Page 148 - Marketing Management

CREATING LONG-TERM LOYALTY RELATIONSHIPS | CHAPTER 5 125

How then do customers ultimately make choices? They tend to be value maximizers,
Customer-
within the bounds of search costs and limited knowledge, mobility, and income. Customers estimate perceived
which offer they believe—for whatever reason—will deliver the most perceived value and act on it Value
( Figure 5.2). Whether the offer lives up to expectation affects customer satisfaction and the
probability that the customer will purchase the product again. In one 2008 survey asking U.S. con-
sumers “Does [Brand X] give good value for what you pay?” the highest scoring brands included
Craftsman tools, Discovery Channel, History Channel, Google, and Rubbermaid. 9 Total Total
Customer-perceived value (CPV) is the difference between the prospective customer’s evaluation of customer customer
all the benefits and all the costs of an offering and the perceived alternatives. Total customer benefit is benefit cost
the perceived monetary value of the bundle of economic, functional, and psychological benefits cus-
tomers expect from a given market offering because of the product, service, people, and image. Total
customer cost is the perceived bundle of costs customers expect to incur in evaluating,obtaining,using, Product Monetary
and disposing of the given market offering, including monetary, time, energy, and psychological costs. benefit cost
Customer-perceived value is thus based on the difference between benefits the customer gets and
costs he or she assumes for different choices. The marketer can increase the value of the customer
offering by raising economic, functional, or emotional benefits and/or reducing one or more costs. Services Time cost
The customer choosing between two value offerings, V1 and V2, will favor V1 if the ratio V1:V2 is benefit
larger than one, favor V2 if the ratio is smaller than one, and be indifferent if the ratio equals one.

APPLYING VALUE CONCEPTS Suppose the buyer for a large construction company wants Personnel Energy cost
benefit
to buy a tractor for residential construction from either Caterpillar or Komatsu. He wants the
tractor to deliver certain levels of reliability, durability, performance, and resale value. The
competing salespeople carefully describe their respective offers. The buyer decides Caterpillar has
greater product benefits based on his perceptions of those attributes. He also perceives differences Image Psychological
benefit cost
in the accompanying services—delivery, training, and maintenance—and decides Caterpillar
provides better service as well as more knowledgeable and responsive staff. Finally, he places higher
value on Caterpillar’s corporate image and reputation. He adds up all the economic, functional, |Fig. 5.2|
and psychological benefits from these four sources—product, services, personnel, and image—and
perceives Caterpillar as delivering greater customer benefits. Determinants of
Does he buy the Caterpillar tractor? Not necessarily. He also examines his total cost of transacting Customer-Perceived
with Caterpillar versus Komatsu, which consists of more than money. As Adam Smith observed over
two centuries ago in The Wealth of Nations,“The real price of anything is the toil and trouble of acquir- Value
ing it.” Total customer cost also includes the buyer’s time, energy, and psychological costs expended in
product acquisition, usage, maintenance, ownership, and disposal. The buyer evaluates these elements
together with the monetary cost to form a total customer cost. Then he considers whether Caterpillar’s
total customer cost is too high compared to total customer benefits. If it is, he might choose Komatsu.
The buyer will choose whichever source delivers the highest perceived value.
Now let’s use this decision-making theory to help Caterpillar succeed in selling to this buyer.
Caterpillar can improve its offer in three ways. First, it can increase total customer benefit by
improving economic, functional, and psychological benefits of its product, services, people,
and/or image. Second, it can reduce the buyer’s nonmonetary costs by reducing the time, energy,
and psychological investment. Third, it can reduce its product’s monetary cost to the buyer.
Suppose Caterpillar concludes the buyer sees its offer as worth $20,000. Further, suppose
Caterpillar’s cost of producing the tractor is $14,000. This means Caterpillar’s offer generates
$6,000 over its cost, so the firm needs to charge between $14,000 and $20,000. If it charges less than
$14,000, it won’t cover its costs; if it charges more, it will price itself out of the market.
Caterpillar’s price will determine how much value it delivers to the buyer and how much flows
to Caterpillar. If it charges $19,000, it is creating $1,000 of customer perceived value and keeping
$5,000 for itself. The lower Caterpillar sets its price, the higher the customer perceived value and,
therefore, the higher the customer’s incentive to purchase. To win the sale, the firm must offer more
customer perceived value than Komatsu does. 10 Caterpillar is well aware of the importance of
taking a broad view of customer value.

Caterpillar Caterpillar has become a leading firm by maximizing total customer
value in the construction-equipment industry, despite challenges from a number of able
competitors such as John Deere, Case, Komatsu, Volvo, and Hitachi. First, Caterpillar
produces high-performance equipment known for reliability and durability—key purchase