Creating superior Customer Experiences is now regarded as one of the primary objectives for organizational success (Verhoef et al., 2009 Peter Verhoef) and organizations are prioritizing the management of Customer Experiences to enhance customer loyalty across brands, channels, and services (Badgett et al., 2007). Managing Customer Experience quality has thus become a crucial strategic element for all organizations as the quality of the experiences a customer has, directly influences their customers’ perception of value.
Board and senior management acknowledge that CX should be the new focus of managerial attention, but often organizations has challenges with the precise definition, its measure and the ‘true value of CX’ which creates a dilemma for developing CX strategies (Klaus & Maklan 2007; Klaus 2011 ).
Understanding and enhancing customer perceived value through effective CX strategies is therefore essential for organizations aiming to differentiate themselves in the market – and as such to create a competitive advantage.
According to Prof. Dr. Phil Klaus (2015), the value customers perceive is largely shaped by their interactions with the organization across various touchpoints, including pre-purchase communications, the purchasing process, and post-purchase support.
Sustainable competitive advantage through CX
Many organizations still try to differentiate themselves based on what they sell. Goods and services serve merely as a means to an end and hold no intrinsic value. People purchase goods and services to gain experiences, not the other way around. The critical value comes from the end result and organizations need to better understand the customer value they are creating.
As a frequent reader of my articles, you should know I am using Joe Pine and Gilmores groundbreaking book "The Experience Economy," very often. Joe Pine (1998) elaborates on the strategic significance of customer experience and argue that we are transitioning from a service economy to an experience economy, where memorable and engaging experiences become the primary source of value for consumers. According to Pine, companies that excel in designing and delivering unique experiences can differentiate themselves in a crowded marketplace, thereby gaining a sustainable competitive advantage.
Currently (2024) Pine started a new book and is inviting others to join him on Substack. According Pine, the next wave is Transformation. It means enabling the transformation that customers ultimately seek through their experiences. This put CX is an interesting daylight and I am curious if and how incumbents can make the move.
But let’s get back to the topic and dive into the relationship between CX and competitive advantage.
CX led Profitable Growth flywheel
In November 2023, I introduced the CX led Profitable Growth flywheel. A mechanism that reflects the impact of Customer Experiences on both profit and growth. In this article, I will focus on how CX drives competitive advantage.
Fig. 1. CX Led profitable growth Flywheel
While product quality and service offerings remain important, they have become increasingly commoditized (Pine 2011), with competitors often able to replicate features, prices, and even innovations rapidly. As a result, the traditional avenues of differentiation are losing their effectiveness. To truly stand out and build lasting customer loyalty, organizations must shift their focus toward differentiating through CX.
Differentiation through CX enables companies to create sustainable competitive advantages.
Products and services can be copied or improved upon by competitors, but a well-executed customer experience strategy builds long-term relationships that are resilient to competitive pressures. This focus on CX ensures that customers are not just satisfied but are emotionally connected to the brand, making them more likely to stay loyal, less likely to be swayed by competing offers and as such perceives value in the relationship.
Customer perceived value
Customer perceived value serves as a crucial moderator between CX and competitive advantage. It plays a pivotal role in how effectively an organization can leverage CX to differentiate itself in the market. While delivering exceptional customer experiences is essential for building strong relationships with customers, the degree to which these experiences translate into a competitive advantage largely depends on how customers perceive the value they receive.
Fig. 2. Customer Perceived Value
Organizations should not only focus on delivering outstanding experiences but also ensure that these experiences are perceived as offering superior value. By doing so, organizations can maximize the impact of their CX strategies and secure a lasting competitive edge in the marketplace.
Customer perceived value, in turn, influences CX. It shapes customer expectations, and if customers believe they are getting a good deal, their expectations for the experience may be higher. Meeting or exceeding these expectations leads to greater satisfaction and a positive overall experience. When customers perceive high value, they are more likely to engage in positive behaviors such as repeat purchases, brand loyalty, and word-of-mouth recommendations, which enhance their overall experience with the brand (Klaus, 2021)
Measure with Customer Value Management
Customer perceived value acts as the lens through which customers evaluate their experiences, while CX serves as the key driver that shapes this value.
Understanding and influencing perceived value through CX alone is not enough. Organizations should systematically measure, compare, and optimize the value delivered to customers relative to competitors. This is where Customer Value Management (CVM) comes into play .
