Customer value in the service-dominant logic

Department of Business Studies Bachelor Thesis Spring 2010 Submission date: 2010-06-07 Instructor: Peter Thilenius

Customer value in the service-dominant logic

the iPhone seen through the mindset of the S-D logic

Authors:

Jacob Ståhle

Viktor Thunmarker

Department of Business Studies Bachelor Thesis Spring 2010 Submission date: 2010-06-07 Authors: Jacob Ståhle & Viktor Thunmarker Instructor: Peter Thilenius

Customer value in the service-dominant logic

the iPhone seen through the mindset of the S-D logic

Abstract

This thesis examines customer value by studying the iPhone through its users from a Service- Dominant logic perspective. We distinguish three parts of the theory: the process of value- creation; the role of the firm; and customer involvement in shaping the offering. By conducting interviews with students in Uppsala, Sweden, we recognize three findings. First, while value is mainly created through the use of an offering the start and end of the value creating process is difficult to distinguish. Second, by interacting with the customer during the use of an offering the firm can affect the value the customer experiences. Third, by customizing an offering more value can be created, and if the customer participates in the process it is more like to succeed.

Keywords: customer value, Service-Dominant logic, value-in-use, value-in-exchange, iPhone

Introduction

Do firms overlook the individual customer by trying to satisfy the masses? Due to technological advances the customer has become aware of the possibilities that a globalized world offers. The customer can find multiple alternatives to any solution, communicate across the globe, and interact with firms to create solutions that fully satisfy their needs. Firms can no longer see their customers as segments or groups; rather they must acknowledge each individual. The market has evolved from firm-centric to customer-centric.

In order to understand the value phenomena marketing research has experienced a similar evolution with the recent emerging of a new marketing logic, the service-dominant (S-D) logic.

The S-D logic challenges the old goods-dominant (G-D) logic and how value is created. Value used to be seen as created by the firm, embedded into the product during production and ultimately delivered through the exchange - this is no longer the case. Value is now created by the customer and products are only seen as tools used to create value. It is not the product that matters, but what you accomplish with it; the way a car makes you feel when cruising down the main street, or the ability to be on time as you do not have to wait for the bus.

We now stand before a shift in marketing logic. If the S-D logic is to succeed more research must be conducted to understand the customer value phenomena (Woodruff and Flint 2006, p.183).

One aspect of the value phenomena that need further empirical research on qualitative level is the customer‟s perception of value (Ravald 2008, p.13). Hence, we will attempt to conduct an initial empirical study on customer value. The aim of this paper is to study customer value through the mindset of the service-dominant logic. In order to do so we will examine how customers perceive value through a product that is able to satisfy a variety of demands, the iPhone.

We will start by reviewing relevant literature and construct a theoretical framework based on the S-D logic and adjacent theories. In the method section we will explain how our study was conducted and how the theories were applied. Before the result is presented we will have a short briefing of the iPhone. Finally, the results will be discussed and analyzed according to the theoretical framework and relevant conclusions will be drawn.

The evolution of value

The term “value” has been an area of focus in research for a very long time. Evolving Value has been used to define how customers perceive the produced outcome of a firm. This term has been discussed since the philosophers Plato and Aristotle spoke of value in terms of value-in-use and value-in-exchange (Haksever, et al. 2004; Vargo, et al. 2008). The discussion has continued through the ages and many have been engaged in it, not least economists like Adam Smith and Alfred Marshall. Marshall defined value as the equilibrium between marginal cost and marginal utility (Haksever, et al. 2004). Adam Smith on the other hand defined two types of value, real value and nominal value. The real value was defined as the effort or labor needed to afford goods or services satisfying necessities or pleasures in life. Thus, real value according to Smith is tightly connected to value-in-use. Nominal value on the other hand is what has later become the economical equilibrium

between supply and demand, which leads to a market price. One might think that Adam Smith‟s real value has affected economic research ever since, but surprisingly it has not until recently (Vargo, et al. 2008).

The goods-dominant logic

Smith saw the problems in comparing and measuring real value and the more tangible nominal value came to be the foundation of future research on value (Vargo, et al. 2008). This logic can also be seen in the definition of economy; “the efficient use of resources” (Princeton University 2010).

Since resources are limited, the amount of resources has come to define wealth. From this notion a marketing logic was developed in which resources where in focus, called G-D logic.

In the G-D logic, value has been considered a marketing variable that was controlled by the firm.

Value was seen as something embedded into the product during production, and delivered to the customer through the chain of distribution (Ravald 2008, p.9; Vargo, et al. 2008). According to this the most successful firm is the one best at adding value into their products, and then manages to deliver it to the customer (Ravald 2008, p.10). Hence, the objective of the firm has been to direct production and marketing to maximize value generated in comparison to competitors. In other words, traditional marketing research has been considered a firm-centered and production-oriented concept (ibid, p.9).

In recent years the foundation of value has been reexamined and the thoughts of Adam Smith and the Wealth of Nations from 1776 have been brought back to focus. What was considered hard to measure over 200 years ago is now in the centre of attention, real value and value-in-use, and this is where modern marketing has picked up the trace (Grönroos 1998; Vargo & Lusch 2004; Lusch

& Vargo 2006).

