Profitably Serving Customers
Customer Lifecycle and The Service-Profit Chain
Walter Adamson
June, 2003
Version C
Contact:
adamson@digitalinvestor.com.au
Tel: +61 403 345 632
www.digitalinvestor.com.au | 5/45 William St | Melbourne | Australia | 3000
Introduction
The Service Profit Chain
Customer Lifecycle
Profitably Serving Customers
Followed by:
Part One – Linking the Customer Lifecycle and Business Logic
Part Two – Developing the Customer Value Package
Part Three – Developing Service Products to fill the Value Package
Part Four – Understanding Service Pricing Strategies
Part Five – Improving Margins through the Service Value Chain
adamson@digitalinvestor.com.au | June 2003 |
Slide 2
The Service Profit Chain
Employee
Satisfactio
When we
have nthis .....
Profit &
Growth1
Employee
Loyalty
Internal
Performance
Customer
Loyalty
Employee
Productivit
y
External
Performance
Connected through
Value
Customer
Satisfaction1
Service
Value1
Customer
Value1
1Focus
of This Presentation
adamson@digitalinvestor.com.au | June 2003 |
Slide 3
Customer Lifecycle
Represents the total potential touch-points and profit capture
Phase 1
Pre-sale
Phase 9
Disposing &
Upgrading
Phase 8
Value
Improvemen
t
Phase 2
Value
Identificatio
n
Phase 3
Meeting
Needs
The Customer
Lifecycle
Phase 7
Customer
Value Gain
Phase 6
Customer
Learning
Phase 4
Obtaining
Commitmen
t
Phase 5
Value
Creation
adamson@digitalinvestor.com.au | June 2003 |
Slide 4
Profitably Serving Customers
Customer
Value
Model
Customer
Value
Package
Customer Lifecycle
Profit &
Growth
Value Chain
Whole
Product
Business Logic
$
$
When we
have this
.....
Service-Profit
Chain
A systems thinking approach optimises:
 Value creation for the customer
 Value capture and sustainability for the provider
adamson@digitalinvestor.com.au | June 2003 |
Slide 5
The Customer
Understanding the Customer Value
Model drives the development of the
Customer Value Packages
Customer
Value Model
Customer
Value Package
From the market into the business strategy
 Drives the business logic and value packages
 Reflects industry trends and competitive forces
 Without this analysis the business has no grounding

 A value
package is a customer-oriented offer
 It includes a value proposition for specific customers
 Without this offers will be only features or advantages
 Requires an associated move to solutions selling
adamson@digitalinvestor.com.au | June 2003 |
Slide 6
The Service Product
Understanding the Whole Product
concept allows business to be
captured and value created through
the full Customer Lifecycle
Whole
Product
Customer
Lifecycle
The totality of what a customer buys
 Includes all touch-points, resources, and emotions
 Closely synchronised with the customer value package
 Required to understand pricing, costing and competition

The lifecycle represents the lifecycle touch-points
 Customer value packages must reflect different phases
 Whole product and business logic link to lifecycle
 Understanding required as a key part of solutions selling

adamson@digitalinvestor.com.au | June 2003 |
Slide 7
The Delivery
Understanding the Whole Product
concept allows business to be
captured and value created through
the full Customer Lifecycle
The process of delivering the whole product
 Describes the activities and resources and interfaces
 Closely synchronised with the customer lifecycle
 Required to reduce inefficiencies and increase net profit
Value
Chain

Business
Logic

How the business operates and makes money
 Driven from the strategy and customer value model
 Measured by business targets and key result areas
 Without clear understanding the business is suboptimal
adamson@digitalinvestor.com.au | June 2003 |
Slide 8
The Lifecycle Link to Profit
Understanding the complete
Customer Lifecycle is essential in
order to the satisfaction required in
the Service-Profit Chain
Customer
Lifecycle

A satisfaction cycle

Reflects total costs and potential profit

If broken then breaks satisfaction
Customer satisfaction drives profit
 Value package drives satisfaction
 Solution selling meets value needs

Service-Profit
Chain
adamson@digitalinvestor.com.au | June 2003 |
Slide 9
Profitability and Sustainability
Successfully delivering service
profits requires an understanding
and enablement of the linkages
across the complete system
Profitability

Understand customer value
Sell value propositions that matter
 Effective resource deployment
 Efficient distribution of whole product

Satisfy customers and employees
 Capture fair share of value created
 Re-validate customer value & lifecycle

Sustainability
adamson@digitalinvestor.com.au | June 2003 |
Slide 10
The Lifecycle Sales Approach - 1
Moving Sales from HOW & WHAT
WHO & WHY
Stages of Sales Maturity
Customer
Needs
(Who)
focus
Salesperson
Needs
Problem Solver
Relationship,
Value Provider
3 4
1 2 Advantages
Transaction,
Promoter
Product Pusher
Product
(What)
process
Solution
(Why)
adamson@digitalinvestor.com.au | June 2003 |
Slide 11
The Lifecycle Sales Approach - 2
The primary objective of the salesperson shifts

FROM: Close the sale, and

Sell the advantages and get through the process, TO:

