In my last post, we learnt how Customer Value data correlates to business results. We saw how much of a connection the CVA (Customer Value Added score) has with market share, retention, profits etc. This time, we will go further to study how we can measure loyalty or retention of Customers, and how we can build value maps.
Customer Value and Loyalty
To measure loyalty, we need to ask two more questions: (1) Would you buy this product or service again from this company? and (2) Would you recommend this product or service from this company? These are the same two questions also used to measure net promoter score (NPS). If you asked this question on a 10 point scale, people answering 9 or 10 are called promoters, and those scoring 6 or less are called detractors. Promoters minus detractors give you net promoters.
You can see NPS is nothing more than what we set out to do to measure loyalty or Customer retention. We take the answers to either of our two questions above and plot them against CVA or the actual value score on a 10 point scale. NPS gives us no more information than the loyalty information. Worse still, NPS compares yourself to yourself and not to competition. We know this is flawed. Take an example of grades. Which is better? A score of 60 when the class average is 50, or a score of 70 when the class average is 80. In the first you were 20% better than the average. In the second, you were 12.5 % worse than the class average even though you had better scores. Satisfaction studies generally have this flaw.
CVA is a much more extensive study and gives much more information on what to do, and your competitive position. Banking on NPS alone is a poor substitute for CVA.
The loyalty curve predicts Customer behaviour. When we plot the data we get a typical S-shaped curve. One such curve is shown as the Customer Loyalty Predictor in Figure 7.1. At very high scores of Customer Value, slight changes in Value do not make much difference in the loyalty. But in mid-range Customer Value ratings, we can see small changes in Customer Value can have a huge impact. Thus if we move from 7 to 8 in Value (a 14% improvement), loyalty moves from 50% to 67% or a 34% improvement in retention. Therefore, you must pay attention to improving the Customer Value score. The dramatic mid-range drop in retention due to lowering of Customer Value causes us to call this curve the slippery slope.
The Value Map is generally a plot of benefits versus costs. What it tells you is how a unit of cost impacts benefits or vice versa. It allows you to visually see your competitive position in the marketplace versus your competitors. With this kind of a map, we are able to track or predict your strategic moves to improve your competitive position. A typical Value Map is shown below
In this value map, Figure 7.2, you are shown three segments of the business, an economy product or service, like a low end car, an average one or a high end or premium product or service. Irrespective of what type of product you are selling (economy, average or premium) to win, you must always create more value than competition.
The value map is plotted from the competitive profiles we discussed in the previous chapter. A key line is the quality for price line (or the fair value line). Any product or service close to this line is fairly priced. The farther you move from this line and below it, you will create value. When you move above the line you will be reducing the value you create versus fair value.
This is best shown in the next value map (Figure 7.3) based on the competitive profiles we showed in the past post.
Here the company AA is creating high value for its customers. They are creating even more value for AA (members). AA (members) are AA Customers who are enrolled in a membership program. None of you are in the business of giving away value and losing price. So we move AA (members) value upwards into a higher price zone, or find ways to reduce our costs or the benefits we give.
Figure 7.3 focuses on increasing the Value to the Company or the profit. Starting with AA members, we notice an immense Customer Value is being created for them (see the distance from the fair value line, the only line on the chart). We can increase the price (shown by the vertical green arrow going up), reduce the benefits (green arrow going to the left), or both (green arrow going diagonally towards the fair Value line). One could increase revenues by charging a membership fee.
A better way is to increase price for AA’s Customers (members and non-members) or reduce the benefits (such as sales credit, or free delivery). You can see the position of AA (members) with reduced benefits and higher prices. Yet, AA (members) are receiving more value than competitors are creating, albeit less than before prices were increased or benefits were reduced.
All these will increase the revenue to the Company and its profit. It is better to ensure we continue to be in the high Value zone and add more Value than competitors. These strategies have worked to increase Value to the Company. Note also, that in the two curves there is a different slope to the fair value line.
How to plot the fair value line
The fair value line is based on the relative importance of the benefits and the cost. If both benefits and costs are 50% in importance the slope of the fair value line will be 50% of 90 degrees or 45 degrees. You can plot the value maps for different relative costs and relative benefit ratios
So you can see the value of Customer Value Added study and scores. It tells you about your Customer loyalty and retention, and what you have to do to improve loyalty. With the value maps you can plot your competitive position versus competition using the fair value line, and you can then build a strategy to provide optimum value (not too much, not too little), and increase/decrease value to the Customer or profits.
Do it Yourself
Answer the question on how many people will remain loyal to your company based on the value you create for them. In a given sample you will know what the individual customers are stating as the value they perceive, and simultaneously how many will buy again. This will allow you to plot the slippery slope of the loyalty curve.
Next plot the value map. You can then see where you are and what strategy to adopt to improve your competitive position. Draw the fair value line if cost is 30%, 45%, 60%.
Draw a value map for your product or service. Pay attention to the slope of the fair value line. Mark the value you add and the value your competitor’s add. Comment on what the value map tells you about your business, and what to do next as a strategy.