An executive summary for

managers and executive Gaining competitive advantage

readers can be found at the
end of this article through customer value oriented
management
Frank Huber
Assistant Professor of Marketing, Department of Marketing,
University of Mainz, Mainz, Germany
Andreas Herrmann
Professor of Marketing, Department of Marketing, University of
Mainz, Mainz, Germany
Robert E. Morgan
Chair and Professor of Marketing and Strategic Management, School
of Management and Business, University of Wales, Aberystwyth,
Wales, UK

Keywords Consumer behaviour, Perception, Product attributes, Value,

Competitive advantage
Abstract Within the customer value literature there is a lacuna of theoretical frameworks
and models that underlie consumers' overall product valuation. This paper addresses this
limitation and presents a model integrating consumer values, product benefits, and
various costs of consumption. In the proposed model, benefits and costs are defined in
terms of consumers' perceptions in the activities of acquisition, consumption, and
maintenance, as well as consumers' expectation of value satisfaction before buying.

Introduction
Effective strategy Developing an effective strategy requires that executives and corporate
leaders have the strategic insight and comprehensive understanding of the
product-market domain(s) they operate within. This understanding must be
sourced not to the firm's own (internally derived) perspective but rather from
that of its customers. Recall, for example, that Xerox views itself as a
``document processing'' company, whereas Schlumberger provides
``information'' to the petroleum industry. Strategic decisions are also made
as to the future direction of the company and the means of increasing the
level of customer orientation exhibited. Most strategists agree that creating
customer value is fundamental to increased customer orientation (Slater and
Narver, 1998). Indeed, creating superior customer value is a necessary
precondition for securing a niche in a competitive environment, not to
mention a leadership position in the market (Day, 1990). According to Porter
(1980), a company can follow two generic routes to compete in a market:
differentiation or low-cost. Day (1990, p. 163) argues that both approaches
maintain the same objective, to create superior customer value, because:
Regardless of which of these routes is emphasized, the effort will fail unless
significant customer value is created.
Day (1990, p. 142) proposes that the concept of customer value can be
expressed in the form of an equation: the ``perceived customer value''
represents in this equation the difference between ``customer's perceived
benefits'' and ``customer's perceived costs''. Although Day's (1990)
interpretation of customer value is intuitively sound, some details regarding

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 consumers remain unclear. For example, the process by which consumers
perceive product benefits is nebulous: Day (1990) particularly addresses
product valuation by industrial consumers in detail, but this is only in
principle a part of a much more complex process of product valuation by
consumers. However, a theoretical framework, which underlies the
consumers' overall product valuation, is absent from the literature. Such a
framework should address the issues of how consumers perceive the benefits
and costs of products (evaluation process), as well as what possible benefits
and costs consumers may perceive from products in the market (value
drivers). The current paper attempts to reconcile these gaps. Following
presentation of the process of product valuation for consumers, the paper
continues with a comprehensive model of customer value management for
the consumer market integrating consumer values, product benefits, and
various costs of consumption. In the proposed model benefits and costs are
defined in terms of consumers' perceptions in the activities of acquisition,
consumption (or using), and maintenance, as well as consumers' expectation
of personal values satisfaction before buying. Furthermore this contribution
helps managers offering a toolbox to ``bring the model into use''. Finally, the
implications of consumption behavior analysis for a demand oriented
customer value management are discussed.

A model of customer value for consumer markets

Describing customer value from a normative perspective
``Value'' The concept of ``value'' has been applied to many settings in the
management, strategy, finance, information systems, and marketing
literatures (Wikstrom and Normann, 1994). Although replete within
contemporary research and practice in these disciplines, the value concept is
multifaceted and complicated by numerous interpretations, biases, and
emphases. For instance, the derivations of various value dimensions have
been evident from the point of view of ``strategic value'' (Katz, 1993),
``value'' as equal to revenue minus purchases (Strassmann, 1990), the
economic contribution that ``value'' makes to profit maximization (Banker
and Kauffman, 1991), ``value'' as manifest in continuous quality
improvement initiatives (Richardson and Gartner, 1999), ``intrinsic value''
created through scientific approaches to organization (Meredith et al., 1994)
and, most particularly, the value of customers to an organization (Blattberg
and Deighton, 1996), customer values (Engel et al., 1990), and the principles
of customer perceived value (Zeithaml, 1988). All these theoretical
approaches require unique perspectives and demand specific appreciation of
the value concept(s) in question. For instance, the last three customer-based
derivations of value dimensions are often confused within the marketing
literature but they are by no means synonymous: the value of customers to an
organization concerns the direct benefits that an organization experiences as
a result of customers' loyalty and continued patronage; customer values
reflect the personal values of individual consumers; and, the customer
perceived value approach centers upon the utility a customer receives after
purchasing a product.
``Customer value'' Many marketing strategists and industrial-organization (IO) economists
emphasize that creation of superior ``customer value'' is a key element for
companies' success (Higgins, 1998; Kordupleski and Laitamaki, 1997;
Milgrom and Roberts, 1995; Porter, 1996; Woodruff, 1997; Wyner 1996).
However, what is meant by ``customer value'', from this viewpoint, is quite
different from the meanings of the ``consumer values'' or ``personal values''
that we discussed in the introduction. ``Value'' to marketing strategists

