CONDUCTING MARKETING RESEARCH AND FORECASTING DEMAND CHAPTER 4 133

How do firms develop their forecasts Firms may do it internally or buy forecasts from outside sources such as marketing research firms which develop a forecast by intershyviewing customers distributors and other knowledgeable parties Specialized forecastshying firms produce long-range forecasts of particular macroenvironmental components such as population natural resources and technology Some examples are Global Insight (a merger of Data Resources and Wharton Econometric Forecasting Associates) Forrester Research and the Gartner Group Futurist research firms produce speculative scenarios three examples are the Institute for the Future Hudson Institute and the Futures Group

All forecasts are built on one of three information bases what people say what people do or what people have done The first basismdashwhat people saymdashinvolves surveying the opinshyions of buyers or those close to them such as salespeople or outside experts It includes three methods surveys of buyers intentions composites of sales force opinions and expert opinion Building a forecast on what people do involves another methodmdashputting the prodshyuct into a test market to measure buyer response The final basismdashwhat people have donemdash involves analyzing records of past buying behavior or using time-series analysis or statistical demand analysis

SURVEY OF BUYERS INTENTIONS Forecasting is the art of anticipating what buyers are likely to do under a given set of conditions Because buyer behavior is so important buyers should be surveyed For major consumer durables (for example major appliances) several research organizations conduct periodic surveys of consumer buying intentions These organizations ask questions like the following

Do you intend to buy an automobile within the next six months

000 020 040 060 080 100

No Slight Fair Good High Certain chance possibility possibility possibility possibility

This is called a purchase probability scale The various surveys also inquire into conshysumers present and future personal finances and their expectations about the economy The various bits of information are then combined into a consumer confidence (Conference Board) or consumer sentiment measure (Survey Research Center of the University of Michigan) Consumer durable-goods producers subscribe to these indexes in the hope of anticipating major shifts in buying intentions so they can adjust production and marketing plans accordingly

For business buying research firms can carry out buyer-intention surveys regarding plant equipment and materials Their estimates tend to fall within a 10 percent error band of the actual outcomes Buyer-intention surveys are particularly useful in estimatshying demand for industrial products consumer durables product purchases where advanced planning is required and new products The value of a buyer-intention survey increases to the extent that the cost of reaching buyers is small the buyers are few they have clear intentions they implement their intentions and they willingly disclose their intentions

COMPOSITE OF SALES FORCE OPINIONS When buyer interviewing is impractical the company may ask its sales representatives to estimate their future sales Each sales represhysentative estimates how much each current and prospective customer will buy of each of the companys products

Few companies use sales force estimates without making some adjustments Sales repshyresentatives might be pessimistic or optimistic or they might go from one extreme to another because of a recent setback or success Furthermore they are often unaware of larger economic developments and do not know how their companys marketing plans will influence Cutare saie-s m thek teraitoiry The^ m^nt uciibeiatery ^mdeTestiTnate demand so that the company will set a low sales quota or they might lack the time to preshypare careful estimates or might not consider the effort worthwhile To encourage better estimating the company could offer certain aids or incentives For example sales reps might receive a record of their past forecasts compared with actual sales and also a description of company assumptions on the business outlook competitor behavior and marketing plans

134 PART 2 CAPTURING MARKETING INSIGHTS

Involving the sales force in forecasting brings a number of benefits Sales reps might have better insight into developing trends than any other single group After participating in the forecasting process reps might have greater confidence in their sales quotas and more incentive to achieve them Also a grassroots forecasting procedure provides detailed estishymates broken down by product territory customer and sales rep

JPINION Companies can also obtain forecasts from experts including dealers distributors suppliers marketing consultants and trade associations Large appliance companies periodically survey dealers for their forecasts of short-term demand as do car companies Dealer estimates are subject to the same strengths and weaknesses as sales force estimates Many companies buy economic and industry forecasts from well-known economic-forecasting firms These specialists are able to prepare better economic foreshycasts than the company because they have more data available and more forecasting expertise

Occasionally companies will invite a group of experts to prepare a forecast The experts exchange views and produce a group estimate group-discussion method) or the experts supply their estimates individually and an analyst combines them into a single estimate pooling of individual estimates) Alternatively the experts supply individual estimates and assumptions that are reviewed by the company then revised Further rounds of estimating and refining follow (this is the Delphi method)16

PAST-SALES ANALYSIS Sales forecasts can be developed on the basis of past sales Time-series analysis consists of breaking down past time series into four components (trend cycle seasonal and erratic) and projecting these components into the future Exponential smoothing consists of projecting the next periods sales by combining an average of past sales and the most recent sales giving more weight to the latter Statistical demand analysis consists of measuring the impact level of each of a set of causal factors (eg income marketing expenditures price) on the sales level Finally econometric analysis consists of building sets of equations that describe a system and proceeding to fit the parameters statistically

When buyers do not plan their purchases carefully or experts are not available or reliable a direct-market test is desirable A direct-market test is especially desirable in forecasting new-product sales or established product sales in a new distribution channel or territory (We discuss market testing in detail in Chapter 20)

SUMMARY

1 Companies can conduct their own marketing research or hire other companies to do it for them Good marketing research is characterized by the scientific method creativity multiple research methods accurate model building cost-benefit analysis healthy skepticism and an ethical focus

2 The marketing research process consists of defining the problem and research objective developing the research plan collecting the information analyzing the informashytion presenting the findings to management and making the decision

3 In conducting research firms must decide whether to colshylect their own data or use data that already exist They must also decide which research approach (observational focus-group survey behavioral data or experimental) and which research instruments (questionnaire or mechanical instruments) to use In addition they must decide on a sampling plan and contact methods

4 Analysis should ensure that the company achieves the sales profits and other goals established in its annual

plan The main tools are sales analysis market share analyshysis marketing expense-to-sales analysis and financial analysis of the marketing plan

5 Profitability analysis seeks to measure and control the profitability of various products territories customer groups trade channels and order sizes An important part of controlling for profitability is assigning costs and genershyating profit-and-loss statements

6 There are two types of demand market demand and company demand To estimate current demand compashynies attempt to determine total market potential area market potential industry sales and market share To estimate future demand companies survey buyers intentions solicit their sales forces input gather expert opinions or engage in market testing Mathematical models advanced statistical techniques and computershyized data collection procedures are essential to all types of demand and sales forecasting

CONDUCTING MARKETING RESEARCH AND FORECASTING DEMAND CHAPTER 4 135

APPLICATIONS

Marketing Debate What i s the Best Type of Marketing Research

Many market researchers have their favorite research approaches or techniques although different researchers often have different preferences Some researchers maintain that the only way to really learn about consumers or brands is through in-depth qualitative research Others contend that

the only legitimate and defensible form of marketing research involves quantitative measures

Take a position Marketing research should be quantitative versus Marketing research should be qualitative

