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Strategies for Measuring Customer Value Segments

 

A content analysis of a broad spectrum of public domain materials produced by the top 150 companies in the chemical industry found that 65 percent announced that they are customer focused. But according to an analysis of what these companies actually do in the marketplace or how they deliver against what customers value, only 10 percent are even close to being customer focused. It’s easy to say that the customer is the center of your business strategy. It’s more difficult to behave that way.

Evaluating customer value segments is required to assess their ability to provide profitability. Anticipating customers’ changing needs and expectations by identifying future trends is also required to maintain a position as a value leader. Corporations also have to update and enrich their customer value commitments by refining customer value processes, the population of them, and the infrastructure to support them.

There are five major actions which follow effective measuring.
1. Spotting gaps. These are items arising from an analysis of regular and systematic measures that need to be in place to track results and performance on customer value.
2. Challenge customer understanding. Customer value needs and expectations are dynamic, not static.
3. Redefine customer value commitments. Changing customer value expectations requires a redefinition of your customer value commitment.
4. Improve customer value. As value needs are fulfilled, the value ratio changes.
5. Anticipate change. Customer value commitments result in a better understanding of future customer value needs and expectations. Your ability to anticipate these changes enhances the value of both your customer commitment and customer relationships.

Spotting Gaps
The intent of business measurement is to achieve two main objectives. One, measurement provides information that potentially enables improvement or correction to the goal achievement. These data should indicate where you are delivering value that is important to your customers and where you are failing to do so. It’s important to reinforce the former, but where gaps exist, it’s necessary to reexamine your basic segmentation strategy or redefine your customer commiment.
Two, business measurement provides a relative position assessment on how well something is being accomplished at a certain point in time relative to a goal. Consider your customer commitments balanced against your cost to serve your target customer value segments and their profitability. You may be forced to make choices. In either case, create an action plan for improving customer satisfaction with measurable goals and a timetable, and then constantly monitor the plan and adjust it when necessary. Mine the data and results for any immediate issues or problems that need resolving or whose resolution would provide an immediate benefit or “quick hit.” These are the short-term motivators to pursue the longerterm gains.

While the intent of measurement is often right, what typically plays out in business is somewhere in the spectrum of either measuring everything or a claim that some things just cannot be measured—a leap of faith is required.
Value-based measurements of outcomes need to be connected, but not always in terms cause and effect. For example, aggressive marketing for cellular phone services often generated a high response, but the inability of the service providers to actually provide the services desired meant that response rate didn’t correlate with revenues or profitability.
Any measurement of results must assess how the business is interacting with customers at all of its touch points and how it’s running all business processes to provide its value commitments effectively. A business frequently misses meeting goals, not because it’s not measuring, but because it’s
• measuring things in the wrong order
• measuring the wrong things about customers
• measuring a consolidated view of the market and customers
• measuring what matters to business efficiency, not customers
• measuring its product against competition
• measuring too much

Measuring in the Wrong Order
The business may be measuring important things in the wrong order of when they should be measured, such as measuring and improving its product quality or supply chain or manufacturing efficiency before it knows whether the specific improvements really make a difference to customers. In an organization with diverse capabilities, this can be particularly acute. Every function and team member acknowledges and acts upon the company’s goal to improve. The flurry of plans, actions, and results gets measured every time the dust settles, and every report describes improved performance, except maybe with the customers. The measurements do tell how much faster the product is getting to customers and how good this is for the business’s inventory management; but it’s not measuring the impact on the customer’s operation. More demoralizing occurs when the customer has noticed your improvement and has also noticed the competition made a similar improvement effort. So it’s back to working harder and faster, to only get tougher negotiation with customers with each improvement.

A performance measurement matrix could be developed around customer value based logic. It starts with measuring what value matters to customers and ends with the measurement of how much money a business made. Profits are a result of providing superior value to customers.
First, determine what value factors are critical to customers. CTVs (critical to value) are those value drivers identified for each customer segment that the business has determined form the basis of a superior customer value commitment for each of the respective segments. For example, the goal of Cutting Edge design was to provide better innovation value to the automotive industry. “Better innovation” is vague and hard to measure. So Cutting Edge needed to measure the financial impact of the innovation for the automotive company for each design submitted. Cutting Edge also needed to measure and track each innovative design’s cumulative contribution to the automotive company’s business performance. Without the type of CTV information for the opportunities that Cutting Edge pursued, the best a business can ever hope for is to improve its transactional and product performance. If it competes in an industry of aggressive competitors, such as the automotive industry, this performance is a hard road of short-term wins.