42 JOURNAL OF CONSUMER MARKETING, VOL. 18 NO. 1 2001

 means a return for something in an exchange. Therefore, the meaning of
``customer value'' is a level of return in the product benefits for a customer's
payment in a purchase exchange (Normann and Ramirez, 1993). The total
amount of payments depends upon the number of customers and the turnover
per customer. The literature on competitive strategy argues that the number
of customers can be increased by delivering more customer value than the
competition (Day and Wensley, 1988; Gale, 1994; Porter, 1985; Woodruff
and Gardial, 1996). Therefore, the concept of customer value has by nature a
normative perspective, since it is a fundamental concept underlying the
competitive analysis in the field of IO, based on economic principles and the
customer's choice in the market. The service marketing literature has
extended and refined the notion that customer value is a way to realize
financial success by linking it not only to the number of customers, but
especially to the turnover per customer. It is argued that companies realize
commercial success through the satisfaction of customers by ensuring they
perceive the ``value'' they ``expect'' (van Raaij et al., 1998; Zeithaml et al.,
1990). In the preferred situation therefore the ``expected value'' is similar to
the ``perceived value''. Creating more customer value while maintaining this
balance will result in long-term commercial success. Expected value and
perceived value are strongly interdependent from the customer perspective.
As is noted by Voss et al. (1998), several studies have demonstrated a
positive relationship between expectation and perception (Cadotte et al.,
1987; Gupta and Stewart, 1996; Spreng et al., 1996) ± which is in line with
the concept of cognitive dissonance (Festinger, 1957). Therefore, balancing
customer value is a shared interest of both companies and customers.

Describing customer values from a descriptive interactive relationship

perspective
Customer perspective Customer value is a theoretical construct that captures the customer
perspective of a product. It has been illustrated that a producer can use
customer value as a goal by defining the customer value a selected group of
customers is intended to expect and perceive. Since customer value deals
with the customer perspective, this does not detract from the fact that it
eventually concerns a subjective notion of an individual customer's
judgement of the value of a product (Anderson and Narus, 1998; Woodruff
and Gardial, 1996; Zeithaml, 1988). Like other authors, Woodruff and
Gardial (1996) assert that the judgement of value results from a trade-off in
positive consequences (benefits) or desired outcomes and negative
consequences (sacrifice) or costs.
This subjective evaluation task of the individual is the reason why consumer
behavior researchers, on the other hand, generally refer to the term customer
values. The word ``values'' represents desirability, usefulness or importance
(Peter and Olson, 1990). Consumer research is primarily founded upon a
descriptive-study perspective, such as in the fields of anthropology,
sociology and psychology. Therefore, ``consumer values'' refer to the
important personal goals that consumers seek (Wilkie, 1990). Furthermore,
consumer behavior researchers emphasize that people can achieve some of
their personal values through possession or consumption of products.
Nonetheless, what is needed is an approach that is able to identify value
drivers ± drivers the consumer is seeking, which are the means to reach the
personal goals established, that should be fulfilled when purchasing a
product. A suitable approach which connects the possession or consumption
of products and the consumers' personal values is means-end theory, which
has its roots in cognitive psychology.