CVM offers the strategic framework to continuously assess and improve customer value, ensuring that the organization not only meets but exceeds customer expectations in comparison to the competition. CVM is a powerful business tool as it links customers to KPIs by directly measuring the drivers of purchasing behaviour and the impact these have upon delivering KPIs such as market share, profit and loss, recommendation, share of wallet, ROI etc.
Verhoef (2007) wrote an excellent paper about Customer Value Management where he states that CVM is a learning system in which customer strategies can be constantly improved based on continuous evaluations or prior strategies. The most important succes factor of using CVM, is selecting the best central KPI for your organization. Read one of my previous articles about the importance of metrics for the board of an organization.
Scoring with CVM – how good am I doing?
To benchmark your organisation with the competition, you can use the following formula:
Customer Value = Perceived worth of your offer / Perceived worth of competitive offer
Fig. 3. Benchmarking Competitive Advantage
In case the score is above 1, you do better compared to the competition. Any market change or change in the value of an organizations offer relative to its competitors will be reflected in a change in the CVM score. There is a time-lag, unique to each market place, between a change in the CVM score and a corresponding shift in KPIs. A shift in a CVM score can therefore provide a good prediction of an impending change in an organizations fortunes.
How to start measuring with CVM
To drive change, an organization must manage the elements which drive the customers and markets perception of value by quality received for price paid. Value can be improved by increasing the relative perceived quality, reducing relative perceived price, or using combinations of both. In short, a Customer Value-Added approach. I refer to my article about Customer Value where I explained the impact of CX on Customer value
An organization measures with Customer Value Management (CVM) by systematically assessing and managing the value it delivers to its customers compared to its competitors. CVM involves several key steps and methodologies that help organizations understand how customers perceive their offerings, identify areas for improvement, and strategically enhance the overall value proposition. Here’s how an organization typically measures with CVM:
1.Identifying Key Value Drivers
The first step in CVM is identifying the factors that drive customer value. These value drivers can include product quality, pricing, customer service, brand reputation, convenience, and more. Understanding what is most important to your customers helps focus CVM efforts on the areas that will have the greatest impact.
2.Collecting Customer Data
Organizations use various methods to gather data on customer perceptions and behaviors. This can include customer surveys, interviews, focus groups, and feedback from social media and online reviews. The data collected provides insights into how customers perceive the value of the company’s offerings compared to those of competitors.
3.Benchmarking Against Competitors
CVM involves comparing the company’s performance with that of its competitors. This can be done through market research, competitor analysis, and customer feedback. The goal is to understand where the organization stands in the market in terms of delivering value and identify gaps where competitors might be outperforming.
4.Segmenting Customers
Not all customers value the same things equally. CVM allows organizations to segment their customer base according to different value perceptions and behaviors. By understanding these segments, companies can tailor their value propositions and CX strategies to meet the specific needs of each group.
5.Measuring Value Perception
Organizations measure perceived value by evaluating customer satisfaction, loyalty, and willingness to recommend the brand (often through metrics like Net Promoter Score). This involves analyzing how customers perceive the benefits they receive relative to the costs, including both tangible aspects (e.g., price, product features) and intangible aspects (e.g., brand trust, emotional connection).
6.Evaluating Financial Impact
CVM also involves assessing the financial impact of customer value on the organization. This can be done with calculating the Customer Lifetime Value (CLV), which estimates the total revenue a company can expect from a customer over time. By understanding the financial implications of perceived value, organizations can make more informed decisions on where to invest in improving customer experience and value.
For those who have read my earlier posts, I am intrigued about this step. How is the relationship between CX and Financial Impact. Over the past months, I conducted different interviews to better understand how organizations link the two. I expect to finish the research in 2024, early 2025. For those who are interested, please subscribe to my newsletter on LinkedIN, or here on Substack (https://patrickburggraaf.substack.com)and you will get notified when publication is ready.
7.Implementing Improvement Strategies
Based on the insights gained from CVM, organizations develop and implement strategies to enhance customer value. This could involve product innovation, service improvements, pricing adjustments, or enhanced customer support. The goal is to increase perceived value and, consequently, improve competitive positioning.
8.Continuous Monitoring and Adjustment
CVM is an ongoing process. Organizations continually monitor customer feedback, market trends, and competitive actions to ensure they are consistently delivering superior value. This ongoing measurement allows for agile responses to changes in customer expectations or market conditions, ensuring that the organization remains competitive.
9.Utilizing Customer Feedback for Refinement
Finally, organizations leverage customer feedback to refine their CVM strategies. By understanding the direct feedback from customers regarding what works and what doesn’t, companies can fine-tune their approach to maximize perceived value and enhance overall customer satisfaction.
