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Analyzing Product Efficiency – A Customer-Oriented Approach

Author

Listed:
  • Hans H. Bauer

    (University of Mannheim)

  • Maik Hammerschmidt

    (University of Mannheim)

  • Matthias Staat

    (University of Mannheim)

Abstract

The purpose of this study is to provide a broader, economic perspective on customer value management. By developing an efficiency-based concept of customer value we aim at contributing to the presently underrepresented research field of marketing economics. The customer value concept is utilized to assess product performance and eventually to determine the competitive market structure and the product-market boundaries. Our analytical approach to product-market structuring based on customer value is developed within a microeconomic framework. We measure customer value as the product efficiency viewed from the customer’s perspective, i.e., as a ratio of outputs (e.g., resale value, reliability, safety, comfort) that customers obtain from a product relative to inputs (price, running costs) that customers have to deliver in exchange. The efficiency value derived can be understood as the return on the customer’s investment. Products offering a maximum customer value relative to all other alternatives in the market are characterized as efficient. Different efficient products may create value in different ways using different strategies (output-input- combinations). Each efficient product can be viewed as a benchmark for a distinct sub-market. Jointly, these products form the efficient frontier, which serves as a reference function for the inefficient products. Thus, we define customer value of alternative products as a relative concept. Market partitioning is achieved endogenously by clustering products in one segment that are benchmarked by the same efficient peer(s). This ensures that only products with a similar output-input structure are partitioned into the same sub-market. As a result, a sub-market consists of highly substitutable products. In addition, value-creating strategies (i.e., indications of how to vary inputs and outputs) to improve product performance in order to offer maximum customer value are provided. The impact of each performance parameter on customer value is determined, identifying the value drivers among them. This methodological framework is applied to data of the 1996 German Automobile Club (ADAC) survey.

Suggested Citation

  • Hans H. Bauer & Maik Hammerschmidt & Matthias Staat, 2004. "Analyzing Product Efficiency – A Customer-Oriented Approach," Microeconomics 0402008, EconWPA.
  • Handle: RePEc:wpa:wuwpmi:0402008
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    References listed on IDEAS

    as
    1. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    2. Mahajan, Jayashree, 1991. "A data envelopment analytic model for assessing the relative efficiency of the selling function," European Journal of Operational Research, Elsevier, vol. 53(2), pages 189-205, July.
    3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    4. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132-132.
    5. Lefkoff-Hagius, Roxanne & Mason, Charlotte H, 1993. " Characteristic, Beneficial, and Image Attributes in Consumer Judgments of Similarity and Preference," Journal of Consumer Research, Oxford University Press, vol. 20(1), pages 100-110, June.
    6. Hjorth-Andersen, Chr, 1984. " The Concept of Quality and the Efficiency of Markets for Consumer Products," Journal of Consumer Research, Oxford University Press, vol. 11(2), pages 708-718, September.
    7. DeSarbo, Wayne S. & Kim, Youngchan & Wedel, Michel & Fong, Duncan K. H., 1998. "A Bayesian approach to the spatial representation of market structure from consumer choice data," European Journal of Operational Research, Elsevier, vol. 111(2), pages 285-305, December.
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    Cited by:

    1. Rajagopal, 2006. "Fiscal Policy and Growth: The Case of the Spanish Regions," Economic Issues Journal Articles, Economic Issues, vol. 11(1), pages 9-24, March.
    2. Rajagopal, 2006. "Measuring customer value and market dynamics for new products of a firm: an analytical construct for gaining competitive advantage," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 8(3/4), pages 187-205.
    3. Hans H.Bauer & Maik Hammerschmidt & Matthias Braehler, 2004. "The Customer Lifetime Value Concept And Its Contribution To Corporate Valuation," Microeconomics 0402006, EconWPA.
    4. Rajagopal, 2005. "Measuring Customer Value Gaps: An Empirical Study in Mexican Retail Market," Econometrics 0508012, EconWPA.

    More about this item

    Keywords

    Customer Value; Data Envelopment Analysis (DEA); Efficiency Analysis; Market Partitioning; Product-Market Structuring;

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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