Marketing Discuss ion When was the last time you participated in a survey How helpful do you think was the information you provided How

could the research have been done differently to make it more effective

MARKETING SPOTLIGHT SONY

Sony started as a radio repair shop founded by Masuru Ikura and Akio Morita after World War II The company began its long history of producing compact consumer electronics in 1957 when it introduced the worlds first pocket-sized all-transistor radio The companys name Sony was taken from sonus the Latin word for sound Sony went on to invent a series of transistor-based TVs and increasingly smaller audiocassette recorders In 1979 the Sony Walkman introduced the world to a new portable way of listening to music Sony became a world leader in consumer electronics and was the first Japanese company to have its shares traded on the New York Stock Exchange

In the late 1980s Sony began expanding into media purchasing a US record company (CBS Records for $22 billion in 1988) and a major Hollywood studio (Columbia Pictures for $49 billion in 1989) The purchases made Sony a major force in the entertainment industry

The importance of marketing at Sony started with Akio Morita who said that for a company to be successful it must have three kinds of creativity creativity to make inventions creativity in product planning and production and creativity in marketing

Creativity in marketing at Sony means not just clever ads but deep insight into its customers For example Sony knows its PlayStation customers like to find clues and to decode things So Sonys ads for PlayStation 2 like Signs feature a young man walking the streets of a city where he encounters various signs foreshadowing the events Mannequins appear in a store window arms outstretched and point enigmatically to something thats about to happen The lead character is almost in the midst of his own role-playing game He needs to follow clues to save the heroine said Andrew House Sonys executive vice president of marketing In the ads we were essentially trying to tap into a range of emotions that we think we deliver in the gamesmdashintrigue foreboding excitement panic relief and achievement at the end

Sonys marketing also includes careful measurement of each campaigns effectiveness For example Sony runs 30-second commercials for its PlayStation as part of the previews in more than 1800 theaters and on 8000 movie screens The ads appear before such films as The Cat in the Hat Sony Computer Entertainment America has been running movie ads for six years Cinema advertising has been very effective for us said Ami Blaire director of product marketing The reason why we have committed to cinema every year

is the tremendous unaided recall shown by our own research and Communicus-commissioned ad tracking

Another example of measurement is Sonys GenY youth marketing efforts The online program promoting the NetMD ATRAC CD Walkman and Cybershot U30 ran July 1 through September 30 2003 and we found that more than 70 percent of the clickthroughs were spurred by rich media ads via Eyeblaster vershysus static banners said Serge Del Grosso Director of Media and Internet Strategy Sony Electronics

In fact Sony has even developed a direct-marketing solution which it sells to other companies who want to measure marketing effectiveness The prodshyuct called eBridgefJM] allows marketers to use video measure the effectiveshyness of the campaign and gain insight into the target audience all in one package

Sony expects that the next big breakthrough will not come from a single new electronic device Rather Sony president Kunitake Ando says that the future lies in making a whole range of devices more useful by linking them in a networked home-entertainment system The company believes that its clout in consumer electronics combined with its media content will allow it to steer that convergence in a way that suits it Whether the future of convershygence resides in TVs or PCs or devices $62-billion Sony makes every one of themmdashwith a strong brand name that gives them an extra push off retail shelves around the world

Discussion Questions

1 What have been the key success factors for Sony

2 Where is Sony vulnerable What should it watch out for

3 What recommendations would you make to senior marketing executives going forward What should they be sure to do with its marketing

Sources John Teresko ASIA Yesterdays Fast Followers Todays Global Leaders Industry Week February 2004 pp 22-28 Gregory Solman Sonys Got Game on Movie TV Screens Adweek November 26 2003 p NA Sony Launches Holiday Ad Blitz Technology Advertising amp Branding Report December 1 2003 Tobi Elkin Sony Rolls Cinematic PS2 PushAdvertising Age September 22002 p 4 Digital Player Serge Del Grosso Advertising Age October 27 2003 p 44 The Complete Home Entertainer The Economist March 1 2003 ltwwwsonycomgt

134 PART 2 CAPTURING MARKETING INSIGHTS

Involving the sales force in forecasting brings a number of benefits Sales reps might have better insight into developing trends than any other single group After participating in the forecasting process reps might have greater confidence in their sales quotas and more incentive to achieve them Also a grassroots forecasting procedure provides detailed estishymates broken down by product territory customer and sales rep

JPINION Companies can also obtain forecasts from experts including dealers distributors suppliers marketing consultants and trade associations Large appliance companies periodically survey dealers for their forecasts of short-term demand as do car companies Dealer estimates are subject to the same strengths and weaknesses as sales force estimates Many companies buy economic and industry forecasts from well-known economic-forecasting firms These specialists are able to prepare better economic foreshycasts than the company because they have more data available and more forecasting expertise

Occasionally companies will invite a group of experts to prepare a forecast The experts exchange views and produce a group estimate group-discussion method) or the experts supply their estimates individually and an analyst combines them into a single estimate pooling of individual estimates) Alternatively the experts supply individual estimates and assumptions that are reviewed by the company then revised Further rounds of estimating and refining follow (this is the Delphi method)16

PAST-SALES ANALYSIS Sales forecasts can be developed on the basis of past sales Time-series analysis consists of breaking down past time series into four components (trend cycle seasonal and erratic) and projecting these components into the future Exponential smoothing consists of projecting the next periods sales by combining an average of past sales and the most recent sales giving more weight to the latter Statistical demand analysis consists of measuring the impact level of each of a set of causal factors (eg income marketing expenditures price) on the sales level Finally econometric analysis consists of building sets of equations that describe a system and proceeding to fit the parameters statistically

When buyers do not plan their purchases carefully or experts are not available or reliable a direct-market test is desirable A direct-market test is especially desirable in forecasting new-product sales or established product sales in a new distribution channel or territory (We discuss market testing in detail in Chapter 20)

SUMMARY

1 Companies can conduct their own marketing research or hire other companies to do it for them Good marketing research is characterized by the scientific method creativity multiple research methods accurate model building cost-benefit analysis healthy skepticism and an ethical focus

2 The marketing research process consists of defining the problem and research objective developing the research plan collecting the information analyzing the informashytion presenting the findings to management and making the decision

3 In conducting research firms must decide whether to colshylect their own data or use data that already exist They must also decide which research approach (observational focus-group survey behavioral data or experimental) and which research instruments (questionnaire or mechanical instruments) to use In addition they must decide on a sampling plan and contact methods

4 Analysis should ensure that the company achieves the sales profits and other goals established in its annual

plan The main tools are sales analysis market share analyshysis marketing expense-to-sales analysis and financial analysis of the marketing plan

5 Profitability analysis seeks to measure and control the profitability of various products territories customer groups trade channels and order sizes An important part of controlling for profitability is assigning costs and genershyating profit-and-loss statements

6 There are two types of demand market demand and company demand To estimate current demand compashynies attempt to determine total market potential area market potential industry sales and market share To estimate future demand companies survey buyers intentions solicit their sales forces input gather expert opinions or engage in market testing Mathematical models advanced statistical techniques and computershyized data collection procedures are essential to all types of demand and sales forecasting

