Chapter 3
The value creation
process
The strategy framework for CRM
Business
strategy
• Business
vision
• Industry and
competitive
characteristics
Customer
strategy
• Customer
choice and
customer
characteristics
• Segment
granularity
Information management process
Back-office
applications
Front-office
applications
Analysis
tools
IT
systems
Data repository
Integrated channel management
Sales force

Value
organization
receives
• Acquisition
economics
• Retention
economics
Customer segment lifetime value analysis
Strategy development
process:
Multi-channel
integration process:
Performance
assessment
process:
Value creation
process:
Creating customer value is increasingly seen as a key source of
competitive advantage. Yet, despite growing attention to this aspect
of strategic development, there is remarkably little by way of agree-
ment among managers and commentators on what constitutes
‘customer value’. Further, companies typically do not specify in
sufficient detail what value they seek to deliver to clearly identified
HCRM-Ch03.qxd 9/16/05 10:48 Page 102
The value creation process 103
customer segments and micro-segments and how they propose to
deliver this value.
The value creation process consists of three key elements: deter-
mining what value the company can provide its customers with (the
‘value customer receives’); determining the value the organization

104 Handbook of CRM: Achieving Excellence in Customer Management
their factories but between ‘what they add to their factory output in
the form of packaging, services, advertising, customer advice,
financing, delivery arrangements, warehousing, and other things
that people value’.
2
The value the customer attributes to these benefits
is in proportion to the perceived ability of the offer to solve whatever
customer problem prompted the purchase.
In this section we first review the nature of what the customer buys
by explaining how the core and augmented product, relationships
and brands all contribute to an enterprise’s value proposition. We then
examine the nature of the value proposition and the value assessment.
The nature of value – what the customer buys
Customers do not really buy products or services – when they buy
they expect benefits and value from the total offer the company pro-
vides. This is not just a semantic point, it is an important distinction
which can be strategically vital for the long-term survival of a firm.
There are many examples of companies who have taken a narrow
view and considered their business purely in terms of the traditional
products or services. As a result they were forced out of business
when a competitor or competitors effectively reshaped the market
by not only getting customers, but by keeping them!
How the core and augmented offer add value
For an effective CRM strategy to be realized an understanding of
exactly what the customer is buying is critical. Customers derive
benefits from the purchase of either goods or services. This is called
‘the offer’. An offer can be visualized as a central core surrounded by
a series of tangible and intangible attributes, features and benefits. If
you think of the core as offering the customer essential solutions,

for customers to switch to another supplier.
Thus a firm’s offer is a complex set of value-based promises and the
offer that is developed by the enterprise often needs to be varied
according to the target market being considered. People buy to solve
problems and they attach value to any offer in proportion to this per-
ception of its ability to achieve their particular ends. In other words,
value is assigned by buyers in relationship to the perceived benefits
they receive matched against their expectations.
This approach reconciles the company’s traditional view of the
product, seen in the terms of various inputs and processes needed to
produce it and the consumer’s view of the offer, as being a set of
solutions and supporting benefits. Together these elements comprise
the total value offer. An example of this is shown in Figure 3.1 based
on the personal computer.
The core product for a computer is a machine that permits input,
processing, storage and retrieval of data. This is the minimum require-
ment. The expected product consists of not just the above but also
service support, warranty, a recognizable brand name and attractive
packaging. The augmented product may include the supply of free
diagnostic software, a generous trade-in allowance, user clubs and
other augmentations which are valuable to personal computer buyers.
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106 Handbook of CRM: Achieving Excellence in Customer Management
The potential product may consist of future applications including a
systems controller, facsimile machine or a music composer.
This concept has had a significant impact on thinking of man-
agers. Its special contribution lies in a recognition that additional
elements, beyond that of the product itself, have a profound impact
on the value that can be added for customers. Its limitation has
been that there has been no structured approach available for man-

clubs, personal
selling
Potential Everything that Marketer’s Use as a
product potentially can actions to system controller,
be done with the attract and facsimile machine,
product that is hold customers music composer,
of utility to the regarding and other areas of
customer changed application
conditions
or new
applications
Source: Adapted from Collins
4
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The value creation process 107
The supplementary services model
The ‘supplementary services’ model, developed by consultant and
former Harvard professor Christopher Lovelock, operationalizes the
total value offer by providing specific guidelines on where to seek
value enhancement for customers. His model identifies eight key
elements of supplementary services that can be used to add value to
the core product or service. This provides a far more structured
approach for considering the expected, augmented and potential
elements of a product or service. He suggests there are potentially
dozens of different supplementary services, but most can be classi-
fied into the following eight clusters:
● information
● consultation
● order taking
● hospitality services

