The price you’re worth: A case-study of pricing in the TIC-market

Spring 2020 | ISRN: LIU-IEI-TEK-A--20/03772--SE

The price you’re worth:

A case-study of pricing in the TIC-market

Stefan Lindstedt Kasper Vinberg

Supervisor: Mario Kienzler Examiner: Thomas Rosenfall

Linköping University SE-581 83 Linköping, Sweden 013-28 10 00, www.liu.se

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Acknowledgements

We want to take the opportunity to thank all the people involved during the work of this thesis, as it marks the end of a five-year journey at Linköping University and we could not have made this without their contributions.

First and foremost, we want to thank our supervisor, Mario Kienzler, who has supported and guided us throughout this process and provided us with invaluable feedback. His investment in our thesis has not only made our life easier but has heightened the quality of this work.

We would also like to direct a sincere thank you to our supervisor at Epsilon, who gave us the opportunity to research and learn more about an important and interesting subject, and for giving us all the prerequisites we needed to complete this research work. Additionally, we would like to thank all the people we have come in contact with during the process of writing this thesis, from the employees at Epsilon to the customers who were kind enough to let us interview them.

We would also like to thank our opponents, Axel Leth and Nils Sjöstrand, who aided us with the work through their engagement and feedback. Lastly, we would like to thank our families and friends who have supported us throughout our studies at Linköping University.

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Executive summary

How to price your offering is one of the main managerial decision issues today and is alarmingly often not grounded in necessary market and cost research. Pricing is a complex topic, dependent on a multitude of internal and external factors, which makes pricing practice and strategy alignment even more difficult. As a simplifying measure, pricing practices are commonly categorized into three categories: cost-based, competition-based and value-based pricing, of which value-based pricing is considered the superior practice by scholars. Consequently, the issue of how to adopt value-based pricing and how to actually price according to value is pertinent and a main focus of this thesis. What comprises perceived customer value, how a firm creates and captures value, and how a firm chooses to formulate the customer value proposition in order to communicate the generated value are all questions that this thesis investigates and attempts to answer. Furthermore, the effects of the customer-supplier relationship on pricing and change management aspects of a transition to value-based pricing are also investigated and analyzed.

In order to answer the research purpose and accompanying research questions, a qualitative single case-study was conducted. The case company was a leading company in the TIC-market, who just recently had started discussing implementing value-based pricing and was therefore deemed as an appropriate case for this study. Empirical data was gathered through semi-structured interviews with the employees as well as the customers of the case company.

The analysis of the empirical data in conjunction with the theoretical framework led to a revised analytical model that attempts to explain the relations and correlations of the different concepts discussed in this thesis, as well as conclusions regarding the aforementioned research questions. This study concludes that the common value drivers are Quality, Delivery reliability, Delivery time, Price, Geographical location,

Relationship and communication, Customization. Additionally, the study concludes that

the alignment of pricing practice and strategy is heavily dependent on internal and external awareness, and it is of utmost importance for a firm engaging in value-based pricing to know not only their customer and market, but also their own capabilities and strengths. Regarding how to formulate the customer value proposition, the study concludes that it should be customized for the specific customer and have a resonating focus with elements of points of difference. Lastly, the study details the challenges that a firm transitioning to a value-based pricing practice might encounter, and the suggestive solutions to these obstacles.

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Introduction ... 1

Pricing today ... 1

Market and pricing overview: Testing, Inspection and Certification-market ... 3

Research purpose and questions ... 5

Theoretical framework ... 7

Value ... 7

Perceived Customer Value ... 7

Value creation ... 9

Value capture ... 12

Value segmentation ... 13

Customer value proposition ... 14

Pricing practices ... 16 Cost-based pricing ... 16 Competition-based pricing ... 17 Value-based pricing ... 18 Pricing strategies ... 19 Relationship Marketing ... 20 Customer loyalty ... 21 Customer satisfaction ... 22 Change Management ... 23 Analytical model ... 25 Methodology ... 28 Scientific approach ... 28 Research approach... 28 Case company ... 30 Epsilon AB ... 31 Epsilon’s challenge ... 31 Data-gathering methods ... 32 Interviews ... 33 Interview guide ... 34

iv Trustworthiness ... 38 Authenticity... 39 Research ethics ... 40 Empirical data ... 42 Customer value ... 42

Why employees think customers choose Epsilon ... 42

Why customers choose Epsilon ... 43

Customer priorities in choosing TIC-supplier ... 45

Employees’ market perception ... 45

Customers’ market perception ... 46

Epsilon’s market-unique offerings ... 47

Epsilon’s segmentation of customers... 47

Previous experiences of incorporating value ... 48

Price ... 48

Pricing strategy and processes ... 49

Consequences and problems of the pricing ... 50

The competitive pricing picture ... 50

Communicating customer value and price ... 51

Communication process ... 51

Communication performance... 52

Customer value proposition ... 54

Value hinderances and enablers ... 55

Market unawareness... 55

Value enablers: Tools and guidelines ... 56

Relations in consideration ... 56

Operations versus sales ... 56

The required organizational changes ... 57

Analysis & Discussion ... 59

What generates value ... 59

Working with price... 62

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The value capture dilemma ... 65

Conveying the message ... 66

Propositional imperfections ... 66

The desirable approach ... 68

The bricks of change ... 69

Training wheels of value ... 69

Minding the mindset ... 71

The supportive and effective environment ... 72

Gaining market consciousness ... 73

Planning for change ... 75

Revisiting the analytical model ... 76

Conclusions ... 80

In light of the research questions... 80

Research question I: Value drivers ... 80

Research question II: Practice and strategy ... 81

Research question III: Customer value proposition ... 82

Research question IV: Challenges ... 83

Practical implications ... 85

Theoretical contributions... 86

Future research ... 87

List of references ... 89

Appendix: Interview guide ... 98

Interview guide for employees ... 98

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Table 1: Selection of interview subjects ... 35

Table 2: Quality Control ... 38

Table 3: Customer priorities ratings ... 45

Table 4: Value-based challenges and suggested solutions ... 86

LIST OF FIGURES

Figure 2: Value capture process Source: Own illustration, inspired by Figure 6 in Töytäri (2018) ... 13

Figure 3: Pricing strategies framework Source: Own illustration, inspired by Table 1 in Ingenbleek and van der Lans (2013) ... 20

Figure 4: Analytical model Source: Own illustration ... 25

Figure 5: Case-study design Source: Own illustration, inspired by Figure 16.1 in Bryman and Bell (2011) ... 30

Figure 6: Customer priorities in choosing TIC-market supplier Source: Own illustration ... 61

Introduction

Pricing today

One of the main managerial decision issues today is pricing (Katsigiannis, 2014), partly due to pricing having an enormous impact on financial results, where a 5% increase in price on average leads to a 22% improvement in operating profits (Hinterhuber, 2004). Despite this, industrial pricing is commonly made without being grounded in necessary market and cost research (Lancioni, 2005a). In addition, even though pricing is a vital strategic decision (Piercy, et al., 2010; Lancioni, 2005b) it seldom gets the spotlight in the boardroom (Ståhl, et al., 2018). Instead the pricing decisions are often done, with risk for inconsistency, at lower levels in the organization without an understanding of the bigger picture (Richards, et al., 2005).