CONDUCTING MARKETING RESEARCH AND FORECASTING DEMAND CHAPTER 4 135

APPLICATIONS

Marketing Debate What i s the Best Type of Marketing Research

Many market researchers have their favorite research approaches or techniques although different researchers often have different preferences Some researchers maintain that the only way to really learn about consumers or brands is through in-depth qualitative research Others contend that

the only legitimate and defensible form of marketing research involves quantitative measures

Take a position Marketing research should be quantitative versus Marketing research should be qualitative

Marketing Discuss ion When was the last time you participated in a survey How helpful do you think was the information you provided How

could the research have been done differently to make it more effective

MARKETING SPOTLIGHT SONY

Sony started as a radio repair shop founded by Masuru Ikura and Akio Morita after World War II The company began its long history of producing compact consumer electronics in 1957 when it introduced the worlds first pocket-sized all-transistor radio The companys name Sony was taken from sonus the Latin word for sound Sony went on to invent a series of transistor-based TVs and increasingly smaller audiocassette recorders In 1979 the Sony Walkman introduced the world to a new portable way of listening to music Sony became a world leader in consumer electronics and was the first Japanese company to have its shares traded on the New York Stock Exchange

In the late 1980s Sony began expanding into media purchasing a US record company (CBS Records for $22 billion in 1988) and a major Hollywood studio (Columbia Pictures for $49 billion in 1989) The purchases made Sony a major force in the entertainment industry

The importance of marketing at Sony started with Akio Morita who said that for a company to be successful it must have three kinds of creativity creativity to make inventions creativity in product planning and production and creativity in marketing

Creativity in marketing at Sony means not just clever ads but deep insight into its customers For example Sony knows its PlayStation customers like to find clues and to decode things So Sonys ads for PlayStation 2 like Signs feature a young man walking the streets of a city where he encounters various signs foreshadowing the events Mannequins appear in a store window arms outstretched and point enigmatically to something thats about to happen The lead character is almost in the midst of his own role-playing game He needs to follow clues to save the heroine said Andrew House Sonys executive vice president of marketing In the ads we were essentially trying to tap into a range of emotions that we think we deliver in the gamesmdashintrigue foreboding excitement panic relief and achievement at the end

Sonys marketing also includes careful measurement of each campaigns effectiveness For example Sony runs 30-second commercials for its PlayStation as part of the previews in more than 1800 theaters and on 8000 movie screens The ads appear before such films as The Cat in the Hat Sony Computer Entertainment America has been running movie ads for six years Cinema advertising has been very effective for us said Ami Blaire director of product marketing The reason why we have committed to cinema every year

is the tremendous unaided recall shown by our own research and Communicus-commissioned ad tracking

Another example of measurement is Sonys GenY youth marketing efforts The online program promoting the NetMD ATRAC CD Walkman and Cybershot U30 ran July 1 through September 30 2003 and we found that more than 70 percent of the clickthroughs were spurred by rich media ads via Eyeblaster vershysus static banners said Serge Del Grosso Director of Media and Internet Strategy Sony Electronics

In fact Sony has even developed a direct-marketing solution which it sells to other companies who want to measure marketing effectiveness The prodshyuct called eBridgefJM] allows marketers to use video measure the effectiveshyness of the campaign and gain insight into the target audience all in one package

Sony expects that the next big breakthrough will not come from a single new electronic device Rather Sony president Kunitake Ando says that the future lies in making a whole range of devices more useful by linking them in a networked home-entertainment system The company believes that its clout in consumer electronics combined with its media content will allow it to steer that convergence in a way that suits it Whether the future of convershygence resides in TVs or PCs or devices $62-billion Sony makes every one of themmdashwith a strong brand name that gives them an extra push off retail shelves around the world

Discussion Questions

1 What have been the key success factors for Sony

2 Where is Sony vulnerable What should it watch out for

3 What recommendations would you make to senior marketing executives going forward What should they be sure to do with its marketing

Sources John Teresko ASIA Yesterdays Fast Followers Todays Global Leaders Industry Week February 2004 pp 22-28 Gregory Solman Sonys Got Game on Movie TV Screens Adweek November 26 2003 p NA Sony Launches Holiday Ad Blitz Technology Advertising amp Branding Report December 1 2003 Tobi Elkin Sony Rolls Cinematic PS2 PushAdvertising Age September 22002 p 4 Digital Player Serge Del Grosso Advertising Age October 27 2003 p 44 The Complete Home Entertainer The Economist March 1 2003 ltwwwsonycomgt

CONDUCTING MARKETING RESEARCH AND FORECASTING DEMAND CHAPTER 4 135

APPLICATIONS

Marketing Debate What i s the Best Type of Marketing Research

Many market researchers have their favorite research approaches or techniques although different researchers often have different preferences Some researchers maintain that the only way to really learn about consumers or brands is through in-depth qualitative research Others contend that

the only legitimate and defensible form of marketing research involves quantitative measures

Take a position Marketing research should be quantitative versus Marketing research should be qualitative

Marketing Discuss ion When was the last time you participated in a survey How helpful do you think was the information you provided How

could the research have been done differently to make it more effective

MARKETING SPOTLIGHT SONY

Sony started as a radio repair shop founded by Masuru Ikura and Akio Morita after World War II The company began its long history of producing compact consumer electronics in 1957 when it introduced the worlds first pocket-sized all-transistor radio The companys name Sony was taken from sonus the Latin word for sound Sony went on to invent a series of transistor-based TVs and increasingly smaller audiocassette recorders In 1979 the Sony Walkman introduced the world to a new portable way of listening to music Sony became a world leader in consumer electronics and was the first Japanese company to have its shares traded on the New York Stock Exchange

In the late 1980s Sony began expanding into media purchasing a US record company (CBS Records for $22 billion in 1988) and a major Hollywood studio (Columbia Pictures for $49 billion in 1989) The purchases made Sony a major force in the entertainment industry

The importance of marketing at Sony started with Akio Morita who said that for a company to be successful it must have three kinds of creativity creativity to make inventions creativity in product planning and production and creativity in marketing

Creativity in marketing at Sony means not just clever ads but deep insight into its customers For example Sony knows its PlayStation customers like to find clues and to decode things So Sonys ads for PlayStation 2 like Signs feature a young man walking the streets of a city where he encounters various signs foreshadowing the events Mannequins appear in a store window arms outstretched and point enigmatically to something thats about to happen The lead character is almost in the midst of his own role-playing game He needs to follow clues to save the heroine said Andrew House Sonys executive vice president of marketing In the ads we were essentially trying to tap into a range of emotions that we think we deliver in the gamesmdashintrigue foreboding excitement panic relief and achievement at the end