In transforming a business into a value-based marketer, CTV factors should be the most important focal point of measurement because CTVs are what matter most to the customers’ purchasing decisions and process. Finding the winning value with customers is the starting point for everything else happening in the business.
Realistically, many traditional measurements may stay in place in the near-term to improve transaction and product performance while the business discovers the value most meaningful to customers.
However, the business team needs to have the courage to lead the transition to replace current metrics with CTV metrics as the first measurement priority when running the business. Otherwise, the business will be seduced into believing that the current improvement measures (for example, lowering sales channel costs) are indicators of how well the business is being run. Value-based marketers, though, won’t know if the lower sales channel costs are a good thing until they can assess the sales channel’s performance relative to the customer value commitments and how the costs that impact particular customer segments are being lowered.

Once a business has clear CTVs to focus on, the second step is to measure whether changing processes, systems, resources, suppliers, and/or people can deliver on the value commitments to customers. Value-based marketing shouldn’t be confused with the marketing technique of simply changing the customers’ perception of a product through clever promotional campaigns. Value-based marketing is about creating both better values for customers and a better-run operation that can consistently and profitably deliver the value. Without the right alignment of resources, sustainability is unlikely.

The third priority is to measure how the customer is responding to the value offered. This occurs after measuring the operational changes that are starting to take place. The business can then assess both the customer value it’s providing, and its ability to run the operations and market channels through which the value is being delivered. Assessing customer response to value without the operations and channel assessment can give a false read on the market. It could tell that you have a great new customer value but then encourage the operation to be run in the old ways. This only undermines the great new value discovered, as with what has happened to so many cellular phone providers.

The fourth priority and the one ignored by most companies is to measure how the customer is better off with the new value being offered. If the customer isn’t better off, it won’t be long before the customer discovers alternative value options or just beats upon price terms. Interestingly, with all that has been written about Jack Welch and his successor, Jeff Immelt, in 2002, this point has emerged as perhaps the only difference in their business approaches and what Immelt could build his legacy upon. “Immelt is determined to reshape GE for the next generation . . . making the front-line workers obsessed with helping customers. That’s right—obsessed. He will measure managers by how much they improve their customers’ bottom lines—something Welch never did—and how much time they spend in front of their customers.”

Finally, measure how well you are doing. This is the result gained from doing the first four measurement priorities correctly. Ironically, the point of business is to satisfy someone else’s needs, yet most of the measurement attention is focused on how the business is doing without knowing how the business makes a difference to its customers. It makes one think sometimes as if all the measurement is just for better pitches to Wall Street. Managers know there will only be a bottom line to measure if their products and services are in high demand from their target customers and they determine first what their specific value link is with customers.

The Wrong Customer Perspective
Businesses often measure the wrong things about customers because the business has created the wrong perspective on its customer, such as believing a better product is better for customers, when in some cases a better price with the existing product is what the customer really values. This is the time to be brutally honest and ask, “If I were my customer, how would I do what they are trying to do?” Forget about having the best, most wonderful product. The focus needs to be on what the customer is trying to achieve, why they’re trying to achieve it, and how it could be better achieved.

The Six Sigma movement, with the Voice of the Customer (VOC) tool, is also prone to helping develop the wrong perspective on the customer. The VOC exercise assumes, often wrongly, that customers are able to describe their most pressing needs. It assumes that customers have enough insight about what they are buying to describe improvements or issues or that changes with customers are substantiated with clear supporting statistical data. Six Sigma also has a hard time with handling the early warning signals that may come from things around a customer, but it can lack clear data.