However, with that being said, deciding how to actually price a company’s product or service offering is a complex topic dependent on several inter-organizational as well as external factors (Lancioni, 2005a). Consequently, as a simplifying measure, pricing practices are commonly categorized into three categories: cost-based, competition-based and value-based pricing (Indounas, 2009). These different practices are all driven by differing internal and external organizational elements. Although, as these practices are intended to be implemented for a particular product or service offering, businesses can find themselves using a combination of the aforementioned practices (Hermann, 2015). Furthermore, the usage of pricing practices is not considered mutually exclusive, as managers often combine different types of cost, market and value-information when setting the price (Kienzler, 2018a).

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Historically, cost-based pricing has been the dominating practice for many firms (De Toni, et al., 2016). This practice calculates the cost of producing a product or service and adds a markup in order to create a profit margin and arrive at a final price (Deshpande, 2018). As such, a consequence of using a cost-based pricing practice means ignoring several external factors that could affect the final pricing decision. Competition-based pricing faces similar issues, but in contrast to cost-based pricing it takes the market situation into account. Firms using competition-based pricing make pricing decisions based on information regarding market and competitor prices (De Toni, et al., 2016). However, value-based pricing is increasingly gaining attention and is by many scholars considered the superior practice (Hinterhuber & Liozu, 2012a; Kienzler, 2018a), despite this only a limited number of firms emphasize value-based pricing practice in their pricing (Kienzler, 2018b). Instead, most companies primarily focus on cost-based or competition-based pricing, shown by Hinterhuber (2008) who concludes in a meta-analysis that 37% of industrial companies price according to cost-based pricing and 44% price according to a competition-based pricing. Value-based pricing instead aims to set a price which reflects the perceived customer value of the product or service (Ingenbleek, 2014). As a result, the question of how to price the firm offering in a value-based context, must be preceded by an understanding of what creates value for the firm’s customer. Value creation is central to any organization as it concerns how to serve customers’ specific needs with a firm offering, in a way that generates firm growth, profit and customer satisfaction (McNair-Connolly, et al., 2013; Lepak, et al., 2007). What exactly compromises the term value creation, is widely discussed among authors (e.g., Tuomisaari, et al., 2013; Srivastava, et al., 1999; Treacy & Wiersema, 1993), although with the common denominator that it adresses the elements of value in an offering. Consequently, this thesis adopts the term value driver, introduced by Amit and Zott (2001), which is defined as the general elements driving value in an offering. However, focusing solely on value-creation is hardly enough, as firms must be able to capture this value as well; that is, how the firm can convert the generated value into profit (Bowman & Ambrosini, 2000; Tuomisaari, et al., 2013).

Once the idea of how to create and capture customer value has been conceptualized, the question is how to properly reflect this value in the organization’s communication to the customer, through the customer value proposition (Payne, et al., 2017). This is a crucial and integral part of the value-creation process (Payne & Frow, 2005), which does not only have a positive impact on customer’s value perception and satisfaction (Eggert & Ulaga, 2002), but also enables enhancement of employee satisfaction and behavioral commitment to the firm (Saura, et al., 2005). Payne et al. (2017) defines the customer value proposition as a vital strategic tool used when a company communicates how it aims to provide value for their customers. Similarly, Kambil et al. (1996) argue that value propositions define how items of value, such as product or service features and complimentary services, are packaged and offered to fulfill customer needs.

Moreover, grouping a firm’s customer portfolio into different segments based on their perceived customer value has been proven fruitful in many regards (e.g., Dibb, et al.,

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2002; Taher, et al., 2016; Liozu, 2017; Hunt & Arnett, 2006) and should be considered by all firms who want to improve relative firm performance (Liozu, 2017). Among the many benefits, it helps the firm understand their customers better and treat them accordingly - thus increasing their value and loyalty (Dibb, et al., 2002; Taher, et al., 2016), as well as their satisfaction (Hunt & Arnett, 2006). By segmenting the customer portfolio based on value, the firm is able to create tailored customer value propositions more effectively (Nagle & Holden, 2002a), and thus realize more value (Hinterhuber, 2016; Goyat, 2011). Additionally, Nagle and Holden (2002a) mention that value segmentation goes hand-in-hand with pricing practices that are grounded in value. Although, constructing a value segmentation scheme and reaping its many perks has proven to be a difficult task (Hinterhuber & Liozu, 2012b; Liozu, 2017) – making it all the more interesting to investigate.

Without proper implementation, education and adherence to new coupled organizational pricing processes, as well as managerial recognition of the latter, a change in pricing practice and strategy can be problematic (Hallberg, 2017; Hinterhuber & Liozu, 2017; Kienzler, et al., 2019). This is especially true in the value-based context, as relevant literature suggests that the need for top management support, implementation of appropriate pricing processes and alignment of the sales force with value-based pricing are among the challenges an organization may face (Nagle & Holden, 2002a). This could be managed through change management initiatives (Kitsios & Kamariotou, 2017; Oakland & Tanner, 2007), where authors (e.g., Crawford, 2013; East, 2011; Passenheim, 2010) have found communication and engagement of employees to be key pillars in its success. Additional specific concerns surface in a value-based context, such as establishing a value manager and a value proposition innovation process (Liozu, 2015). Also, to extend the focus of value to be embraced by the sales force (Kienzler, 2018b), thus improving customer insight and help identify and recognize the specific customer’s pain (Töytäri, 2018), and treat it accordingly.

Market and pricing overview: Testing, Inspection and

Certification-market

The Testing, Inspection and Certification (TIC) market was, according to MarketsandMarkets1, valued to $209,4 billion in 2019, with an expected CAGR2 of

4,91% between 2019 and 2024 (MarketsandMarkets, 2019). The market is considered highly fragmented, where the three largest players accounted for less than 25% of the total market share in 2017 (Leggo & Maunsell, 2017).

