CREATING, COMMUNICATING, AND DISTRIBUTING CUSTOMER VALUE Timothy M. Smith BBE

2 Market Sensing (Finding the Value…)

3 VALUE-IN-USE Vinyl SidingWCC Siding Est. Installed Sales$10,000Est. Installed Sales$11,000 Est. Callback Expense$300Est. Callback Expense$150 Est. Labor Expense$3,000Est. Labor Expense$2,550 Price$5,000Price??? Contractor Gross Margin$1,700Contractor Gross Margin??? How much value do the two products create for the contractor? How would you price the WCC siding product? What impacts this decision? New Product Scenario: Opportunity to carry a new innovative Wood-Cement Composite siding product. In part, due to lower energy costs in production, the new product is offered to you at a lower cost than the current vinyl siding option (Your Cost of Goods Sold for an average WCC siding job is estimated to be $3,900 versus $4,250 for the average vinyl job). Superior strength, stiffness, and wood-like appearance of the WCC product is expected to result in higher installed sales to the homeowner. Improved durability and fastener system is expected to reduce callback expenses by 50%. The improved fastener system is also expected to decrease labor expenses associated with installation by approximately 15%. Summary Table:

4 CUSTOMER VALUE Two sides of Value:  A customer perceived quality-price relationship of company’s offerings.  more demanding customers  increased global competition  improved access/speed of communications  superior customer value: the next major source of competitive advantage. (Day 1994, Woodruff 1997)  A measure of worth attributed to a customer, realized by a company  Delivering customer perceived value profitably

5 CUSTOMER VALUE Two Focal Questions Impacting Customer Value:  What dimensions of value do customers care about?  How do competing offerings fare along these dimensions?

6 PRODUCT ATTRITUTES AND VALUE

7 CUSTOMER VALUE Two Focal Questions Impacting Customer Value:  What dimensions of value do customers care about?  How do competing offerings fare along these dimensions?

8 Value Fundamental Value Equation: (Value f – Price f ) > (Value a – Price a )

9 THE VALUE SALAMI: A CONCEPTUAL FRAMEWORK Total Value Created Total Costs (Value to the Supply Chain) Profit Margin Customer Value Price

10 CUSTOMER VALUE: A CONCEPTUAL FRAMEWORK  Compete against other value offerings distributed to customers! Value Captured by the Firm (Margin) Value Distributed to Customer Product Quality Service Quality Total Costs (Value to the Supply Chain) Value Captured by the Firm (Margin) Price t Total Value Created Service Quality t Value Distributed to Customer Added CV Price s t Total Costs (Value to the Supply Chain) Value Captured by the Firm (Margin) Price t c Traditional Supplier Service Strategy Cost Leadership Added CV Cost c t ServiceQuality s Cost t s Product Quality Service Quality Product Quality Total Costs (Value to the Supply Chain) Value Distributed to Customer

11 Quality and Price

12 THE IMPORTANCE AND NATURE OF CUSTOMER VALUE Value Loyalty/Purchase Volume

13 THE IMPORTANCE AND NATURE OF CUSTOMER VALUE Value Loyalty/Purchase High Low

14 CUSTOMER VALUE – HARDWOOD LUMBER CASE Top 3 Suppliers by Volume Suppliers Ranked #1 Suppliers Ranked #2 Suppliers Ranked #3 Percent of Purchases52.67 (n=75) (n=75) (n=75) Relationship (years)7.95 (n=80) 7.43 (n=75) 5.88 (n=62) Perceived Value Delivered4.39 (n=94) 4.13 (n=90) 3.96 (n=82)  Significant differences were detected between each supplier category for all variables (except for Relationship - S1:S2).  Ten percent reduction in perceived value, corresponds with a 61% reduction in purchase volume and a 26% reduction in customer tenure.  Customer Value is ALL or NOTHING? * * Percent of top-3 suppliers only; 33%, 16%, 13% of total company purchases, respectively. Evidence from the Hardwood Lumber Industry

15 SEGMENTATION

16 SEGMENTATION

17 Segmentation Variables

18 CUSTOMER VALUE – HARDWOOD LUMBER CASE  Segments Matter!

19 COMMUNICATING VALUE

20 ADDING VALUE – COOPERATIVE ADVERTISING

21 INSTALLATION SOLUTIONS – Stock Building Supply  Direct to the Builder Installed Service Program.  We take the worry off of your hands and do the installation while you continue to build more homes! What could be easier?  You never have to deal with another subcontractor...we do it all for you.  All of the materials and service applied to your account...one less invoice for you to deal with!  We stand behind the quality workmanship and the product. Our installers are professionals. They work quickly and efficiently.  We offer the Professional Advantage in Quality Service and Installation on:  Framing  Siding -- Vinyl, Fiber Cement, and Cedar  Windows -- PORTRAIT Convertible, Wood and Vinyl  Insulation  Sheetrock  Garage Doors  Exterior/Interior Doors -- PORTRAIT Distinction, Fiberclassic, and Classic Craft  Locks and Hardware  Custom Stairs  Specialty Millwork  Full line of Moulding and Interior Products  Cabinets -- Most Brand Name Cabinets  Countertops -- Solid Surface, Granite and Custom Laminate Countertops  Flooring & Carpet  Decks, Porches, & Fences -- Treated Pine, Chain Link, PVC, and Aluminum

22 SO, WHAT DOES THIS MEAN?  If customer value is something consciously left on the table by a supplier, this value proposition must be DISTINQUISHABLE from competitors and of a MAGNITUDE sufficient to affect behavior.  The factors determining “high value” can be very different between segments – value is determined by the customer.  Important attributes in the buying decision are not necessarily “value- adding” attributes (typically thought of as adding further processing to the product).  The most important attributes in purchasing hardwood lumber - consistent thickness and price - did little to influence customer perceptions of high value.  Ability to transact on-line plays a very small role in hardwood lumber purchase decisions, even among distributors, but significantly impacted this segment’s value perceptions of suppliers.