line, email address, or forum for customer support.

Moving forward along the chain, managers can then deter-mine the key value drivers for the company, i.e., those attrib-utes that affect global consumer evaluations. Firms should al-locate investments to those inputs which best address the most important attributes as dictated by the operational mod-el. Firms can answer questions such as: Is delivery time more important than salesperson responsiveness to determining

customer satisfaction? What about the product breadth? Af-ter-sales support?

The strategic model is typically estimated using regression-based techniques such as seemingly unrelated regression, structural equation modeling, hierarchical linear modeling path models, and Bayesian network analysis (see Frennea et al. 2013 for an overview).

Operational ModelThe operational model focuses on implementation, one link at a time, with the goal of increasing efficiency and achieving operational benchmarks. Benchmarks can be derived at the customer or subunit level (such as geographic areas or gener-al decision making units), depending on the data availability and the units of interest. For B2B firms serving SMEs, the rel-evant subunit may be franchise locations or sales teams. This analysis can be used to develop short- and medium-term met-rics that must be achieved to ensure that the strategic model is being followed throughout the firm.

Thus, different subunits may be compared based on oper-ational metrics of “salesperson responsiveness” such as re-sponse time, order turnaround time, and percentage of calls returned. Companies can also compare subunits in terms of which drivers of satisfaction are more important to custom-ers, characterize them based on differences in drivers, and de-velop appropriate performance benchmarks. This can be used to create specific dashboards, scorecards, and incentive pro-grams.

Implementation of SPC-basedimprovement effortsO

vera

ll Cu

stom

er S

atis

fact

ion

Inde

x

Time PeriodSource: authors´ illustration

Fig. 3 Results from Implementing the SPC at ABC Corporation

Management SummaryThe SPC framework is a valuable management tool that describes how companies transform input (employee performance and supply chain investments) into out-puts (customer retention, revenue, and profitability) via throughputs (customer satisfaction and loyalty met-rics). The SPC guides companies in identifying the key strategic initiatives as well as how to implement each in-itiative to maximize outcomes. Through two case stud-ies, the authors detail how the SPC was implemented by B2B companies catering to SMEs to improve operation-al performance, enhance customer satisfaction and re-tention, and increase revenues.



Implementing the SPC: Examples of SME Customer Management

Case 1: ABC CorporationFirst, we consider the example of a large and industry-leading commercial and industrial services company serving mainly SMEs. The company, designated here as ABC Corporation (identity disguised), had annual revenues in excess of US$ 4 billion. Historically, ABC grew by acquiring smaller compet-itors, but senior management had begun to realize the need for organic growth by reducing customer churn – i.e., loss of existing customers to competitors. An SPC model was devel-oped for ABC to provide strategic and operational guidance.

Data. Customers in each of the 200-plus geographic oper-ating units were surveyed quarterly by telephone, for a total of approximately 5,000 interviews per year. Customers rated the company on specific attributes within the different areas shown in figure 2. For benchmarking purposes, competitors’ customers were also surveyed using these same items, but in separate surveys. Customer churn was derived from the ABC billing system – defined here as the proportion of all custom-ers in the time period who terminated service.

Findings. The SPC analysis is shown in figure 2. The top four areas of service experience relating to customer satisfac-

tion were service dependability (.33), value (.14), brand rep-utation (.18), and customer support (.09). Dependability was the clear choice for focused improvements.

Financial implications of SPC. The SPC model showed how overall customer satisfaction led to three customer-rele-vant outcomes: (1) renewal of service contracts with the com-pany, (2) consideration of alternative vendors to ABC, and (3) willingness to recommend ABC to other businesses (see fig-

Source: authors´ illustration a Statistically significant at p = .01 level

Fig. 4 The Satisfaction Profit Chain for XYZ Corporation

On-Time DeliveryProblem HandlingHealth & Safety Performance

TechnicalIssues

Technological InnovationProduct QualityValue

Brand Equity

ResponsivenessProject Status UpdatesPositive Attitude

Project DeliveryIssues

Prioritization of ProjectsResponsivenessProposals Respond to Needs

Sales TeamIssues

OverallSatisfaction

Customer Retention

NetMargins

.73ª

.67ª

.58ª

.43ª

4.12ª 1.34ª

Main Propositions •Companies can use the satisfaction profit chain (SPC) to illuminate the “black box” around value creation, i.e., articulate how drivers of customer satisfaction and loy-alty can be created, sustained and enhanced over time.•The SPC links operational investments to compo-nents of customer satisfaction and loyalty which in turn are linked to customer retention and profitability.•The SPC provides both strategic and operational guidance. The strategic model identifies the key initia-tives in the chain while the operational model focuses on implementing each initiative to maximize outcomes.



ure 2). All these outcomes directly impact customer churn. A 1% gain in overall satisfaction was estimated to reduce actual customer churn by 0.4%, which would increase gross margin by US$ 40 million for ABC. What role would dependability play in this? For every 1% improvement in dependability rat-ings, overall satisfaction increased by 0.6%, which through its effect on lowering customer churn, would result in an esti-mated US$ 22 million gain in gross margin.

Implementing the SPC. Via a sub-driver analysis, the anal-ysis identified the key attributes driving perceptions of over-all dependability. These were: “No missed service calls”, “I can rely on ABC’s service”, and “My service is performed at the scheduled time”. Management chose to focus on “No missed service calls”.