Solve the problem of why the customer needs the product

Create customer value and capture a fair share of it
Customer Needs
(Who)
Problem Solver
focus
Salesperson
Needs
Transaction,
Product Pusher
Product
(What)
3
1
4
2
Relationship,
Value Provider
process
Advantages
Promoter
Solution
(Why)
adamson@digitalinvestor.com.au | June 2003 |
Slide 12
The Service Profit Chain
Employee
Satisfactio
When we
have nthis .....
Profit &
Growth1
Customer
Loyalty
Employee
Loyalty
Internal
Performance
External
Performance
Employee
Productivit
y
Connected through
Value
Customer
Satisfaction1
Service
Value1
Customer
Value1
1Focus
of This Presentation
adamson@digitalinvestor.com.au | June 2003 |
Slide 13
The Service-Profit Model
1
Linking the Customer Lifecycle and Business Logic
Customer Lifecycle
Business Logic
Customer Value
Customer Value Model
Customer Value Package
Customer Value Audit
adamson@digitalinvestor.com.au | June 2003 |
Slide 14
Customer Lifecycle
The objective is to optimise the creation and capture of value
Phase 1
Pre-sale
Phase 9
Disposing &
Upgrading
Phase 8
Value
Improvemen
t
Phase 2
Value
Identificatio
n
Phase 3
Meeting
Needs
The Customer
Lifecycle
Phase 7
Customer
Value Gain
Phase 6
Customer
Learning
Phase 4
Obtaining
Commitmen
t
Phase 5
Value
Creation
adamson@digitalinvestor.com.au | June 2003 |
Slide 15
Business Logic
To service customers you need operational business logic
 ‘The logic that organises a business’s approach to things’
Competition
Business
Strategy
Marketing
& Sales
Logic
Customer’s Needs
Customer Value Model
Delivery &
Customer
Support
Revenue
Model
Customer
Value Package
Service
Product
Design
Profit Targets
Resources
adamson@digitalinvestor.com.au | June 2003 |
Slide 16
Lifecycle and Business Logic
To maximise return on investment:
 The customer lifecycle is supported by the Business Logic
Business Logic
adamson@digitalinvestor.com.au | June 2003 |
Slide 17
Business Logic Basics

Describes how a business operates and how it makes money
Value
Creation
Customer Value
The Value Proposition
Business Logic
Value
Capture
Marketing Model
Revenue Model
Operations Model
Value Chain
Core Competencies
People Management
Systems Management
Funds and Investment
adamson@digitalinvestor.com.au | June 2003 |
Slide 18
Business Logic and Strategy



Business Logic is the essential logic of the business
Needed in order to optimise value creation and capture
Expressed in terms of a major action premise that can:
– Maximize market share, revenue, short-term-profit, ROI, or,
– Whatever focus the Business Leaders have chosen

The Logic aligns the action premise and the people’s energies:
–
–
–
–
Marketing and Sales Logic
Revenue Model
Service-Product Development Logic
Customer Delivery and Support Logic
adamson@digitalinvestor.com.au | June 2003 |
Slide 19
Business Logic and Strategy

Marketing & Sales – how to we gain access to our customers?
– Niche, vertical, horizontal, alliances, distribution

Revenue Model – how do we use and make our money?
– Market share, growth, acquisition, cost performance

Service-Product – what value package will we take to market?
– Commodity, uniqueness, speed, trend, lifestyle, informational

Customer Delivery & Support – how do organise ourselves to make
the other logics work together?
– Product focus, geography, function, matrix, account
You need to test the total business logic to see that it makes sense!
adamson@digitalinvestor.com.au | June 2003 |
Slide 20
Strategic Model

The Strategic Model drives the Business Logic and the
Customer Value Package – using the Customer Value Model
Vision
Customer Value
Model
Mission
Core Values and
Philosophy
Customer Value
Package
Business Logic
and Strategy
Operating
Environment
Business Targets
Key Result Areas
adamson@digitalinvestor.com.au | June 2003 |
Slide 21
Customer Value
Customer Value Model
Customer Value
has three major
components
Customer Value Package
Business Logic and Strategy
adamson@digitalinvestor.com.au | June 2003 |
Slide 22
Customer Value Model

A set of critical factors that define customer value
–
–
–
–
–
From the customer’s point of view
Requires detailed engagement and research
Input from the market
Drives the business logic
Drives the customer value package
Tells us what value we have to provide in order to win, and
keep, the customer’s business over the complete lifecycle.
adamson@digitalinvestor.com.au | June 2003 |
Slide 23
Building the Customer Value Model

Competitive edge
– Salespeople who understand their customer’s value model better than
their competitors have a better chance to win the business

How do your customers define value?
– Must be derived from the minds of the customer
• Effective engagement
• Communication
• Develop Value Propositions
– Must be validated in solid customer research
• Who has best performance in the industry – key metrics, and why?

Must be able to implement the path to the customer’s ‘truth’
The customer value model is an ‘invisible truth’ used by the
customer to evaluate the quality of outcomes you provide.
adamson@digitalinvestor.com.au | June 2003 |
Slide 24
Hierarchy of Customer Value

There is a hierarchy of customer value satisfiers:
– Base value – the fundamental components of the customer value
package you need in place just to stay in business
– Expected value – what your customer considers ‘normal’ for you and
your competitors
– Desired value – added value features that customers know about but
don’t necessarily expect because of the current level of performance of
your competitors
– Unanticipated value – going beyond the customer’s expectations and
desires – provided that the customer really values these “surprises”

You must go beyond ‘base’ and ‘expected’ to make a difference
You must have mastered the first two levels in order to satisfy the
customer on the higher levels. Failings in the first two levels will
waste the effort and investment in the higher levels.
adamson@digitalinvestor.com.au | June 2003 |
Slide 25
Customer Value Package


The enterprise infrastructure for value creation
PLUS, the Whole Product
1. Marketing & Sales Logic
2. Service Product Design
3. Delivery & Customer Support
Enterprise Components
4. Revenue Model
5. Branding & Reputation
6. Informational
7. Interpersonal
adamson@digitalinvestor.com.au | June 2003 |
Slide 26
Customer Value Package

Enterprise capabilities are needed to deliver the Whole Product:
Enterprise Capabilities
1. Marketing & Sales Logic
The Whole Product
2. Service Product Design
Pre-Sales
Support
3. Delivery & Customer Support
The
Produc
t
PostSales
Support
plus
4. Revenue Model
5. Branding & Reputation
Life-Cycle
Support
6. Informational
7. Interpersonal
adamson@digitalinvestor.com.au | June 2003 |
Slide 27
Customer Value Package

A multidimensional logic for managing the customer’s experience
with your company, and with the value it creates

The customer value package must be right if you hope to build in
the customer’s mind an impression of quality and value for money

