Customer Value

Strategy for Increasing Customer Value

Customer value is the benefit received by the customer from a product or service relative to its cost.

As noted in previous entry Opens in new window, customers receive value from purchasing the products and services of an organization.

If the value the customers receive is less than the price they pay for the product and/or service, they will not make the purchase.

Therefore, an organization must offer its products and services at a price less than the value placed on them by the customer.

At the same time, the organization must be able to provide the product or service at a cost less than the selling price in order to sustain itself.

For example, if customers value a pair of sandals at $35, retailers must sell them for no more than $35, say $34, and be able to acquire them for $28. The difference between the sales price and the purchase cost represents the gross margin on the sandals.

The larger the margin, the more organizational value is created. In brief, organizational value is the benefit received by various stakeholders from their investment in the organization.

To make matters more complex, the organization Opens in new window must accomplish this task in a world of technological change Opens in new window, and competition and globalization Opens in new window.

Organizations develop strategies by looking at the opportunities and threats posed by technological change, globalization, and customer preferences. New technology offers opportunities to be more efficient and competitive, but also threatens to make the existing technology of the organization outdated.

Competition and globalization provide threats of new competitors entering an organization’s market, but a global economy provides greater opportunities of expanding markets for an organization’s products or services.

Changing customer preferences provide opportunities to develop new products and services, but threaten the success of existing products and services. Steve Jobs at Apple had the genius to invent and produce iPads to satisfy customer preferences that customers did not know they had until they saw the iPad.

At the same time, organizations must recognize their own strengths and weaknesses, given their existing and proposed characteristics.

Given the existing potential strengths and weaknesses of the organization and the opportunities and threats of the environment, it must decide how to create “customer value.

Organizations generally follow one of the following three strategies:

  1. innovative product/service design,
  2. high-quality products and services, or
  3. low-cost production.

These strategies reflect the key variables that provide customer value.

1.   Innovative Product/Service Design

Some organizations focus on using changes in technology and customer preferences to introduce new innovations or designs that add customer value.

For example, Apple’s innovative iPad design captured a large segment of the tablet computer market. Facebook “invented” social networking.

Being the “first mover” requires an organization to have excellent marketing and design skills.

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The marketing function is critical in identifying customer trends and niches that have not been previously identified.

At the same time, an organization needs a good design team to take advantage of new technologies and meet changing customer demand.

This approach is often described as a differentiation strategy in that efforts are made to distinguish the product or service from those of competitors.

By beating other global competitors to the market with a new product or service, an organization, such as Apple, can temporarily reap the rewards of adding customer value before profits are diluted due to competition.

Obtaining patents can lengthen the time of profitable opportunities for a new product, but other organizations will soon find ways to make similar products.

The strategy of competing through innovative product/service design is higher risk, but offers large profit opportunities.

Certain brand-name drug companies typically compete through innovative product design. They spend considerable resources on research and development for new remedies for diseases.

When successful, a new drug can be very profitable, but if a pharmaceutical firm cannot continually develop new drugs, the company will have to invest in a different strategy to survive.

2.   High-Quality Products and Services

Some organizations follow the strategy of providing high-quality products and services to achieve customer value.

High quality in this case means delivering a product or service that conforms to the specifications of the design and meets or surpasses the expectations of the customer.

High quality does not necessarily mean taking a product with greater functionality than other products. A five-bedroom home is a different house than a one-bedroom apartment, yet both can be of high quality if they meet the customer’s expectations.

Moreover, one customer can perceive two five-bedroom houses differently in terms of quality, due to other features such as size, layout, landscaping, and location.

Successfully achieving a high-quality strategy requires that the organization pay considerable attention to the details of manufacturing and service provisions.

The organization must be aware of customer expectations and develop procedures to ensure that each product and service satisfies and even surpasses those expectations. For example, Internet-banking firms must offer customers highly reliable, and easy-to-use network platforms.

3.   Low-Cost Production

Another strategy used in order to compete in global economy is to be the low-cost producer of a product or service. Low-cost retailers, such as Wal-Mart, ALDI, and Tesco, can sell at lower prices than their competitors.

By offering the products and services at a lower price, these organizations create customer value. This strategic approach is often referred to as cost leadership.

To be a low-cost producer, an organization must operate very efficiently. Low-cost producers cannot afford to have numerous non-value-added activities.

At the same time, low-cost producers cannot completely sacrifice quality. Customers will still expect a certain quality level.

Generic drug manufacturers are examples of low-cost producers. They spend very little on advertising and expect to be successful by charging lower prices for drugs than brand-name drug companies do.

Most grocery chains and drug stores, such as Kroger’s in the US, Carrefour in France, and Boots in the UK, have their own private label brands.

These products compete with name brands, and can sell at lower costs because of savings on advertising.

In some cases, private label goods, such as President’s Choice in Canada, replace name brands due to their own marketing product development, customer loyalty, and trademark recognition.

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Role of Management Accounting to Implementing Strategies

Whether an organization chooses to create customer value Opens in new window through innovation, high quality, or low cost, management accounting plays an important role.

Strategies require planning and implementation, both of which are supported by management accounting.

Management accounting methods Opens in new window should differ, however, depending on the strategy chosen. Certain management accounting methods promote innovation, while others promote quality or low-cost production. Matching management accounting methods with a strategy is critical to the success of the organization.