søndag 22. mars 2015

Providing value to shareholders by providing value to customers

This note is based on a videoed lecture at Telenor Group in Norway.

The late marketing-guru and Harvard-professor Ted Levitt once wrote:
The purpose of a business is to get and keep a customer. Without customers, no amount of operations expertise or financial wizardy can keep a company going.
At the heart of any private business model is its ability to create, communicate, and capture value. When you look at firms over time, some do it better than others, which begs to question: how do firms create superior value?

There are two schools of thought: 
  1. A firm-centric by cutting costs and being more efficient and 
  2. A customer-centric by investing in customer experiences. 

As the first is being challenged by the second in its ability to create superior shareholder value, I want to explore in this short note, how firms can create superior shareholder value by improving current market offer, i.e. what the firm is offering today.

Research that we have done at Center for Service Innovation (CSI) at the Norwegian School of Economics, tells us that value comes from four sources:
  1. Perceived value of core service (e.g. Starbucks' freshly brewed coffee)
  2. Perceived value of service delivery (e.g. barista providing the coffee, interacting with customers)
  3. Perceived value of loyalty program (e.g. benefits of being loyal to Starbucks)
  4. Perceived value of the environment where the service is co-created (e.g. the design of and atmosphere in Starbucks)

Any one of these four sources of value has the potential to make Starbucks and any other firm relatively more attractive in the marketplace - because they add value to customers.

Professor Donald E. Sexton at Columbia, NY, in his book "Value above costs" defines customer value added as the difference between perceived value and the variable unit cost of making the service available to the customer. High or low customer value added is reflected in 
  1. Customers' willingness to pay for the service and 
  2. Customers' degree of aroused emotions

 High willingness to pay combined with aroused emotions reflect an excellent customer experiences, which is a strong incentive to buy again. Customer retention is linked to firm value through customer profitability, cash flow, and customer equity, i.e. net present value of current and new customers future purchases. Firms with high customer equity, is more valuable to shareholders than firms with low customer equity.

So, going back tot the initial question: How do firms create superior shareholder value? The answer should come as now surprise: By providing superior customer value! Happy and loyal customers will over time create superior shareholder value. 

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