Customers’ expectations vary enormously even in the same line of
business
adamson@digitalinvestor.com.au | June 2003 |
Slide 28
Customer Value Expectations

Potential value expectations are broad e.g. a fashion store
 Continuity of benefits and costs profile
 Continuity of supplier support
RELIABILITY
 Supplier reputation and experience
 Branding
 Warranty package
 Information
 Quality specification and control
 Parts and service coverage
SECURITY
 Cash flow
 Operating compatibility
 Operating flexibility
 Status/prestige
‘ Fashion’ currency
PERFORMANCE
Customer Value Criteria
ECONOMY
 Acquisition costs
 Installation costs
 Set up and training costs
 Maintenance costs
 Disposal value and costs
 Supplier information
 Opportunity costs
AESTHETICS
CONVENIENCE
 Transaction facilities and process
 Product service and parts availabilities
 Warranty service processing
 Sales and service response
 Time
 Location
 Information
 Style
 Design
 Conformance
 Longevity
 Design/style continuity
adamson@digitalinvestor.com.au | June 2003 |
Slide 29
Customer Value Audit



Does the design of your CVP reflect the customer’s value model?
Or does it reflect just the convenience of your organisation?
Cross-match Customer Value Model, to Customer Value Package
Customer Value Package
Customer Value Factors
Marketing & Sales Logic
Service Prod Design
Delivery & Support
Revenue Model
Branding & Reputation
Informational
Interpersonal
CVM1 CVM2 CVM3
CVM4
adamson@digitalinvestor.com.au | June 2003 |
Slide 30
Customer Value Audit


Will these Customer Value Packages lead to success?
Where are the gaps, how to fill them?
Customer Value Package
Customer Value Factors
Pre-Sales Support
Software
Hardware
Consulting
Integration Services
Post-Sales Support
Life-cycle Support
CVM1 CVM2 CVM3
CVM4
adamson@digitalinvestor.com.au | June 2003 |
Slide 31
Market Value Audit

Determine the “defining features” by cross-referencing the value
packages with the customer types – the market segment benefits
–
–
–
Customers on one axis – cluster customers into sets
Value packages on the other axis – cluster value packages
The clusters (sets) represent meaningful defining features

5
4
Customer
Value
3
Packages
2



1
1
Look for Niches
2
3
4
5
Customer Types
adamson@digitalinvestor.com.au | June 2003 |
Slide 32
The Service-Profit Model
1
2
Developing the Customer Value Package
Understanding Value
Developing a Value Proposition
Integrating the VP into a Customer Value Package
adamson@digitalinvestor.com.au | June 2003 |
Slide 33
Understanding Value


Value is “mindware” created by the product/service you sell
The end condition a customer deems worthy of their approval
Value Package
Customer’s Perception
Emotional Reaction
eMotion-Value
End Condition Approval
adamson@digitalinvestor.com.au | June 2003 |
Slide 34
Understanding Value - 2

Value is in the mind of a specific client
Value = Benefits – Cost
Benefits exist only with a particular client or set of clients in a
particular business setting. Therefore, if there is no specific
client and business setting you cannot promote value1.
Features
Lead To
Advantages
Lead To
Benefits
Features are an objective characteristic of the product or service.
Advantages indicate how the features might help sets of clients.
1In
that case you will be promoting “features”, “advantages” or just technology.
adamson@digitalinvestor.com.au | June 2003 |
Slide 35
Understanding Value - 3

Perception of value is tied to emotion, and personal values
eMotion-Value = eMotion-Benefits – eMotion-Cost
The outcomes, which are stated as benefits, are as much
perception as measurable factual reality.
Both facts and perception are reality. But interestingly, while
facts belong to organisations, perceptions belong to individuals.
The eMotion Value Proposition Model1 explains:
–
–
–
–
–
1For
Why 'good' proposals stall
Why high return (high ROI) proposals are blocked
Why the 'best' proposal does not always win
How personal distraction and effort mould perceptions of benefits
How individual recognition and reward mould perceptions of value.
full details of the eMotion VP Model go to www.digitalinvestor.com.au
adamson@digitalinvestor.com.au | June 2003 |
Slide 36
Developing a VP - Asking Questions

Start with good sense of the business situation
– Industry
– Company and its issues
– Personal (relationship)

It is about the art of questioning and analysis
–
–
–
–
–
–
–
–
–
–
–
What is the business’s perspective of the situation?
What are they doing now and why?
What are the tensions in what they are doing now?
What is the ideal or “tomorrow state” as currently perceived?
What barriers are faced in getting there?
Which barriers have the biggest impact and where?
What are their investment criteria?
What is the decision-making process?
What has been agreed to now and and in the past in IT initiatives?
How do they perceive the value added by IT so far? Why?
What is their ideal solution and how do they know when they achieve it?
adamson@digitalinvestor.com.au | June 2003 |
Slide 37
Developing - Discovering Needs 1

The objective is to uncover the business’s specific needs
– Concentrate on identifying the real needs:
• Place yourself in their shoes
• Place yourself in their customer’s shoes
– Work on improving your questions and interaction
– Be aware of “knowing too much” - let the business talk!

Then, move to offering a credible solution
– Float options, build and test your solutions
– Work in parallel to action the needs into an IT strategy

Do not spend time or energy
– “Selling” features, unqualified advantages, and technology
– Turning the needs analysis back to a generic IT solution
– Disparaging alternative IT solutions from the business

Work to generate business ownership of the proposition
adamson@digitalinvestor.com.au | June 2003 |
Slide 38
Developing – Discovering Needs 2

The most powerful tool is the “Day in The Life”:
– Live a day in the life of the business and their customers

It is powerful because
–
–
–
–
The business commits to spend time and energy
You commit to contribute and report
It brings ownership through joint generation of the VP
It BUILDS WIDER RELATIONSHIPS

Focus on your customer’s customers

Workshop the outcomes to generate the VP
– Build a case which delivers “ladders of value”
– Also build ladders of compelling IT investment strategy
adamson@digitalinvestor.com.au | June 2003 |
Slide 39
Developing – Generating the VP

A useful technique
When we
have this .....
We will be
able to do
these things
...
And we’ll be
able to measure
the benefits this
way .....
Which means
this in
business
terms ......
adamson@digitalinvestor.com.au | June 2003 |
Slide 40
Testing the Value Proposition

Is there a common understanding of the central need?