Consolidated Customer Viewpoints
Many companies develop extensive market research surveys that ultimately become part of a consolidated view of customers rather than develop a customer value segmentation approach that recognizes the different value drivers between customer groups. Many customer satisfaction surveys roll up all customers into one database and then analyze the most dominant data points. When the data are consolidated, the top issues, needs, and customer products and services are analyzed to determine where to focus efforts and resources. What the business doesn’t learn is that the top-rated needs and issues are not the same for all customers; it just looks that way from the analysis done. without using customer value segments, the business can measure and make decisions based upon a sum total composite of many different customer inputs. The best of the best doesn’t emerge. Rather, the best middleof-the-road answer comes out that doesn’t really matter to any one group of customers. The longer a business uses this approach, the more mediocre its results become and the more frustrated it becomes since it can’t explain why all its work studying customers has not made a difference.

Measuring What Matters to You
Measuring as though it really matters, but not to the customer, is another common misguided use of measurement. The business has developed measures that it believes are important to its own success and makes assumptions about what the customer’s needs are. These assumptions about the customer form the basis of what a business thinks it must do to meet its own success criteria. It focuses totally on execution, measuring frantically against its internal goals and perhaps getting fairly creative along the way to explain what actually happens in the marketplace relative to its goals.
Usually the product or service forms the core identity for the business, so measurement is centered on the product or service. The central focal point becomes the customer value segments and how the business is aligning its costs and resources to provide its customer value commitments.

Measuring Products Against Competition
Measuring the product/service and business performance relative to the competition is based on the fallacy that the business believes the better product, service, or business wins the customer’s business. In a world of similar customer options, this works until one competitor wakes up and says “enough” and changes the game based upon new value, technology, product, or service. Great value creators all share the ability to discover new value, even in mature markets. This usually doesn’t happen by studying the competition, but by studying the world of the customer.

Measuring Too Much
Having more data isn’t inherently better. More data can mean a diminishing return in understanding and applying it. Eventually there is so much data that no one remembers what the question was. Or the company suffers from “paralysis by analysis.”
Some businesses become so convinced that the latest globally connected customer relationship management (CRM) system will save the day in answering any question or targeting customer needs that they lose sight of the two-legged computers they employ who have more data than the Central Intelligence Agency. The issue isn’t more data, but tapping the right data, in the right place, at the right time. Though this is the promise of CRM systems, only a human brain has the processing capability to glean real insight from mounds of data. The discovery of value can only come from discovering what really will make a difference to the customers’ life or business. Measure what will impact customers long before counting how much money the business will make.

Challenging Customer Understanding
The clothing industry is constantly scrambling to predict and be on the leading edge of the target customers’ expectations. One such company we know has a three-segment strategy view of the world: 18–24, 24–30, and Old People. Understanding these customers is like trying to capture snowflakes to prove that no two are ever identical.
Customers’ perceptions are their reality, and perceptions constantly shift. This means that your understanding must also shift. Given the data, are your customer value segments correctly defined? Have new customer value segments appeared and, if so, are they viable, profitable target customer value segments?
One chemical company conducted a comprehensive study of its end-user customers and identified four needs- and behavior-based customer value segments: Committed, Switchers, Strugglers, and Complacent. For each customer value segment the company had developed a clear customer value commitment and was implementing a well-defined strategy in each customer value segment. The new strategies were working well, and the business was being transformed into a much more focused and more profitable enterprise. But after two or three years, it became apparent that the least successful part of the client’s customer value commitment strategy was “Stop the Switchers.” This discovery caused the company to reassess its segmentation and identify a new customer value segment that needed to be addressed—the Goners. These were former Switcher customers the client had failed to stop from switching.

When you’re meeting the value expectations for one customer value segment but not another, challenge yourself. Why are you stronger in one and weaker in another? What do you understand about the former and don’t understand about the latter? Are your commitments different to the two customer value segments? Why? What about your ability to create value? What does the difference in satisfaction indicate? Do you have enough or the right resources to support the weaker segment?