1 MarketsandMarkets is a leading global B2B research agency, currently serving the large majority of

Global Fortune 1000 companies.

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On a global level MarketWatch3 suggests that the TIC-market could be segmented by its

different application areas, in which case it covers the textile, automation, automotive, food and beverage, aerospace, and oil and gas industry among others (MarketWatch, 2020). Continuing, the market compiles a broad spectrum of services related to testing, inspection and certification of materials and components.

Talking to an industry leader in the TIC-market, one also finds that the market provides services regarding accident and hazard investigations, as well as risk and damage analysis. Additionally, the offerings of the TIC-market partly constitute commoditized, standardized and highly competitive services as well as more specialized, expertise-demanding services4.

According to MarketWatch (2020), providing maintenance of safety, health and quality requirements of their customer’s products is the overarching purpose the TIC-market serves. As a result, the rising global awareness among consumers regarding health, safety and quality, across industries, is one of the key drivers for the market’s continuous growth.

Moreover, pricing in the TIC-market is an interesting topic and a critical issue. Similar to other markets, what makes a suitable, and practically implementable, pricing practice and strategy is heavily dependent on the offering being a service or product. Given that the nature of the TIC-market is partly service-oriented, a need of delivering quality service is essential for success and survival (Zeithaml, et al., 1996). Fornell (1992) demonstrates a positive correlation between service quality and customer satisfaction. Additionally, that customer satisfaction is a driver for future company profit and growth. Furthermore, studies show that perceived customer value has a positive impact on, and is a direct predecessor of, customer satisfaction (Oh, 1999). Taking in account the correlating relationship between perceived customer value and customer satisfaction (Oh, 1999), and the fact that high customer satisfaction is strongly related to delivering high quality service (Zeithaml, et al., 1996), the value-based methodology arguably qualifies for being a suitable pricing practice for service sub-segments of the TIC-market today.

Even though a large portion of the TIC-market consists of service-nature offerings, there are also sub-segments that constitutes of more commoditized, standardized offerings with less differentiation amongst competitors and higher competitive intensity. These types of products or commoditized services are more in favor of a competition-based or cost-based pricing practice and strategy (Amaral & Guerreiro, 2019).

3 MarketWatch is an American financial information website that provides business news and analysis, and

is a subsidiary of Dow Jones & Company

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Research purpose and questions

When considering the aforementioned aspects, it becomes evident that deciding on a pricing strategy in industrial markets, especially in the context of the TIC-market, is a source of confusion with a multiple dependency on a range of various external and internal factors. Pricing practices, value drivers and value propositions are some of these factors that need to be considered. Even in the context of value-based pricing, underlying topics such as what actually comprises customer value, as well as how to formulate and communicate this value in a plausible way emerges and demands thought. Additionally, after a definitive pricing strategy has been conceptualized, what the challenges are for the necessary changes, processes and mindsets to be durably adhered to across the organization.

These questions, in the context of a company active in the TIC-market, will serve as the purpose of this thesis. More specifically the purpose is:

To investigate how pricing practices and strategies can incorporate customer value and what challenges this can entail.

In order to answer the research purpose, it has been broken down into four distinct research questions outlined below, together with a brief description of what each question entails.

Research question I: What are common value drivers?

This research question entails unfolding what drives value for the customers in the TIC-market. What specifically creates value for a firm’s customers depends greatly on the needs of that specific customer. This might result in an over-extensive list of value drivers. However, value drivers cannot seldomly be aggregated into more general themes, applicable for a wider range of customers. Subsequently, this research question aims to uncover these themes.

Research question II: How can firms determine which pricing practice and subsequent

strategy to pursue?

This research question concerns how the inter-organizational configurations should be set up in order to facilitate and simplify the process of engaging with a pricing practice and pricing strategy, on a case-to-case basis. More specifically, to learn which the determinants are that ought to be evaluated, in order to arrive at an appropriate pricing practice and strategy for the specific case.

Research question III: How can customer value propositions be customized, formulated

and communicated?

As previously mentioned, what drives customer value often varies between individual, or groups of, customers. How this value, once created by the firm, is communicated to the customers is likewise an important issue that ought to be addressed. More specifically,

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this regards how created value can be translated into words and action that, in a customized and captivating way, intensifies customers’ willingness to purchase a firm’s offering.

Research question IV: What are the challenges in adhering to a determined pricing

practice and strategy?

An important, easily overlooked, aspect of introducing and implementing organizational change is taking precautionary action in getting every employee on board with the change. This is especially true in the context of altering the way of viewing pricing since it often disrupts old and well-established ways of working. Challenges and obstacles such as these, impeding the change, must be identified and addressed in order to effectively execute the change.

Theoretical framework

Value

A central concept often surfacing when talking about pricing is value. What do customers actually gain from purchasing a product or service? This section aims to give a theoretical overview of some of the more common terms often associated with the broad concept of value. Firstly, the section attempts to depicture the concept of perceived customer value, what it is and how it can be measured. Secondly, on a more fundamental level explain how value is created and captured by a firm, the determinants and different ways of thinking. Furthermore, theory regarding how the concept of segmentation makes its way into the value-sphere, and how firms can distinguish themselves by communicating this value through their customer value propositions, is discussed.

Perceived Customer Value

When outlining the broad concept of value, it is beneficial to first understand how and what customers actually perceive as value. Subsequently, the concept of perceived customer value emerged as the defining business issue of the 1990s, and has continued to receive extensive research interest in the present century (Sánchez-Fernández &

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Bonillo, 2007). It has been proven that using the concept of perceived customer value results in creating more satisfied customers, as well as also having a direct effect on customer repurchase intention and loyalty (Akbar Aulia, et al., 2016). Therefore, delivering superior value has become a vital strategic component for firms to be able to gain a competitive advantage and long-term success (Asgarpour, et al., 2015).

Defining what constitutes customer value is difficult, as there are various types of value dimensions depending on the nature of the product characteristics (Akbar Aulia, et al., 2016). As such, there are a number of definitions outlining perceived customer value. One of the most common definitions is provided by Zeithaml (1988) who defined value as the consumer’s overall assessment of the perceived extracted utility of a product, offset with what is given for it.

Woodall (2003) suggested that there are five distinct notions of value for the customer:

Net value, Marketing value, Derived value, Sale value and Rational value. Net value

means the balance of benefits and sacrifices, which essentially measures how worthwhile the transaction is. Derived value, which is outcome-oriented and based on the notion of use-value means that benefits are derived from consumption-related experiences.

