Superior Customer Value

Strategies for Winning and Retaining Customers, Third Edition

Art Weinstein, D. Hank Ellison

• Publisher: CRC Press
• Year: 2012
• Print ISBN: 9781439861288
• eBook ISBN: 9781439898406
• Topic: Business
• Subtopic: Operations
• Index: Business

A customer-centric culture provides focus and direction for the organization, ensuring that exceptional value will be offered to customers ? this, in turn, results in enhanced market performance. Unfortunately, caught up in the daily economic and competitive pressures of running complex and fast-changing businesses, managers may lose sight of custo

II

DESIGNING A SUCCESSFUL CUSTOMER STRATEGY

Chapter 4

Building a Winning Business Model and Value Proposition

It ain’t that hard to be different.

Tom Peters

We believe that we know where the world should go. But unless we’re in touch with our customers, our model of the world can diverge from reality. There’s no substitute for innovation, of course, but innovation is no substitute, for being in touch, either.

Steve Ballmer

One of the most critical challenges for service firms is to differentiate themselves from competitors. It is relatively easy to be like everyone else; great companies have their own unique identities and carefully conceived value propositions. Realize that different isn’t always better, but better is always different! In this chapter, we explore how a business model provides the basis for a customer-centric marketing strategy, how to design and refine successful value propositions (VP), and creative ways to add value for customers.

Business Models

A business model describes the rationale of how an organization, creates, delivers, and captures value.¹ The business model provides all stakeholders (owners, shareholders/investors, employees, suppliers, partners, customers, communities, and media) with a shared understanding of how the business operates. A strong business model provides a competitive edge in the marketplace/marketspace by demonstrating that a company’s goods, services, or ideas are different, more innovative, and better than its rivals.

Howard Schultz, founder and CEO of Starbucks, commented on his company’s phenomenal success:

Customers don’t always know what they want. The decline in coffee-drinking was due to the fact that most of the coffee people bought was stale and they weren’t enjoying it. Once they tasted ours and experienced what we call the “third place”—a gathering place between home and work where they were treated with respect—they found we were filling a need they didn’t know they had.

Herbert Kelleher and Rollin King sketched out the Southwest Airlines business model on a cocktail napkin at breakfast in 1967. Recognizing a need for a service-oriented low-cost airline, the “Texas triangle” meant that Southwest would fly dozens of daily flights between Dallas, Houston, and San Antonio. When the company faced a cash crunch during its challenging first year, the company sold one of its four airplanes but kept the existing flight schedule, launching the start of the company’s renowned 15-minute turnaround.

Osterwalder and Pignon explain that, to design winning business models, entrepreneurs or managers should explicate nine building blocks: customer segments, value proposition, channels, customer relationships, revenue streams, key resources, key activities, key partners, and cost structure. They recommend preparing a business model canvas to get participation and buy-in from all key decision makers. (See LEGO Factory example in Figure 4.1; this is a customized LEGO toy set created online by customers.) In fact, these authors employed this research process in writing their book Business Model Generation (www.businessmodelgeneration.com). This project represented a true cocreation of value, as 470 participants from 45 countries provided input to their guidebook.²

Internet commerce is well suited to many new types of business models. Rappa reported nine major types (categories) and more than 40 subcategories of online models. These basic categories include brokerage (Orbitz), advertising (Yahoo), infomediary (DoubleClick), merchant (Lands’ End), direct manufacturer (Dell), affiliate (Commission Junction), community (Flickr), subscription (NetFlix), and utility (Slashdot).³ An alternative view by Wirtz and colleagues looked at a 4C Internet business model consisting of content (Wall Street Journal), commerce (Amazon), context (Google), and connection (Earthlink).⁴

Figure 4.1 LEGO Factory: customer-designed kits. KP = Key Partners, KA = Key Activities, KR = Key Resources, VP = Value Proposition, CR = Customer Relationships, CH = Channels, CS = Customer Segments, C$ = Cost Structure, R$ = Revenue Streams. (Reprinted from A. Osterwalder and Y. Pigneur, Business Model Generation [New York: John Wiley and Sons, 2010], 73. With permission.)