Sonys marketing also includes careful measurement of each campaigns effectiveness For example Sony runs 30-second commercials for its PlayStation as part of the previews in more than 1800 theaters and on 8000 movie screens The ads appear before such films as The Cat in the Hat Sony Computer Entertainment America has been running movie ads for six years Cinema advertising has been very effective for us said Ami Blaire director of product marketing The reason why we have committed to cinema every year

is the tremendous unaided recall shown by our own research and Communicus-commissioned ad tracking

Another example of measurement is Sonys GenY youth marketing efforts The online program promoting the NetMD ATRAC CD Walkman and Cybershot U30 ran July 1 through September 30 2003 and we found that more than 70 percent of the clickthroughs were spurred by rich media ads via Eyeblaster vershysus static banners said Serge Del Grosso Director of Media and Internet Strategy Sony Electronics

In fact Sony has even developed a direct-marketing solution which it sells to other companies who want to measure marketing effectiveness The prodshyuct called eBridgefJM] allows marketers to use video measure the effectiveshyness of the campaign and gain insight into the target audience all in one package

Sony expects that the next big breakthrough will not come from a single new electronic device Rather Sony president Kunitake Ando says that the future lies in making a whole range of devices more useful by linking them in a networked home-entertainment system The company believes that its clout in consumer electronics combined with its media content will allow it to steer that convergence in a way that suits it Whether the future of convershygence resides in TVs or PCs or devices $62-billion Sony makes every one of themmdashwith a strong brand name that gives them an extra push off retail shelves around the world

Discussion Questions

1 What have been the key success factors for Sony

2 Where is Sony vulnerable What should it watch out for

3 What recommendations would you make to senior marketing executives going forward What should they be sure to do with its marketing

Sources John Teresko ASIA Yesterdays Fast Followers Todays Global Leaders Industry Week February 2004 pp 22-28 Gregory Solman Sonys Got Game on Movie TV Screens Adweek November 26 2003 p NA Sony Launches Holiday Ad Blitz Technology Advertising amp Branding Report December 1 2003 Tobi Elkin Sony Rolls Cinematic PS2 PushAdvertising Age September 22002 p 4 Digital Player Serge Del Grosso Advertising Age October 27 2003 p 44 The Complete Home Entertainer The Economist March 1 2003 ltwwwsonycomgt

136 PART 2 CAPTURING MARKETING INSIGHTS

NOTES

1 Allison Fass Bear Market Forbes March 1 2004 p 88

2 1994 Survey of Market Research edited by Thomas Kinnear and Ann Root (Chicago American Marketing Association 1994)

3 Emily Sweeney Karmaloop Shapes Urban Fashion by Spotting Trends Where They Start Boston Globe July 8 2004 p D3

4 Kevin J Clancy and Robert S Shulman Marketing Myths That Are Killing Business (New York McGraw-Hill 1994) p 58 Phaedra Hise Comprehensive CompuServe Inc (June 1994) 109 Business Bulletin Studying the Competition Wall Street Journal pp A1-A5

5 Kate Maddox The ROI of Research B to B April 5 2004 pp 25 28

6 For some background information on in-flight Internet service see In-Flight Dogfight Business2Com January 9 2001

pp 84-91 John Blau In-Flight Internet Service Ready for Takeoff IDG News Service June 14 2002 Boeing In-Flight Internet Plan Goes Airborne The Associated Press April 18 2004

7 For a discussion of the decision-theory approach to the value of research see Donald R Lehmann Sunil Gupta and Joel Steckel Market Research (Reading MA Addison-Wesley 1997)

8 Allison Stein Wellner Look Whos Watching Continental April

2003 pp 39-41 Linda Tischler Every Move You Make Fast

Company April 2004 pp 73-75

9 Bruce Nussbaum The Power of Design BusinessWeek May 17 2004 pp 86-94

10 Roger D Blackwell James S Ilcnsel Michael B Phillips and Brian Sternthal Laboratory Equipment for Marketing Research (Dubuque IA KendallHunt 1970) Wally Wood The Race to Replace Memory Marketing and Media Decisions (inly 1986) 166-167 See also Gerald Zaltman Rethinking Market Research Putting People Back In Journal of Marketing Research 34 no 4 (November 1997) 424-437 Andy Raskin A Face Any Business Can Trust Business 20 December 2003 pp 58-60 Louise Wilt Inside Intent American Demographics (March 2004) 34-39

11 Maddox The ROI of Research pp 25 28

12 Peter Fuller A Two-way Conversation Brandweek February 25 2002 pp 21-27

13 Catherine Arnold Hershey Research Sees Net Gain Marketing News November 25 2002 p 17

14 Witt Inside Intent pp 34-39

15 Will Wade Care and Feeding of Cyberpets Rivets Tag-Along Marketers New York Times February 26 2004 p G5

16 Kevin J Clancy and Peter C Kricg Counterintuitive Marketing

How Great Results Come from Uncommon Sense (New York The Free Press 2000)

17 John D C Little Decision Support Systems for Marketing Managers Journal of Marketing (Summer 1979) 11 See Special Issue on Managerial Decision Making Marketing Science 18 no 3 (1999) for some contemporary perspectives

18 Leonard M Lodish CALLPLAN An Interactive Salesmans Call Planning System Management Science (December 1971) 25-40

19 Christine Moorman Gerald Zaltman and Rohit Deshpande Relationships Between Providers and Users of Market Research The Dynamics of Trust Within and Between Organizations Journal of Marketing Research 29 (August 1992) 314-328

20 Quote excerpted from Arthur Shapiro Lets Redefine Market Research Brandweek June 21 2004 p 20

21 John McManus Stumbling into Intelligence American

Demographics (April 2004) 22-25

22 John Gaffney The Buzz Must Go On Business 20 February 2002 pp 49-50

23 Tim Ambler Marketing and the Bottom Line The New Metrics of Corporate Wealth (London FT Prentice Hall 2000)

24 Bob Donath Employ Marketing Metrics with a Track Record Marketing News September 15 2003 p 12

25 Kusum L Ailawadi Donald R Lehmann and Scott A Neslin Revenue Premium as an Outcome Measure of Brand Equity Journal of Marketing67 (October 2003) 1-17

26 Ambler Marketing and the Bottom Line The New Metrics of Corporate WealthTm Ambler What Does Marketing Success Look Like Marketing Management(Spring 2001) 13-18

27 Fred Vogelstein Mighty Amazon Fortune May 26 2003 pp 60-74

28 Jeffrey Schwartz New Digital Dashboards Help Drive Decisions

B to B July 142003 pp 126

29 Robert S Kaplan and David P Norton The Balanced Scorecard

(Boston Harvard Business School Press 1996)

30 Richard Whiteley and Diane Hessan Customer Centered Growth (Reading MA Addison-Wesley 1996) pp 87-90 Adrian

J Slywotzky Value Migration How to Think Several Moves Ahead of the Competition (Boston Harvard University Press 1996) pp 231-235

31 Marion Debruyne and Katrina Hubbard Marketing Metrics working paper scries Conference Summary Marketing Science Institute Report No 00-119 2000

