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Delivering Value

Delivering value to customer is of prime importance. Delivering value by a company increases the brand value of the company.

There are various interpretations of what is meant by customer value. The term may mean low price, receiving what is desired, receiving quality for what is paid, or receiving something in return for what is given (Zeithaml, 1988). Woodruff’s (1997) definition of customer value is widely cited and encompasses most interpretations of customer value. Woodruff defines customer value as: “a customer perceived preference for and evaluation of those products attributes, attribute performances, and consequences arising from use that facilitate (or block) achieving the customer’s goals and purposes in use situations”.

The definition above suggests that there are two aspects to customer value: desired value and perceived value. Desired value refers to what customers desire in a product or service. Perceived value is the benefit that a customer believes he or she received from a product after it was purchased.

Customer value can be examined at different levels. At a low level, customer value can be viewed as the attributes of a product that a customer perceives to receive value from. At a higher level, customer value can be viewed as the emotional payoff and achievement of a goal or desire. When customers derive value from a product, they derive value from the attributes of the product as well as from the attribute performance and the consequence of achieving desired goals from the use of the product (Woodruff, 1997).

In the 1981 staff paper “Market strategy and the price-value model,” Harvey Golub and Jane Henry introduce a framework designed for industries whose products have a sizable share of intangible or subjective value. Every product or service gives customers some benefit, for which they are willing to pay up to some maximum price. In microeconomic terms, this maximum is the “reservation price,” or, in Golub and Henry’s lexicon, simply the value the customer ascribes to the product. The strength of the buying proposition for any customer is a function of its value to that customer, minus the price—in other words, the surplus value that the customer will enjoy once that product is paid for. Golub and Henry’s model plots all products in a certain market on a two-dimensional price-value graph, enabling the strategist to identify underpriced and overpriced products and to spot regions of price-value space that are relatively free of products and therefore ripe for new entries.

Another price-value model, designed more for business-to-business equipment sales than for the consumer goods market, is described in a 1979 staff paper by John L. Forbis and Nitin T. Mehta. Their “Economic value to the customer” framework is based on a simple observation. To get customers to switch from some other product to yours, you have to give them at least as much value beyond the price they are paying—that is, at least as much surplus value—as they are receiving from the product they currently use. This paper is a good example of the emphasis on detailed analysis and quantification that pervades all of McKinsey’s strategy work.

A 1988 staff paper by Michael J. Lanning and Edward G. Michaels combines the value maps developed in the price-value models with the idea of the “business system,” which was introduced in 1980. The paper, “A business is a value delivery system,” emphasizes the importance of a clear, well-articulated “value proposition” for each targeted market segment—that is, a simple statement of the benefits that the company intends to provide to each segment, along with the approximate price the company will charge each segment for those benefits. Lanning and Michaels use value maps for each customer segment to reveal which value propositions are most likely to appeal strongly to specific segments. Then, to help managers implement their value propositions throughout their companies, the authors introduce an important extension of the business system: the concept of the value delivery system, which is geared toward advancing the value proposition at each stage of production and distribution.