Magazine Article


Small Business Advisor:

Measuring Customer Value
To borrow a phrase from Capital One® "What's in your wallet?®"

Small Business Advisor

Go get your wallet and take out all the contents. Its ok, we'll wait. Not only will you have a chance to clean out your wallet, you're going to learn a lot about yourself, and your customers. Now, empty all the items in front of you. Separate them into two piles, those things you can replace and those you can't.

If you're like most people, you carry money, credit cards, insurance cards, your driver's license and family pictures in your wallet. Which of these is the most valuable? A good test would be if the wallet was lost, what could be replaced and what couldn't. Money? Go to the bank. Credit Cards? Contact the credit card company, cancel the old ones and have them send you new ones. Insurance cards? Same thing. License? Off to Motor Vehicles and get a replacement. Wallet photos? Where do you go to get them replaced, especially if you do not have the negative or digital file? The scramble begins, you tear apart the house, then begin asking all your relatives for a copy. If no one has another copy, the pictures are gone forever. So, which is the most valuable?

It is ironic that the item with the lowest cost has the highest value.

What are you doing to help your customers understand this? Offer archival CDs, online back up service, second set of prints. Many of you are frustrated with trying to educate your customers, but this article isn't about that. It's about adding value for your customers. Customers are willing to reward you if you can recognize and add value to their lives. At the same time, you must recognize the things customers aren't willing to pay for, the things we do that don't add value.

What are customers willing to pay for? When customers purchase things from you, think about all the things that you put into that purchase.

Suppose you want a salad for lunch. The local deli takes lettuce, tomatoes, carrots and whatever else you want in the salad, cut the ingredients up, put them in a bowl, add some dressing, and wrap it up for you. This process of preparing the salad is the added value. The process of cleaning the utensils, walking back and forth to the refrigerator for the salad dressing, and any of the other extra motions that go into making the salad, are waste.

Value Added or Not

Toyota categorizes what value is by classifying them into three categories:

1. Value Added. What is the actual transformation process core to the service that the customer is paying for? Customers willing to pay for information transfers, education, or physical transformations are added value. Haven't you paid for seminars to improve yourself and your business skills?

2. Non-Value Added. What is pure waste? Wait times, walk times, rework and unused information are examples of Non-Value Added pure waste. Writing checks, printing them out, and walking to the Post Office to mail them are pure waste. How can you minimize this process by eliminating unnecessary usage of time? Electronic funds transfers and online banking eliminate many wastes, including time, paper (the physical checks), mailing costs, and walking to the printer and the Post Office are Non-Value Added activities.

3. Non-Value Added, but Required. Taiichi Ohno, the founder of the Toyota Production System (TPS) referred to this as "non-value added work" or, sometimes, incidental work. Things like inspections, control checks, to make sure procedures are being followed. For example, checking for and upgrading software, sweeping and cleaning your store, and color-balancing a printing machine would be Non-Value Added, but Required work.

As competition continues to put pressure on your operation, it becomes critical for survival to recognize these parts of your organization that add value, what customers are willing to pay for, and those that they are not. We can look outside our industry for fresh ideas, for new ways to do things, to cut costs, increase value, expand markets, and boost profits.

Look at the automotive industry. The survivors of its most turbulent times will be leaner, more competitive and profitable once they adapt to the new methods of producing and selling cars. How will they do this? They are making fundamental organizational changes, breaking away from past practices and recreating their companies.

Toyota put everyone on notice. The Toyota Way and lean production changed the way we look at organizations. They didn't start a couple of years ago, or even a decade or two ago, they started 70 years ago with the start of the company. It is a part of their culture and permeates through every part of their organization. Toyota sees their mission as much more than this, it sees the Toyota way as their contribution to society.

They also focus on their customer, updating their products to meet customer demand. They listen to their customers, carefully and slowly evaluate their decisions then execute quickly. The don't sacrifice long term gains for short-term profitability. That recently became obvious when their profitability far outpaced all the American automakers combined. The short-term results were a direct result of long-term planning.

What are your company's processes? How do you add value? Do you continually do things that don't add value (busy work)? Are you recognizing where the waste is in your organization? Do you have a plan for your business, both short-term and long-term strategies?

Once you begin to recognize, evaluate and transform your company, its culture, and people, you will be on your way to increased customer satisfaction and retention as well as the reward for all this, increased profit.

1 2 next