Information
Consultation
Order-taking
Hospitality
Safekeeping
Exceptions
Billing
Figure 3.2 Using the ‘Lovelock supplementary services’ checklist – a personal
lines insurance example
1. Information element
• Easy recognizible phone number
• 24-hour service
• Clear pricing policy
•‘Plain English’ wording
• Simple claims handling
• Brochure with full details of product range and
features
• Clear details of who we are and where we are
• Easy methods of contact (phone, reply paid form,
letter, internet)
• Contact name(s)/team
• Train staff and have systems (e.g. CTI) to deliver
• Mambers’ magazine
• Service guarantee
2. Consultation element
• Information dafabase & CTI
• Quick response
• Technically competent
•‘Customer-freindly’ help desk and call centre
• Inventory pro-forma

• Add on benefits (car hire, towing)
5. Safe-keeping element
• Data security/protection
• Security advice
• Photocopying items
• Anti-theft devices at free or heavily discounted prices
• Help line for emergencies
• Personal alarms
6. Exceptions element
• Specialist help desks for
– high sums assured
– high risk items
– high risk areas
• Bad claims record
• Antiques special cover
• Complaints hot line
• Unconditional service guarantee
• Quality control on repairers
• Customer feedback surveys
• Publicize advocacy
7. Billing element
• No claims discount structure
• Offer of other insurance at discounted rates
• Bonus on second anniversary of policy
• Tips of value /other product offers
• Offers at highly attractive terms for customer
e.g. AMEX
8. Payment element
• Loyalty discount
• Continuous collection

outside the routine of normal service delivery.Exceptions include special
requests for customized treatment that require a departure from normal
operating procedures,problem solving when normal service delivery fails
to run smoothly as a result of accidents or delays, equipment failures or
customers experiencing a difficulty using the product. Complaints, sug-
gestions or compliments should be developed through well-defined pro-
cedures that make it easy for employees to respond. Restitution in
compensating customers for performance failures may involve refunds;
compensation or free repair should also be addressed.
7. Billing: Billing is common to most transactions. Inaccurate, illegible or
incomplete bills are very likely to disappoint customers who, up to that
point, may have been quite satisfied with the service. Billing should be
timely because it will probably result in faster payment.Customers value
well presented billing information. American Express is excellent at
doing this. Some companies help customers view their bills at their con-
venience at an earlier stage than normal. For example, by having billing
information on an Internet or Extranet site.
HCRM-Ch03.qxd 9/16/05 10:48 Page 109
8. Payment: In most cases billing and payment are still separate activities.
A bill usually requires the customer to take action on payment which
may take a lot of time.A challenge is to balance the needs of the organi-
zation for security and efficiency with the customer’s own preference
for convenience and credit. One element within payment is verification
and control. Here organizations need to ensure appropriate controls
are in place to ensure correct payment is made without alienating
customers through unduly intrusive processes.
The eight supplementary services act as a checklist in a search for
new ways to augment existing core products as well as to help to
design new offerings. Companies wishing to use this framework
should start with a workshop with relevant managers to undertake

However, creating a superior offer is not enough. It needs to be
leveraged by building lasting relationships with those customer
groups the enterprise has chosen to do business with plus brand
leveraging to develop greater value for customers.
How relationships add value
Once a superior offer has been developed, the enterprise needs to
focus on building enduring relationships with customers.
Customers value relationships with trusted suppliers who make a
superior offer. As relationships are an important dimension of value,
considerable efforts need to be expended on building and enhancing
these relationships over time.
However, experience suggests that most companies direct the
greater part of their marketing activity at winning new customers.
But while businesses need new customers, they must also ensure
that they are directing enough of their effort at existing customers.
Those companies that focus too much on marketing to new cus-
tomers often experience the ‘leaking bucket’ effect, where they lose
customers because they are directing insufficient marketing activity
generally, and customer service specifically, at them.
Author William Davidow has highlighted this problem: ‘It has
always been incredible to me how insensitive companies can be to
their customers. Most of them don’t seem to understand that their
future business depends on having the same customer come back
again and again’.
6
Too many companies, having secured a cus-
tomer’s order, then turn their attention to seeking new customers
without understanding the importance of maintaining and enhanc-
ing the relationships with their existing customers.
Customer ladder of loyalty