JOURNAL OF CONSUMER MARKETING, VOL. 18 NO. 1 2001 43

 The operationalization of the cutomer values concept
Means-end theory posits that linkages between product attributes,
consequences produced through consumption, and personal values of
consumers underlie their decision-making processes (Gutman, 1991). Means
are products or services, and ends are personal values considered important
to consumers. Means-end theory seeks to explain how an individual's choice
of a product or service enables him or her to achieve his or her desired end
states. Such a framework consists of elements that represent the major
consumer processes that link personal values to behavior.
Two assumptions underlie the model:
(1) all consumer actions have consequences; and
(2) all consumers learn to associate particular consequences with particular
actions they may take.
Consumption of products Consumers obtain consequences from the consumption of products or
services. Consequences may be desirable (benefits) or undesirable ± they
may stem directly from consuming or the act of consumption, or occur
indirectly at a later point in time or from others' reactions to one's
consumption behavior. The central aspect of the theory is that consumers
choose actions that produce desired consequences and minimize undesired
consequences (Peter and Olson, 1990).
Personal values are beliefs people have about important aspects of
themselves and the goals toward which they are striving. Personal values are
the ultimate consequences of behavior for individuals, such as feelings of
self-esteem, belonging or other value orientations (Rokeach, 1973). In this
sense, personal values are part of the central core of ``self''. Thus, personal
values, as the psychological core of self, are held to provide consequences
(consequences refer to the outcomes accruing to the person from behavior,
such as consuming a product) with positive or negative valences. That is,
personal values determine which the individual desires as consequences and
which are undesirable. Naturally, given that attributes produce
consequences, one must consider the attributes that products or services
possess. Therefore, we must also be aware of attribute-consequence
relations. Overall, attribute-consequence-value interrelationships are the
focus of this theory. Values provide the overall direction, consequences
determine the selection of specific behaviors in specific situations, and
attributes convey the essence of the tangible product or service that produce
the consequences (Olson and Reynolds, 1983). The most relevant methods
available to explore the knowledge structure of the consumer are the:
repertory grid approach; laddering interview; content analysis; and, the
laddering method (Reynolds and Gutman, 1988; Gengler and Reynolds,
1995). However, in order to obtain an understanding of the concrete
attributes, which determine the buying behavior of the consumer, conjoint
analysis is an adequate technique (Wittink et al. 1994; Green and Srinivasan,
1990).
Summary In summary, ``customer value'' normatively focuses on a buyer's evaluation
at the time of a product purchase, while ``consumer values'' descriptively
emphasize individuals' valuation of product consumption or possession.
Consumer researchers will argue that consumers buy products not for the
sake of its ``transactional value'' but for the product's benefits that will
satisfy their needs or personal values. However, in an exchange environment,
product benefits alone do not completely explain consumers' product choice.
Often, consumers may find products desirable ± yet, in assuming that the

44 JOURNAL OF CONSUMER MARKETING, VOL. 18 NO. 1 2001

 consumer has adequate financial capacity, one must not equally assume that
a purchase will follow. These cases imply that normative points of view are
also necessary in consumer choice research. From an economics perspective,
consumers may apply cost-benefit evaluation to a purchase decision, at least
when the costs are considered ``significant'' (Olshavsky and Granbois,
1979). Therefore, with respect to a sound customer value analysis for a
consumer market, both the descriptive and normative aspects are essential
(Saren and Tzokas, 1998). The current paper proposes a comprehensive
model of customer value for consumer markets, which integrates both
viewpoints upon consumer behavior, including consumer values expectation
before purchase, customer value evaluation at the time of buying, and value
actualisation in consumption (Holbrook, 1994).

The model
According to social psychologists, an individual's perception of objects, and
events is influenced by his or her cognitive traits (e.g. personality or
attitude), their emotional predisposition, and their demographics.
Customer characteristics As indicated in Figure 1, these factors of customer characteristics form the
background of the customer's perception. As the perceived benefits are
manifest more clearly than personal values, the buyer's evaluation of a
product purchase begins at this point. The matching process on the consumer
``value'', ``benefit'', and ``attribute'' level can be described as an experiential
judgement of outcomes compared to a set of subjective standards resulting in
a sense of fulfilment, including over- (when the perceived value exceeds the
expected value) or under-fulfilment (when the expected value exceeds the
perceived value). An important distinction should be made here in that
product benefits based on consumption or use of the product are not the sole
benefits consumers realize. Rather, they may also derive benefits of a
purchase from the buying activities per se, other consumption supporting
features as well as from the recycling of the product. Treacy and Wiersema
(1993) claim that today's customers have, ``an expanded concept of value
(purchase benefits) that includes convenience of purchase, (and) after-sale
service'' (p. l84) in addition to the traditional product benefits.
``Perceived customer value'' To evaluate the ``perceived customer value'' of a product, the costs of
obtaining the perceived benefits are usually the major concern of buyers,
since consumers may apply principles of costs-benefits to evaluate a
purchase (Zeithaml, 1988). The model proposes that the relevant costs of a
purchase considered by consumers include the following: monetary costs;
time costs; search costs; learning costs; emotional costs; and, cognitive and
physical effort coupled with financial, social, and psychological risks.
Furthermore, every category of these costs may play a part in purchase,
possession, consumption, and maintenance. Consumers encounter risks when
they face the uncertainty or potential negative consequences of consumer
activities. For example, being cheated, overcharged or misled into buying an
unnecessary product or possessing or using certain products, such as
unconventional clothes, may incur social costs. Maintenance risks include
being overcharged for supplies and or suffering the possibility that they will
be discontinued. Nevertheless, all of these costs, like the benefits, are also
subject to consumer perceptions.
The model suggests that customer value is a consequence of subjective
evaluation which in turn results from the summing of the various elements
contributing to the perceived fulfilment of the value, benefit, and attribute
level and perceived costs, taking into account subjective weighting factors.