The digital era has been the primary driver of many recent business transformations. Apple’s iTunes (www.Apple.com/iTunes) is a great example of the changing music industry. Record companies, distributors, and music retailers once controlled the marketing channels and profits; today, artists and the platform (iTunes) have the market power. While in the past it was not uncommon for a band to earn only $1 from a $16 CD sale, today they often generate $7 from a $10 downloaded album on iTunes.

Newspaper publishers have struggled to stay relevant; they are attempting to morph into information providers as their readership base ages and defects to other media. The Wall Street Journal, New York Times, and USA Today have stellar reputations, translating into large and loyal customer bases, and they can charge fees for their online content. In contrast, most major metropolitan newspapers are a less viable option, as free alternatives (Web sites, smartphones, community magazines, television) abound.

Business models can be viewed from the perspective of shapers versus participants (types include influencers, hedgers, and disciples). Google, Microsoft, Facebook, Apple, and Salesforce.com are examples of shapers, since they open up platforms for third parties. These proactive organizations are market drivers and open up new market space. Companies that adopt, embrace, and enhance shapers’ platforms are participants and may include applications (apps) developers, service firms, or online e-tailers. These companies include influencers (Bank of America for Visa), hedgers (advertisers that support Google and Microsoft platforms), or disciples (Dell’s exclusive commitment to the Wintel platform).⁵

Zynga, a Silicon Valley social-gaming company, has generated hundreds of millions of dollars in revenues, largely through Farmville, its hugely popular game. Millions of Internet users manage virtual plots of land, grow crops, raise animals, and use online tools such as tractors. It has been estimated that there are 20 times more people today playing Farmville than there are actual farms in the United States.⁶ Some other examples of commonly used business models are listed in Table 4.1.

Value Proposition

A value proposition (VP) is a “statement that matches up the firm’s distinctive competencies with the needs and preferences of a carefully designed set of potential customers.”⁷ It helps firms as a communications device and is a basis for creating a shared understanding. A well-designed VP is a strategic business tool that includes, but goes beyond, the product mix, pricing, and promotion (marketing communications) to define the organization’s competitive advantage through offerings, people, processes, and technology.

For example, the “Passionate Pursuit of Perfection” is the Lexus value proposition. This value statement encapsulates the essence of this upscale Japanese automobile manufacturer’s worldwide marketing commitment to customer delight and retention with respect to product-line quality, sales philosophy, dealership atmospherics, customer service, image, distribution, and logistics. A positioning strategy that supports the VP is how the organization delivers and differentiates value to its customers (this is discussed later in the chapter).

Table 4.1 Business Models

Type of Business Model	Description	Corporate Examples
Bricks and mortar	Traditional retail stores	Blockbuster Video, Whole Foods
Bricks and clicks	Retail and e-tail	Best Buy, Target
Internet pure-play	Online presence only	Blue Nile, Overstock.com
Software as a Service (SaaS)	Delivering applications over the Internet as a service	ADP, Salesforce.com
Community of users	Users generate knowledge, solve problems, and offer place for exchange	eBay, Wikipedia
Shaper	Open up new market space/platforms	Apple, Facebook
Platform participant	Enhance platforms by creating user applications	Zynga, Foursquare
Multisided markets	Company serves multiple customer segments, e.g., readers and advertisers	USA Today, Visa
Bundling	Sell two or more products for a discount	Comcast, Microsoft Office
Unbundling	Sell a single product even though company offers related products	AT&T DSL service, Windows Live Essentials
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Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Contents
• Preface
• Acknowledgments
• About the Author
• SECTION I CUSTOMER VALUE—THE BUILDING BLOCKS
• SECTION II DESIGNING A SUCCESSFUL CUSTOMER STRATEGY
• SECTION III EXCELLING IN THE MARKETSPACE
• SECTION IV RETAINING CUSTOMERS—ANALYSIS AND STRATEGY
• Notes
• SECTION V CUSTOMER VALUE CASE STUDIES
• Index