By Dagmar Recklies
This article first appeared in Effective Executive, ICFAI University Press, July 2006
In today’s globalising economy competition is getting more and more fierce. That means it becomes more difficult for products and services to differentiate themselves from other offerings than ever before. Not only is the number of competitive offerings rising due to globalisation of production, sourcing, logistics and access to information. Many products and services face new competition from substitutes and from completely new offerings or bundles from industry outsiders. Since product differences are closed at an increasing speed and many companies try to win the battle for customers by price reductions, products and services tend to become commodities.
On the other hand, customer behaviour becomes more hybrid. On one hand, customers are increasingly price sensitive – searching for bargains at marketplaces like ebay or buying their groceries at discount markets. On the other hand they enjoy branded and luxury goods. One and the same person may plan a weekend trip with a no-frills airline and a stay at a five-star-hotel.
In the result, customers have a wider choice of often less distinguishable products and they are much better informed. For many offerings the balance of power shifts towards the customer. Customers are widely aware of their greater power, which raises their expectations on how companies should care for them.
Bringing it all together, it becomes ever more difficult to differentiate a product or service by traditional categories like price, quality, functionality etc.
In this situation the development of a strong relationship between customers and a company could likely prove to be a significant opportunity for competitive advantage. This relationship is not longer based on features like price and quality alone. Today it is more the perceived experience a customer makes in his various interactions with a company (e.g. how fast, easy, efficient and reliable the process is) that can make or break the relationship. Problems during a single transaction can damage a so far favourable customer attitude.
The consequence for companies is that they have to adapt their ways of competing for customers. Traditionally, companies have focused their efforts of customer relationship management on issues like customer satisfaction and targeted marketing activities like event marketing, direct marketing or advertising. Although doubtless necessary and beneficial, these activities are not longer enough. They narrow the relationship between company and customer down to a particular set of contacts in which the company invests its efforts. Most likely this will produce not more than a satisfied customer who is well aware of the companies offerings and has a positive attitude towards them. However, a satisfied customer is not necessarily a loyal one.
If a customer is satisfied that means that a product of service has met his expectations and that he was not dissatisfied by it. Customer satisfaction is doubtlessly very important. It is the precondition for repeat purchases and it prevents the customer from telling others about his disappointing experiences. A loyal customer, however, is more than a customer who frequently purchases from a company.
The difference is the emotional bond which links the customer so closely to the company that he develops a clear preference for these products or brands and is even willing to recommend them to others. Loyal customers truly prefer a product, brand or company over competitive offerings. Thus loyalty goes beyond a rational decision for known quality or superior price-performance-ratio. It is about the customers’ feelings and perceptions about the brand or product.
When the customer makes his buying decision, he evaluates the benefits he perceives from a particular product and compares them with the costs. The value a customer perceives when buying and using a product or service go beyond usability. There is a set of emotional values as well, such as social status, exclusivity, friendliness and responsiveness or the degree to which personal expectations and preferences are met. Similarly, the costs perceived by the customer, normally comprise more than the actual price. They also include costs of usage, the lost opportunity to use an other offering, potential switching costs etc. Hence, the customer establishes an equation between perceived benefits and perceived costs of one product and compares this to similar equations of other products.
Based on this, customer loyalty can be understood as to how customers feel about a product, service or brand and whether their perceived total investments with a it live up to their expectations.
The important point here is the involvement of feelings, emotions and perceptions. In today’s competitive marketplace, these perceptions are becoming much more important for gaining sustainable competitive advantage.
Customer perceptions are influenced by a variety of factors. Besides the actual outcome – i.e. did the product or service deliver the expected function and did it fulfil the customers need – the whole process of consumption and all interactions involved are of crucial importance. In today’s globalised information driven economy this can also comprise issues like
· How other customers or influencing groups perceive the product or brand
· The degree to which the customer feels the actual marketing campaign addresses the most important issues
· Responsiveness and service quality of any affiliates, e.g. distribution partners
Customer perceptions are dynamic. First of all, with the developing relationship between customer and company, his perceptions of the company and its products or services will change.
The more experience the customer accumulates, the more his perceptions will shift from fact-based judgements to a more general meaning the whole relationship gains for him. Over time, he puts a stronger focus on the consequence of the product or service consumption.
Moreover, if the customers’ circumstances change, their needs and preferences often change too. In the external environment, the offerings of competitors, with which a customer compares a product or service will change, thus altering his perception of the best offer around. Another point is that the public opinion towards certain issues can change. This effect can reach from fashion trends to the public expectation of good corporate citizenship. Shells intention to dump its Brent Spar platform into the ocean significantly altered many customers perception of which company was worth buying fuel from.
Research has been don on the impact of market share on the perceived quality of a product. Depending on the nature of the product and the customers’ preferences, increasing market share can have positive or negative effects on how the customer perceives the product.
The concept of customer perception does not only relate to individual customers in consumer markets. It is also valid in business to business situations. For example, a competitor benchmarking survey of a large industrial supplier revealed that the market leader, although recognised for excellent quality and service and known to be highly innovative, was perceived as arrogant in some regions. If we take into consideration that there are about four other large players with a similar level of quality and innovative ideas, this perceived arrogance could develop into a serious problem. Customers here are well aware the main characteristics of all the offerings available at the market are largely comparable. So they might use the development of a new product generation of their own to switch to a supplier that can serve them not better or worse, but with more responsiveness and understanding.