The study team undertook a comprehensive root cause analysis of the operational factors causing missed service calls. Two key causes – out-of-date customer location information on daily service routes, and failure to check service personnel in at the end of the work day – were identified by the team as the most actionable and effective ways of reducing missed ser-vice calls. The costs of pursuing each of these operational av-enues were also estimated and deducted from the estimated gains in gross margin.

Consequence of implementing the SPC. The quarter follow-ing the implementation of the operational changes based on the SPC led to fewer missed service calls and increased scores on service dependability. In the next quarter, overall custom-er satisfaction rose and the gains continued in future quarters

(see figure 3). Customer churn rates correspondingly declined from 13% to 10%, and gross margins improved.

Case 2: XYZ CorporationXYZ Corporation (identity disguised) is a Fortune 500 indus-trial equipment and services company with annual revenues over US$ 15 billion. Management wanted to understand the brand positioning of the company in light of increased com-petition. Top management was also interested in developing a strategic focus for the organization so that different divisions could be aligned around common strategic initiatives.

Data. The firm used an external vendor to survey 1,800 cus-tomers, many of them SMEs, on several customer value items as shown in figure 4. Data on customer retention and net mar-gins was gathered via internal records.

Findings. The top areas of the customer experience relat-ing to overall customer value were technical issues (.73), brand equity (.67), sales team issues (.58), and project deliv-ery (.43). Management was surprised by the impact of tech-nical issues on overall customer values. Generally, it was be-lieved that the sales team and project delivery were the big-gest drivers of customer value. Additionally, the key role of brand equity was novel, as management had not explored this possibility, thinking that branding was more a business-to-consumer market issue.

Application. Based on the analysis, management decided to focus on perceptions of brand equity and technical issues. To determine how to improve brand equity and technical is-sues, the analysis identified the key attributes driving percep-tions on these two elements of customer experience. For brand equity, these included “technological innovation”, “product quality”, and “value”. For technical issues, these in-cluded “on-time delivery”, “problem handling”, and “health and safety-related performance”.

Financial results. A 1-point gain in overall customer value (as measured by overall satisfaction) was estimated to increase customer retention by over 4%, resulting in a nearly US$ 200 million gain in net margins.

Lessons Learned•The SPC gives top management the ability to depict the complex interrelationships among the drivers, com-ponents, and outcomes of customer value as well as con-textual factors that are specific to each company.•By implementing the SPC, companies can improve operational performance, enhance customer satisfac-tion and retention, and increase revenues. •Using this framework requires a disciplined approach informed by data and a comprehensive analysis at the strategic and tactical levels.•Business to Business (B2B), Small to Medium Sized Enterprises (SME), Industrial Markets, Customer Val-ue, Satisfaction Profit Chain

“The SPC model provides a road map for strategic focus as well as for specific operational improvements.”



Consequences of implementing SPC. The SPC analysis fo-cused top management on investing in a program to strength-en brand equity and initiatives designed to improve “on-time delivery” and “problem handling”. Preliminary financial re-sults are positive and consistent with expectations. Specifics are omitted here at the request of the sponsoring organization.

Concluding CommentsThe SPC model not only illuminates the path to improved customer retention but also to greater financial value for shareholders. Internally, it provides a road map for strategic focus as well as for specific operational improvements. Most importantly, it enables management to avoid vague generali-ties and adopt a well-defined and measurable strategic focus and operational execution. In both cases, management efforts and strategic areas of focus are also linked to measurable out-comes: margins, retention, and profitability.

To be sure, using the SPC framework involves a disciplined approach that is informed by analytical information. It is clearly not a tool for management that wants to “shoot from the hip” and use data to justify pre-determined decisions. However, it is evident that the rewards from adopting such a disciplined and analytical approach can provide rich financial results for firms willing to undertake the exercise.

ReferencesEcorys (2012): EU SMEs in 2012: At the Crossroads, http://ec.eu-ropa.eu/enterprise/ policies/sme/facts-figures-analysis/perfor-mance-review/files/supporting-documents/2012/annual-report_en.pdf, accessed: 11.10.2013.

European Commission (2005): The New SME Definition: User Guide and Model Declaration, http://ec.europa.eu/enterprise/poli-cies/sme/files/sme_definition/sme_user_ guide_en.pdf, accessed: 11.10.2013.

Frennea, C./Mittal, V./Westbrook, R. (2014): The Satisfaction Profit Chain, in: Rust, R. T./Huang, M.-H. (Eds.): Handbook of Service Marketing Research, New York: Edward Elgar Publishing, pp. 182–218.

Kamakura, W. A./Mittal, V./de Rosa, F./Mazzon, J. A. (2002): Assess-ing the Service-Profit Chain, in: Marketing Science, 21, 3, pp. 294–317.

Mittal, V./Frennea, C. (2010): Customer Satisfaction: A Strategic Re-view and Guidelines for Managers, in: Fast Forward, MSI Report 10-701.

Rust, R./Zahorik, A./Keiningham, T. (1995): Return on Quality (ROQ): Making Service Quality Financially Accountable, in: Jour-nal of Marketing, 59, April, pp. 58–70.

SBA Office of Advocacy (2012): Frequently Asked Questions, http://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf, accessed: 09.10.2013.

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