32 Alfred R Oxenfeldt How to Use Market-Share Measurement

Harvard Business Review (January-February 1969) 59-68

33 There is a one-half chance that a successive observation will he

higher or lower Therefore the probability of finding six successhy

sively higher values is given by (12) to the sixth or 164

34 Alternatively companies need to focus on factors affecting shareshyholder value The goal of marketing planning is to increase shareshyholder value which is the present value of the future income stream created by the companys present actions Ratc-of-return analysis usually focuses on only one years results See Alfred Rapport Creating Shareholder Value rev ed (New York The Free Press 1997)

35 For additional reading on financial analysis see Peter L Mullins Measuring Customer and Product Line Profitability (Washington

DC Distribution Research and Education Foundation 1984)

36 The MAC Group Distribution A Competitive Weapon (Cambridge MA MAC Group 1985) p 20

37 Robin Cooper and Robert S Kaplan Profit Priorities from Activity-Based Costing Harvard Business Review (May-June 1991) 130-135

38 Jack Neff PampG Clorox Rediscover Modeling Advertising Age March 29 2004 p 10

39 Laura Q Flughes Econometrics Take Root Advertising Age

August 5 2002 p S-4

CONDUCTING MARKETING RESEARCH AND FORECASTING DEMAND CHAPTER 4 137

40 Hitting the Bulls-Eye Target Sets Its Sights on East Coast Expansion Newsweek October 11 1999 Janet Moore and Ann Merrill Target Market Minneapolis-St Paul Star Tribune July 27 2001 Clarke Canfield Anticipation Builds as Fast-Growing Target Enters Another State AP Newswire August 6 2001

41 For a good discussion and illustration see Roger J Best Market-

Based Management 2nd ed (Upper Saddle River NJ Prentice

Hall 2000) pp 71-75

42 Will the Have-Nots Always Be with Us Fortune December 20

1999 pp 288-289

43 For further discussion see Gary L Lilien Philip Kotler and

K Sridhar Moorthy Marketing Models (Upper Saddle River NJ Prentice Hall 1992)

44 lthttpwwwnaicscom httpwwwcensusgovepcdnaics02gt

45 Brian Sternthal and Alice M Tybout Segmentation and Targeting in Kellogg on Marketing edited by Dawn Iacobucci (New York John Wiley amp Sons 2001) pp 3-30

46 Norman Dalkey and Olaf Helmer An Experimental Application of the Delphi Method to the Use of Experts Management Science (April 1963) 458-467 Also see Roger J Best An Experiment in Delphi Estimation in Marketing Decision Making Journal of Marketing Research (November 1974) 447-452 For an excellent overview of market forecasting see Scott Armstrong ed Principles of Forecasting A Handbook for Researchers and Practitioners (Norwcll MA Kluwer Academic Publishers 2001) and his Web site lthttpfourpswhartonupenneduforecast handbookhtmlgt

CONNECTING WITH CUSTOMERS

IN THIS CHAPTER WE WILL ADDRESS THE FOLLOWING QUESTIONS

1 What are customer value satisfaction and loyalty and how can companies deliver them

2 What is the lifetime value of customers

3 How can companies both attract and retain customers

4 How can companies cultivate strong customer relationships

5 How can companies deliver total quality

6 What is database marketing

CHAPTER 5 CREATING CUSTOMER VALUE SATISFACTION AND LOYALTY

Today companies face thei r toughes t compet i t i on ever Mov ing

f r o m a product and sales phi losophy t o a market ing phi losophy

however gives a company a bet ter chance of outper forming comshy

pet i t ion And the cornerstone of a well-conceived market ing or ienshy

ta t ion is s t rong customer relat ionships Marketers must connect

wi th customersmdashinforming engaging and maybe even energizing

them in the process John Chambers CEO of Cisco Systems put it

wel l Make your customer the center of your cul ture Customer-

centered companies are adept at bui ld ing customer relationships

not just products they are skil led in ma rke t engineer ing not just

product engineering

Employee welcomes customers to a Las Vegas WaMu bank

Washington Mutual prides itself on being customer-friendly

alk into most banks and youll notice that human contact is kept to

a minimum The scenario at a branch of Washington Mutual known

affectionately as WaMu (Wa-moo) by its employees and loyal

customers is a sharp contrast There are no teller windows No ropes If you

need to open a checking account (with free checking) you step right up to

the concierge station and a friendly person directs you to the right nook

WaMu gets cozier with customers by training its sales associates to be

approachable and to find out about customers needs If a customers child

just got into college they can walk him or her over to a loan officer or they

can steer a prospective homeowner to the mortgage desk If your children

are with you and get restless you can send them to the WaMu Kidsreg corner

140 PART 3 CONNECTING WITH CUSTOMERS

to play The banks format known as its Occasiotrade style which is Latin for favorshy

able opportunity is carefully designed to facilitate cross-selling of products This

is important because when customers buy multiple products they are more likely

to remain a customer of the bank and are far more profitable After four years the

average customer who opens a free checking account and then purchases addir

tional products has an exponentially more profitable relationship with the bank

and this is reflected in higher than average deposit investment consumer-loan

and mortgage-loan bank balances This kind of growth has propelled the formerly

unknown Seattle thrift bank into a $268 billion major player in under a decade

WaMu is now the nations largest thrift bank and the sixth-largest bank overall-1

As Washington Mutuals experience shows successful marketers are the ones

that fully satisfy their customers In this chapter we spell out in detail the ways

companies can go about winning customers and beating competitors The answer

lies largely in doing a better job of meeting or exceeding customer expectations

Building Customer Value Satisfaction and Loyalty

Managers who believe the customer is the companys only true profit center consider the traditional organization chart in Figure 51amdasha pyramid with the president at the top manshyagement in the middle and front-line people and customers at the bottommdashobsolete Successful marketing companies invert the chart (Figure 51b) At the top are customers next in importance are front-line people who meet serve and satisfy customers under them are the middle managers whose job is to support the front-line people so they can serve customers well and at the base is top management whose job is to hire and support

FIG 5 1 |

Traditional Organization Versus Modern

Customer-Oriented Company

Organization

(a) Traditional Organization Chart (b) Modern Customer-oriented Organization Chart

CREATING CUSTOMER VALUE SATISFACTION AND LOYALTY lt CHAPTER 5 141

good middle managers We have added customers along the sides of Figure 51 (b) to indicate that managers at every level must be personally involved in knowing meeting and serving customers

