Gale: Managing Customer Value
(create quality & service that customers can see, and brings a competitive advantage)


General

In his book 'Managing Customer value', Bradley T. Gale has proposed a model to quantify the value of a product-service system in order to be able to analyse the competitiveness of a product portfolio of a company. This book has been written in 1994 after the PIMS study ("Profit Impact of Marketing Strategy"), a statistic analysis on 3500 American companies, (Buzzel et al., 1987). This study had revealed that the main drivers for company profits were "relative quality" and "relative market share", see Fig. Gale 1 .

The route to a high profit is clear: via a high 'relative quality', a high 'relative market share' can be achieved, resulting in a high ROI. But the question then is how to achieve a high relative quality, being a high quality at the right price.
The key to this question is to focus on the quality dimensions (Garvin) that are important to the customers (as perceived by the customers). There are two options:
1. either improve the quality/price ratio of the quality dimensions which are important to the customers
2. or try to influence the customer preferences in the direction of those quality dimensions of your own products which are relatively high in comparison with the competitors.

Option 1 is obvious: companies have to deliver products with a good quality/price ratio. Option 2 is often combined with option 1. When a car manufacturer has developed a relatively safe car, this manufacturer has to make the market aware of this fact and has to make it an important quality dimension at the moment of purchase. The same applies to the issue of the environment. Only the right marketing strategy will result in the desired situation that the product is perceived as better at the moment of purchase.

The model is explained here by an example, providing the main methodology, its characteristics, and the philosophy behind this model .
The (slightly simplified) methodology comprises three steps:
Step 1. Assessment of the 'perceived quality ratio' of the product-service system
Step 2. Assessment of the 'perceived price ratio' and the 'fair price'
Step 3. Assessment of the strategic consequences.

Note: The model has been linearized and slightly simplified to bring it in line with the wide spread methodology of the 'Decision Matrix'.

Step 1. Assessment of the 'perceived quality ratio'

Since most of the strategic marketing analyses are confidential, we will use here a hypothetical example of vegetables, where a 'bio-vegetable' (no use of pesticides) is compared with the normal vegetable.
The comparison is made by a panel of consumers, as they perceive the relative ratings (1 is the lowest score in rating, 9 is the highest score in rating). The results and the calculation scheme are given below

(1)
Aspect
(2)
Importance
(3)
Q rating Bio-product
(4)
Q rating Normal product
(5) delta Q rating
= (3) - (4)
(6) 'weighed'
= (5) x (2)
Taste
0.2
8
6
+2
+0.4
Appearance
0.2
6
8
-2
-0.4
Health aspects
0.2
8
5
+3
+0.6
Presentation
0.1
7
8
-1
-0.1
Availability
0.2
6
8
-2
-0.4
Environment
0.1
8
5
+3
+0.3
Total
1.0
7.1*)
6.7*)
+0.4

*) This is the weighed average quality = sum of quality rating x importance

The 'perceived quality ratio' is now defined as:
7.1 / 6.7 = 1.06
so the bio-product is rated 6 % better in terms of perceived quality.
Note that this rating depends on the characteristics of the people on the panel. The Q rating as such in columns (3) and (4) don't vary much with the people on the panel. The importance of column (2), however, is very sensitive for the type of people on the panel (and therefore the so called 'market niche'). A different marketing strategy is needed for a different market niche.

Step 2. Assessment of the 'perceived price ratio' and the fair price

The reason that Gale uses the word 'perceived price ratio' is that for many modern products the price is not so clear anymore (examples: mortgages, pension funds, lease contracts, service guarantees, etc.)
In this case the perceived price ratio is simple: it is the ratio of prices for both product types. In other words, when the bio-product is 15% more expensive, the perceived price ratio is 1.15 .

The market position of the bio-product (in relation to the normal product) is depicted in Fig. Gale 2.
The dotted line in slide gale2 is the 'fair price' line. It represents the value (in terms of money) of quality. Everything below the fair price line is perceived as too expensive; everything above the fair price line is perceived as attractive in terms of 'value for money'.
In this case, the panel stated that a maximum extra price of 10% for the bio-product was acceptable. In other words: for the majority of the people on the panel a 'perceived price ratio' of 1.1 was just acceptable (as a maximum) at the 'perceived quality ratio' of 1.06. The fair price line is then a straight line through (x=1;y=1) and (x=1.1;y=1.06).
The actual perceived price ratio (1.15) of the bio-product is then too high in comparison with the value of the product.

The first reaction of most people is that the price has to be lowered (in slide gale2, the market position of the bio-product has to shift to the left). Slide gale2 shows, however, that there is an alternative: increase the perceived quality ratio, either by increasing the quality or by influencing the perception (change the consumer preferences).
We will analyse these options for a market strategy in Step 3.

Step 3. Assessment of the strategic consequences

In the above example, there are three options to bring the product above the fair price line:
1. lower the price by at least 5% by lowering the costs of production and distribution
2. increase the quality of the product
3. change the perception of 'what is important'.

The first option seems simple, but is often hard to realize in practice. When the sales volume is higher, distribution costs can be lower, but when a lower price doesn't generate the required extra volume, this option doesn't work. In general one should take care that savings in production and distribution may not harm the product quality (otherwise one is acting "pound foolish - penny wise"). Savings are only allowed in aspects which are not important to the customers. However, in this case there are no such opportunities.

The second option is more promising, especially when it is focussed on quality aspects which combine:
- a low score for the 'Q rating' ,column (3) of the above table
- a high score for 'Importance' ,column (2) of the above table
In this example this is the case for 'Availability' and 'Appearance'.

The third option seems to be the most attractive from the point of view of strategic marketing. The strategy here is to focus on the quality aspects with the highest scores: 'Taste', 'Health' and 'Environment'.
The aim is to increase the 'Importance', column (2), as perceived by the customers, by an advertising campain (making people aware of the high score of your product and the importance of it).
In other words, when the 'Importance' of 'Health' related to this product can be increased from 0.2 to 0.3 and the 'Importance' of 'Availability' can be decreased from 0.2 to 0.1 (the health issue becomes so important that people are prepared to get the bio-product in a specialized shop), the scores in the above table will change as follows:
Q rating Bio-product: 7.3
Q rating Normal product: 6.4

The result is that the new 'perceived quality ratio' is 7.3 / 6.4 = 1.14
Which is well above the fair price line.
The strategy of the three options is summarized in Fig. Gale 3 .

Literature: see under tab data, reference 1.0

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