Marketing value emphasizes the offerings perceived attributes and is more of a strategic

element of value. Sale value is heavily focused on price within a competitive environment, where the best sale value is the option that carries the lowest price. Rational

value is based on a benchmark in price where the customer will compare the difference

between the price offered by the firm and the market benchmark.

Khalifa (2004) proposed an integrative configuration that included three complementary models: Customer value in exchange, Customer value dynamics and Customer value

build-up. The author defines customer value in exchange as a benefits-costs model where

the customer is willing to engage in a business relationship if the perceived benefits outweigh the sacrifices required. The customer value dynamics model reflects how a customer evaluates an offering, in terms of both offering features and how the customer is treated by the company (Khalifa, 2004). Customer value build-up model looks at four factors to determine the total customer value, namely customer needs, customer benefits, if the firm views the customer as a person or just a consumer, and also if the view of the customer relationship is seen as a transaction or an interaction (Khalifa, 2004).

Traditionally, value has been likened to utility, as seen with the aforementioned definition presented by Zeithaml (1988). This theory states that consumers derive value from the difference in utility gained by the product or service and the disutility represented by the price paid, which is too simple a definition for many scholars (Sánchez-Fernández & Iniesta-Bonillo, 2007). This is an approach that views perceived value as a one-dimensional construct, meaning that perceived value is a single overall concept that can be measured by a self-reported item (or set of items) that evaluates the consumer’s perception of value (Sánchez-Fernández & Iniesta-Bonillo, 2007).

Continuing, Callarisa Fiol et al. (2011) argue that perceived value encapsulates the assessment made by the customer regarding the utility of a relationship with suppliers,

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and is derived from the customer’s perception of benefits and sacrifices in terms of

affective, emotional, social and rational or functional elements involved. This is an

example of an alternative approach that views perceived value, not as a one-dimensional but rather as a multidimensional, construct that consists of various interrelated attributes or dimensions that form a holistic representation (Sánchez-Fernández & Iniesta-Bonillo, 2007).

Another model that exist that attempt to define what consumer value actually entails is the PERVAL scale, developed by Soutar & Sweeney (2001). The model contains quality, price, emotional value and social value as the four value dimensions, and 19 items, where items refer to the questions asked to determine the importance of each of the value dimensions mentioned. Walsh et al. (2014) provides definitions of these four value dimensions, where they state that quality is the functional value and refers to the practical or technical benefits obtained. Furthermore, price refers to how satisfactory a product is offset with the cost, time and effort required to obtain the product. Emotional value is said to refer to mental or psychological needs of consumers and the utility in terms of feelings or affective states that the product can generate. Finally, social value refers to the social utility, such as status or prestige, which can be obtained from purchasing and using the offering. The PERVAL scale has been altered and built-upon by several scholars, sometimes adding a value dimension and sometimes by altering the items in the scale (Soutar & Williams, 2009). However, when altering the PERVAL scale, it is important to keep the industry and offering in mind, in order to adapt the model correctly.

Taken together, the definition and concept of perceived customer value has been frequently debated from its origin to the present century, made apparent from the above outlining of the term. The different definitions presented by various scholars all choose to look at perceived customer value from different angles, taking different dimensions and factors in account. Some argue it’s a one-dimensional construct whilst others suggest it’s a multi-dimensional one. However, the pervading theme among all these definitions, is that the term concerns some type of customer-made evaluation of the offering; that is, how much the customer feels it’s worth, offset to what is sacrificed for taking part of the offering. One way of measuring perceived customer value, taking in account its complex nature, is the PERVAL-scale, which this thesis has chosen to adopt. The PERVAL-scale is seen as appropriate due to its general acceptance amongst scholars for evaluating customer value, and because of the high degree of adaptability it carries, depicted above.

Value creation

Value creation is central to any economic enterprise, as it defines the organization’s

capability to serve customers and generate growth and profits (McNair-Connolly, et al., 2013). However, what specifically goes into creating value is subject of heated discussion and differs greatly among scholars (e.g., Lepak, et al., 2007; Tuomisaari, et al., 2013; Skilton 2014; Srivastava, et al., 1999; Treacy & Wiersema, 1993)

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Lepak et al. (2007) defines value creation as the process of addressing vital customer needs by offering a product or service that the customer uses for their own perceived satisfaction. The authors add that the process of value creation will differ based on whether value is created by an individual, organization or society. Likewise, Tuomisaari et al. (2013) extends the previous definition by making note of service-dominant logic, and argues that the process of value creation for the user is always an interaction between supplier and customer. In other words – that value is a co-creation process.

A related view, presented by Skilton (2014), is that buyer value creation strategies will depend on key supplier capabilities. Suppliers who control these key capabilities will gain bargaining power over the customer. In turn, if the buyer does not depend on the supplier capabilities, they can use cheaper and less capable suppliers. This leads to the conclusion that strategic decisions regarding value creation and value capture (defined below), determine the overall structure of sourcing for the particular offering (Skilton, 2014). Srivastava et al. (1999) partly concurs by arguing that supply chain management, relationship management and product development are key processes in value creation. Contrastingly, Treacy & Wiersema (1993) instead chooses to highlight product leadership, operational excellence and customer intimacy as leading contributing factors in value creation.

In conclusion, there is a disparity in what value creation exactly comprises. For this reason, this study will adopt the aggregated term value drivers, as introduced by Amit and Zott (2001), described as any source of value creation which is used to refer to any factor that enhances the total value created.

When reviewing the literature regarding value drivers, two separate definitions emerge. One of these defines a value driver as a factor that increases the shareholder value of the company (L.E.K. Consulting, 2017; Rappaport, 1998). The second definition, introduced by Amit and Zott (2001) and relevant to this thesis, concerns factors that increase value for the customer. As examples of such, Amit and Zott (2001) highlight Efficiency,

Complementarities, Lock-in and Novelty, in the context of e-businesses, as overarching,

general and interconnected categories of value drivers, consisting of multiple value-driving activities. Although this generalization of Amit and Zott (2001) derives from research in the context of e-business, a number of the presented value drivers are non-exclusive for e-businesses and even non-non-exclusive across industries. Hence, a revised version of Amit and Zott’s framework, applicable in a more general context, is illustrated below in Figure 1.