Figure 3.3 The customer ladder of loyalty
112 Handbook of CRM: Achieving Excellence in Customer Management
‘Client’ who purchases regularly and then a ‘Supporter’ of the
company and its products. The next step is to create ‘Advocates’
who provide powerful word-of-mouth endorsement for a company.
In a business-to-business context an advocate may ultimately
develop into a ‘Partner’ who is closely linked in a trusting and strate-
gic relationship with the supplier.
General Electric’s (GE) Appliance Division in the USA is a good
example of an organization which has created value by building a
closer relationship with its final consumers through an innovative
call centre and moving customers from a ‘buyer’ or ‘client’ level to a
‘supporter’ or ‘advocate’ level on the ladder (see box).
Positions on the ladder, once reached, are not necessarily stable
over time. Different patterns occur in different industries. Research
in industries such as retailing suggests that advocacy may reach a
peak at the time of purchase but may drop off after that. Thus rela-
tionship-based efforts may need to be put in place to build on earlier
transactions. On the other hand, the position on the ladder may build
slowly over time as a result of continued product use or experience
with a company. The author only became an advocate of Hewlett
Packard printers after many years of faultless printer operation, during
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The value creation process 113
which time all his other pieces of office equipment developed faults
or broke down.
It is not always desirable to progress a relationship with every cus-
tomer. Some customers or customer segments may not justify the
investment needed to develop a ‘Supporter’ or ‘Advocate’ relation-
ship, as it may prove too costly to do so. Some customers at the

tions provides valuable input to the sales, marketing and new product
development processes.’
7
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114 Handbook of CRM: Achieving Excellence in Customer Management
relevant, effective and believable sources of information for other
customers. A number of researchers have argued that word-of-
mouth is the most effective source of information for consumers.
While commercial sources normally inform the buyer, personal
sources legitimize or evaluate products for them. Legitimization
makes the step of converting prospects into customers on the ladder
of loyalty that much easier.
Research by Tom Jones and Earl Sasser of Harvard Business
School has found that, except in rare cases, total or complete
customer satisfaction is key to securing customer loyalty and that
there is a tremendous difference between the loyalty of merely
satisfied and completely satisfied customers. They cite Xerox
research that found totally satisfied customers were six times more
likely than satisfied customers to repurchase Xerox products and
services over the next 18 months. (See box for their view on loyalty.)
The Harvard Business School view on loyalty
Customer referrals, endorsements and spreading the word are extremely
important forms of consumer behaviour for a company. In many prod-
uct and service categories, word of mouth is one of the most important
factors in acquiring new customers. Frequently, it is easier for a customer
to respond honestly to a question about whether he or she would recom-
mend the product or service to others than to a question about whether
he or she intended to repurchase the product or service. Such indications
of loyalty, obtained through customer surveys, are frequently ignored
because they are soft measures of behaviour that are difficult to link to

the most valuable type of loyalist, the apostle, and eliminating the
most dangerous type of defector or hostage, the terrorist, should
be every company’s ultimate objective’.
9
In particular, this latter
category ‘the terrorist’, not mentioned earlier, is of special interest.
Terrorists represent the most dangerous group of defectors. These
are customers who have had a bad experience and make it a crusade
to tell others about their anger and frustration. Unfortunately, terror-
ists are typically far more committed and effective at creating
negative word of mouth than advocates are at demonstrating
positive word of mouth.
Consumer ‘terrorism’ and militancy is on the increase and as
customer expectations appear to increase at a faster rate than organi-
zations’ capacity to improve customer service, we can expect
increased activity in this arena in the years ahead. Television pro-
grammes such as Watchdog in the UK (www.bbc.co.uk/watchdog),
consumer advocate columns in Sunday newspapers and many sites
on the Internet provide enormous opportunities for ‘terrorist’ activity.
Websites such as www.Grumbletext.com shown in Figure 3.4 provide
a structured environment for individuals to vent their displeasure.
The low cost and pervasive nature of the Internet make it an ideal
channel for aggrieved customers to communicate their dissatisfac-
tion, frustration or anger to a wide range of existing or prospective
customers. The following selection represents a very small number
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116 Handbook of CRM: Achieving Excellence in Customer Management
of the many web sites aimed at such communications:
www.insurancejustice.com
www.financevictims.com

