Unit II Article Review Read and analyze the following article, which can be accessed by clicking the link below. Breur, T. (2006). The importance of focus for generating customer value. Journal of Financial Services Marketing, 11(1), 64–71. Retrieved from https://search-proquest-com.libraryresources.columbiasouthern.edu/abicomplete/docview/195285738/3DD8404D9B984970PQ/1?accountid=33337 Write a summary of the article to include the purpose of the article, how research was conducted (if any), the results, and other pertinent information from the article. Additionally, respond to the questions below. 1. Aggregate company performance numbers are not always the best way to measure performance. What are the most useful performance criteria to determine how a company is doing along its strategic marketing process? 2. How does the author describe how a firm measures profitability at the individual customer level? 3. Why is this method for measuring customer value important? 4. Even though this article is written about the financial services industry, how might these principles be used in another industry? Your response should be a minimum of two to three pages in length, and answers to the questions above should be formatted in essay format. Use APA style when writing your review. Cite any direct quotes or paraphrases from the article, and include any references used in your review on a reference page. Practice papers The importance of focus for generating customer value Received (in revised form): 30th September, 2005 Tom Breur* has a background in database management and market research. In the past he has specialised in data mining and analytical CRM He regularly teaches at universities and MBA classes on data-driven decision management, and frequently appears as a speaker at conferences» XLNT Consulting helps companies make more money with their data. Prior to founding his company in 2004, Dr Breur held several positions within ING, all in business intelligence, market research and data mining Abstract A carefully chosen customer value proposition (CVP) is essential to create customer value. Both value creation from the customer and the corporate viewpoint gain from consistent and deliberate focus on key market segments and core competences. The result is a mutual exchange of value, thus stabilising and strengthening the competitive position in the market. Conversely, failure to maintain a consistent focus puts value creation at risk, and potentially causes one’s competitive position to break down, System Theory offers a useful framework to integrate value creation from both the customer and the corporate perspective. Journal of Financial Services Marketing (2006) 11 , 64—71. doi:10.1057/palgrave.fsm.4760001 Keywords Customer value, target marketing, system theory, market segmentation, CRM, customer lifecycle management, shareholder value, customer value proposition INTRODUCTION integrated, It also provides a powerful model The term ‘customer value’ is typically used to deal with the complexity and intricate in one of two ways. Either it is used to interdependencies of real world problems. denote the value a customer gets from System Theory enables the presentation of these causal dynamics in a simple yet using a product, or it is taken to mean the profit a customer is generating for the comprehensive way. It IS somewhat of a paradox to consider company. In parallel the business literature the value for the customer as if this were has two strands. One is considered a ‘soft’ and the other a ‘hard’ approach to value opposed to the value for the company. There creation. The soft approach seems to deal just really should not appear to be a conflict of interest between value for and value from the with how to please the customeL The hard customer, since this is not a zero sum game. approach deals with the creation of shareholder value. A customer that is getting excellent service In this paper, the author will take a holistic (that is, getting a lot of value) is therefore less view, embracing both the soft and the hard likely to shop around, compare prices and approach to value creation. System Theory maybe even churn. Good service and satisfied provides a framework in which both value for customers are needed to avoid a product and from the customer can be studied and being perceived as ‘merely’ a commodity and to command a premium price. This then •Correspondence. XLNT Consulting Langestraat 8-03 5038 SE comes back to enhance the profitability of a Tilburg The Netherlands Tel: +21 6 463 468 75; customer and thereby accelerates the creation e-mail: email@example.com of shareholder value. Vol. 11, 1 64—71 ©2006 1363-0539 $30.00 www.palgrave-journals.com/fsm There is no reason to suggest that value created for the customer is in any way opposite to value generated from the customer. The trick lies in matching the offer to the customer needs, or finding the ‘right’ customer given a company’s offering. I To achieve this goal, it is essential that a purposely chosen customer value proposition (CVP) be pursued. The strategy should then consistently be supported by everyday tactical decisions. There exists no quality of strategy per se. What constitutes quality in a strategy is the manner in which each and every decision that is made within the company, on a daily basis, is aligned with its ultimate strategic choices. MEASURING CUSTOMER VALUE There are many possible criteria to measure corporate performance like market share, turnover, profit, number of products sold, etc. These performance criteria can be used to evaluate how a company is doing at a given moment in time (ad hoc), periodically or continuously. Aggregate turnover, sales volume or market share do not necessarily provide a reliable picture of the (financial) performance of a company. For instance, a large market share could have been acquired at too high cost; as a result the profit per customer may become too low. It is better not only to rely on aggregate performance figures, but also on criteria that are determined at the individual customer level. The question then is: what are the most useful performance critena to determine how a company is domg? Such