Why should anyone want to use the proposed solution?

What genuine business value does it return?

Examples of things to consider:
–
–
–
–
–

What problem does it solve for potential customers?
Does it open a new market?
Does it better exploit an existing market?
Does it eliminate or reduce inefficiencies?
Does it solve the same problem as competing systems but at less
cost?
How does the value proposition fit into the development of the
Customer Value Package?
adamson@digitalinvestor.com.au | June 2003 |
Slide 41
Integrating the VP into a CVP
The VP guides development of a Customer Value Package:
Value Proposition
Enterprise Capabilities
1. Marketing & Sales Logic
The Whole Product
2. Service Product Design
Pre-Sales
Support
3. Delivery & Customer Support
The
Product
PostSales
Support
plus
4. Revenue Model
5. Branding & Reputation
Life-Cycle
Support
6. Informational
7. Interpersonal
adamson@digitalinvestor.com.au | June 2003 |
Slide 42
Integrating the VP into a CVP
The Whole Product plus Enterprise Capabilities need optimisation:

The Whole Product must be tailored to include the VP

The Enterprise Capabilities have to support delivery of the VP

This combines to produce a specific Customer Value Package

Examples of things to consider
–
–
–
–
–
–
How does the Whole Product mix need to be modified?
How does the organisational infrastructure need to be modified?
What role do channels and does distribution play?
How does this CVP fit or blend with other CVPs which need support?
What is the revenue model associated with this CVP?
How can IT support and improve profitability of delivery of the CVP?
adamson@digitalinvestor.com.au | June 2003 |
Slide 43
IT Support of the CVP
How can systems support the Customer Value Package:

What is the timing, sequence, priority and risk?

Can they be built and implemented within a reasonable time?

At an acceptable cost?

Examples of things to consider
–
–
–
–
–
–
Are the necessary skill sets available, and the technology?
Should it be insourced or outsourced?
How do they fit the current systems architecture?
Do they have to be integrated with other systems and data?
Do they improve the underlying technology fabric?
Do they improve the company’s overall operations?
adamson@digitalinvestor.com.au | June 2003 |
Slide 44
The Service-Profit Model
1
3
Developing Service Products to fill the Value Package
Service-Product Development
Whole Product Concept
Whole Product Value
Technology Adoption Lifecycle
adamson@digitalinvestor.com.au | June 2003 |
Slide 45
Service-Product Development

The fundamental elements of service-product formulation are
coordinated market value propositions and delivery at a profit
Value Proposition
Service
Product
Design
Service Delivery
Customer
Go to Market
Activity Costing/Profit
adamson@digitalinvestor.com.au | June 2003 |
Slide 46
Which Customer?


The model points to a customer, but which customer?
This requires market segmentation including technology lifecycle
Value Proposition
Service
Product
Design
Service Delivery
Customer?
Go to Market
Activity Costing/Profit
Integration
Logic
adamson@digitalinvestor.com.au | June 2003 |
Slide 47
Service Product Design Audit


The Customer Value Models are customer pulls
Match those pulls to the Service-Product Design Elements
Lifecycle Adoption Phase
Customer Value Factors
Value Proposition
Service Delivery
Go To Market
Activity Costing/Profit
Integration Logic
CVM1 CVM2 CVM3
CVM4
adamson@digitalinvestor.com.au | June 2003 |
Slide 48
Whole Product Definition
Service-Products are complex - they have many dimensions
 The Whole Product is the totality of what a customer buys
 A whole product is the physical object, software or service from
which customer gets direct utility, plus other factors, services
and perceptions that make the product:
–
–
–
–
–

Useful
Desirable
Convenient
People
Brand attractiveness - “Intel Inside”
For example Computer Operating System is:
– Software + development + environment (hardware and software) +
documentation to use it + training program + reseller’s service &
troubleshooting capabilities + availability of hardware drivers +
suppliers enhancement plans, + reliability + interface design appeal
+ brand appeal (Mac) etc.
adamson@digitalinvestor.com.au | June 2003 |
Slide 49
Whole Product Concept


The “whole product” gives the customer value satisfaction
The cost of creating a complete product is often many times the
cost of developing the generic product or service
Generic Product
Expected Product
Value
Augmented Product
Potential Product
adamson@digitalinvestor.com.au | June 2003 |
Slide 50
The Expected Product
A step above the Generic Product
The Expected Product represents the customer’s base expectations




Delivery conditions, installation services, post-sale services, spare parts,
training, packaging conveniences
Other examples of the minimum expectations:
– The bank: the loan officer who is cooperative
– The realtor: who is on your side
– The lawyer: who protects you
– The retailer: who sells you products which work and are reliable
The expected attributes vary by customers and industries
They could be sources of product differentiation
– Depending on how well vendors implement their value packages
adamson@digitalinvestor.com.au | June 2003 |
Slide 51
The Augmented Product
Augmentations are means of product differentiation
Customers may be offered more than they expect:
– Computer that comes with “Office 2000” already installed
– Optical store that replaces customer’s lost contact lenses nights &
weekends and delivers them to customer’s home




Augmentations can also bring about customer dependency
They can educate customers about what it is reasonable to expect
This raises the competitive bar since augmented benefits may turn
into customer expectations (and move into the inner circle)
Not all customers can be attracted by an ever-widening circle of
augmented benefits
adamson@digitalinvestor.com.au | June 2003 |
Slide 52
The Potential Product
The Potential is everything feasible to get and keep customers
– what can be feasibly done with the existing product & service
– what is possible in the future
– what is needed in the future


