WHAT IS VALUE-BASED MARKETING?
Consumers make explicit and/or implicit trade-offs between the perceived benefits of a product or service and its cost. (See Exhibit 1.6.) Customers naturally seek options that provide the greatest benefits at the lowest costs. On the other side, marketing firms attempt to find the most desirable balance between providing benefits to customers and keeping their own costs down.
To better understand value and develop a value-based marketing orientation, a business must understand what customers view as the key benefits of a given product or service and how to improve on them. For example, some benefits of staying at a Sheraton hotel might include the high level of service quality provided by the personnel, the convenience of booking the room at Sheraton.com, and the overall quality of the rooms and meals offered. In broader terms, some critical benefits may be service quality, convenience, and merchandise quality. The customer’s potential cost elements (for this example in the terms of a value-based marketing strategy) would include the price of the room and meals, the time it takes to book a room or check in at the hotel, and the risk of arriving at the hotel and finding it overbooked.
How Firms Compete on the Basis of Value
With such a simple formula, marketers should be able to deliver value consistently, right? Well, not exactly. In today’s quickly changing world, consistently creating and delivering value is quite difficult. Consumer perceptions change quickly, competitors constantly enter markets, and global pressures continually reshape opportunities. Thus, marketers must keep a vigilant eye on the marketplace so they can adjust their offerings to meet customer needs and keep ahead of their competition.25
Value-based marketing isn’t just about creating strong products and services; it involves deciding which products/services to provide for whom. For example, Walmart does not serve customers who are looking to impress their friends with conspicuous consumption. Rather, Walmart serves those who want convenient one-stop shopping and low prices—and on those values, it consistently delivers. But good value is not always limited to low prices. Walmart carries low-priced pots, pans, and coffee pots. But cooking enthusiasts may prefer the product selection, quality, and expert sales assistance at Williams-Sonoma. That is, the prices might not be as low as Walmart’s, but Williams-Sonoma customers believe they are receiving a good value because they can enjoy that extra selection, quality, and service.
How Do Firms Become Value Driven?
Firms become value driven by focusing on three activities. First, they share information about their customers and competitors across their own organization and with other firms, such as manufacturers and transportation companies, that help them get the product or service to the marketplace. Second, they strive to balance their customers’ benefits and costs. Third, they concentrate on building relationships with customers.
Sharing Information
In a value-based, marketing oriented firm, marketers share information about customers and competitors and integrate it across the firm’s various departments. The fashion designers for J.Crew, for instance, collect purchase information and research customer trends to determine what their customers will want to wear in the next few weeks; simultaneously, the logisticians—those persons in charge of getting the merchandise to the stores—use the same purchase history to forecast sales and allocate appropriate merchandise to individual stores. Sharing and coordinating such information represents a critical success factor for any firm. Imagine what might happen if J.Crew’s advertising department were to plan a special promotion but not share its sales projections with those people in charge of creating the merchandise or getting it to stores.
Balancing Benefits with Costs
Value-oriented marketers constantly measure the benefits that customers perceive against the cost of their offerings. They use available customer data to find opportunities to better satisfy their customers’ needs, keep costs down, and develop long-term loyalties. Such a value-based orientation has helped Target and Walmart outperform Standard & Poor’s retail index, Kohl’s beat other department stores, and Southwest Airlines succeed where mainstream carriers could not.
Southwest Airlines has become the largest U.S. carrier, flying approximately 101 million customers around the country for an average ticket price of $119.16 (compared with JetBlue’s average ticket price of $139.40). Southwest makes frequent and short trips, such as Las Vegas to Los Angeles.26 The company cuts costs through its famous “cattle call” seating methods, in which customers get to choose their seats on a first come, first served basis. For those flyers who value being first on the plane though, the airline also provides an “Early Bird” check-in service for $10 per flight.27 Some low-frills, low-cost carriers, such as Ryanair and easyJet,28 have adopted Southwest’s model to offer customers cheap intra-Europe airfares too. Ryanair and easyJet generally fly to and from out-of-the-way airports like Stansted, which is 34 miles northeast of London. But many customers balance such inconvenience against the price to determine the value: Consider, for example, the London to Zurich, Switzerland, route for $50 or London to Athens, Greece, for $100. Around the world, conventional airlines have started their own low-frills, low-cost airlines, such as Singapore Airlines’ Tiger and the Australian Jetstar, run by Quantas.
Many companies have been able to lower costs and still deliver excellent overall value by focusing on what the customer values. For example, IKEA does not have highly paid salespeople to sell its furniture, but its simple designs mean customers can easily choose a product and assemble it themselves.
Building Relationships with Customers
During the past decade or so, marketers have begun to realize that they need to think about their customer orientation in terms of relationships rather than transactions.29 A transactional orientation regards the buyer–seller relationship as a series of individual transactions, so anything that happened before or after any transaction is of little importance. For example, used car sales typically are based on a transactional approach; the seller wants to get the highest price for the car, the buyer wants to get the lowest, and neither expects to do business with the other again.
A relational orientation, in contrast, is based on the philosophy that buyers and sellers should develop a long-term relationship. According to this idea, the lifetime profitability of the relationship is what matters, not how much money is made during each transaction. Thus, Apple makes its new innovations compatible with existing products to encourage consumers to maintain a long-term relationship with the company across all their electronic needs. In a more service-oriented setting, UPS works with its corporate shippers to develop efficient transportation solutions. Over time, UPS then becomes part of the fabric of the shippers’ organizations, and their operations become intertwined. In this scenario, they have developed a valuable long-term relationship.
Firms that practice value-based marketing use a process known ascustomer relationship management (CRM), a business philosophy and set of strategies, programs, and systems that focus on identifying and building loyalty among the firm’s most valued customers.30 Firms that employ CRM systematically collect information about their customers’ needs and then use that information to target their best customers with the products, services, and special promotions that appear most important to them.
Now that we’ve examined what marketing is and how it creates value, let’s consider how it fits into the world of commerce, as well as into society in general.
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