Lecture 3: Value to Customer & Value of Customer Flashcards
Value
Value to Customer (VTC)
Create Value To Customers: If people can understand and recognize the value created for them, they will be willing to spend money to buy your product.
Customer value is the perception of what a product or service is worth to a customer versus the possible alternatives.
Value of Customer (VOC)
Qualitative Approach and Quantitative Approach
VOC: Market Attractiveness
Customer (First C):
Which market is the most attractive to me as a company if I want to make the most profit?
What are the key variables?
1. Market size: how big is the market?
- Supply-side approaches (how big is the manufacturing process?)
- Demand-side approaches (TAM, SAM, SOM)
- Market growth rate: how fast is each market (i.e., TAM, SAM, SOM) growing? How fast will they be growing in the future?
- Willingness to pay: how much are consumers willing to spend on your product.
Note: All variables pertain to the nature of your customers.
Different Market Sizes: TAM, SAM, AND SOM
TAM: Total Available Market.
- The entire population that would consume your kind of product or service. Difficult to reach all of your consumers because of your distribution channels (e.g., there are coffee drinkers all over the world, but you might not be able to sell your coffee in Europe, Africa, and Australia).
SAM: Serviceable Available Market
- Of the total available market, you can only service a portion.
SOM: Serviceable Obtainable Market
- Of the serviceable available market, only a portion of people is going to consume or actually buy your product. Only going to obtain a subset of available people, consumers might choose your competitors instead.
VOC: Other considerations (Company, Competitors).
Company (Second C):
- Potential for cannibalization: If a market is attractive, but by going there, you are going to eat up lots of your existing market share in other products sold by your company, then your cannibalization rate is really high.
Competitor (Third C):
- Competitive intensity: how strong are your competitors in this market.
VOC: The Chain Ratio Approach to Demand Estimation
A quantitative approach to thinking about VOC by systematically going through subsets.
Think of demand terms: TAM, SAM, SOM; we want to quantify those terms.
Example: Demand for a new light beer,
The population of interest multiplied by the per capita spent/expense on discretionary items multiplied by the percentage spent/expense on food multiplied by the percentage spent/expense on beverages multiplied by the percentage spent/expense on beer.
Note: Every time you add a percentage, the total value is reduced (broadest to the narrowest).
VOC: The Basic Value Model
The Retail metaphor: how do you estimate revenue
Revenue = Traffic (number of visits/how frequently people come by your store)
* Conversion rate (likelihood of purchasing anything in my store)
* Basket size (total amount spent per customer among those who buy things in my store.)
Opportunity Segment:
- Identify “deficient” behaviours (from to the point of view of your company, not as a judgement about your customers); try to correct those.
Ask yourself which of these three estimates are you wanting to target? Maybe there’s a ton of traffic in your store, but they are reading the samples and go check the price on amazon, see its 15% cheaper and buy on amazon instead. Lots of traffic but zero conversion rate, zero basket size. You want to change that.
VOC: Opportunity Segmentation
Ice cream Parlour example
Dimensions: Frequency, Volume, Margin
Each arrow (dimension) points to a different opportunity segment. The goal is to maximize value.
VOC: Advanced Model
Here we use total revenue as a surrogate for value of customer. Total revenue isn’t actually the value of a customer, it is being used as a proxy for the purposes of this course.
In more sophisticated analyses: use net present value (NPV) techniques to compute customer lifetime value (CLV). You care about the lifetime of the customer and how much value they are generating for your company over their lifetime (not just that day, week, or month).
VTC: Example B to B: Business to Business
The idea is that by creating better value to your customers, they can appreciate your service better, and because it is saving them costs, you can presumably charge them a higher price and that, in turn, means that the Value of Customer (VOC) is also increasing.
Service: Coal distribution, Customers: Iron manufacturers (used in a blast furnace).
Coal delivered to yard, stays there for 8 days, and then used in furnace.
How can you add VTC? How can you generate more value to your customers? Can you add value to provide better service, add value to the customers’ consumption experience?
Shorten the delay, what else can you do? Eliminate delay all together. Eliminate inventory carrying costs for customers. Eliminate all cost handing costs entirely.
VTC: Example B to C: Business to Customer
Overnight 6-hr flight from Toronto to Dublin, Ireland. Mostly business travelers making a day trip (work). Fly for a day and then come back to Toronto.
How can you add VTC? What can the flight company do better for business people?
- Ways to offer better sleep quality: Greater seat recline, sleeper suits & toiletries, arrival lounges with shower facility, better meals, etc.
- Beyond quality of sleep, can you increase quantity of sleep for your customers? Maximize sleep time
- Serve meal in the arrival area, give an option then they sleep on the plane instead of eating
- Provide all arrival documentation prior to boarding - Increase flight time to 8 hrs (by lowering velocity of the flight)? Cf. set-out sleeper train in railroad industry.
Note: In the railroad industry, there are trains that go slower than they could be, lower speed saves cost, and people can get the sleep 8 hours they want, can add value to customer experience.
VTC: A Simple Taxonomy (types of value)
The goal is to maximize both economic and experiential value.
Notes on the table:
1. Value Creation Results in overall dollar savings/impact for the customer. If you can save time/ expend less time, you are saving manufacturing costs (economic value).
- Predictability of economic value (can do the math) and experiential value (you don’t know how people are going to experience it, so you don’t how much value they get from the different experiences. But once you give people the experience, you can ask them how the experience was. And afterwards, you can quantify the value.
How do you estimate the economic value of an experiential benefit? Ask customers how much they are willing to pay for it and perform regression models to infer the experiential value of the product.
Examples of each kind of value?
Haircut: An experience where people are often willing to pay more to have a better experience (Experiential value)
A house: both economic value (investment, reselling), and living in the house (experiential value)
VTC Calculations
Value = number of factors
VTC
= Cost they already incur (already willing to pay) (and will save) + Net benefit from switching
= Reference Value + Positive Diff. Value – Negative Diff. Value
Note: you have to quantify these values.
Differentiation Value
Differentiation Value is the value to customer (both positive and negative) of any differences between the firm’s offering and the reference offering.