Some companies have been founded with the customer-on-top business model and cusshytomer advocacy has been their strategymdashand competitive advantagemdashall along Online aucshytion giant eBay Inc epitomizes this New World Order

r- E B A Y

eBay helped facilitate the exchange of $20 billion of goods in 2003 Consumer trust is the key element of that

success which enabled the company to grow and support commerce between millions of anonymous buyers

and sellers To establish trust eBay tracks and publishes the reputations of both buyers and sellers on the basis

of feedback from each transaction and eBays millions of passionate users have come to demand a voice in all

major decisions the company makes eBay sees listening adapting and enabling as its main roles This is clear

in one of the companys most cherished institutions the Voice of the Customer program Every few months eBay

brings in as many as a dozen sellers and buyers and asks them questions about how they work and what else

eBay needs to do At least twice a week the company holds hour-long teleconferences to poll users on almost

every new feature or policy The result is that users (eBays customers) feel like owners and they have taken the

bull initiative to expand the company into ever-new territory2

With the rise of digital technologies like the Internet todays increasingly informed conshysumers expect companies to do more than connect with them more than satisfy them and even more than delight them For instance customers now have a quick and easy means of doing comparison shopping through sites like Bizrate Shoppingcom and Pricegrabbercom The Internet also facilitates communication between customers Web sites like Epinionscom and Amazoncom enable customers to share information about their experiences in using varshyious products and services

Customer Perceived Value

Consumers are more educated and informed than ever and they have the tools to verify companies claims and seek out superior alternatives3 How then do they ultimately make choices Customers tend to be value-maximizers within the bounds of search costs and limited knowledge mobility and income Customers estimate which offer will deliver the most perceived value and act on it (Figure 52) Whether or not the offer lives up to expectashytion affects customer satisfaction and the probability that he or she will purchase the prodshyuct again

Customer perceived value (CPV) is the difference between the prospective customers evaluation of all the benefits and all the costs of an offering and the perceived alternatives Total customer value is the perceived monetary value of the bundle of economic functional and psychological benefits customers expect from a given market offering Total customer cost is the bundle of costs customers expect to incur in evaluating obtaining using and disshyposing of the given market offering including monetary time energy and psychic costs

Customer perceived value is thus based on the difference between what the customer gets and what he or she gives for different possible choices The customer gets benefits and assumes costs The marketer can increase the value of the customer offering by some comshybination of raising functional or emotional benefits andor reducing one or more of the varshyious types of costs The customer who is choosing between two value offerings VI and V2 will examine the ratio VI V2 and favor VI if the ratio is larger than one favor V2 if the ratio is smaller than one and will be indifferent if the ratio equals one

APPLYING VALUE CONCEPTS An example will help here Suppose the buyer for a large construction company wants to buy a tractor from Caterpillar or Komatsu The competing salespeople carefully describe their respective offers The buyer wants to use the tractor in residential construction work He would like the tractor to deliver certain levels of reliability durability performance and resale value He evaluates the tractors and decides that Caterpillar has a higher product value based on perceptions of those attributes He also pershyceives differences in the accompanying servicesmdashdelivery training and maintenancemdashand decides that Caterpillar provides better service and more knowledgeable and responsive personnel Finally he places higher value on Caterpillars corporate image He adds up all

F I G 5 2

Determinants of Customer-Delivered

Value

CHAPTER 5 CREATING CUSTOMER VALUE SATISFACTION AND LOYALTY

Today companies face thei r toughes t compet i t i on ever Mov ing

f r o m a product and sales phi losophy t o a market ing phi losophy

however gives a company a bet ter chance of outper forming comshy

pet i t ion And the cornerstone of a well-conceived market ing or ienshy

ta t ion is s t rong customer relat ionships Marketers must connect

wi th customersmdashinforming engaging and maybe even energizing

them in the process John Chambers CEO of Cisco Systems put it

wel l Make your customer the center of your cul ture Customer-

centered companies are adept at bui ld ing customer relationships

not just products they are skil led in ma rke t engineer ing not just

product engineering

Employee welcomes customers to a Las Vegas WaMu bank

Washington Mutual prides itself on being customer-friendly

alk into most banks and youll notice that human contact is kept to

a minimum The scenario at a branch of Washington Mutual known

affectionately as WaMu (Wa-moo) by its employees and loyal

customers is a sharp contrast There are no teller windows No ropes If you

need to open a checking account (with free checking) you step right up to

the concierge station and a friendly person directs you to the right nook

WaMu gets cozier with customers by training its sales associates to be

approachable and to find out about customers needs If a customers child

just got into college they can walk him or her over to a loan officer or they

can steer a prospective homeowner to the mortgage desk If your children

are with you and get restless you can send them to the WaMu Kidsreg corner

140 PART 3 CONNECTING WITH CUSTOMERS

to play The banks format known as its Occasiotrade style which is Latin for favorshy

able opportunity is carefully designed to facilitate cross-selling of products This

is important because when customers buy multiple products they are more likely

to remain a customer of the bank and are far more profitable After four years the

average customer who opens a free checking account and then purchases addir

tional products has an exponentially more profitable relationship with the bank

and this is reflected in higher than average deposit investment consumer-loan

and mortgage-loan bank balances This kind of growth has propelled the formerly

unknown Seattle thrift bank into a $268 billion major player in under a decade

WaMu is now the nations largest thrift bank and the sixth-largest bank overall-1

As Washington Mutuals experience shows successful marketers are the ones

that fully satisfy their customers In this chapter we spell out in detail the ways

companies can go about winning customers and beating competitors The answer

lies largely in doing a better job of meeting or exceeding customer expectations

Building Customer Value Satisfaction and Loyalty

Managers who believe the customer is the companys only true profit center consider the traditional organization chart in Figure 51amdasha pyramid with the president at the top manshyagement in the middle and front-line people and customers at the bottommdashobsolete Successful marketing companies invert the chart (Figure 51b) At the top are customers next in importance are front-line people who meet serve and satisfy customers under them are the middle managers whose job is to support the front-line people so they can serve customers well and at the base is top management whose job is to hire and support

FIG 5 1 |

Traditional Organization Versus Modern

Customer-Oriented Company

Organization

(a) Traditional Organization Chart (b) Modern Customer-oriented Organization Chart

CREATING CUSTOMER VALUE SATISFACTION AND LOYALTY lt CHAPTER 5 141

good middle managers We have added customers along the sides of Figure 51 (b) to indicate that managers at every level must be personally involved in knowing meeting and serving customers

Some companies have been founded with the customer-on-top business model and cusshytomer advocacy has been their strategymdashand competitive advantagemdashall along Online aucshytion giant eBay Inc epitomizes this New World Order

r- E B A Y

eBay helped facilitate the exchange of $20 billion of goods in 2003 Consumer trust is the key element of that

success which enabled the company to grow and support commerce between millions of anonymous buyers

and sellers To establish trust eBay tracks and publishes the reputations of both buyers and sellers on the basis

of feedback from each transaction and eBays millions of passionate users have come to demand a voice in all

major decisions the company makes eBay sees listening adapting and enabling as its main roles This is clear

in one of the companys most cherished institutions the Voice of the Customer program Every few months eBay

brings in as many as a dozen sellers and buyers and asks them questions about how they work and what else

eBay needs to do At least twice a week the company holds hour-long teleconferences to poll users on almost

every new feature or policy The result is that users (eBays customers) feel like owners and they have taken the

bull initiative to expand the company into ever-new territory2

With the rise of digital technologies like the Internet todays increasingly informed conshysumers expect companies to do more than connect with them more than satisfy them and even more than delight them For instance customers now have a quick and easy means of doing comparison shopping through sites like Bizrate Shoppingcom and Pricegrabbercom The Internet also facilitates communication between customers Web sites like Epinionscom and Amazoncom enable customers to share information about their experiences in using varshyious products and services