Suppliers, and customers, can compete more effectively with the
Potential Product in the changed conditions of future
In high tech markets, customers desire extendibility for the
product so that the platform and basic technology can last over
several generations of technology lifecycles
– e.g. semiconductor technology cycles

Building and maintaining a Product Roadmap is important
adamson@digitalinvestor.com.au | June 2003 |
Slide 53
Product Lifecycle


Products are marketing inventions
Product invention / definition is a continuous process
– Starts at the intersection of new technology capability and perceived
market opportunity
– Continues past product introduction thru to discovery of new
applications (not envisioned by the original developers)

Continues further
– As product marches down the Technology Adoption Life Cycle and it
is redefined for new groups of customers
– As the company diversifies into new market segments to capture
more market share
adamson@digitalinvestor.com.au | June 2003 |
Slide 54
Whole Product Value
To the potential customer, value satisfaction is the “product”
 The generic “thing” or “device” is not itself the product. It is the
minimum necessary to get into the “game”
 Whole Product value has meaning only from the viewpoint of the
customer or the ultimate user - only they can assign value

Customers’ needs and wants define whole product value
– Depending on the targeted market segment, the whole product offer
must change to meet different value expectations


When positioning against competition, it is important to compare
complete whole product customer value packages
The whole product must be defined differently in different
phases of the Technology Adoption Life Cycle
adamson@digitalinvestor.com.au | June 2003 |
Slide 55
Technology Adoption Lifecycle


The Customer Value Package must be different for each stage
At different stages customers buy and perceive value differently
34%
Early
majority
2.5 %
Innovators
13.5%
Early
adopters
34%
Late
majority
16%
Laggards
Time
adamson@digitalinvestor.com.au | June 2003 |
Slide 56
Technology Lifecycle Value Audit


Rate the Customer Value Packages against the adopter stage
Look for gaps and misalignments in the offer and the adopter
Lifecycle Adoption Phase
Customer Value Factors
Innovators
Early Adopters
Early Majority
Late Majority
Laggards
CVP1 CVP2
CVP3
CVP4
adamson@digitalinvestor.com.au | June 2003 |
Slide 57
Customer and Technology Lifecycle

Effort and resource expenditure through the customer lifecycle
needs to be optimised against the technology adopter lifecycle
Customer Lifecycle
2
1
2
1
2
1
These buyers1 need less
selling and more confidence
that you will support the
product they are willing to try
Early
adopters
2
1
1
Early
majority
Late
majority
These buyers2 need more
selling and confidence that
others have bought the
product and are satisfied
Laggards
adamson@digitalinvestor.com.au | June 2003 |
Slide 58
The Service-Profit Model
1
3
4
Understanding Service Pricing Strategies
Service Pricing Strategies
Price-Value Perceptions
Value Strategies for Service Pricing
Service Costing
Activity-Based Costing
adamson@digitalinvestor.com.au | June 2003 |
Slide 59
Pricing Strategies
Cost-based Pricing
Begin with costs and work towards selling price
Demand-based Pricing
Begin with selling price and work towards costs
Competition-based Pricing
Above The Market
Begin with Competitors’ Pricing
At The Market
Below The Market
Combination Pricing
Price
Cost factors
Customer Value
Competition
adamson@digitalinvestor.com.au | June 2003 |
Slide 60
General Pricing Challenges
Pricing strategies and challenges
Competition-based problems:
• Small firms may charge too little to
be viable
• Heterogeneity of services limits
comparability
• Prices may not reflect customer
value perception
Cost-based problems:
1. Costs difficult to trace
2. Labor more difficult to
price than materials
3. Costs may not equal value
Demand-based problems:
1. Monetary price must be adjusted to reflect
the value of non-monetary costs
2. Information on service costs is less available to
customers, hence price may not be a central factor
adamson@digitalinvestor.com.au | June 2003 |
Slide 61
Service Pricing Strategies
What makes it difficult and different?
 Hard to calculate financial costs of creating an intangible

High ratio of fixed to variable costs - cost to serve one extra
customer may be minimal (but must still recover fixed costs)

Variability of inputs and outputs - how to define a “unit of service”
and establish basis for pricing?

Many services hard for customers to evaluate--what price can
they put on the ‘value’ which is delivered?

Importance of time factor - same service may have more value
to some customers when delivered faster

Use of physical or electronic channels - may create differences
in perceived value
adamson@digitalinvestor.com.au | June 2003 |
Slide 62
Pricing Strategies
Choice of strategy depends on:
 The technology, refer to the technology lifecycle (part three)
 The market and your customer power
 Your cost structure
 The competitive environment
– Threat of substitution
– Threat of new entrants
Keys to Demand-based Pricing:
 Set prices consistent with customer perceptions of value
 Prices are based on the whole product value package
adamson@digitalinvestor.com.au | June 2003 |
Slide 63
Incorporating Value into Pricing
You must fully understand what value means to customers:






What benefits does the whole product package provide?
How important is each of these benefits as to the others?
How much is it worth to the customer to receive a particular
benefit in a service product’s value chain?
At what price will the service be economically acceptable to
potential buyers?
In what context is the customer purchasing the service?
What is the customer’s perception of ‘value’?
adamson@digitalinvestor.com.au | June 2003 |
Slide 64
Price-Value Perceptions
Four customer-definitions of value:
Value is low price.
Value is everything
I want in a service.
Value is the
quality I get for
the price I pay.
Value is all that
I get for all
that I give.
adamson@digitalinvestor.com.au | June 2003 |
Slide 65
Value Strategies for Service Pricing

Pricing strategies to reduce uncertainty
– service guarantees
– benefit-driven (pricing that aspect of service that creates value)
– flat rate (quoting a fixed price in advance)

Relationship pricing--incentives to patronize one supplier
– non-price incentives
– discounts for volume purchases
– discounts for purchasing multiple services