11 Figure 1: Value driver categories

Source: Own illustration, inspired by Figure 1 in Amit and Zott (2001)

Weinstein (2012) and Johnson and Weinstein (2004) explain that customer value demands extraordinary performance on four value-points: service, quality, image and

price. Service is described as the intangible value in the offering and quality is the

customers’ perception of how their expectations were met. Continuing, image is the customers’ perception of the organization they interact with, and price is defined as the price charged and that customers are willing to pay. These are to be seen as four broad and general categories, encompassing a wide variety of value-adding activities and features, which this thesis chooses to define as value drivers.

As companies must constantly search for ways to add value to their products and services, Johnson and Weinstein (2004) discuss a number of value drivers in the context of these four value-points. Additional features and benefits can increase the value in the offering, for example Verizon adding special services such as voice mail and internet access in an attempt to satisfy customer needs. Branding can help the company differentiate its image and distinguish itself from competitors. Involving customers can add value and strengthen relationships with customers and lead to a higher degree of

customization and choice, which is a value driver in and of itself, exemplified by The

Farm Journal which publishes over 1000 different versions of every issue to readers. Continuing, enhanced quality is exemplified by Motorola and General Electric and their pursuit of six sigma (and beyond) quality, and how being best in class should not only be a goal, but an integrated part of the business culture. Exceptional service is exemplified by Ritz-Carlton hotels and how the management urges its employees to move heaven and

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earth in order to satisfy their customers. Simplifying or bundling the offering is another value driver that can lead to greater profits, exemplified by how Microsoft offers stand-alone products, but also bundled products such as the Microsoft Office package, which has led to a higher degree of customization and choice for the customers. Lastly, Johnson and Weinstein (2004) mention technological leadership, and how this value driver can be a great source of differentiation.

All the value drivers mentioned seek to increase customer satisfaction and add on value in the offering for the customer. By developing, improving and delivering on these activities and features, an organization can strengthen their competitive advantage (Johnson & Weinstein, 2004).

Value capture

Continuing, creating value and defining value drivers are rarely enough without a plan for capturing the generated value. However, before talking about Value capture, the terms of

Use value and Exchange value ought to be defined. Use value is defined as something

subjectively assessed by the customers, specific attributes or qualities perceived by customers in relation to their specific needs. In contrast, Exchange value is defined as the monetary amount paid by the buyer to the seller for the perceived value, which is only realized at the point of sale (Bowman & Ambrosini, 2000; Tuomisaari, et al., 2013). As a result, (Bowman & Ambrosini, 2000) defines value capture as the realization of exchange value by economic actors, such as the firm, customers and employees, or more simply put – “[…] profit is value captured by the firm” (Bowman & Ambrosini, 2000, p.

13). In a similar manner Tuomisaari et al. (2013, p. 554) defines value capture as “[…]

the exchange value of an offering minus the costs of production, i.e. the profit margin”.

Additionally, Bowman and Ambrosini (2000) state that value capture is determined by the perceived power and bargaining relationships between buyers and sellers, meaning that a higher customer bargaining power results in a lower value captured by the firm. Porter (1980) states that a high bargaining power of buyers comprises several different factors, among these are the buyer’s ability to substitute the offering and the total size of the customer orders to the firm.

Taken together and consolidated, the above concepts of value capturing have been depictured in Figure 2 below. The figure shows the individual terms in relation to one another. WTP is an abbreviation for willingness to pay; that is, the amount the customer is willing to pay for the offering. Standard price refers to a cost-based price with an added standardized profit margin. Production cost refers to all associated costs in the process of creating the offering. The gap between the standard price and the maximum WTP represents the value that is generated from the offering, and that can be captured by the firm. Subsequently, as captured value can be translated into realized profit, the model shows the amount of profit realized or unrealized by the firm, in the context of the specific offering. This generated value is made up of, with basis in the above theory, a

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combination of how much value the customer believes the offering brings (i.e. perceived customer value) and the power bargaining relationship between the customer and the supplier, as presented by Porter (1980).

To summarize, a high perceived customer value and low customer bargaining power results in more value to be captured by the firm, and vice versa. However, a high perceived customer value could also be offset with a high customer bargaining power, resulting in a lesser amount of value to be captured.

Figure 2: Value capture process

Source: Own illustration, inspired by Figure 6 in Töytäri (2018)

Value segmentation

Taher et al. (2016) define Value Segmentation as something that helps businesses to understand different types of customers, develop long-term relationships with them and hence increase their value and loyalty. Similarly, Goyat (2011, p. 47) defines, what arguably could be a synonym to value segmentation, Needs-Based Segmentation as the act to “Group customers into segments based on similar needs and benefits sought by

customer in solving a particular consumption problem”. By grouping customers in this

way, managers are able to target customer segments with different value perceptions (Nagle & Holden, 2002a), understand them and their needs better (Dibb, et al., 2002; Taher, et al., 2016), and treat them accordingly. As a result, value segmentation can function both as a driver for businesses to create more satisfied customers (Hunt & Arnett, 2006), but also as a driver for higher perceived customer value (Akbar Aulia, et al., 2016; Taher, et al., 2016; Oh, 1999; Amaral & Guerreiro, 2019). The necessity of segmenting customers based on needs and values is further strengthened by Liozu (2017) who states that segmentation has a positive relation with relative firm performance. Taking the above definitions of value segmentation in consideration, one can imagine that the concept would be compatible with a pricing strategy based on customer value. This notion is agreed upon by Nagle and Holden (2002a) claiming segmentation to be particularly important for pricing strategies emphasizing customer value. Similarly, by Liozu and Hinterhuber (2013) who state that value-based pricing, among other things,

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implies aligning prices with differences in value perceptions across segments. Lastly, Goyat (2011) and Hinterhuber (2016) affirm that businesses can provide higher customer value by developing a market mix which addresses the specific needs and concerns of different selected segments.

Although value segmentation seems auspicious, a study by Liozu (2017), where 144 managers in large firms were surveyed, indicated that respondents found segmentation to be one of the biggest concerns in value-based pricing. This is arguably linked to what Hinterhuber and Liozu (2012b) state regarding what makes segmentation challenging for a business - namely the processes of obtaining unbiased information regarding customer’s value perception. Using similar logic, Dibb et al. (2002) conclude that businesses that manage to properly segment their customers into separate segments or groups, may be able to capture more value than those who cannot. This is in line with what Kienzler (2018a) describes as ambiguity aversion, which is a hindrance for adopting a value-based pricing strategy, as defined in a previous subsection.