JOURNAL OF CONSUMER MARKETING, VOL. 18 NO. 1 2001 45

46
Figure 1. A model of consumer values and customer value

JOURNAL OF CONSUMER MARKETING, VOL. 18 NO. 1 2001

 Thus far, in the current model of customer value, benefits, and costs are
defined in terms of consumer perceptions in the activities of acquisition,
consumption, and maintenance, as well as consumer expectations of personal
values satisfaction before purchase. That is, this consumption behavior
approach is both holistic and analysis-oriented, advancing beyond traditional
``customer-oriented'' concepts, which usually focus on the buyer's economic
evaluation at purchase. As emphasized in the model, the importance of
benefits and costs varies among individuals due to their personal
characteristics and value system.
Phenomena These phenomena have led in brand and sales management practice to
benefit or cost segmentation ± the process of dividing consumers into
homogeneous subgroups or segments based upon their interest in particular
benefits (Porter, 1996). The benefits most important to target customers are a
fundamental issue in brand and sales strategies, such as product
differentiation and positioning. Furthermore, as the benefit a consumer wants
to receive represents a part of his or her value system, the manager should
not overlook the relevance of the consumer's abstract method of structuring
his or her behavior. This means nothing else than expanding the brand and
sales into ``values and perceived customer value'' management. However,
companies have to go one crucial step further ± to obtain a more accurate and
complete profile of the customer in respect of his or her characteristics, the
direct and indirect (pre-) economic significance of the customer has to be
calculated. In other words, based upon the identified personal values and
perceived customer value, it makes sense to compute all monetary and non-
monetary losses sustained by a supplier, if he or she fails to retain a certain
customer. However, customer migration of this kind does not only result in
losses in sales, turnover, and profitability: it is more appropriate also to
include in this consideration, pre-economic value components such as the
reference potential, cross-selling potential, and information potential of
customers.
Absolute sales potential Within the framework of the analysis of absolute sales potential, customers
are assessed on the basis of sales, which have been transacted over a certain
period, or attainable future sales and, depending upon how promising they
appear, classified as A, B or C customers. Differentiated approaches also
include in the sales-related customer assessment the life cycle phase in which
to position the customer relationship.
The widely held opinion that ``high costs mean high profits'' has long been
discredited. Instead of this, it has been possible to observe dispersion of
profits over a generally wide spectrum. In this context the absolute amount of
the customer contribution margin is greatly dependent on the total volume of
the customer's purchases ± profitability is most certainly not. The immediate
need resulting from this is to identify differences in customer value as part of
an accounting exercise based on the income generated by an individual
customer. What is important in this context is that the revenue generated by
each individual customer and the costs incurred by this customer are
allocated on an individual basis. An accounting system set up in this way is
also the basis for calculating the monetary customer profitability potential. It
states the monetary customer profitability potential, which can be quantified
with the help of customer profitability accounting, and indicates to what
extent an individual customer represents a profit or loss for the company.
Contribution The contribution made by every customer to the profit over a given period
can be determined by calculating the ``customer contribution margin''
(customer profitability calculation referred to a given period). By allocating