Low-cost leadership
– Convince customers not to equate price with quality
– Must keep economic costs low to ensure profitability at low price
adamson@digitalinvestor.com.au | June 2003 |
Slide 66
Pricing Questions - Services












How do you calculate the total potential profit of offerings?
Can you rank service-products by margin, by total profit?
Can you rank service-products in the technology lifecycle?
What does each function and process contribute to profit?
How can you reduce costs by 20% in the service-product chain?
What mix of service-products yields the highest profits?
What new blends of services yield the potential best profits?
What is your maximum possible revenue given the resources?
What are the key ingredients of the offers that drive profits up?
What continuing investment is needed to support current offers?
What investments are needed to create new offers?
Can costs be better distributed through a channel strategy?
adamson@digitalinvestor.com.au | June 2003 |
Slide 67
Service Costing
Service costing is an application of strategic cost analysis, for:
 Modifying product mix and pricing
– Repricing customer value packages
– Substituting services and offers
– Eliminating elements and resulting excess capacity

Improving service-product design and development
– Redesigning service-products
– Improving delivery and whole product support processes
– Investing in technology support

Improving customer relationships
– Changing operating policies and strategy

Improving channel relationships
adamson@digitalinvestor.com.au | June 2003 |
Slide 68
Strategic Cost Analysis
Strategic cost analysis uses activity costing to:
 Identify distorted service-product costs
 Determine unprofitable Customer Value Packages
 Highlight areas for different channel strategies
 Explain undercosting and overcosting of products and services
 Give management insight into the cost structures for making and
selling diverse products
Particularly, it must focus on whole product and the value chain:
 Assigning activity costs to whole product customer value packages:
– calculating the activity cost per unit of activity driver
– preparing a bill of activities for each whole product
adamson@digitalinvestor.com.au | June 2003 |
Slide 69
Strategic Cost Analysis Benefits
Particular benefits relate to service-product development:
Management can identify and evaluate new service-products
to improve performance by evaluating how service
and process designs affect activities and costs.
Companies can work with their customers to
evaluate the costs and prices of alternative value packages.
adamson@digitalinvestor.com.au | June 2003 |
Slide 70
For Service Firms
The general approach is very similar to that in manufacturing:
 Costs are divided into homogeneous cost pools and classified
as output unit-level, batch-level, product- or service-sustaining,
and facility-sustaining costs
The cost pools correspond to key activities:
 Costs are allocated to products or customers using activity
drivers or cost-allocation bases that have a cause-and-effect
relationship with the cost in the cost pool
CVP 1
Resource
s
Activitie
s
CVP 2
CVP 3
adamson@digitalinvestor.com.au | June 2003 |
Slide 71
Service Costing - 1
Service costing is a critical element of performance management

Identify the processes for each CVP value chain
Allows you to answer key questions:





What does it cost to deliver these services?
Are we delivering our services cost-effectively?
How do our service costs compare?
How much should we charge for these services?
Is there is an alternative, less costly, way to deliver these
services?
adamson@digitalinvestor.com.au | June 2003 |
Slide 72
Service Costing - 2
How do you find the processes to analyse?
Organisations are managed vertically, however:
 Work gets done horizontally via business processes
 Processes cut across functions and layers of the organisation
 Processes consume all types of the resources of an organisation
 Process measures help resolve friction and take out costs
 Processes provide feedback for continuous improvement

Process measures enable customers of the processes to be
served more effectively and efficiently

Processes consist of activities
– measure through activity-based costing
adamson@digitalinvestor.com.au | June 2003 |
Slide 73
The Logic of Activity Costing



Products and Services are consumed by customers
Activities are consumed by products and services
Resources are consumed by activities
That buy our
Services
It is the
Customers
That consume
our
Resources
Which makes
us conduct
Activities
adamson@digitalinvestor.com.au | June 2003 |
Slide 74
Basic Activity Cost Allocation
The costing process is simple in theory:
Fundamental
Cost Objects
Assignment to Other
Cost Objects
Activities
Costs of Activities
Product Lines
Individual Products
Customers
Distribution Channels
adamson@digitalinvestor.com.au | June 2003 |
Slide 75
Implementing Activity Costing
Follow four stages to assign overhead costs to products:
Step 1
Step 2
Identify and classify cost
objects (activities).
Identify cost drivers relevant to each
activity in a whole product value
package:
Marketing & Sales
Corporate Services
Lifecycle Support
Customer Value Package 1
Customer Value Package 2
 Calculate a cost-driver rate for each activity.
 Assign activity costs to customer value packages using the cost-driver rate.
adamson@digitalinvestor.com.au | June 2003 |
Slide 76
Activity-Based Costing
The logic of ABC is simple:

It is a methodology to calculate the cost of activities (such as
train employees), and cost objects (such as products and
services)

It assumes that services create needs for outputs which create
the demand for activities which, in turn, consume resources.

By tracing costs to services/outputs according to the activities
required to provide them, ABC provides a more accurate picture
of costs and performance.
adamson@digitalinvestor.com.au | June 2003 |
Slide 77
Cost Drivers
Knowing the cost drivers is an integral part of ABC
Drivers apply to activities or factors that cause costs to be incurred
There are volume-based drivers and non-volume-based:


Volume-based cost drivers
– Assumes all costs are driven, or caused, by the volume of
production (or sales)
Non-volume-based cost drivers
– Costs are not directly related to production volume
adamson@digitalinvestor.com.au | June 2003 |
Slide 78
Activity–Based Costing - 1
The key principles are that:




Cost are assigned to activities
Costs driven by volume are at ‘unit level’
Cost drivers are identified for batch-level and product-level
costs, but not for facility-level costs
Unit, batch and product-level costs vary proportionally with their
cost drivers
Managers need to see “whole product” costs as an integral part of
the firm’s effort to create value for customers.
adamson@digitalinvestor.com.au | June 2003 |
Slide 79
Activity-Based Costing - 2
The ABC process relates activities to the resources they consume
Classifies costs into four levels:
 Unit level
– Activities performed for each service-product unit
 Batch level
– Activities performed for a group of service-product units
 Product level
– Activities performed for service-product families
 Facility level
– Costs incurred to support the whole enterprise
adamson@digitalinvestor.com.au | June 2003 |
Slide 80
Activity-Based Costing - 3
Other costing factors to consider are:

Customer Lifecycle Costs
– Customer-level costs -- things like preparing bids, processing
orders, answering questions, expediting rush orders,
designing products, providing support

Net Margin Realized
– Difference between the revenue and unit and batch level
costs of manufacturing the item. The profit on the actual
goods sold, without consideration of the specific costs to
selling them to the customer
– Influenced by the price demanded by the customer (related to
their bargaining power) as well as the inherent profitability of
the item
adamson@digitalinvestor.com.au | June 2003 |
Slide 81
When to Use ABC - 1
An option when one or more of the following conditions exist:






Indirect costs are significant in proportion to direct costs and use
only one or two cost-drivers
Goods are complex, requiring many inputs and processes.
Simple, high-volume products perform more poorly than
complex, low-volume products
Different departments believe costs are assigned inaccurately.
The company loses bids it thought were low, and wins bids it
thought were high
Operations have changed significantly, but the costing system
has not changed
adamson@digitalinvestor.com.au | June 2003 |
Slide 82
When to Use ABC - 2
When organizations find themselves on a crisis course:





Selling (funding) the wrong products or services
Serving the wrong customers
Designing costly products
Instituting cost cutting programs that fail, and/or
Obtaining the wrong (unnecessary) parts from outside suppliers
adamson@digitalinvestor.com.au | June 2003 |
Slide 83
Strategic Cost Analysis Benefits
ABC benefits will be greatest where:





Overhead costs are a significant proportion of total cost, and a
large part of overhead is not directly related to production
volume
The business has a diverse product range, and individual
product’s use of support resources differs from their use of
volume-based cost drivers
Production activity involves diverse batch sizes and product
complexity
There are likely to be high ‘costs’ associated with making
inappropriate decisions, based on inaccurate product costs
The cost of designing, implementing and maintaining the ABC
system is relatively low due to sophisticated IT support
adamson@digitalinvestor.com.au | June 2003 |
Slide 84
Typical Revelations
The application of strategic cost analysis typically reveals:






Higher-volume products/services are overcosted
Lower-volume products/services are undercosted
Unexpected differences in customer profitability
Opportunities to improve processes
25-35% of activities don’t contribute to organizational goals
80% of costs are consumed by 20% of the activities
adamson@digitalinvestor.com.au | June 2003 |
Slide 85
Limitations
However, ABC can be difficult to implement in service firms:



High levels of facility costs cause problems with costing services
Individual activities are difficult to identify because they are nonrepetitive
A non-repetitive production environment makes it difficult to
identify service outputs
Challenge:

ABC systems require management to estimate costs of activity
pools and to identify and measure cost drivers for these pools.
adamson@digitalinvestor.com.au | June 2003 |
Slide 86
The Service-Profit Model
1
3
4
5
Improving Margins through the Service Value Chain
Customer Lifecycle and Profitability
Lifecycle Sales Approach
Increasing Net Value
adamson@digitalinvestor.com.au | June 2003 |
Slide 87
Customer Lifecycle Costs

The lifecycle incurs costs in delivering through the value chain
Phase 1
Pre-sale
Phase 9
Disposing &
Upgrading
Phase 8
Value
Improvemen
t
Phase 2
Value
Identificatio
n
Phase 3
Meeting
Needs
The Customer
Lifecycle
Phase 7
Customer
Value Gain
Phase 6
Customer
Learning
Phase 4
Obtaining
Commitmen
t
Phase 5
Value
Creation
adamson@digitalinvestor.com.au | June 2003 |
Slide 88
Whole Product Value Chain

The Customer Value Package offer is a value chain
Value/Cost A
Generic
Product
Value/Cost B
Value/Cost C
Value/Cost D
Expected Product
Total Solution

Is each extension feasible, achievable, sustainable?
– Investment and resource allocation?
– Market competitiveness and positioning?
– Ability to make a profit?
adamson@digitalinvestor.com.au | June 2003 |
Slide 89
Value Chain Analysis

Value chain analysis helps to understand (at a high level) how
each of your business activities adds value to your company

The objective of value chain analysis is to maximise the
profitability of your business activities in a sustainable manner

Value chain analysis can also be applied to the Whole Product
offer to understand the value offered to the customer and your
costs associated with each element of that offer

The chain comprises the activities and functions performed by a
company to deliver value to its customers.
Are you profitably delivering value to your customers?
adamson@digitalinvestor.com.au | June 2003 |
Slide 90
Value Chain
Consider a value chain for the "Recruitment" business activity
The links in the value chain could be:






Identify - a list of all of the candidates that applied
Select - those candidates that meet the basic criteria
Screen - identify the best two/three for the vacancy
Interview - determine who should be offered the job
Offer - the job to the best candidate
Train - the new employee when they join the company
Each step in the chain adds value and adds costs
adamson@digitalinvestor.com.au | June 2003 |
Slide 91
Value Chain Analysis - 1
A Value Chain Analysis:




Summarises your customer value package activities as distinct
value chains - one for each package
Outlines and analyses the key links in each of your customer
value packages
Defines the metrics you will measure to determine performance
of your customer value packages
Identifies opportunities to improve the profitability of your
customer value packages
adamson@digitalinvestor.com.au | June 2003 |
Slide 92
Value Chain Analysis - 2
Distributors’ and forward channels partners’ value chains:

Change costs and margins of distributors and forward channel
partners influence price paid by ultimate consumers
Therefore these activities must be analyzed as part of the chain:
 The quality of activities performed by distributors and forward
channel partners influence the quality of products/services of the
company to the end-user
 The activities have a direct impact on the profitability of the
customer value packages and the lifetime customer value
adamson@digitalinvestor.com.au | June 2003 |
Slide 93
Growing the Bottom Line

Value chain analysis and activity-based costing are tools to grow
the bottom line and the quality of earnings:
Value/Cost A
Generic
Product
Value/Cost B
Value/Cost C
Value/Cost D
Expected Product
Activities
Costs of Activities
Product Lines
Individual Products
Customers
Distribution Channels
adamson@digitalinvestor.com.au | June 2003 |
Slide 94
Increasing Net Value
Value/Cost A
Generic
Product
Value/Cost B
Value/Cost C
Value/Cost D
Expected Product
Total Solution

Reduce resource expenditure at each stage of the value chain
Minimize interpersonal blockages
Optimize informational sharing and transfer
Decrease intra-enterprise engagement friction
Understand the Whole Product cost and value chain!