Redefining Customer Value Commitments
As a result of challenging your customer understanding, your customer value commitments will have to be redefined. Changing customer needs and customer lifetime value means that last year’s customer value commitments are already outdated. Organization alignment may have shifted, which could hinder the ability to provide customer value. The competition might have changed its customer value commitments.
The lesson is that satisfaction, for example, may not be the appropriate customer value commitment for a customer value segment where the product has matured into a cash cow with high margins. The customer value commitment may need to be realigned to an exit strategy.
Dow Chemical’s Epoxy Products business examined its customer value commitments a number of years ago and recognized that none addressed the needs of a certain customer value segment. This group of customers regularly sought to buy standard epoxy products in bulk quantities in a no-nonsense way at a competitive price. Dow redefined its customer value commitments and created a brand-new customer value commitment based on a new E-business solution: e-epoxy.com which offers the following:
• Customer Value Segment: purchasers of bulk and full truckloads of epoxy
• Customer Value: convenient and easy to purchase; transparent pricing
• Superior Value: lowest price; easiest to do business with
• Profitable for Dow: low cost to serve, adherence to clear business rules, no confusion
• Banner Headline: fastest and cheapest bulk epoxy; no-nonsense

Improving Customer Value
The next step is to address all the organizational, people, and infrastructure issues based on the changes in customer understanding and customer value commitments.

The root cause of each change needs to be identified, as well as any barriers that could hinder your making the improvement. Following are some techniques we have found helpful.
• Set up a multi-function workshop that involves everyone who could influence the customer satisfaction. Have the participants review, understand, and analyze the data. If they do, they will take ownership for what the data reflect.
• Even better, set up a multi-function workshop with representatives from your own company and the customer company, then review, understand, and analyze the data.
• Separate the changes into short-term (need resolution tomorrow), medium-term (need resolution by next month), and long-term (need resolution before the end of the quarter).
• Brainstorm the gaps or changes and the possible solutions for each category. Brainstorming is a non-evaluative process—no idea is too outof-the-box or too “not doable.”
• Rank the solutions for each from most likely to succeed to least likely to succeed or from easy hanging fruit, low resource no-brainers to those that are more difficult.
• Set measurable target objectives for each solution.
• Assign responsibility for implementation of specific solutions; ownership is assigned in the workshop. There also needs to be someone to chase the solution owners.
• Assign timetables, milestone targets, and review sessions.

Again, don’t get caught in the trap of focusing so much on the changes that you forget to reinforce what’s operating well. Where your data have indicated that you are doing well in delivering value, you should be looking for ways to enhance the current value delivery and anticipate change.
Take a lesson from Internet failures. Many Internet businesses enjoyed millions of hits on their websites. Unfortunately, many dot-coms rejoiced a little early. Internet use changed.

Anticipating Change
Value managers operate in a world of constant and often rapid change. The dynamics of societies, economies, markets, companies, customers, potential customers, and competitors impact the success or failure of the strategies, commitments, and plans. They need to have highly efficient change radar in place to be able to anticipate and respond to these changes. This means having regular, interactive dialogs with customers and asking pertinent questions about their futures. This means conducting regular economic and market research to anticipate changes in the macro picture. This means monitoring competitor activities closely and regularly reviewing and assessing competitor strategies.
We’ve all seen planning processes and systems fail because they became a “fillin-the-blanks” exercise. Planning is a serious process, demanding a high level of analysis and dynamic creativity in the interpretation of data and the development of scenarios; it’s not about forgetting the development of your own strategies in the glow of the scenarios.

There are five important actions that will affect your ability to anticipate and plan for the future.
1. Define the market opportunity or customer value segment based on the customer value sought.
2. Use the PMLC Value Cycle to “predict” where the value is headed in your markets and customer value segments.
3. Use the value planning tool to drive the future, rather than hope you’ll be ready when it happens.
4. Have sufficient people in the organization looking at the future to balance those following the day-to-day business.
5. Align your metrics to drive the future of your customer value commitment.

Describing the customer value segment or market opportunity in terms of the value sought by the customer is the first and most fundamental step in changing the mind-set of you and your organization into a customer-value driven mind-set. It is not easy, because it does not come naturally to most of us brought up in a product-driven culture. So it takes practice. Think about these scenarios:
• There is no market for buttons, but there is customer value in closing gaps on clothing to protect decency, to keep warm, or to keep cool and ventilated.
• There is no market for insulation, but there is customer value in Warm and Comfortable Building Occupants, long-term well-preserved produce, minimized risk of food poisoning, etc.
• There is no market for (your product or service), but there is customer value in the benefit it delivers to your customers. It’s your turn to put your own offerings into this simple mind-set change model.