How brands add value
The brand is also an important element in contributing to the value
proposition. Originally the role of a brand was to enable a customer
to identify the manufacturer of a product. Over time the concept of
a brand broadened to include further meaning: symbols, images,
feelings and relationships. Brands add value to the company
because they add value to the customer. Thus a product is something
that is made by a company; a brand is something that is bought by a
customer. A product can be imitated by competitors, while a brand is
different from that of its competitors. A strong brand is unique.
David Aaker, a professor of Marketing Strategy at the University
of California at Berkeley has neatly summed up the role of the brand
in value creation for the customer:
Brand-equity assets generally add or subtract value for customers.
They can help them interpret, process and store huge quantities of
information about products and brands.They also can affect customer
confidence in the purchase decision (due to either past-use experience,
familiarity with the brand and its characteristics).Potentially more impor-
tant is the fact that both perceived quality and brand associations can
enhance customers’ satisfaction with the use experience. Knowing that a
piece of jewellery came from Tiffany can affect the experience of wearing
it:the user can actually feel different.
10
We discussed above how the core and augmented product offer adds
value. A brand adds to this offer in ways that differentiate it from
other similar products, ways that are important and of value to the
customer. What distinguishes a brand from an unbranded product
and gives it value to the customer is the sum total of customers’
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118 Handbook of CRM: Achieving Excellence in Customer Management

how, over 15 years ago, the American Express office in New York
could replace a stolen card within two hours, while in the 2000s it
took a major British bank over 15 days to accomplish the same task.
As a result of such experiences, the brand image is further enhanced
or diminished in the eyes of the customer.
The importance of brand image
Examples of the value of brand image is apparent in all industries.
One of the best illustrations of this is the taste test for Coke and Pepsi,
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The value creation process 119
shown in Figure 3.5. The column titled ‘open’ shows the results of a
survey of an open taste where the two products were placed in front of
the respondents. Apparently using their most discriminating taste
sensitivities, 65 per cent of those surveyed preferred Coke, while 23
per cent preferred Pepsi and 12 per cent of them ranked them equally.
When a matched sample was subjected to a blind taste test (where
the identity of the two colas was concealed – see column titled
‘blind’), there was a very different result. The blind taste test showed
44 per cent preferred Coke and 51 per cent preferred Pepsi, an
increase in preference for Pepsi of over 120 per cent. Significantly dif-
ferent results were obtained from the consumers in the two different
controlled tests.
How can this great difference and resulting brand loyalty be
explained? The answer is that customers ‘taste’ both the drink and
its brand image. This brand image adds value to the consumer when
they see the familiar Coke package and logo. While these ‘added
values’ may relate to an emotional level they are, nevertheless, real
for the customer perceiving them. The subsequent New Coke deba-
cle when Coca-Cola introduced a new product that tasted better in
blind taste tests, but was not acceptable to customers, taught them a

Don Peppers and Martha Rogers have noted that CRM is about
persuading consumers to participate in a dialogue by establishing a
relationship that helps bond the consumer to the brand. By building a
relationship with customers, the organization can create real and tangi-
ble value for them. Agood example of this value creation can be seen in
motorcycle manufacturer Harley-Davidson’s successful turnaround.
Harley’s success is closely tied to needs, aspirations and relationships
with its customer base and they have played to that strength (see box).
Harley-Davidson: Building a relationship brand
The Harley-Davidson story is one that shows how a world-famous
brand has used customer relationships to emerge from near extinction
and reclaim its pre-eminent position in the market. It has delivered dou-
ble digit growth in both turnover and profits over the last decade. In
1903, Harley-Davidson produced a total of three motorcycles. In 2003,
they built more than 250 000 and shipped them with extensive lines of
branded clothing, parts and accessories and collectibles, to more than
60 countries worldwide. Sales were over $4 billion. Gross profit over
$1 billion and net income more than $0.5 billion.
A well-established Harley Owners Group (HOG) holds regular rallies
around the world. These are often attended by company executives so that
they can meet customers and talk about the company’s vision and values.
Anyone who buys a Harley-Davidson motorcycle becomes a member of
the Harley-Davidson Club. The clubs meet at the dealerships, where they
can ride together and also buy the company’s branded clothing.
HOG is a sub-brand that represents a relationship to a community of
people, an affinity group of motorcycle owners. With HOG clubhouses
strategically located in the dealerships, owners consume their product as
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The value creation process 121
The behaviour of employees also contributes greatly to the brand.