Customer Perceived Value

Consumers are more educated and informed than ever and they have the tools to verify companies claims and seek out superior alternatives3 How then do they ultimately make choices Customers tend to be value-maximizers within the bounds of search costs and limited knowledge mobility and income Customers estimate which offer will deliver the most perceived value and act on it (Figure 52) Whether or not the offer lives up to expectashytion affects customer satisfaction and the probability that he or she will purchase the prodshyuct again

Customer perceived value (CPV) is the difference between the prospective customers evaluation of all the benefits and all the costs of an offering and the perceived alternatives Total customer value is the perceived monetary value of the bundle of economic functional and psychological benefits customers expect from a given market offering Total customer cost is the bundle of costs customers expect to incur in evaluating obtaining using and disshyposing of the given market offering including monetary time energy and psychic costs

Customer perceived value is thus based on the difference between what the customer gets and what he or she gives for different possible choices The customer gets benefits and assumes costs The marketer can increase the value of the customer offering by some comshybination of raising functional or emotional benefits andor reducing one or more of the varshyious types of costs The customer who is choosing between two value offerings VI and V2 will examine the ratio VI V2 and favor VI if the ratio is larger than one favor V2 if the ratio is smaller than one and will be indifferent if the ratio equals one

APPLYING VALUE CONCEPTS An example will help here Suppose the buyer for a large construction company wants to buy a tractor from Caterpillar or Komatsu The competing salespeople carefully describe their respective offers The buyer wants to use the tractor in residential construction work He would like the tractor to deliver certain levels of reliability durability performance and resale value He evaluates the tractors and decides that Caterpillar has a higher product value based on perceptions of those attributes He also pershyceives differences in the accompanying servicesmdashdelivery training and maintenancemdashand decides that Caterpillar provides better service and more knowledgeable and responsive personnel Finally he places higher value on Caterpillars corporate image He adds up all

F I G 5 2

Determinants of Customer-Delivered

Value

140 PART 3 CONNECTING WITH CUSTOMERS

to play The banks format known as its Occasiotrade style which is Latin for favorshy

able opportunity is carefully designed to facilitate cross-selling of products This

is important because when customers buy multiple products they are more likely

to remain a customer of the bank and are far more profitable After four years the

average customer who opens a free checking account and then purchases addir

tional products has an exponentially more profitable relationship with the bank

and this is reflected in higher than average deposit investment consumer-loan

and mortgage-loan bank balances This kind of growth has propelled the formerly

unknown Seattle thrift bank into a $268 billion major player in under a decade

WaMu is now the nations largest thrift bank and the sixth-largest bank overall-1

As Washington Mutuals experience shows successful marketers are the ones

that fully satisfy their customers In this chapter we spell out in detail the ways

companies can go about winning customers and beating competitors The answer

lies largely in doing a better job of meeting or exceeding customer expectations

Building Customer Value Satisfaction and Loyalty

Managers who believe the customer is the companys only true profit center consider the traditional organization chart in Figure 51amdasha pyramid with the president at the top manshyagement in the middle and front-line people and customers at the bottommdashobsolete Successful marketing companies invert the chart (Figure 51b) At the top are customers next in importance are front-line people who meet serve and satisfy customers under them are the middle managers whose job is to support the front-line people so they can serve customers well and at the base is top management whose job is to hire and support

FIG 5 1 |

Traditional Organization Versus Modern

Customer-Oriented Company

Organization

(a) Traditional Organization Chart (b) Modern Customer-oriented Organization Chart

CREATING CUSTOMER VALUE SATISFACTION AND LOYALTY lt CHAPTER 5 141

good middle managers We have added customers along the sides of Figure 51 (b) to indicate that managers at every level must be personally involved in knowing meeting and serving customers

Some companies have been founded with the customer-on-top business model and cusshytomer advocacy has been their strategymdashand competitive advantagemdashall along Online aucshytion giant eBay Inc epitomizes this New World Order

r- E B A Y

eBay helped facilitate the exchange of $20 billion of goods in 2003 Consumer trust is the key element of that

success which enabled the company to grow and support commerce between millions of anonymous buyers

and sellers To establish trust eBay tracks and publishes the reputations of both buyers and sellers on the basis

of feedback from each transaction and eBays millions of passionate users have come to demand a voice in all

major decisions the company makes eBay sees listening adapting and enabling as its main roles This is clear

in one of the companys most cherished institutions the Voice of the Customer program Every few months eBay

brings in as many as a dozen sellers and buyers and asks them questions about how they work and what else

eBay needs to do At least twice a week the company holds hour-long teleconferences to poll users on almost

every new feature or policy The result is that users (eBays customers) feel like owners and they have taken the

bull initiative to expand the company into ever-new territory2

With the rise of digital technologies like the Internet todays increasingly informed conshysumers expect companies to do more than connect with them more than satisfy them and even more than delight them For instance customers now have a quick and easy means of doing comparison shopping through sites like Bizrate Shoppingcom and Pricegrabbercom The Internet also facilitates communication between customers Web sites like Epinionscom and Amazoncom enable customers to share information about their experiences in using varshyious products and services

Customer Perceived Value

Consumers are more educated and informed than ever and they have the tools to verify companies claims and seek out superior alternatives3 How then do they ultimately make choices Customers tend to be value-maximizers within the bounds of search costs and limited knowledge mobility and income Customers estimate which offer will deliver the most perceived value and act on it (Figure 52) Whether or not the offer lives up to expectashytion affects customer satisfaction and the probability that he or she will purchase the prodshyuct again

Customer perceived value (CPV) is the difference between the prospective customers evaluation of all the benefits and all the costs of an offering and the perceived alternatives Total customer value is the perceived monetary value of the bundle of economic functional and psychological benefits customers expect from a given market offering Total customer cost is the bundle of costs customers expect to incur in evaluating obtaining using and disshyposing of the given market offering including monetary time energy and psychic costs

Customer perceived value is thus based on the difference between what the customer gets and what he or she gives for different possible choices The customer gets benefits and assumes costs The marketer can increase the value of the customer offering by some comshybination of raising functional or emotional benefits andor reducing one or more of the varshyious types of costs The customer who is choosing between two value offerings VI and V2 will examine the ratio VI V2 and favor VI if the ratio is larger than one favor V2 if the ratio is smaller than one and will be indifferent if the ratio equals one