B
y systematically applying these steps, organizations can effectively measure and manage the value they deliver to customers, ensuring they remain competitive and aligned with customer expectations. CVM provides a structured approach to understanding and optimizing the value proposition, leading to stronger customer relationships and sustained business growth.
CX is just one driver of sustaining a competitive advantage
While CX has rightly become a focal point for organizations aiming to differentiate themselves in the market, relying solely on CX as a competitive advantage is not enough in today’s complex and dynamic business environment. Organizations must recognize that true competitive advantage is multifaceted, requiring a holistic approach that integrates CX with other strategic elements.
Think about a strong value proposition, operational excellence and last but not least innovation. On innovation I conducted a case study in a fortune 500 company. I can’t share any learnings or recommendations, but you can find the literature study as part of this case study here.
Wrapping up
Customer perceived value amplifies the benefits of a positive CX by turning satisfied customers into loyal advocates. A well-crafted customer experience that aligns with customers’ expectations and delivers significant value can lead to repeat purchases, higher customer lifetime value, and positive word-of-mouth. These outcomes contribute to a stronger competitive advantage, as the brand not only retains its existing customer base but also attracts new customers through recommendations and a favorable market reputation.
Customer perceived value acts as a moderator by influencing how customers differentiate between competing offerings. In markets where products and services are increasingly commoditized, the perceived value that customers attach to a brand can be the deciding factor in their choice. When customers perceive that a brand consistently delivers superior value—whether through high-quality products, exceptional service, or memorable experiences—they are more likely to remain loyal, even in the face of lower-priced alternatives. This loyalty translates into a sustained competitive advantage for the organization, as it builds a customer base that is less price-sensitive and more resistant to competitors' overtures.
Furthermore, customer perceived value enhances an organizations ability to command premium pricing. When customers believe they are receiving significant value, they are often willing to pay more for a product or service, thereby improving the organizations’ profitability and market position. This ability to command higher prices without losing customers is a critical aspect of competitive advantage in many industries.
In my next article, I will dive deeper in the right wheel of the CX Lex profitable growth flywheel (fig. 1). I will discuss how we can make CX more upstream next to the downstream value it is often positioned (marketing, sales, service).
References
Pine, B. J., & Gilmore, J. H. (2011).The experience economy. Harvard Business Press.
Prahalad, C. K., & Ramaswamy, V. (2004). Co-creating unique value with customers. Strategy & Leadership, 32(3), 4-9.
Verhoef, P. C., Lemon, K. N., Parasuraman, A., Roggeveen, A., Tsiros, M., & Schlesinger, L. A. (2009). Customer Experience Creation: Determinants, Dynamics and Management Strategies. Journal of Retailing, 85(1), 31-41.
Badgett, M., Boyce, M. S., & Kleinberger, H. (2007). Turning Shoppers into Advocates. IBM Institute for Business Value.
Klaus, Philipp (2011), “Quo Vadis, Customer Experience?” in C. Rusconi (ed.),
Beyond CRM: Customer Experience in the Digital Era. Strategies, Best Practices
and Future Scenarios in Luxury and Fashion, Milano: Franco Angeli, pp. 165–175.
Klaus, Philipp and Stan Maklan (2007), “The Role of Brands in a Service Dominated
World,” Journal of Brand Management, 15 (2), 115–122.
Klaus, P. (2015).Measuring Customer Experience: How to Develop and Execute the Most Profitable Customer Experience Strategies. Palgrave Macmillan.
Klaus, P. (2021). The role of customer experience in the perceived value-word-of-mouth relationship.Journal of Services Marketing, 35(4), 456-468. https://doi.org/10.1108/JSM-11-2020-0431
Verhoef, P. C., Van Doorn, J., & Dorotic, M. (2007). Customer value management: an overview and research agenda.Marketing-Journal of Research and Management,3(2), 105-120.
Digital Experiential Value
Delivering Digital Customer Experience invariably raise questions about business economics, priorities, and how to invest in it. Without a quantified link tovaluesuch efforts often can’t show clear gains and as such clear foundation to create momentum in your organisation. Read this article to understand how Icombine different classifications of Customer and Business Value and put them in the context of Digital Customer Experiences
Conscious or unconscious Digital Customer Experiences
In this article I argue that there is a great opportunity for organizations to create consious breaks in the customer journey.
Conclusion Paper Digital Customer Experience Elasticity
Download here the full paper of the three articles on Digital Customer Experience Elasticity