Research regarding value has shifted from a firm-centric view, where the firm is in focus of value- creation, to a customer-centric view (see Grönroos 1998; Prahalad & Ramaswamy 2000; Sheth, et al. 2000; Prahalad & Ramaswamy 2004; Vargo & Lusch 2004). In theory, the customer-centric view involves identifying the customer and his needs on an individual level and satisfy them in ways that generate the most value for the customer. Since the firm is no longer seen to be in the centre, the firm-centric G-D logic can no longer be applied.

The service-dominant logic

Wikström (1996) claims that the customer cannot be seen as passive since value can only be made and experienced by the customer. Rather the customer must be seen as an active and

knowledgeable co-creator of value in a process that takes place between the firm and the customer. According to this, the notion of the firm as a producer and the customer as a consumer should be replaced by the view that both the firm and the customer are active parties in the process of creating value (Ravald 2008, p.9). This notion of the customer in centre of the value creating process has been the focus of recent marketing research and the foundation of the S-D logic.

Vargo & Lusch (2004) compiled years of service research into one article, which has become the foundation of discussions regarding the S-D logic. They started by dividing resources into two categories: operand and operant resources. The operand resource is the static and often tangible resources that must be acted upon, i.e. a product or outcome of a firm. The operant resources on the other hand are the dynamic resources that enable one to act upon the operand resources, i.e.

knowledge and skills on usage. This is where the S-D logic really differs from the G-D logic; G-D logic focuses on the operand resources while the S-D logic focuses on the operant. Vargo &

Lusch (2004) state that in the S-D logic everything is seen as services and products are physical goods in which services can be transferred.

Furthermore, they claim that value can only be jointly created in the interaction between the customer and the firm. This interaction can happen during the use of an offering, which is referred to as value-in-use (Vargo & Lusch 2004), or experiences generated through the use of a product (Prahalad & Ramaswamy 2000). The focus then shifts towards what the product does for the customer during usage, the situation in which it can facilitate the creation of value, while the importance of the product per se fades (Prahalad & Ramaswamy 2004, p.10; Ravald 2008, p.11).

This can be exemplified through a digital camera; the camera itself does not create value but the experience of using the camera, the ability to easily recall memories and the ability to transfer these memories into something else, i.e. a photo or a t-shirt, does.

However, the notion that the customer is always co-creating the value has received criticism.

Grönroos & Ravald (2009) believe that participants in the value discussion have accepted the customer as co-creator without any questioning of the logic at all. The customer‟s role as a co- producer of services was established back in the late 70‟s. If goods are to be seen as transmitters of services the customer is not co-producing value, but the mechanisms from which value can emerge. Hence, when the customer is left alone with the product they are solely creating value.

However, if value is created and consumed at the same time any interactions during the value creation will affect the perceived value. The firm can strive to create interactions to directly and

actively affect the customer‟s value creation, and enhance the value they create from the firm‟s offering. If such interactions with the customer occur during the use of a product they co-create the value with the customers. Thus, co-creation of value is possible after all but it requires interaction (Grönroos 2008).

Grönroos & Ravald (2009) also criticize the neglect of value-in-exchange. They state that “Customer may buy goods based on a judgment of value-in-exchange, which in itself includes an expectation of value-in-use.” (Grönroos & Ravald 2009, p.10). If the judgment of future value-in-use is incorrect and the customers are proven wrong, they will most likely not purchase the goods again. Hence, value-in-exchange should not be disregarded but seen as a function of value-in-use.

Vargo, et al. state that “value is co-created through the combined efforts of firms, employees, customers, stockholders, government agencies, and other entities related to any given exchange, but always determined by the beneficiary (e.g. customer)” (Vargo, et al. 2008, p.148). Perceived value is the result of multiple factors that affect the value-in-use a product gives. If a customer purchases a car, the perceived value will be a result of several factors including the service and tools provided by the manufacturer, the skills and knowledge of the customer regarding how to handle the car, the roads the government has to build, and other cars on the road. This means that both internal factors, such as the experience, knowledge and skills of the customer, and external factors, such as roads or other cars on the road, affect the process of value-creation.

Grönroos & Ravald (2009) are on a similar path and state that value-creation is dependent on the context in which the customer operates. If the context changes the customers value creation may take a new direction and the value created out of an existing resource may be altered; i.e. if you drive a Volvo and everyone else is driving Lada the value creation differs compared to if you drive a Volvo and everyone else is driving Ferraris.

This leaves us with three propositions so far:

(1) The process of value-creation starts at the exchange as value is created through usage, instead of ending at the exchange as suggested by G-D logic.

(2) The context in which the customer operates will affect the perceived value.

(3) By interacting with the customer during the use of a product the firm may affect the value a product gives, and thus co-create the value with the customer

Customers evolving

The market has changed as the customer has evolved from being isolated to connected, from unaware to informed, and from passive to active (Prahalad & Ramaswamy 2004, p.2). These changes are largely due to technological advances; information is easily accessed and it is easier to interact with other people and create networks that can influence the companies. With these factors in mind, the customers want to be active and co-create the products and services they consume in order to create the most value (ibid p.5).

