Value and the Value Chain

A channel of distribution involves multiple parties: manufacturer, wholesaler, retailer, and cus­tomer. These parties are most apt to be satisfied with their interactions when they have similar beliefs about the value provided and received, and they agree on the appropriate payment for that level of value.

From the perspective of the manufacturer, wholesaler, and retailer, value is embodied by a series of activities and processes—a value chain—that provides a certain value for the consumer. It is the totality of the tangible and intangible product and customer service attributes offered to shoppers. The level of value relates to each firm’s desire for a fair profit and its niche (such as discount versus upscale). Firms may differ in rewarding the value each provides and in allocating the activities undertaken.

From the customer’s perspective, value is the perception a shopper has of a value chain. It is the customer’s view of all benefits from a purchase (formed by the total retail experience). Value is based on perceived benefits received versus the price paid. It varies by type of shopper. For example, price-oriented shoppers want low prices, service-oriented shoppers will pay more for superior customer service, and status-oriented shoppers will pay a lot to patronize prestigious stores.

Why is value such a meaningful concept for every retailer in any kind of setting?

• Customers must always believe they get their money’s worth, whether the retailer sells $45,000 Patek Phillipe watches or $40 Casio watches.
• A strong retail effort is required so that customers perceive the level of value provided in the manner the firm intends.
• Value is desired by all customers; however, it means different things to different customers.
• Consumer comparison shopping for prices is easy through ads and the Web. Thus, prices have moved closer together for different types of retailers.
• Retail differentiation is essential so a firm is not perceived as a “me too” retailer.
• A specific value/price level must be set. A retailer can offer $100 worth of benefits for a $100 item or $125 worth of benefits (through better ambience and customer service) for the same item with a $125 price. Either approach can work if properly enacted and marketed.

A retail value chain represents the total bundle of benefits offered to consumers through a channel of distribution. It comprises shopping location and parking, retailer ambience, the level of customer service, the products/brands carried, product quality, the retailer’s in-stock position, shipping, prices, the retailer’s image, and other elements. As a rule, consumers are concerned with the results of a value chain, not the process. Food shoppers who buy online via Peapod care only that they receive the goods ordered at the promised time, not about the steps needed for the home delivery of food at the neighborhood level.

Some elements of a retail value chain are visible to shoppers, such as display windows, store hours, sales personnel, and point-of-sale equipment. Other elements are not visible, such as store location planning, credit processing, company warehouses, and many merchandising decisions. In the latter case, various cues are surrogates for value: upscale store ambience and plentiful sales personnel for high-end retailers; shopping carts and self-service for discounters.

There are three aspects of a value-oriented retail strategy: expected, augmented, and poten­tial. An expected retail strategy represents the minimum value chain elements a given customer segment (e.g., young women) expects from a type of retailer (e.g., a mid-priced apparel retailer). In most cases, the following are expected value chain elements: store cleanliness, convenient hours, well-informed employees, timely service, popular products in stock, parking, and return privileges. If applied poorly, expected elements cause customer dissatisfaction and relate to why shoppers avoid certain retailers.

An augmented retail strategy includes the extra elements in a value chain that differentiate one retailer from another. As an example, how is Saks different from Sears? The following are often augmented elements: exclusive brands, superior salespeople, loyalty programs, delivery, personal shoppers and other special services, and valet parking. Augmented features complement expected value chain elements, and they are the key to continued customer patronage with a par­ticular retailer.

A potential retail strategy comprises value chain elements not yet perfected by a competing firm in the retailer’s category. For example, what customer services could a new upscale apparel chain offer that no other chain offers? In many situations, the following are potential value chain elements: 24/7 store hours (an augmented strategy for supermarkets), unlimited customer return privileges, full-scale product customization, instant fulfillment of rain checks through in-store orders accompanied by free delivery, in-mall trams to make it easier for shoppers to move through enormous regional shopping centers, and a doorman. The first firms to capitalize on potential features typically gain a head start over their adversaries. Barnes & Noble and Borders accom­plished this by opening the first book superstores, and Amazon.com became a major player by opening the first online bookstore. Yet, even as pioneers, firms must excel at meeting customers’ basic expectations and offering differentiated features from competitors if they are to grow, which is why Borders eventually had to close all its stores—it did not adapt fast enough.

There are five potential pitfalls to avoid in planning a value-oriented retail strategy:

Planning value with just a price perspective. Value is tied to two factors: benefits and prices. All major discounters now accept credit cards because shoppers want to purchase with them.

• Providing value-enhancing services that customers do not want or will not pay extra for. Ikea knows most of its customers want to save money by assembling furniture themselves.
• Competing in the wrong value/price segment. Neighborhood retailers generally have a tough time competing in the low-price part of the market. They are better off providing augmented benefits and charging somewhat more than large chains.
• Believing augmented elements alone create value. Many retailers think that if they offer a benefit not available from competitors that they will automatically prosper. Yet, they must never lose sight of the importance of expected benefits. A movie theater with limited parking will have problems even if it features first-run movies.
• Paying lip service to customer service. Most firms say, and even believe, customers are always right. Yet, they may act contrary to this philosophy—by having a high turnover of salespeople, charging restocking fees for returned goods that have been opened, and not giving rain checks for out-of-stock items.

To sidestep these pitfalls, a retailer could use the checklist in Figure 2-2, which poses a num­ber of questions that must be addressed. The checklist can be answered by an owner/corporate president, a team of executives, or an independent consultant. It should be reviewed yearly or more often if a major development, such as the emergence of a strong competitor, occurs.

Source: Barry Berman, Joel R Evans, Patrali Chatterjee (2017), Retail Management: A Strategic Approach, Pearson; 13th edition.