Companies have done a lot to improve customer satisfaction and customer relationships in the past. As discussed above, this will not be enough any more.
Any serious effort to manage customer perceptions starts with a good measurement system. Companies must be truly willing to look at the whole process of interaction through the customers eyes. For many companies, this requires a more or less extensive shift in mindset, since most departments from development to sales will be involved.
The backbone of any customer perception management and measurement system, however, is thorough market research and surveys. There are several aspects of measuring customer perceptions.
· First of all the company has to find out how itself and its offerings are perceived by the customers. It is essential to identify what the customer is actually buying and which features are most important to him. Only this way it is possible to align the internal focus and resources to the customers expectation. This information is of greater value if it can be compared to the customers’ perception of competitive offerings. Not only will this reveal relative strengths and weaknesses, it is also a valuable source of ideas for improvement.
· Besides that, surveys should also identify the relative importance of several influencing variables in the eyes of the customer. To know what matters most to the customer helps to set priorities for projects.
· Of course, as with any market research activities, it should be based on a careful customer segmentation. Customer groups that differ by frequency of use, social status, geographical region or other criteria, are likely to have different expectations and preferences. Hence, they will probably perceive an offering in different ways.
· Zeithaml et al suggest to incorporate several behavioural-intentions questions to identify signals that are potentially favourable or unfavourable for the company. Questions for behaviour intentions are potentially of higher validity and richer diagnostic value than the “overall service quality” or “customer satisfaction” variables. Since these questions are directed at potential future actions they can not only indicate of changes in demand and market trends. They also provide early warning signs and help to take to take timely corrective action.
Only if a company knows which features of its products and services or which other points of contact with the customer are considered most important by the customers, it can develop appropriate strategies. Such a strategy will not only help the company to strengthen the emotional bond with the customer through targeted improvements and activities. It may also have the positive side effect that the customers’ whole experience leads him to the conclusion that this company really understands his distinctive needs and really takes him seriously. Hence, the customers perception of the whole company may improve beyond a positive attitude towards a particular product.
Based on thorough research, companies can develop strategies and initiate targeted activities to manage and improve customer perceptions. This article finishes with some examples of how this can be done. It has to be taken into consideration, however, that there is no one right strategy. Since these measures shall provide a distinctive competitive advantage, they should be based on the particular competencies and resources of a company and they should aim at setting the company apart from the other market participants.
· The service experience is closely linked to his perception of the total company and its offerings – be it products or service. A common idea of many authors is that it is not always necessary to deliver the absolutely perfect customer experience. Instead it is important to solve the customers need or problem in a matter that is perceived appropriate. For many retail products, for example, it will be sufficient in most cases to offer an appropriate group of substitute products, but not all particular products. In service situations, customers will - depending on the actual nature of the service - not expect an immediate service delivery. They will however expect a delivery within a time frame that is either market standard or meets the service promise of the actual service provider. As long as the company keeps this promise, the customer will perceive this as satisfying. Byrnes even suggests that you earn more customer loyalty when you do a good job fixing a service problem, than if there had been no problem at all. The point is to meet or excel the customers’ expectations, not to achieve some ideal level of product or service delivery.
· Companies should try to make sure that their customers are fully aware of all the ways their offering can provide value to them. They have to explain the customer how this particular product can deliver more value than those from competitors. This approach means to widen the customer perception and to extend their awareness and appreciation to more features or aspects of the offering. However, this point has to be considered very carefully in order not to produce an diametrical effect.
This point again highlights the critical importance of market research. In this example, market research would help the company to develop different communication strategies that focus on those product features that are of high priority for particular market segments.
· A commonplace strategy to circumvent the loss of exclusivity associated with high market share is to leverage the brand by introducing new related brands. This is very efficient with fragrances or fashion brands.
· In situations in which customers perceive high market shares lead as a sign of quality, it is advisable to advertise a favourable high share, e.g. “Americas most popular SUV”, “Three out of five people already use …”.
· It is advisable to contact customers who indicate low results for loyalty or perception of the company in the surveys. Direct contact allows to identify the roots of the problem and – if possible – to solve the issue. Besides solving some customer-specific problems and thus improving the perception of some individuals, such follow-ups may reveal some causes for problems that are common to wider parts of the customer base. These are the starting points for some improvements with potentially significant effects.
· Follow-up is the hallmark of any loyalty or customer perception surveys. The effects of any activities should be measured and analysed by follow-up surveys to provide further insights.
More Information on Customer Management and Customer Perception
A list of links to external articles is available in our
 IBM Business Consulting
Services. 2006. 20:20 Customer Experience. available
 Krell, E. 2005. Differentiate a satisfied customer from a loyal one. available under http://searchcrm.techtarget.com/originalContent/0,289142,sid11_gci1093440,00.html
 Hellofs, L., Jacobson, R. 1999. Market share and customers’ perceptions of quality: When can firms grow their way to higher versus lower quality? Journal of Marketing. 63(1), page 16
 For details see: France Telecom. After the commercial launch: analysing use to understand the customer. Available under http://www.francetelecom.com/sirius/rd/en/ddm/en/technologies/ddm200411/techfiche3.php
 Zeithamel, V., Berry, L., Parasuraman, A. 1996. The behavioural consequences of service quality. Journal of Marketing. 60 (2), page 31
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