Customer Centricity

—Creating Customer Value

Li Yang
Dec 2019
 Course Roadmap
Customer and Developing Advanced Marketing
Marketing Strategies Marketing Plans Topics

Sessions 1 - 4 Sessions 5 - 8 Sessions 9 - 12

1 Deriving Customer Value 5 Pricing 9 Internet Marketing

2 Creating Customers Value 6 Channel 10 Social Media Marketing

3 Segmentation & Targeting 7 Communication 11 Big Data & AI

4 Positioning 8 Branding 12 Blockchain

 Some Logistics
• Starbucks
– Presentations on Dec 10: two groups
– 15 minutes per presentation including Q&A (strict timing)
– Every group member must speak
– Hard-copy case analysis report due at 9am on Dec 16
– Case report format:
• 7 page limit: 5 pages of text plus (optional) 2 pages of appendices
• 12 pt, Times Roman, double space, 1” margins
• Guideline questions provided in advance
• Concise (but not just bullet-points ) reports are encouraged

• Group assignment on Conjoint

– Will be delivered after today’s class, due on Jan 15
 Last Time …
• Customers are assets

• Three key levers of growth:

– Customer acquisition (AC)
– Customer retention (r)
– Customer expansion (m)

• CLV is a useful tool for:

– Acquisition budgeting
– Segmentation + Targeting
– Market value
 Today
• Creating values for customers
– Economic value
– Functional value
– Experiential value
– Social value

• Measuring customer preference

– Conjoint analysis
 The Marketing Framework
What Customer
Market Knowledge
Think, Feel, and Want

Marketing Strategy
Segmenting
Targeting
Positioning

Marketing Programs
Product
What Customers Buy Place
Price
Promotion
Customer
Lifetime
Customers Value Firm

Financial
Performance/Value
 The Marketing Framework
What Customer
Market Knowledge
Think, Feel, and Want

Marketing Strategy
Segmenting
Targeting
Positioning

Marketing Programs
Product
What Customers Buy Place
Price
Promotion
Customer
Lifetime
Customers Value Firm

Financial
Performance/Value
 Value for Customers
• Value: the difference between what a customer pays
and the bundle of benefits she receives
Economic

Functional
Experiential

Social
 Economic Value
• Economic value to customers (EVC)
– Tangible monetary benefits

– Either at the time of purchase

– Or over the long-term use

Total Cost of Ownership
 Quantifying EVC

• EVC = Maximal price a customer is willing to pay

= Total cost of ownership of existing alternative
− After purchase cost of new product
+ Additional benefit of new product
 EVC Example
• EVC = Maximal price a customer is willing to pay

• Problem:
The current existing product Y is sold for $300, a setup
cost of $200, and a maintenance and operations cost of $500. In
contrast, the new product X reduces the setup cost to $100,
reduces the maintenance and operations cost to $400, and also
improves the customer’s productivity by $100. The cost of
producing X is $300.
What is the EVC of this new product X?
How should X be priced?
EVC Example
 EVC Properties
• EVC is the maximum possible price. Actual price is usually less
to provide incentive to customers to switch

• EVC includes both purchase price and after-purchase cost.

Comparison should be based on the same time frame

EVC of LED relative to CFL (for 50,000 hour use) = 89.75 – 50 = 39.75
 Pricing SuperOil
Texas Oil, Inc. needs to determine the price of a new engine oil
product “SuperOil”.
Basic oil: change every 6,000 miles, $35 per change ($10 for oil cost, $20 for
labor, $5 for disposing old oil)

SuperOil: change once every two years, regardless of mileage. Requires

special skills for mechanics, labor cost increases to $30, and disposal cost
doubles

What is the EVC for a driver who drives (a) 15,000 miles per year, (b) 45,000
miles per year, or (c) 60,000 miles per year? How would you price and target?

EVC serves as a segmentation and targeting tool

 EVC Properties
• EVC is always relative to an existing product
– Different products
– Different usage patterns
– Different perceptions of new product benefits

EVC of LED relative to CFL (for 50,000 hour use) = 89.75 – 50 = 39.75
EVC of LED relative to Incandescent (for 50,000 hour use) = 352.50 – 50 = 302.5
 Value for Customers
• Value: the difference between what a customer pays
and the bundle of benefits she receives
Economic

Functional
Experiential

Social
 Functional Value
• Functional benefits that cannot be easily translated
in terms of price or economic benefits
Evaluate Functional Features
 Evaluate Functional Features
• Multi-attribute model
 Marketing Implications
• Results

– Inferior quality: quality improvement needed

– Perception issue: correct through advertising

– Comparative advertising to bring down competitive brands

– Change weight distribution via advertising

– Give up on this guy, target a different customer

 Multi-attribute Model Limitations
• Compensatory vs. non-compensatory
– Trade off one feature with another
– Budget setting
– Brand, country of origin, etc.

• Context dependent
– Prospect theory

• Difficult for consumers to respond

– Conjoint study
 Feature Fatigue
“Customers don’t buy a quarter-inch drill bit, they buy
quarter-inch hole.” --Leo McGinneva

• Features ≠ benefits

Single blade Gillette TRAC 2 Gillette TRAC 3 Gillette TRAC 4

Gillette TRAC 5 Gillette TRAC 6 Gillette TRAC 7

 Feature Fatigue
• Capability ≠ Usability
– BMW 745 dashboard has 700+ features
– LG refrigerator builds in TV in the door
 Value for Customers
• Value: the difference between what a customer pays
and the bundle of benefits she receives
Economic

Functional
Experiential

Social
 Experiential Value
• Psychological and emotional benefits that consumers
derive from products and services
– Branding

– Design

– Customer service

– Emotional benefits
 Design

Aesthetically Beautiful!!
 Design
• Guess what type of business might have this layout
for the lobby of its offices?

The world-famous
Mayo Clinic Hospital
 Customer Service
A significant gap between firms’ perception of good
service and customers’ actual experience of satisfaction
– Solution?

– Improve (front-line) employee satisfaction!

Cold Stone Ice-cream
酷圣石
 Emotional Benefits
• Marketing is not only about product information, but
about building emotional bonds with customers to
create long-term loyalty
Commercial at London Olympics
33
 Value for Customers
• Value: the difference between what a customer pays
and the bundle of benefits she receives
Economic

Functional
Experiential

Social
 Socially Connected World

• Product’s value depends on social interactions

– Network effects
– Preference formation
– Social capital
– Social relationship
 Network Effects
• The value of a product increases as more customers adopt it

• Increasing return to scale => dominance

– Taobao, Youtube, etc.

• How to quickly build up scale?

– Freemium, e.g., early Taobao
– Sharable features, e.g., Dropbox
 Preference Formation
• Consumers’ preferences are often constructed and
heavily influenced by their peers
Social Condition Independent Condition

Names of bands
and songs
Names of bands
and songs
Number of
downloads
(fake)

“Popular” songs become even more popular

Herding Behavior
 Social Capital
• User-generated content (UGC)

• What motivate people to create UGC?

– Reciprocity
– Self-esteem: empowered and important
– Social currency: looks good by others
 Social Relationships
• Build and strengthen social relationships
– eBay Group Gift

– Nike+
 Today’s Takeaways
• Value: the difference between what a customer pays
and the bundle of benefits she receives
Economic

Functional
Experiential

Social
 Next …
• How to measure customer preference
– Conjoint analysis

• “Apple Vs. Samsung: The $2 billion Case”