performance criteria should also provide guidance on how to change course ‘in mid-air’, to offer help with tactical decision making. In general, aggregate numbers do not give sufficient insight to help everyday decision making at the operational level Not all customers are created equal • some are more profitable than others. For this reason, it is highly desirable to have some of kind of measure in place to discriminate between customers on the basis of their value to the company If a company wants to measure profitability at the individual customer level, it will need to calculate both revenue and cost at the individual level Often, it is not possible to determine exact variable costs at the individual customer level. What this would require is an integral account of each service request, each customer contact, and all transactions. Multiplying the contacts by an itemised cost would then give total variable costs. In many cases it will be a challenge to consolidate such detailed data across all customer touch points. If consolidation is not feasible, some fair approximation of costs per customer needs to be determined Usually the hardest part in determinincr individual customer profitability is dealing with the fixed costs. With regard to the cost per customer, one needs to set up an allocation scheme that takes into account how fixed costs should be distributed among customers. This is not easy, but necessary, to establish an individual profitability calculation. As an example, suppose hardware is needed to host a new voice response (VR) system. If only 10 per cent of customers have started using this system in the first year, it seems hardly reasonable to charge these customers with the full hardware costs. Another difficult question can be to determine whether costs should be allocated at the customer or the account level. These questions challenge the fundamental business model, and are not straightforward. Besides current profitability, one can also take future profitability into account. One would like to make decisions on the basis of not just the present value, but also the potential future value of a customer. In order to make such decisions, It is necessary to estimate the discounted future cash How that is to be expected from every customer. Such measures have been labelled ‘life time value , or more realistically ‘long-term value’s Such calculations are not easy to realise, if only because they rely on very high quality data to reach a level of accuracy that IS acceptable for practical busmess purposes. Measuring customer profitability is very important in order to target the right prospects. Companies want to spend their marketing resources where they will generate the highest payoff. This requires insight in cross- and up-sell potential. It is not just current profitability, but also the development of customer profitability over time that is important. These together need to be known to evaluate the return on investment (ROI) of marketing spend efficiently. FROM AGGREGATE TO INDIVIDUAL CUSTOMER DATA Businesses are increasingly run ‘by the numbers’. CRM, the new marketing paradigm, has helped to shift the focus from aggregate company sales to financial measures at a lower level of aggregation: the individual customer. It is certainly no longer enough to know that one’s market share went up, The underlying ‘quality of growth’ needs to be monitored as well. The percentage of new customers and attrition of the existing base for example, can have a very big impact on bottom line figures, and further potential for growthþ’6 According to many,7 s CRM has failed in many respects. Even If this were true, it has nonetheless brought about a lasting change 111 focus on the kinds of numbers that are used to steer businesses. In this new marketing paradigm, the focus is now on customer lifecycle management, on developmg and malntaimng customer relations. Marketing spend is seen, not just as an expense, but rather as an investment in the relation with the customer. At the moment, generally accepted accounting practices (GAAP) do not allow customers as assets in the books. In the same vein, marketing expenses cannot be booked as investments. Yet at the same time, companies are publicly valued on the basis of number of customers, customer acquisition and churn rates, and cross-sell ratios. So the financial markets clearly value companies in ways that appear at odds with CIAA P. VALUE FROM OR FOR THE CUSTOMER? Sometimes the debate on generating value is treated as a zero sum game: by doing more for the customer the company is earning less. But this is only an apparent paradox.9 Sustainable value can only be created If the supplier can afford to Offer the current service level and still maintain profitability From the customer perspective, they consistently need to get more a better overall deal than they could get from the competition. If dealing with the current supplier does not generate excess value, instability will result, Excess value means more than Just offering a better price. As an example, a private banking client may get a less favourable transaction rate with a high street bank than with a discount direct broker, but as long as the ‘total experience’ IS better, the high street bank still provides more value. For the company, value creation comes in the form of a steady cash flow, which can be counted on also to extend into the future, These fllture projections are where a difference becomes apparent between traditional valuing methods and the new marketing paradigm. Value IS created in marketplaces where both suppliers and customers are in a winwin relation. Only then will the supplier be able to sustain Its market position, and only then will it be in the customer’s best interest to maintain the relationship with this supplier 1363-0539 $30.00 Loyalty is not something that can be bought, at least not profitably for prolonged periods of time. In fact customers cannot even be owned. Customers can be rented from the marketplace, but this comes at a price, namely acquisition and retention costs. Loyalty is a privilege one can earn by consistently delivermg superior value to the customer. Essentially, it is the customer who chooses where to do business, Deep promotions can (temporarily) seduce the customer into a trial. But this has nothing to do with owning a customer, nor with creating sustainable value, Earning money, generating shareholder value, comes from offering value to customers that is convmcing enough to give the company a chance to rent a customer’s business from the marketplace over prolonged periods of time. THE DYNAMICS OF GROWTH System Theory has generated templates, fundamental mechanisms that are useful to apply to real world problems. They are also sometimes labelled ‘systems archetypes’. Il These are structure diagrams that describe causal patterns where cause and effect are intertwined. Therefore, the question ‘what is cause and what is effect’ becomes trivial These are powerful models to describe and simplify business concerns in ways that allow for dealing with real-life complexities. 