JOURNAL OF CONSUMER MARKETING, VOL. 18 NO. 1 2001 47

 customer-specific profits and costs correctly, the monetary customer
profitability potential can be calculated so as to provide detailed statements
on which customers are considered to be profitable over a given period and
those which are not. In order to plot the different development potential of
customers in each case, it is essential to calculate the customer contribution
margin on the basis of the planned figures for future accruals.
The customer life cycle can, in principle, be described as the time sequence
of a business relationship and operationalized with the help of, among other
factors, sales, turnover or customer profitability time series (Dwyer, 1989).
In the case of the ``customer life cycle calculation'' (customer profitability
calculation accrued over a number of periods), apart from the costs and
revenues of processing the transaction and follow-up, the pre-transaction and
subsequent revenues (e.g. disposal revenues) must always be included in the
calculation. These costs, which have the character of investment costs, must
be paid back over the duration of the relationship.
``Reference potential'' is understood to mean the number of potential
customers an owner of a product can reach, and influence accordingly, with
positive, neutral or negative information in respect of a manufacturer or a
certain model within a certain period of time because of his recommendation
behavior and power of influence, together with the size, type, and contact
frequency/intensity of his or her network of social contacts.
The ``cross-selling potential'' of a customer is a benchmark to ascertain
whether an existing customer relationship can also be used for further
products or product groups from the same company. The greater the
opportunities for sales or profit expressed as a result of the cross-selling
potential, the more valuable the customer has in the eyes of the supplier, all
other things being equal.
``Information potential'' The ``information potential'' of the customer is obtained from the total useful
information received by the company from the customer within a certain
period of time and which the company can apply appropriately in the
production and utilization of the product or service. It is particularly relevant
to mention here the customers' ideas, complaints, and suggestions for
improving the product which represent a potential variable in so far as, if
they are implemented appropriately within the company, they may result in
greater efficiency or cost savings not only in the production process and
logistics but also sales and accounting procedures.

Implications
There are several implications for management from this model. With regard
to the marketing function, we illuminate the relevance of the means-end
approach ± its categorization of value, benefits, and attributes may help
marketers identify their target consumers' central and peripheral needs.
Then, the typology could help companies design their products and related
marketing programs, such as advertising and distribution. The need to take
account of sets of values when designing products can also be demonstrated
as follows: if it is assumed that the length of the front section of a vehicle is
an important criterion for a potential car buyer, the knowledge that this
attribute helps to raise the customer's self-esteem will inspire the product
designer to devise a different body shape than if the value associated with the
attribute is ``safety''. This knowledge of the ``why'' should thus exert a
decisive influence on the development of new seats or on modifications to
existing ones. The same may follow for the creation of advertising
campaigns.

48 JOURNAL OF CONSUMER MARKETING, VOL. 18 NO. 1 2001

 Product design process In addition, the demand-oriented part of the model, where we identify values
and benefits at a high level of abstraction could be the starting point for a
revolutionary product design process (Porter, 1996). When captured, a
customer segments' current personal values are projected forward in time.
The personal values segmentation scheme provides insight into the future
because these values represent customers' enduring beliefs (Johnson, 1998).
This is not to say that customers' values are necessarily stable. Two other
sources of information must be integrated into the value projection process.
Customer values vary systematically with age and value projection must also
take into consideration societal, cultural or other environmental value
changes (Parasuraman, 1997). This integration of current trends provides a
picture of what consumers are likely to demand in the future and what kind
of products they may wish to have.
Concerning the supply-side of the model, customer orientation is not only a
word but a philosophy and companies have to organize their internal
processes in an adequate sense (Brand, 1994; Vantrappen, 1992). This means
that personnel who are responsible for analyzing the actual and future values
of the social system have to work together with designers, who are best able
to transfer the relevant values and benefits into product attributes.
Furthermore, in these cross-functional teams, where we find trend scouts and
creative designers, it is necessary to integrate a marketing controller. This
individual serves as a conduit to bring together the relevant personal values,
perceived customer values and the customer value segmentation approach,
based upon criteria the company may define. This incorporation of the
marketing controller's role might evoke a dejaÁ-vu with the target-costing
concept. However, the approach we suggest here goes one crucial step
further. This is the reason why we think that the use of the term ``target
design'' represents the notion much better. Based on the relevant consumer
data, the marketing controller has to calculate not only the ``hard'' costs for
the financial input and the planned output to satisfy the needs of a profitable
segment but also has to evaluate the ``soft'' factors like the ``reference
potential'', or the ``information potential'' of these segments and promote a
vision of which hierarchy the company should provide, which target product
to which target segment.
Conclusion As a conclusion, we can suggest that while customer value has traditionally
been considered an ``off the balance sheet'' asset, managers are realizing that
modelling these issues is a necessary consideration in developing a coherent
understanding of company activities and resources. Research on valuing
consumers as assets, and on how managers become responsible for
developing their value, has not, to our knowledge taken place. Future
research and practice has to recognize, that the actual values which managers
manage are neither subjective (``in'' an individual) nor objective (``in'' the
object), be they exchange value or utility values. They are interactively
established, plural and, as they cannot be reduced to a single measure (Dean
et al., 1997), the manner in which they are identified, selected, defined,
evaluated, communicated, and managed by interacting stakeholders
represents a rich set of research opportunities.

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