Share a common intent about the customer value package




adamson@digitalinvestor.com.au | June 2003 |
Slide 95
Margin Improvement
Margins can be improved through process improvement:
 Time and motion studies (1940s)
 Workflow analysis (1960s)
 Technology-based approaches (1970s)
 Business process reengineering (1980s)
 Process mapping (late 1980s)
Differences between activity-based and processed-based approach:
 The activity-based view reveals how resources have been
consumed
 The process-oriented view cuts across the entire organization and
reveals all resources and costs expended on producing a process
output e.g. a customer value package
adamson@digitalinvestor.com.au | June 2003 |
Slide 96
Service Process Chain - 1
The CVP is delivered by a “process” chain, or value chain:
A Customer
Value
Package
Process
xxxxx
Activity
Service
Product
Marketing &
Sales
Support
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
Determining
Service-Product
Mix
Determining
Marketing &
Sales Effort
Support &
Lifecycle Effort
Customer Value
& Your Profit
adamson@digitalinvestor.com.au | June 2003 |
Slide 97
Service Process Chain - 2
There is a different chain for each part of the customer lifecycle:
1
9
2
8
3
7
4
6
5
Service
Product
Marketing &
Sales
Support
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
adamson@digitalinvestor.com.au | June 2003 |
Slide 98
What To Measure
Process improvement uses many measures:
 Activity-Based Cost – the cost of resources consumed by each
activity performed
 Rework – the cost of non value-added activities to correct things
not done right the first time
 Cycle Time – length of time it takes to get an outcome for a
process
 Touch Points – number of times an item is touched as it moved
through a process
 Cost per Process Output – process cost divided by a volume of
items produced by a process
 Customer Satisfaction – the degree to which customers are
satisfied with the performance of the process
adamson@digitalinvestor.com.au | June 2003 |
Slide 99
Service Process Improvement - 1
A methodical approach is required, focused on processes:








Firstly, identify the activities behind the customer value package
Determine the cost of resources used to perform each activity some allocation may be required using resource drivers (labor,
capital, materials, energy)
Allocate secondary activity costs to primary activities if needed
Combine activities with similar drivers/behavior into cost pools
based on process, activity level, consumption ratio
Identify a cost driver for activities
Calculate the budgeted cost per unit of the cost driver for each
activity
Collect information about cost driver usage for value package
Allocate costs to customer value package
adamson@digitalinvestor.com.au | June 2003 | Slide 100
Service Process Improvement - 2
Analyze the process chain for the total Customer Value Package:
Value Chain - Processes
Enterprise Capabilities
1. Marketing & Sales Logic
The Whole Product
2. Service Product Design
Pre-Sales
Support
3. Delivery & Customer Support
The
Product
PostSales
Support
plus
4. Revenue Model
5. Branding & Reputation
Life-Cycle
Support
6. Informational
7. Interpersonal
adamson@digitalinvestor.com.au | June 2003 | Slide 101
Customer Profitability - 1
The most common problem in determining customer profitability:

Selling, marketing, distribution and administrative costs are not
assigned to products or customers

This is not necessary for financial reporting
Management considers them ‘fixed’
It is considered too expensive to do so



As a result, the behavior of these costs is not well-understood
and cannot be easily managed
Value-chain analysis identifies and allocates these costs
Costs are allocated to each customer value package
adamson@digitalinvestor.com.au | June 2003 | Slide 102
Customer Profitability - 2
Knowing the customer-profit profile determines value packages
A mismatch between the value package and customer profile:



Erodes profits
Misses the chance to capture extra profits
Consumes resources managing the mismatch
The matching of value packages and customers is step one
Value chain analysis, and profitability analysis are step two
From there margins can be improved
adamson@digitalinvestor.com.au | June 2003 | Slide 103
Customer Profitability - 3
Types of Customer-Profit Profiles
Net Margin Realized
High
Passive
Impressive
Product is crucial
 Good supplier relationship
Costly to service, but pay top
dollar

Aggressive
Sensitive

Price-sensitive and few special
demands
Leverage their buying power
 Low price and lots of
customized service and
features
Low
Low
Cost to Serve
High
adamson@digitalinvestor.com.au | June 2003 | Slide 104
Gaining Internal Balance

There are often significant disagreements between staff about
the costs and profitability of products and services.
Products
& R&D
Delivery
Consulting
Sales
CEO &
Finance
Technology
1
2
3
4
4
Quality
2
1
2
3
3
Top-line
3
4
1
1
2
Profit
4
3
4
2
1
adamson@digitalinvestor.com.au | June 2003 | Slide 105
Summary – Improving Margins
By following the value chain analysis process:




The profitability of each Customer Value Package is known
The Value Packages are matched to the customer profiles
Margins will be improved for each value package
Alignment will be gained between all parties to the value chain
and service product about its contribution to profit
adamson@digitalinvestor.com.au | June 2003 | Slide 106
Profitably Serving Customers
1
2
3
4
5
Contact:
Walter Adamson
Digital Investor Pty ltd
5/45 William St, Melbourne 3000
Office: 0500-500-321, Cell: 0403 345 632
adamson@digitalinvestor.com.au
adamson@digitalinvestor.com.au | June 2003 | Slide 107