This evolution of the customer can be illustrated through an example. Previously, when a patient visited his doctor, the doctor seemed to know how to treat the patient, and since the patient was no physician himself he probably agreed. Similarly, firms thought they knew how to create customer value, and most customers agreed. Today the process is slightly more complex. The patient can access the knowledge, skills and experience of other patients and doctors and learn about any condition and any treatment, from laser surgery to naturopathic drugs. Ultimately, the patient can cut his own way through the wellness space and construct his own personal wellness portfolio, i.e. combining advices from the internet with treatment suggested by the doctor. This wellness portfolio becomes the patient‟s value bundle, which is the customer‟s notion of what is best for him considering his knowledge, skills and previous experience (Prahalad & Ramaswamy 2004, p.6). Hence, firms can only make value-propositions consisting of a product that can facilitate value-creating activities, and the value is ultimately determined by the customer (Vargo

& Lusch 2004). This leaves us with another proposition:

(4) Firms can only make value-propositions and the customers determine the value.

The value determined is based upon experience, knowledge, skills and preferences.

Creating an arena for value-creation

Many researchers have questioned if the S-D logic, as presented by Vargo & Lusch (2004), takes the customer focus far enough. Peñaloza & Venkatesh even state that “…S-D logic continues, rather than challenges, the objectified treatment of customers” (Peñaloza & Venkatesh 2006, p.

307). The S-D logic takes a company perspective as it considers the customer to be an operant resource (Vargo & Lusch 2004; Lusch & Vargo 2006). Grönroos (2008) believes this to be a sign of Vargo and Lusch being stuck in a product-orientation, since the company is seen to have the lead role in value-creating activities. Ravald (2008, p.12) concludes that as long as the customer is seen as a co-creator or operant resource of the firm, the value-creating activities are believed to belong to the firms.

Ravald (2008, p.11) suggests that the role of the value creator should be placed solely on the customer, and that firms can only facilitate these activities, which is in line with Wikström (1996).

Wikström, et al. (1998) recognize that activities undertaken by the firm should focus on supporting the value-creating activities by the customer. Since the value is always created in the customer‟s own processes supporting could happen through development of processes within the framework in which the customer can create value (Ravald 2008, p.11). Prahalad &

Ramaswamy (2004, p.121) take it further by claiming that the producer is an available resource to be used by the customer.

A prerequisite for value creation is that the firm produces resources that are used as input in the customer‟s consumption or value-generating processes (Grönroos & Ravald 2009). The resources are required for the customer‟s value creation as the customers must integrate with something and create value out of it. Grönroos & Ravald (2009) conclude that when the firms supply the customer with these resources they facilitate value creation.

The value-creating processes of the customer could be described as an arena where firms may temporarily enter and make their competence available for the customer‟s value-creating activities. The challenge for companies is to stay in this arena, and staying requires the firms to understand the activities that create value for the customers (Ravald 2008, p.16).

The need for a more customer-centric view of the S-D logic is due to the fact that customers no longer want to be passive and told what to consume. Since the customers know more, and are capable of much more than they previously were, they want to interact with the firms to create the best possible solution for their needs in order to create maximum value out of it (Prahalad &

Ramaswamy 2004, p.5). Companies should facilitate the customers own value-creating activities by considering the whole process of consumption, and see exactly how and where they can facilitate the customers value-creating activities (Nilsson 1983; Vargo & Lusch 2004). The presence of a company in the value-creating activities contributes to the direction of the value experience (Ravald 2008, p.21). Moving towards a customer-oriented view on value then implies embracing the notion that resources provided by the companies are ultimately used in the value- creating activities, owned and undertaken by the customer (Ravald 2008, p.22). This leaves us with another proposition:

(5) The role of the firm is to provide resources to facilitate value-creation rather than creating value for the customer. Products are available resources that can be used by the customers in value-creating activities

Customer involvement in shaping the offering

Lusch & Vargo (2006) recognize two components in creating value, co-creation of value through using the offering (value-in-use) and through co-producing the offering. Co-production means that the customers actively participate in the production of the core offering. One way of using the customer as a co-producer is by outsourcing activities that used to be done by the firm to the customer (Hilton 2008). Hilton (2008) argues that the outsourcing of activities to the customer leads to the customer deepening his role in the production and enhances the value-in-use that will be created from the outcome.

However, the S-D logic is not the only source of literature that speaks of co-production. Alvin Toffler introduced the term prosumption in the early 80‟s, which refers to customers producing the products they later consume. Xie, et al. (2008) continue to examine prosumption and define it as

“value-creation activities undertaken by the consumer that result in the production of products they eventually consume and that become their consumption experience” (p.110), a definition they regard as similar to what Vargo & Lusch (2004) define as value-in-use and value-in-exchange.

Customers engaged in prosumption create their own experiences by co-producing the sellers‟

offerings, which results in socio-psychological experiences for the consumer (Xie, et al. 2008). In other words, customer involvement in the production process of a product that they later consume will lead to more value being created. Franke, et al. (2009) find through two studies that products customized to fit customer preferences deliver clear benefits to the customer. The benefits of customization can then be described as follows:

(6) Customers engaged in the production of an offering can gain more value from it, compared to if they were not engaged in the production process.

(7) Products that are customized to fit customer preferences will generate more perceived value.

Summary

In order to facilitate the connection between our theoretical framework and our discussion we chose to categorize the propositions made above into three areas; the process of value creation, the role of the firm, and customer involvement in shaping the offering. Below you will find the propositions inserted into each categorization.