1 2, 13 The basic model here looks like Figure 1. Providing value to the customer leads to growth, which in turn leads to a better focus Figure l A reinforcing cycle ot * understanding of the reasons behind success (customer feedback and research), which then leads to providing even more value. This way the cycle can continue growing. It is a socalled reinforcing cycle, and therefore it has a plus sign 111 the centre. The objective of this paper is to demonstrate the central importance of managerial focus in this reinforcing cycle. Focus is a leverage point in that It can make or break success. A loss of focus will cause the cycle to break down gradually over times The risk that lies within growth is that success can blind one to the reasons behind it. Success in the marketplace comes from a match between the company’s CVP and meeting needs of customers. This is matched by a focus on core competencies as they relate to generating value for customers. What is it about the service that customers value the most? By putting effort where this is most appreciated, one can stay ‘lean and mean . It is vitally important to determine the company’s core competencies. One needs to define exactly what the benefits are for the customers that are most appreciated. Then it is necessary to specify the needed processes, systems and communication that are required to deliver the unique benefits. Why is it that (high value) customers like the company? Then, focus all energy towards meeting those goals. If not, there is a real danger of diffusion of the CVP, as in the next system diagram. (See Figure 2.) A more elaborate value/ growth model might look something like Figure 2. Given an organisation’s infrastructure and value proposition, certain customers can be profitably targeted, others may not be. The constellation of organisation structure, systems in place, and the value proposition a business is working with (its ‘capabilities’), together comprise the most important elements that will influence the costs of an organisation. Moving outside these core competences brings with it a risk of inefficiencies. This risk comes In added cost in relation to the © differentiated position. The brand becomes an ‘average’; there is no longer a way to differentiate oneself from the competition. marginal increment in number of customers. Customer acquisition costs, and the investments needed to cross-sell to customers will rise gradually (at the group level). That is why the loop on the right of Figure 2 has a minus sign in the centre, indicating this mechanism will bring growth to a halt. The reason why the loop on the right of Figure 2 is so pernicious has to do with the fact that only after a while will it become apparent that a cohort of new customers is of the wrong kind. Only after repeated unsuccessful croSS- and deepd-sell attempts will it become apparent that there is a misfit between new customers and CVP. But typically, these customers will have been around for quite a while before this becomes apparent. RISKS OF AN UNDIFFERENTIATED APPROACH What are the risks of an undifferentiated growth strategy? This results in the ‘drag’ that is caused by the right loop in Figure 2, the one with the minus sign in the centre. This will result in a loss ot- value in four places: There is less of a match between the value proposition and the new customers. As a result, one becomes increasingly dependent on customers choosmg the company, instead of the other way around. This risks devaluation of the brand for two reasons, First, for many customers one can not deliver what they expect. And secondly, one loses its One loses focus on core competencies given the CVP-segment match. Because of heterogeneity in new customers, pressure arises to diversify activities, to fulfil more different kinds of needs. For example, there Will be more processes to manage, more different kinds of questions and requests from customers, and one risks running Into service and communication problems. It is inevitable that lack of a clear priority of service and value will lead to higher operating costs. The bottom line is that there will be more errors in fulfillment because one has been forced to offer more diverse services. Once the wrong customers have entered the base, it becomes much harder to cross- and hard-sell. Also, developing new products becomes much harder: who to develop them for? This will then further amplify the difficulties 111 crossselling. The leverage on the market goes down, costs go up, and therefore there is even less competitive power. One does not know the customers, simply because there is no typical customer any more. And the customers do not know the company, due to lower average tenure. Service costs are likely to go up when customers are less familiar With the company’s services. 1 5 For these four reasons higher costs will be inevitable, thereby making it even harder to compete. Margins have eroded and more cumbersome operations negatively affect the ability to move quickly into new market segments. Heterogeneity in customer needs will lead to a mismatch with the CVP, therefore it will become harder to satisfy existing customers. In particular, loyalty and referral rates
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