part of a Harley-Davidson community. They have not only bought a
Harley motorcycle, they have formed a relationship with other members
of the owners club and identify with the group through wearing
branded merchandise. Harley-Davidson owners place great value on the
brand and are extremely loyal with a 95 per cent repurchase rate.
12
A
good number of them demonstrate their relationship to the brand by
having a Harley-Davidson tattoo on their arms – a unique and perma-
nent symbol of loyalty to the brand!
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122 Handbook of CRM: Achieving Excellence in Customer Management
messaging’ in which it broke down the message into four units and
delivered them to the user at different areas of the site, based on their
level of involvement with the company. P&G found that sequential
messaging significantly increased purchase intent.
14
At the time of writing, US consumers spend some $93 billion annu-
ally on shopping directly online. A further $138 billion is spent by
them on goods and services purchased offline after first seeking
information online. This research, carried out by the Dieringer
Research Group for the American Interactive Consumer Survey,
underlines the importance of the Internet as a channel for the brand.
Overall, some 23 million Americans spend $500 or more, both online
and offline, after first gathering product information online. When
asked about the impact of the Internet on brand images, 45 per cent
of all online adults, which equates to 25 per cent of all US consumers,
said that their brand opinions had changed in one or more of the ten
common product categories covered by the survey.
15

from customer value and this has recently become a key area of focus
for all enterprises. With a widespread acceptance of the importance
of brands, there has been increasing recognition that the consumer’s
choice depends less on evaluation of the functional benefits of a
product or service and more on their assessment of the company and
the people behind it.
In an offline environment, the relationship that customers have with
a brand is frequently the result of their interactions with the staff of
that organization and their perceptions of service quality. The brand
relationship is the outcome of a series of brand contacts that the cus-
tomer has with the organization. Over time these customer contacts or
‘moments of truth’ result in increased or decreased customer value.
In an online environment, the Internet creates major opportunities
and threats for brands. The greatest opportunities relate to speed
and cost. The great advantage the Internet has over more traditional
media is its ability to manage customer relationships from aware-
ness to buying action. It also potentially enables customer contact
24 hours per day at much lower cost. However, as noted above it is a
much less trusted medium.
Overall, there are more similarities than differences when building
a traditional versus an online brand. The key issue is to ensure that
where customers use offline and online channels there is brand con-
sistency and they have superior customer experiences. We will
return to this issue in Chapter 4.
The value proposition
Having examined how product and service offers, relationships and
brands can be utilized in order to create customer value, we now
turn our attention to how these components of customer value can
be utilized in a formal statement of value, or value proposition.
In recent years managers have started to use the term value proposi-

proposition. This topic is addressed later in this chapter.
A structured method for developing value propositions, origi-
nated by consulting firm McKinsey and Co. and further developed
by others,
17–21
is comprised of two main parts: formulation of the value
proposition and profitable delivery of this value proposition by
means of a value delivery system.
Formulating the value proposition
Formulating the value proposition forms the first part of the value
proposition concept. Some examples of value propositions, based on
work by consultants Michael Lanning and Lynn Phillips,
22
are
shown in Figure 3.6. The approach followed in developing these
value propositions involves determining:
● the target customers
● the benefits offered to these customers
● the price charged relative to the competition, and
● a formal statement of the value proposition.
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The value creation process 125
The value proposition approach suggests companies should adopt a
three-step sequence of:
● analysing and segmenting markets by the values customers desire
● rigorously assessing opportunities in each segment to deliver superior
value
● explicitly choosing the value proposition that optimizes these
opportunities.
Step 1: Analysing markets based on value

premium
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126 Handbook of CRM: Achieving Excellence in Customer Management
frontier. If companies fall consistently in the underperformer region
of the map their future survival is questionable.
These researchers suggest three generic strategies for developing
differentiated value propositions on the value map:
24
1. Extend the value frontier towards the low end of the value map – the strat-
egy adopted by Southwest Airlines in the USA and by easyJet and Go
airlines in Europe.
2. Extend the value frontier towards the high end of the value map – this
strategy was adopted by British Airways and Air France with their
Concorde fleets before they were retired. Pursuit of this strategy is
often based on technological innovation.
3. Shift the value frontier – the strategy adopted by Virgin Atlantic with its
‘upper class’ service, offers first class facilities and a highly distinctive
personality based on a business class fare structure.
High-performance companies characteristically focus on the develop-
ment of superior value propositions in order to take advantage of new
growth opportunities and identifiable, premier customer groups.
Step 2: Assessing opportunities in each segment to deliver superior value
When a critical review of any market is undertaken it soon becomes
obvious that the idea of a single market for a given product or serv-
ice is highly restrictive. As we discussed in the previous chapter, all
Cost
Performance
Virgin
Atlantic
The value