Moreover, by having proper value segmentation in place, a firm can reap extensive economic benefits of using different bundling strategies for the varying segments (Stremersch & Tellis, 2002). When bundling two complementary offerings, targeting a specific consumer segment, where one offering has a higher perceived value than the other, the lesser-value offering will enhance the value of the high-value offering (Yalcin, et al., 2013). In this way a firm can decrease that specific segments’ price sensitivity and increase their likelihood of purchasing the offering (Stremersch & Tellis, 2002). Notably, this way of bundling two complementary offerings is well kindred with what Johnson and Weinstein (2004) exemplifies to be value drivers for increasing the customers’ perceived value, depicted in a previous subsection.

Customer value proposition

Payne et al. (2017) defines Customer Value Proposition, henceforth referred to as CVP, as a vital strategic tool used when a company communicates how it aims to provide value for their customers. Similarly, Kambil et al. (1996) argue that value propositions define how items of value, such as product or service features and complimentary services, are packaged and offered to fulfill customer needs. In contrast, Saura et al. (2005) choose to highlight that CVPs can enhance employee satisfaction, psychological attachment, and behavioral commitment to the firm.

Webster (1994) defines CVP as a statement of how the firm proposes to deliver value to their customers in a superior way that differentiates them from their competitors. Similarly, Kaplan and Norton (2001) define CVP as how an organization differentiates itself from competitors to attract, retain and deepen relationships with target customers. Hadinsah et al. (2018) builds on the aforementioned definitions by adding that a value proposition is a clear, interesting and credible expression of the experience customers receive from suppliers’ value-creating offering.

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Liozu (2015) claims that the CVP is at the heart of everything a company does for its customers. Thus, it has a heavy impact on strategy. Kaplan and Norton (2004) concur by stating that strategy is based on differentiated CVPs, as satisfying customers is the source of sustainable value creation. Likewise, Hadiansah et al. (2018) argue that no firm can assume to meet the expectations of every single customer, however the strategies employed will determine what value proposition the company offers to meet these expectations and win the customers’ loyalty.

Anderson et al. (2006) state that value propositions can be categorized into three separate categories: All benefits, Favorable points of difference and Resonating focus. Below follow the authors explain of the different categories:

Firstly, All benefits appear to be the most commonly used approach for managers when constructing a CVP. This type of CVP basically lists all the perceived benefits the company believes it can deliver to its target customers. It requires the least amount of customer knowledge and competitors and is easy to construct. A disadvantage is the benefit assertion, meaning that managers may list benefits that actually don’t provide any value to the customer.

Secondly, Favorable points of difference recognize that the customer has an alternative to one’s own company. This type of CVP lists all favorable points of difference an offering has relative to the next best alternative in the market. It is a more complicated proposition to construct and requires more knowledge and work, and can lead to value presumption, meaning that the company assumes the points of difference will have value for the customer, which will not necessarily be the case.

Lastly, Anderson et al. (2006) explain Resonating focus, seen as the most desirable approach. These offerings focus on the few features that generate the most value for the customer and convey the superior performance in a way that emphasizes a thorough understanding of the customer’s priorities.

Liozu (2015) instead presents eight key dimensions to consider when creating and designing a compelling value proposition, called “The 8 I’s of a Compelling Value

Proposition”. Following, the author explains the different components: (1) Integrative -

the CVP needs to include the most relevant part of the offering, such as products, services, solutions and other intangible features of the offering. (2) Intangible - the value proposition should consider both the tangible and intangible parameters of the offering, but it should be framed as focusing on delivering an emotional and psychological experience based on customer needs. (3) Indispensable - it is important for firms to investigate just how much their customers depend on them, and how they would manage without the supplier. (4) Innovative - most CVPs are created on the foundation of a new idea, concept or venture, and as such customers have come to expect innovation from their suppliers. (5) Inviting - how the company chooses to communicate the CVP is an important aspect, as the CVP has to be inviting for both customers and employees to read and operationalize. (6) Inspirational- a CVP should trigger a response from the customer that excites them regarding the possibility of doing business with the supplier. It should

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also generate excitement in the work force. (7) Inimitable - perhaps the most critical aspect, as the CVP should be unique and difficult for competitors to copy. (8) Impactful - lastly, the CVP needs to really resonate with the customer and show just how much of an impact or benefit the offering will provide the customer.

Taken together, the above demonstrates a lack of general consensus over the meaning of what the term CVP constitutes. It is found to not only yield benefits from an external customer point of view, but also as a strengthening tool for internal elements, such as behavioral commitment to the firm. Moreover, consolidating the above CVP literature displays many similarities in the definitions used. For example, seeing the CVP as something putting the spotlight on differentiation amongst competition and clearly defining the value of the offering for the customer. However, as in most cases dealing with theoretical concepts, reality is seldom as black-and-white. As a result, it is not unlikely that companies do not adhere to a single type of CVP, but rather use varying mixtures of the different concepts.

Pricing practices

The importance of setting the appropriate price for a product or service cannot be understated. Setting the price too low can lead to losses, whereas setting the price too high can result in failure to receive orders (Ståhl, et al., 2018). These risks need to be considered in order to mitigate financial shortcomings and stay competitive. Thus, a firm can decide how to practice pricing of their product or service in a number of ways. This is known as applying a pricing practice, and the most common ways of doing this is what this section is about.

More formally, pricing practices are commonly defined as a set of activities executed by managers that lead to a decision on price (Ingenbleek & van der Lans, 2013). Pricing practices are commonly divided into three separate approaches: cost-based, competition-based and value-competition-based (Indounas, 2009; Nagle & Holden, 2002b). What pricing practices a firm chooses to engage in is subject to product and market conditions (Ingenbleek, et al., 2003), as such, Hermann (2015) states that businesses, offering a combination of services and products, often uses a combination of the aforementioned practice. Likewise, Kienzler (2018a) argues that the usage of pricing practices is seldom mutually exclusive and that managers often combine different types of cost, market and value-information when setting the price. The following section will outline the three different practices, what defines them and what separates them.

Cost-based pricing

Cost-based pricing is the simplest and most popular practice used when setting prices, and has historically been the most common practice employed, since it contains an element of financial caution (De Toni, et al., 2016). The price is calculated using the cost

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of creating a product or delivering a service, such as direct material cost, direct labor cost, and overhead costs, and then adding a markup percentage to create a profit margin in order to arrive at a price (Deshpande, 2018).

A study on 187 UK-based companies and 90 Australian companies yielded three factors that can affect a cost-based pricing practice: competition intensity, company size and type of industry (Guilding, et al., 2005). Competition intensity hampers the range of the profit margin that can be applied. Company size affects the ability to influence prices, while type of industry can affect the capacity to identify the self-cost of a product or service. In a study of managers in the US, findings revealed that cost-based practices rely on experience, prior knowledge, gut and intuition, and thus do not have dedicated pricing functions (Hinterhuber & Liozu, 2012a). Having good knowledge and understanding of the company’s production process is therefore essential when using this type of pricing practice (Ståhl, et al., 2018).