APPLYING VALUE CONCEPTS An example will help here Suppose the buyer for a large construction company wants to buy a tractor from Caterpillar or Komatsu The competing salespeople carefully describe their respective offers The buyer wants to use the tractor in residential construction work He would like the tractor to deliver certain levels of reliability durability performance and resale value He evaluates the tractors and decides that Caterpillar has a higher product value based on perceptions of those attributes He also pershyceives differences in the accompanying servicesmdashdelivery training and maintenancemdashand decides that Caterpillar provides better service and more knowledgeable and responsive personnel Finally he places higher value on Caterpillars corporate image He adds up all

F I G 5 2

Determinants of Customer-Delivered

Value

CREATING CUSTOMER VALUE SATISFACTION AND LOYALTY lt CHAPTER 5 141

good middle managers We have added customers along the sides of Figure 51 (b) to indicate that managers at every level must be personally involved in knowing meeting and serving customers

Some companies have been founded with the customer-on-top business model and cusshytomer advocacy has been their strategymdashand competitive advantagemdashall along Online aucshytion giant eBay Inc epitomizes this New World Order

r- E B A Y

eBay helped facilitate the exchange of $20 billion of goods in 2003 Consumer trust is the key element of that

success which enabled the company to grow and support commerce between millions of anonymous buyers

and sellers To establish trust eBay tracks and publishes the reputations of both buyers and sellers on the basis

of feedback from each transaction and eBays millions of passionate users have come to demand a voice in all

major decisions the company makes eBay sees listening adapting and enabling as its main roles This is clear

in one of the companys most cherished institutions the Voice of the Customer program Every few months eBay

brings in as many as a dozen sellers and buyers and asks them questions about how they work and what else

eBay needs to do At least twice a week the company holds hour-long teleconferences to poll users on almost

every new feature or policy The result is that users (eBays customers) feel like owners and they have taken the

bull initiative to expand the company into ever-new territory2

With the rise of digital technologies like the Internet todays increasingly informed conshysumers expect companies to do more than connect with them more than satisfy them and even more than delight them For instance customers now have a quick and easy means of doing comparison shopping through sites like Bizrate Shoppingcom and Pricegrabbercom The Internet also facilitates communication between customers Web sites like Epinionscom and Amazoncom enable customers to share information about their experiences in using varshyious products and services

Customer Perceived Value

Consumers are more educated and informed than ever and they have the tools to verify companies claims and seek out superior alternatives3 How then do they ultimately make choices Customers tend to be value-maximizers within the bounds of search costs and limited knowledge mobility and income Customers estimate which offer will deliver the most perceived value and act on it (Figure 52) Whether or not the offer lives up to expectashytion affects customer satisfaction and the probability that he or she will purchase the prodshyuct again

Customer perceived value (CPV) is the difference between the prospective customers evaluation of all the benefits and all the costs of an offering and the perceived alternatives Total customer value is the perceived monetary value of the bundle of economic functional and psychological benefits customers expect from a given market offering Total customer cost is the bundle of costs customers expect to incur in evaluating obtaining using and disshyposing of the given market offering including monetary time energy and psychic costs

Customer perceived value is thus based on the difference between what the customer gets and what he or she gives for different possible choices The customer gets benefits and assumes costs The marketer can increase the value of the customer offering by some comshybination of raising functional or emotional benefits andor reducing one or more of the varshyious types of costs The customer who is choosing between two value offerings VI and V2 will examine the ratio VI V2 and favor VI if the ratio is larger than one favor V2 if the ratio is smaller than one and will be indifferent if the ratio equals one

APPLYING VALUE CONCEPTS An example will help here Suppose the buyer for a large construction company wants to buy a tractor from Caterpillar or Komatsu The competing salespeople carefully describe their respective offers The buyer wants to use the tractor in residential construction work He would like the tractor to deliver certain levels of reliability durability performance and resale value He evaluates the tractors and decides that Caterpillar has a higher product value based on perceptions of those attributes He also pershyceives differences in the accompanying servicesmdashdelivery training and maintenancemdashand decides that Caterpillar provides better service and more knowledgeable and responsive personnel Finally he places higher value on Caterpillars corporate image He adds up all

F I G 5 2

Determinants of Customer-Delivered

Value

142 PART 3 CONNECTING WITH CUSTOMERS

the values from these four sourcesmdashproduct services personnel and imagemdashand pershyceives Caterpillar as delivering greater cusshytomer value

Does he buy the Caterpillar tractor Not necshyessarily He also examines his total cost of transshyacting with Caterpillar versus Komatsu which consists of more than the money As Adam Smith observed over two centuries ago The real price of anything is the toil and trouble of acquiring it Total customer cost includes the buyers time energy and psychic costs The buyer evaluates these elements together with the monetary cost to form a total customer cost Then the buyer considers whether Caterpillars total customer cost is too high in relation to the total customer value Caterpillar delivers If it is the buyer might choose the Komatsu tractor The buyer will choose whichever source he thinks delivers the highest customer perceived value

Now let us use this decision-making theory to help Caterpillar succeed in selling to this buyer Caterpillar can improve its offer in three ways First it can increase total cusshy

tomer value by improving product services personnel andor image benefits Second it can reduce the buyers nonmonetary costs by reducing the time energy and psychic costs Third it can reduce its products monetary cost to the buyer

Suppose Caterpillar concludes that the buyer sees its offer as worth $20000 Further supshypose Caterpillars cost of producing the tractor is $14000 This means that Caterpillars offer potentially generates $6000 over the companys cost so Caterpillar needs to charge a price between $14000 and $20000 If it charges less than $14000 it wont cover its costs if it charges more than $20000 it will price itself out of the market

The price Caterpillar charges will determine how much value will be delivered to the buyer and how much will flow to Caterpillar For example if Caterpillar charges $19000 it is creating $1000 of customer perceived value and keeping $5000 for itself The lower Caterpillar sets its price the higher the customer perceived value and therefore the higher the customers incentive to purchase To win the sale Caterpillar must offer more customer perceived value than Komatsu does1

Caterpillar sells tractors like this one not just on the products attributes but also on the value of the

services personnel and image the company offers

NS Some marketers might argue that the process we have described is too rational Suppose the customer chooses the Komatsu tractor How can we explain this choice Here are three possibilities

1 The buyer might be under orders to buy at the lowest price The Caterpillar salespersons task is to convince the buyers manager that buying on price alone will result in lower long-term profits

2 The buyer will retire before the company realizes that the Komatsu tractor is more expensive to operate The buyer will look good in the short run he or she is maximizing personal benefit The Caterpillar salespersons task is to convince other people in the customer company that Caterpillar delivers greater customer value

3 The buyer enjoys a long-term friendship with the Komatsu salesperson In this case Caterpillars salesperson needs to show the buyer that the Komatsu tractor will draw complaints from the tractor operators when they discover its high fuel cost and need for frequent repairs

The point of these examples is clear Buyers operate under various constraints and occashysionally make choices that give more weight to their personal benefit than to the companys benefit

Customer perceived value is a useful framework that applies to many situations and yields rich insights Here are its implications First the seller must assess the total customer