The process of value creation

(1) The process of value-creation starts at the exchange as value is created through usage, instead of ending at the exchange as suggested by G-D logic.

(2) The context in which the customer operates will affect the perceived value.

(3) By interacting with the customer during the use of a product the firm may affect the value a product gives, and thus co-create the value with the customer.

The role of the firm

(4) Firms can only make value-propositions and the customers determine the value. The value determined is based upon experience, knowledge, skills and preferences.

(5) The role of the firm is to provide resources to facilitate value-creation rather than creating value for the customer. Products are available resources that can be used by the customers in value- creating activities.

Customer involvement in shaping the offering

(6) Customer engaged in the production of an offering can gain more value from it, compared to if they were not engaged in the production process.

(7) Products that are customized to fit customer preferences will generate more perceived value.

Method

In order to investigate how customers perceive value we chose to interview users of the iPhone 3G and 3GS. Through the introduction of smartphones the mobile telephone market has evolved to more than just making phone calls and sending text messages. We found the iPhone particularly interesting because Apple and the iPhone have been a hot topic in the mobile

telephone market the last couple of years and customer satisfaction has proven to be as high as 92% (CFI Group 2009).

When conducting a study based on interviews there are some issues that must be examined.

Researchers in many different fields of science have questioned this method‟s validity as they consider it to be unscientific (Kvale 1997, p.60). Interviews may require interpretation of the researcher, but this is required to discuss feelings and emotions. In the social context the interview has been proven useful to obtain deeper knowledge regarding customers and the value they perceive and was therefore useful for our study (Woodruff & Gardial 1996, p.160).

The interviews were semi-structured, which is best suited when trying to understand a customer and it enables the researcher to get deep into the customer‟s value perception (Woodruff &

Gardial 1996). As we did not seek to generalize our findings in a broader context, but rather to get deeper insight into perceived-value, the alternative method would have been to conduct the study through focus groups. However, we wanted to dig deeper into the individual‟s minds and not have them affect each other, which easily occurs in focus groups. In order to make sure that our study was as valid¹ as possible we made sure that our questions enabled the respondents to talk about the areas we intended to examine, and were producing relevant data for our study. We realized that the respondents may interpret the questions in different ways, and therefore the semi-structured interviews enabled us to explain or reformulate questions when necessary. In other words, the control over the interview given by the semi-structured interview helped us direct the interviews so the participants understood the questions better, and provided opinions regarding the same processes, which improve the reliability of the results.

In semi-structured interviews the questions are flexible and open. Answers can be made in any possible way and researchers can choose to go further into interesting areas whenever they deem that there is more to investigate (Gillham 2008). By using flexible and open questions we sought to understand the individual customer‟s value perception while avoiding asking leading questions.

The questions have been developed through the quality criteria by Kvale (1997, p.134) to ensure that the empirical data does not lower the quality of the analysis. We further used Kvale‟s (1997, p.170) three steps of analyzing the material during the interview to ensure our data was correct.

First, we listened as the participants described their thoughts. Occasionally they also discovered new thoughts they had not even considered before. Then, we interpreted the responses during the interview to make sure we understood them correctly and gave the respondents the opportunity to adjust

1Validity refers to how well a study measure what it is suppose to measure (Ekengren & Hinnfors 2006)

their responses. By conducting multiple interviews we sought to distinguish general thoughts regarding the perception of value as well as identify specific findings of our targeted group (Kvale 1997, p.134).

In order to make sure that our questions were appropriate considering the desired results, a pilot study was conducted. Two persons were interviewed in order to make sure the questions were understood and interpreted according to their purpose. The pilot study highlighted that some questions were difficult to understand and interpreted in a different way than intended.

Therefore, several supporting questions were added to avoid the problems mentioned above.

Selection

When conducting interviews the selection of participants should derive from deliberately selected cases, materials, or events that may provide the researcher with the empirical data required to study a phenomenon (Flick 2007, p.27). Thus, we chose to pin point a selection of participants that possess the knowledge and experience required.

The smartphone market has become quite diversified in recent years and many new models have been released (CFI Group 2009). They are all similar in functionality, but the experience of using them may differ due to different interfaces and features. We chose to limit our participant to users of the Apple iPhone 3G or 3GS. To ensure that the participants had enough experience we only selected respondents who had possessed an iPhone for at least a month. By limiting our study to the iPhone, and not smartphones, we were able to make sure our participants have experiences of the same product, which in turn eliminated varying opinions and feelings to be the result of different products.

We have chosen to gather the data from people between the ages of 20 to 30 years. This target group was chosen since they have been growing up in a technological environment and therefore have the technological experience to fully take advantage of the product.

To find these people an email was sent to one hundred third-year business students at Uppsala University. As a result of the email we got 6 respondents who matched our criteria and were all selected to participate in the study. After these 6 interviews were conducted we saw a connection between the technological knowledge of the customer and their answers. Therefore 3 additional participants were pinpointed based on their technological knowledge to even the number of participants with high- and low technological knowledge.

In total 9 participants were chosen. Since we did not believe that gender would have an impact on our results the group consisted of 6 men (participant A, B, C, D, F and G) and 3 women (participant E, H and I). Furthermore, 5 of the 9 participants regarded themselves as interested in technology in general (participant A, B, C, D and E) and 4 did not (participant F, G, H and I).