The PMLC value cycle and its four generic customer value segments—Innovator, Optimizer, Operationalizer, and Economizer—can be used to plot current and anticipate future value expectations by examining well-established behavior that exists in all markets. The most important variable is the time between a new introduction and when the product or service no longer matters to customers. To make this tool work for you, you can’t rely on your current product orientation, which tends to focus on the changes in the technology, competitors, and products in the market.

The key is to focus on the nature of customer value in your markets and customer behavioral characteristics within the four customer value segments or the customer value segments you’ve defined.
For example, Innovator customers will predominately be interested in the unique advantage of a new technology that enables them to do something better than they can do it today. A new blockbuster drug may be most meaningful today as a unique cure. But the Operationalizer and Economizer customer value segments may not believe in its curing powers or have the capability to affordably access the drug. These customers can and will influence the value in the marketplace for the drug over time. Your firm can determine and anticipate the implication of these value expectations and proactively plan your response.
. The critical strategy considerations for suppliers and manufacturers of components to value customers are shown in each of the three segments in the value cycle. Whether customers actually exist in these customer value segments already is not as important as accepting that they will exist at some point and that you can anticipate what values will be important to them based upon understanding the four generic customer value segments. If the four customer value segments already exist, then you can anticipate movement up the value curve knowing that, in time, a new Innovator customer value commitment will be developed. This new value commitment will allow Innovator customers to do something else that they can’t do today. You can either guess at what that might be, or you can drive the market using the value planning tool.

Strategic value planning is a means by which your company can both influence customer value and create an ongoing laboratory with your customers to develop the next new innovation. In Strategy 1, you describe what you’re currently doing and what is possible today. Determining Strategies 2 and 3 requires that you identify what would be the next meaningful value expectation for customers. Accuracy isn’t as critical as creating prototype concepts you can share with customers either by hypothesis or from direct customer input. These value prototypes will help your customers understand better the implications of what you can do for them by seeing what you’re talking about.

The fourth item you need to consider is your people. This means having the right people and using the right discipline to anticipate the future. William Bridges points out in The Character of Organizations that organizations “. . . differ in character. A play-it-safe, old-line manufacturing company has a very different character from a new start-up software company. They differ in the same way that two individuals do. And the character of both the manufacturing company and the software company differ from those of a state university, a community hospital, or an architectural firm.”

As a company focuses more on efficiency, it tends to be less friendly to innovative people. The forward thinkers leave and are replaced by efficiency-oriented people. If your customer value commitments have also evolved to efficiency as the primary value, this may be OK. Odds are, though, that you are trying to manage a mix of customer value segments, including innovators and economizers. The company is evolving to one customer value expectation, but it is still attempting to respond to all the competing needs. Strategy becomes hostage to debates about what customers want.

People focusing on capturing available growth have replaced the people who understood and designed the company’s customer value commitments and customer value segments. This results in a myopic perspective, which in turn results in a lack of understanding and an inability to anticipate the changes in customers’ value needs and expectations. The company becomes less and less disciplined in its customer value planning, and form is less and less likely to follow value in the future.
You need to be aware of what’s happening not only to your cost structure, but also to the way your organization works, to the way it makes decisions, and to changes in the type of people who are making or influencing decisions. Developing a dynamic model in your organization improves how you see, develop, and capture opportunities, plus it embeds those organizational traits and personalities that are essential for sustainable performance into your business culture.
The Myers-Briggs Type Indicator (MBTI) can be used quite successfully as a personality assessment tool to analyze the people who make up an organization. It can also be very useful in identifying people within an organization who are better suited to anticipate future trends and “predict” how things will change.

The fifth way to anticipate how customer value expectations and your customer value commitments will change in the future is to measure the impact your customer value commitments have on your customer value segments and their businesses. This is the most critical leading indicator of performance and yet often the least measured item. Measuring the impact of your current customer value commitments provides insight into your customers’ current decisions and future intent and value needs.

Establishing your future customer value commitments to deepen your customer relationships is something you can plan for and control. This tool challenges your company to transform its relationship with its customer value segments proactively from selling them products to becoming an integral partner of your customers’ businesses.

 

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