Advantages of using cost-based pricing include that data is generally available (Amaral & Guerreiro, 2019), as well as being easy to use and easy to motivate price increases and assures profits to the company (Deshpande, 2018). The major disadvantage is that it does not take competition, customer needs and demands, and other market conditions, in consideration (Amaral & Guerreiro, 2019; Deshpande, 2018; Avlonitis & Indounas, 2005).

There are several methods for calculating the cost of producing a product or delivering a service, including the two traditional methods job costing and process costing, as well as activity-based costing. Job costing is best suited when goods and services are produced when receiving a customer order, according to specifications made by the customer, or in separate batches (Skousen & Walther, 2009). In essence, the job costing method asks the question: “What did it cost to perform this job?”. In the process costing method, costs are divided into processes or departments and what material, labor, direct expenses and overheads go into each process (Jha & Goda, 2016). It is mostly applicable for companies with mass production and assembly operations. Activity-based costing, or ABC for short, attempts to split production into different core activities and determine the costs related to those activities, and then assign the costs to products based on how much the different activities are required to produce the product (Skousen & Walther, 2009).

Competition-based pricing

Competition-based pricing makes use of information regarding market and competitors’ prices in order to motivate the specific price level applied (De Toni, et al., 2016). Prices are decided and based on information regarding competitor prices (Sammut-Bonnici & Channon, 2015). It informs the organization about how and how much competitors charge for the perceived benefits in the offering (Ingenbleek, et al., 2003).

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According to a study on managers in the US, like with cost-based strategy, managers mostly rely on experience, prior knowledge, gut and intuition when setting prices in a competition-based practice (Hinterhuber & Liozu, 2012a).

An advantage with this practice is that the competitive situation is always considered, while the main disadvantage, similar to cost-based pricing, is that demand-related aspects are ignored (Hinterhuber & Liozu, 2012b). Applying a competition-based pricing practice can also increase the risk of entering a price war with competitors (Hinterhuber & Liozu, 2012b). Adopting this sort of practice can also be dangerous as the company does not have clear cost or profit information from its competitor who, in some cases, may be working with very low margins (Nagle & Holden, 2002b). It is most applicable for medium-market share firms that are competing with high-market share companies or for companies working with products or services with low differentiation (Sammut-Bonnici & Channon, 2015).

Value-based pricing

Another approach to pricing is the value-based pricing practice, which is considered superior according to marketing scholars and pricing practitioners (Hinterhuber & Liozu, 2012a). Value-based pricing is a pricing practice in which the managers make decisions based on the perception of benefits from the product or service being offered to the customer, and how these benefits are perceived and weighted by the customers in relationship to the price they pay (De Toni, et al., 2016). This definition of value-based pricing takes customer needs in consideration, which is a major advantage. However, it is more difficult to gather relevant data (Amaral & Guerreiro, 2019).

Findings from a study based on interviews with 44 managers in 15 US industrial firms, revealed that firms using the value-based pricing practice make product-pricing decisions based on formal market research, scientific pricing methods and expert recommendations (Hinterhuber & Liozu, 2012a). Another study also revealed that companies that use a value-based pricing practice and set higher prices tend to yield a greater profit margin than their counterparts that use cost or competition-based practices (De Toni, et al., 2016).

Even though value-based pricing has been proven to be a superior pricing practice through empirical evidence, it still faces resistance from managers (Kienzler, 2018a). Kienzler continues by listing five reasons why managers may be reluctant to convert their pricing strategy to be based on a value-based pricing practice, namely: Perceived lack of

control, Herding, Fixed-pie bias, Ambiguity aversion and Egocentric fairness bias.

Firstly, he mentions a Perceived lack of control, meaning that a manager’s perception of their control over pricing affect pricing practices. This is strengthened by Dolan and Simon (1996) who claims managers often lack confidence in their ability to influence market prices. Secondly, Kienzler (2018a) discusses Herding, which essentially refers to a hive-mind form of thinking, where an individual will disregard certain information and

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instead choose to base decisions on what the majority does, and is thus more likely to price their product according to market prices instead of making informed pricing decisions. Fixed-pie bias is stated as the third reason, and is defined as the flawed belief that the opposing actor in a negotiation, which in this context refers to the customer, has an interest that is directly opposite to one’s own (Liu, et al., 2015). Additionally, when negotiating prices, managers often view pricing as a zero-sum game (Hinterhuber, 2004).

Ambiguity aversion refers to how an individual prefers to avoid basing decisions on

ambiguous information. For managers, information regarding costs or competitors is more readily available, whereas perceived customer value is harder to obtain and often contains elements of uncertainty and ambiguity. Lastly, Egocentric fairness bias fundamentally means that price fairness is biased toward the buyer’s perspective, and managers are worried that their customers view prices calculated using a value-based pricing practice, as unfair and difficult to motivate.

Pricing strategies

Noble and Gruca (1999) define a pricing strategy as the means employed to achieve a pricing objective, and argue that the majority of pricing strategies imply a price level related to costs, competition or customers. Nagle et al. (2011) mention that such a pricing objective could be an increase in profitability. Other examples of pricing objectives include sales and market share maximization, price differentiation, maintenance of existing customers and long-term firm survival (Avlonitis & Indounas, 2005). The choice of pricing objective will heavily influence the methods used to reach this objective, and having a coherent pricing strategy is required if the firm wishes to make effective pricing decisions (Avlonitis & Indounas, 2005). Achieving an improved profitability, for example, concerns more than simply adjusting price levels, as several other factors determine what a pricing strategy must entail (Nagle, et al., 2011). Internal and external conditions, such as market share, costs, product differentiation, economies of scale and market growth rate among others, are the determinants that decide which pricing strategy is applied by managers to achieve the objective (Noble & Gruca, 1999).

Even though the concepts of pricing strategy and pricing practice can seem to be interchangeable definitions of the same thing, they are in fact different from one another. The terms are related in the way that pricing strategies are implemented through pricing practices, however, an important distinction to make is that pricing strategies are seen as observable in the market, while pricing practices are only observable within the boundaries of an organization (Ingenbleek & van der Lans, 2013). Knowing what particular pricing strategy an organization has applied, may help predict what price-setting practice(s) the organization will engage with (Ingenbleek & van der Lans, 2013). Although, implementing a pricing strategy is no simple task as it requires involvement of many different departments within an organization, such as marketing, sales, finance and capacity management (Nagle, et al., 2011). Nagle et al. (2011) continue by stating that a

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successful implementation of a pricing strategy is reliant on three aspects: an effective organization, timely and accurate information, as well as properly motivated management.