We believe that this selection provided us with necessary insight on how the iPhone is perceived by customers in this segment and therefore enables a study of the iPhone through the S-D logic.

Data collection method

The interviews were conducted in a setting where disturbance was minimized and in places familiar to the participants, i.e. where they study. This was done in order to create a calm environment in which the persons felt comfortable and able to speak their minds, suggested by Kvale (1997, p.18). During the interviews the respondents brought their iPhones with them, or were given the alterative to borrow one from us. The iPhone could then be used as point of reference, and contextualize the interview while making sure that we spoke of the same things.

Both the authors have been using an iPhone and know how the phone works and of relevant terms. Therefore, it was easier to understand what the participants described while conversations in the interviews were more likely to flow without disturbance. Finally, since the researchers are knowledgeable in the area it was easy to direct the interviews and decide what areas that needed to be further investigated.

To ensure that ethical principles were followed we used The Swedish research council² four areas to guarantee the respondents integrity (Vetenskapsrådet 2002). The first area ensures that the participant is informed of the purpose of the interview, which was done both when the participants were first contacted and at the beginning of the interview. The second area is consent, and therefore we informed every participant that the participation was voluntary and if they wanted they could end the interview at any time. The third area is confidentiality and all of our participants were informed that they were treated anonymously and the material would only be used by the authors and not exposed to anyone else. The fourth and last area is the use of the material. We informed the participants that the material was to be used for this thesis only, and would not end up in any other situation.

We saw this as an initial empirical study in customer value and were interested in general thoughts. The interviews that were conducted took between 15 to 25 minutes, which was enough

2 Vetenskapsrådet

to provide us with the material necessary. The interviews were recorded by audio and notes were taken on vocal expressions as well as body language. Both the authors of the thesis were present for the interviews and by doing so any questionable situation was discussed and solved by common interpretation. One of the authors was in charge of asking the questions and keeping the conversation going, while the other took notes. The interviews were transcribed to provide us with material for the analysis and in total we gathered 192 minutes of recordings and 20 pages of transcription. We consider this to be enough empirical data to provide us with a perception of how the customer perceives value.

Discrepancy between theory and empirical findings

The theoretical framework discussed in the previous chapters is intangible and difficult to translate into practice. The S-D logic has been developed as a mindset in which future research can be built upon, and not as a practical tool on how to understand customer value. Because the theory is lacking practical elements, the reader might consider it to be a discrepancy between the theory and the empirical study. However, by identifying certain areas of interest from the theoretical framework we interpret the theory into a practical model which is used to explain the empirical study. This paper does not aim to complement existing theory, but rather to exemplify how a modern product can be seen through modern marketing research and highlight any difficulties.

Operationalization

In order to analyze the iPhone through the mindset of the S-D logic we recognized three areas that needed to be examined. These areas are the process of value creation, the role of the firm and customization. Below you will find a description of each area and the major question those seek to answer. For a complete list of the interview questions, see Appendix A. Because our participants were from Sweden the interviews were conducted in Swedish, to make the participants more comfortable with the language. Therefore, the questions (Appendix A), quotations (Appendix B) and the email (Appendix C) have been translated into English.

The first area, the process of value creation, is designed to investigate when the process of value- creation starts and how customers perceive their interactions with the firms. This area is connected to the propositions regarding value-in-use and that interaction during usage affect the value-creation. Furthermore, this area seeks to answer when the value-creation starts, and if the firm can enhance the customer‟s perceived value by interacting with them during the use of the iPhone. For example, in this area we asked the participants to “Tell us about the purchase of your

iPhone” where we attempted to get a glimpse of where the value-creating process started, and

“What did you believe you would use the iPhone for before you actually bought one?” where expectations were mapped.

The second area, the role of the firm, is designed to investigate which activities create value. This area is connected to propositions regarding that firms can only make value-proposition, that value is individually determined by the customers, and that products are only available resources for the customers. This area seeks to answer if it is the iPhone itself, the use of the iPhone or the activities that the iPhone facilitates that creates value and if value is individually determined based on previous experience, knowledge and preferences. For example, in this area we asked the participants to “Tell us about how you use your iPhone?” and their answers were interpreted to be what value creating activities that the iPhone supported, i.e. staying in touch with friends.

The third area, customization, is designed to investigate the process and the result of the customization. This area is connected to the proposition regarding customer engagement in producing an offering and customer engagement in customization. The iPhone enables customers to participate in the process of customization themselves, and this area seeks to answer how customers consider this extra work to make the product as desired. For example, in this area we asked the participants “How do you feel about choosing and removing applications?” and “Have your view of the iPhone changed? How?”.

Handling the empirical data

The presentation of the empirical data presented in the next section differs slightly from the theoretical categories. The reason for this discrepancy is to get a narrative structure of the empirical section which makes it easier to follow as a reader.

In order to present the data in a structured and logical way we have chosen to analyze and present the interview material according to Kvale‟s (1997, p.178) categorizing according to opinions³. This means we have merged similar opinions into one category (i.e. “5 out of 9 believe…”), but present opinions that stick out as well. We developed these categories during the analysis according to relevance for the theoretical framework. This type of analysis could end up in tables or figures but we will present the results in a narrative structure because thoughts and perceptions are not black or white. This was done to give the reader an overview of the material as well as deeper insight and the variety of opinions. The material is therefore exemplified by

3 Meningskategorisering

quotations taken from the interviews. Any quotations that might be unclear without its original context are complemented with a note by the authors, which can be found within parentheses.

Before the empirical results are presented a short description of what the iPhone is and how it works will be provided.

What is the iPhone?

The iPhone is a device that enables the customer to make calls and sending text messages, but also contains a camera, a music player, an Internet browser, a calendar, and several other features.

The most revolutionary feature of the iPhone is the use of the application system. The application system allows customers to download applications that enable different features of the iPhone, i.e. games, communication through social networks, and maps. Thus, the customers can customize their iPhone according to their individual wants and needs. The applications can be downloaded straight from the iPhone through a marketplace developed by Apple, called Appstore. After logging in to Appstore the user can browse applications that may satisfy their needs before downloading them. Appstore is a marketplace that is moderated by Apple, but the applications are provided by third-party developers. Apple provides these third-party developers with the tools to create applications and verifies the quality of the applications before they are allowed to enter Appstore.

In other words, there are some parties involved in the use of the iPhone; we have already mentioned the customer, Apple, and the developer of applications. But in order to make phone calls, send text messages, and get online via the mobile net an operator is required. However, the iPhone also has the possibility of accessing the internet through wireless internet connections (Wi-Fi). Since the service provided by the operator is homogenous and all of our participants used one this will have limited impact on our results and treated accordingly.

Results

Customers’ expectations on the iPhone

When purchasing the phone all of the participants interviewed had similar expectations on how they would use the iPhone. 7 out of 9 expected their usage to mostly consist of the standard applications included in the iPhone. Participant A states that “Back then you didn‟t really see what I now believe is great - all these applications. I just saw the basic functions such as camera, iPod and the calendar. After a while I realized the bonus in downloading new applications, but

that “I just saw the iPhone as a luxury phone, but it has opened a whole new world to me” (note:

talking about the possibility of downloading applications). The remaining 2 out of 9 already knew about the third-party applications available and expected these applications to be a major part of their usage.

Because theory has taken a step away from value-in-exchange we wanted to see how the customer felt about this activity and if it matters. 5 out of 9 expressed some kind of joy or sense of value when they spoke of the actual purchase of the iPhone. All of these participants recognize themselves as interested in technology. C states with enthusiasm that “I was thrilled, I borrowed a friends iPhone and loved it and went straight to the store and bought one. I was really satisfied with the purchase” and participant A states that “I was very satisfied when I got my hands on the phone”. Participant B expressed similar expectations and stated that “I bought it when the iPhone 3G was released, and pretty much waited outside the store”. The remaining 4 did not express any joy or sense of value when they spoke of the purchase and did not consider themselves interested in technology in general. Participant H expressed this by saying “it‟s more fun using it (note: than purchasing it)”.

The value-creating activities the iPhone supports

The iPhone‟s ability to integrate different devices is what 5 out of 9 believed is the best thing.

Participant F describes this feature as integrating multiple devices into one unit; “previously when I went out I had a phone, a camera, and an iPod with me – it just became too much. Now everything is there – I‟ve got my calendar, camera, phone in there and I don‟t need much more”.

Participant I states similarly that “It has everything. It is so useful, I don‟t need my iPod, I can surf the web, listen to Spotify – it is fun… It‟s like everything in one device, a small computer”.

Participant E focuses more on the software integration and states with enthusiasm that “It is really indispensable because I send e-mails with it, I send text messages, I speak on the phone with it, I order books with it – really, I do everything on it. Everything”.

Except from the integration of devices, the iPhone‟s ability to be upgraded and changed through software updates was mentioned by 2 out of 9 as the best characteristic of the iPhone.

Participant D mentioned the ability for software upgrades that keeps the phone up-to-date with preferences, “when you feel like using your phone for something else all you need to do is download new applications and throw away the old ones”. Instead of software upgrades to match your preferences participant A spoke of software upgrades as a replacement for buying new devices, “previously you bought a phone and then after a year a new feature arrived and you had

to buy a new phone in order to get the new feature. Now, all you have to do is upgrade the software. You feel constantly up-do-date”.

The remaining two participants had different thoughts on what the best thing about the iPhone is. Participant H said “I haven‟t had any problems since I bought it”, and participant D said “I treasure that it is simple to use, user friendly”.

How the participants use the iPhone

When the participants looked back on their usage the last couple of weeks everyone stated that they used the basic functions of a phone, i.e. calling and sending text messages. Participant B states that “the basic phone functions are most important. Even if I use other features the phone is still most important” and participant F agreed by stating that her usage mostly consists of

“making phone calls and sending text messages of course”.

However, 7 out of 9 also state that they frequently use multiple additional features and applications provided both by Apple as pre-installed applications and applications from developers. Participant G states that he “checks his email, surfs the web, watches TV through play-services and takes photos and records videos” and participant C states that “90 percent is probably Facebook, email and text messaging and then in addition I‟m occasionally surfing the web and playing Angry Birds (note: game), wait – Angry Bids is probably a part of that 90 percent”. Participant D also states that he “makes calls, sends text messages, watches videos, listens to music, checks TV.nu (note: application for TV-guide) and plays games”. The remaining 2 out of 9, participant F and H, occasionally used additional features mainly consisting of those provided by Apple. Both participant F and H do not recognize that they had any need for any other application than those pre-installed by Apple. Participant H states that “I make calls, and send text messages of course, check my e-mail and take pictures – that‟s probably it”.