Noble and Gruca (1999) developed a framework for categorizing pricing strategies and organized them into four pricing situations: New product, Competitive, Product line and

Cost-based. Examples of strategies included in the framework are: Price skimming, price bundling, and customer value pricing. Ingenbleek and van der Lans (2013) build on this

framework by removing the cost-based pricing situation, as they argue that it is actually a pricing practice, and adds strategies such as premium pricing to the pricing situations. The framework can be seen below in Figure 3, depicting the different strategies and associated descriptions.

Figure 3: Pricing strategies framework

Source: Own illustration, inspired by Table 1 in Ingenbleek and van der Lans (2013)

Ingenbleek and van der Lans (2013) explain that the various strategies require a firm to engage in different levels of value-based, cost-based and competition-based pricing. A firm that chooses to emphasize value in their pricing practice must therefore choose an appropriate strategy, emphasizing value, in order to reap the rewards. The framework depicts popular pricing strategies that can be pursued by companies, and in what situation a specific strategy may be most applicable. For example, customer value price strategy can be applicable for a firm deciding to pursue a value-based pricing practice.

Relationship Marketing

Grönroos (1994) defines Relationship Marketing as activities meant to identify, establish, maintain, enhance, and when necessary, terminate relationships with customers and other stakeholders, at a profit. This definition is further acknowledged by Harker (1999) claiming it to be one of the more beseeming ones for the term. However, a content analysis consisting of 72 definitions aiming to resolve the issue of how to define the term, presented by Agariya and Singh (2011), shows that a clear picture of what relationship

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marketing truly entails is yet to surface. Although, the same study concluded that the core of all definitions orbits the acquisition, retention, loyalty and profitability enhancement of, and through, customer relationships.

Hunt and Arnett (2006) state a number of benefits received by customers as well as businesses when embracing the concept and activities of relationship marketing. Among these are that the customer experiences a decrease in search costs as a result of the customer not having to find a new supplier (Hunt & Arnett, 2006), which in turn stimulates a higher perceived customer value (Woodall, 2003). Bakos (1997) continues by claiming that low search costs can trigger buyers to look at other offerings presented by the supplier, thus increasing total sales by the firm.

Furthermore, Hunt and Arnett (2006) argue that the customers’ perceived risk associated with a market offering is lessened when being part of a business’s relationship marketing activities. This reduced perceived risk consecutively leads to a higher perceived value for the customer (Sweeney, et al., 1999).

Moreover, Nwakanma et al. (2007) state that by engaging in relationship marketing a greater emphasis is put on listening to and communicating with the company’s customers. Continuing, they argue this increases the effectiveness of understanding what the customer actually wants, thus enabling a higher level of accurate customer customization and helps to gain a competitive advantage. At the same time, a higher customer customization ensures a better customer satisfaction (Hunt & Arnett, 2006). Consequently, relationship marketing leads to a higher perceived customer value (Oh, 1999).

Besides increasing the overall perceived customer value, relationship marketing has been found to affect price levels between customers (Ståhl, et al., 2018), as well as inclining customers to be less price sensitive (Grönroos, 1994; Nwakanma, et al., 2007).

When talking about relationship marketing it is beneficially preceded by an understanding of two intrinsic and integral terms, namely: Customer Loyalty and

Customer Satisfaction. These are therefore delineated below.

Customer loyalty

An integral part of the concept of relationship marketing is the term Customer Loyalty (Ograjenšek & Gal, 2011). Edvardsson et al. (2000) define customer loyalty as a customer’s inclination to make a repurchase from the same firm again. Similarly, Oliver (2010, p. 432) defines customer loyalty as:

“[...] a deeply held commitment to rebuy or repatronize a preferred product or service consistently in the future, despite situational influences and marketing effort having the potential to cause switching behavior”.

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In contrast, Dick and Basu (1994) argue that customer loyalty should be defined as the strength of the relationship between a customer; that is, how he/she perceives his/her own bond to the firm, and the actual volume of purchaseand re-purchase by that individual. This is the definition that will be adopted throughout this thesis.

Customer loyalty is very important for many reasons, Heskett et al. (2015) claim it to be the single greatest source of revenue growth and profit, which is strengthened by Thomas and Tobe (2013) who emphasize that loyalty tends to be profitable since the expenses to gain a new customer are much higher than retaining existing ones.

Authors Fornell (1992) and Chattopadhyay (2019) argue that customer satisfaction (defined below) and customer loyalty have a direct positive correlation, such that if a customer’s satisfaction is earned, the customer loyalty will tend to follow. Furthermore, Oliva et al. (1992) argue that there are two critical thresholds when talking about the linkage between customer loyalty and customer satisfaction. Firstly, when a customer’s satisfaction reaches a certain high level, the customer loyalty increases dramatically. In contrary, if the customer’s satisfaction declines to a certain point, loyalty instead decreases dramatically. In between these two thresholds, loyalty remains relatively flat (Olivia, et al., 1992).

Customer satisfaction

The second integral part of relationship marketing is the concept of Customer

Satisfaction. As with most concepts related to value, there are a number of different

scholar definitions for the term, and the different aspects of satisfaction make defining it challenging, mostly since it relates to the entire consumption experience (Oliver, 1997). Ograjenšek and Gal (2011) argue that customer satisfaction generally is an evaluation or appraisal variable that concern the customers’ judgement of a product or service. Similarly, Yi (1991) defines the term either as an outcome, where satisfaction is an end-state resulting from the consumption experience, or as a process, where emphasis is on the perceptual, evaluative and emotional process that contributes to satisfaction.

An important distinction to make is the one between perceived customer value and customer satisfaction. Perceived customer value can occur at various stages in the purchase process, while satisfaction is unanimously agreed upon to occur post-purchase and post-use (Soutar & Sweeney, 2001).

Mutual for the pre-mentioned definitions is that customer satisfaction is of intangible nature, and thus is not always readily available. Consequently, scholars have theorized that satisfaction is a gap between the customer expectations and perceptions (Ograjenšek & Gal, 2011). Likewise, that it is essential that an organization measures, keeps track of and manages their customer satisfaction just like any physical asset (Ilieska, 2013). One of the many reasons for measuring customer satisfaction, is to understand the company’s performance in relation to the customer, how the company performs in