Customizing the product by downloading applications

All of the participants interviewed considered the ability to download applications as something great, including participant F and H who did not download applications. Participant A states that

“It‟s great, you can always stay up-to-date and new things are released all the time. The whole application thing is just awesome, it‟s their (note: Apple) strength”. Participant E says “… It is so easy. I just enter Appstore, see something – this sounds good – and then I read about it and download it and „BUPP!‟ and it starts working without even a reboot! I‟m very happy (note:

referring to the application system)”. Participant B states that “It is actually a phone that gets

better every year, and that is fascinating, it‟s sick that it works all the way. The ability to adapt the product makes it fit my old man as good as it fits me”.

By downloading new applications the iPhone becomes customized according to the customers own usage. Participant E exemplifies this by saying “I can sometimes watch other people‟s iPhones and think that „I wouldn‟t do like that‟, or that „I don‟t want those applications‟”. None of the participants interviewed believes that this adaptation can be done pre-purchase by Apple and participant I states that “It‟s not certain that the applications Apple chooses fits me, and that‟s why I think it‟s pretty sweet that I can choose applications and adapt the phone in my own way”. Participant C say that “I believe that it would be something negative if Apple put more applications into the phone pre-purchase and that it is much better to choose yourself”.

We asked the participants how they would describe this process of downloading applications, and 7 out of 9 believe that they either adapt or develop the product in some way instead of simply using it. None of the participants interviewed think that the process of downloading applications is an effort at all. Participant I said, “the system is so smooth that you don‟t even realize that you have to make an effort to get the right applications”. Participant G states that “When downloading applications you adapt the product to fit your own needs and to satisfy them – it used to be just a phone but now it‟s a phone, video player and so on”.

All of the participants interviewed believed that their iPhone had become more personalized over time. Participant B believes that “You fuse together, integrate with it. It becomes a part of your everyday life”. Participant I states that “we have become very close – me and the phone”.

How customers perceive applications

The application system is designed to let anyone create an application and distribute it through Apple‟s Appstore. However, the parties involved were not always clear to the participants. 6 out of 9 thought that the applications were bought from the developer of the application in question and that Apple only provides the platform. 2 out of 9 thought that both Apple and the developer were the source of the application and 1 out of 9 believed Apple was the only source.

Because the parties involved are not obvious to the participants the origin of value becomes quite blurry. Out of all 9 participants 4 blame Apple for failures in an application, 4 blame the developer of the application and 1 believe it to differ depending on the situation. At the same time, out of the 9 participants 4 give credit to Apple when everything is working smoothly and 3 give credit to both Apple and the developer of the application, while 2 give credit to the developer of the application.

All of the participants interviewed stated that when an application is working correctly their view of the iPhone changes in a positive way. Participant I state “My view on the iPhone got better, much better” while participant F highlights that the opposite might happen as well by stating that

“if it (note: referring to an application) didn‟t work I would become less comfortable with the phone”.

Discussion

In order to identify what the iPhone really is we must look at what value-creating activities the iPhone facilitates for the customer. All of the participants in our study recognized that their perceived value originated through the use of the iPhone, when it supported their day-to-day activities, i.e. integrating multiple devices, enabling communication or making waiting more pleasant through games.

In a traditional sense the iPhone is a mobile telephone, and Apple is in the mobile telephone business. However, the empirical results of this study show that if the value-creating activities that the iPhone supports are the facilitating of day-to-day activities and thus the iPhone can be defined as a facilitator of day-to-day activities. Hence, Apple is not in the mobile telephone business but in the business of facilitating day-to-day activities and lives in general. Participant I even stated that “it becomes a companion in life”.

The process of value-creation

Based on the literature review we have suggested that the process of value-creation starts at the exchange as value is created through usage. There was no doubt that our participants experienced value through the use of their iPhones, as value-in-use. Surprisingly the participants that regarded themselves as interested in technology in general spoke of the exchange as value creating itself.

This value-in-exchange was most obvious in the cases where the participants had been waiting for the iPhone explicitly, knew all about it and were excited to purchase one. However, the joy that these participants spoke of during the exchange was most likely the excitement of what value- creating activities the iPhone could facilitate in the future, in other words what value-in-use is to come. If that is the case then this is in accordance with Grönroos & Ravald (2009) who speak of value-in-exchange as a function of value-in-use This also depends on the definition of value; if we define value as the customer being or feeling better off than before, which is similar to Grönroos (2008), it can be argued that the joy our participants experienced during the exchange was value.

Some of our participants even spoke of how they discussed the product and were excited pre-

offering, i.e. discussions and gathering of information, may create value without the offering being used. This suggests that the value-creating process may start before the actual exchange has occurred, before value-in-use and before value-in-exchange, and elapses over the exchange and usage.

We also suggest that the context in which the customer operates will affect the perceived value.

Furthermore, firms may affect such context by interacting with the customer during the use of a product and ultimately affect the perceived value. All of our participants experienced that the value they perceive is greater because Apple interacts with them and affects the context in which they operate, i.e. by supplying applications in one place or providing updates. Grönroos & Ravald (2009) suggest that this is value co-creation by stating that the firm co-creates value by interacting with the customer during the use of a product. However, value co-creation does not fit with the notion that the customer is the sole creator of value (Ravald, 2008; Grönroos & Ravald, 2009).

Hence, we would like to argue that Apple is only indirectly co-creating the value as they are only affecting the context in which the customer operates, and are not creating nor delivering any value. The firm cannot create value and therefore Apple is only facilitating the customer‟s value- creation further by interacting with the customer, which enhances the perceived customer value.

Finally, our study indicates that any failure by third-parties that results in errors in the application will affect the customer‟s perception of the iPhone itself. In other words, Apple then becomes responsible for third-party applications since they affect the overall perception of the iPhone.

The role of the firm

In accordance with the literature we have seen that firms can only make value-propositions and the customers determine the value, and hence the value is determined based on the customer‟s previous experience, knowledge, skills and preferences. Thus, the role of the firms becomes to provide resources to facilitate value creation, and products only become available resources that can be used by the customers. None of the participants spoke of the iPhone as value itself, but of what they could accomplish with it. This suggests that the iPhone is just an available resource that the customer can use to facilitate value-creating activities. Since some participants spoke of certain activities as value-creating while other discarded the same activities completely while promoting others it seems like the customer‟s previous experience, knowledge and skills indeed affect the perceived value. Since value is individually determined by the customers each individual determines the value an offering gives, and therefore offerings only become value-propositions.

Participant E verifies this by stating “I can sometimes watch other people‟s iPhones and think that „I wouldn‟t do like that‟, or that „I don‟t want those applications‟” suggesting that different people create value from different activities.

The majority of the participants also downloaded applications. As the possibilities evolve the customers find new ways of satisfying their needs, and thus find new ways to facilitate their value-creating activities. Applications and means of using the iPhone to facilitate value-creating activities theoretically never ends and the iPhone avoids becoming out-of-date, and ultimately replaced, as long as the hardware is not out-dated. The role of Apple then becomes to provide enough value-propositions to satisfy the variety of demands that are put on the iPhone.

Customer involvement in shaping the offering

It has been discussed in the literature review that customers experience more value if they participate in the production of an offering or if the offering is customized according to the needs of the individual. All of our participants recognized that the possibility to customize the product was great, even though not everyone currently do it. However, those who did customize it felt that their iPhone became personalized. When the iPhone became more personalized it became more valuable to the participant, which is best illustrated by quotes like “You fuse together, integrate with it. It becomes a part of your everyday life” (Participant B) and “We have become very close – me and the phone” (Participant I). The logic behind this is not revolutionary; the better a product fits your preferences the more value creation it facilitates. Our participants further felt that by doing the customization themselves they made sure that the customization would fit their preferences. Furthermore, the participants suggested that the option to customize the iPhone yourself made the life cycle longer, as the customer could re- customize it whenever their preferences changed. The iPhone can then be used for a longer period of time and thus facilitate more value, since it is used more.

7 out of 9 participants believed that by downloading applications they did something else than just use the iPhone, i.e. developing or customizing it. If the customer only derives value from the use of a product the process of customization cannot facilitate value creation itself. However, our participants thought that the process of customization was easy and smooth and no one expressed any concern about putting an effort into seeking, reading about, and downloading applications. Some even expressed joy in the process of customization itself, which suggests that instead of being an effort as we initially thought, the process can facilitate value-creation itself. If this is the case though, we speculate that this value is similar to the value-in-exchange that some of our participants felt; the expectation of future value-in-use, that the customization would lead to, causes some kind of excitement.

We can see that by customizing the product the customer perceives more value, and if the customer is engaged in such activities himself the result of the customization is more likely to fit the customer‟s preferences.

Conclusions

The aim of this paper was to understand customer value by studying a modern product through the mindset provided by the S-D logic. Considering the activities that the iPhone facilitates it should not be seen as a mobile phone but as a facilitator of day-to-day activities. All of our participants recognized that they experienced value while using the iPhone to facilitate day-to-day activities, so called value-in-use. While marketing research have focused on value-in-use and value-in- exchange our study highlights that the start of the value-creation may start at an earlier stage and is not exclusively limited to the usage. Some of the answers of our participants suggest that the process may start before the exchange – without the actual product.

By interacting with the customer after the exchange has occurred Apple tries to affect the context in which the iPhone is used. This is done by controlling the user experience of the iPhone by providing the market place Appstore and ensuring the quality of each application. The exact definition of these interactions is not clear, on one hand it can be argued that the firm is co- creating the value and on the other that they are only facilitating the customers own value creating processes. Nevertheless, our participants recognized that Apples interactions enhanced the value they created with the product, suggesting that interactions after the exchange do affect the process of value creation.

When the iPhone was customized all of our participants experienced that it became personalized and perceived that it created more value. By performing the customization themselves the customer felt that their product was better tailored to their needs than if Apple had done it.

Customization is then likely to be successful when the customer is involved in the process.

Furthermore, by keeping the process simple and smooth none of our participants experienced that they had to put any effort into it at all – even though the work to customize it had been outsourced to them.

Customers do not seem to perceive who is delivering what part of the iPhone, and applications that malfunction are likely to negatively affect the customers view of the iPhone – no matter if it is the fault of Apple, third-party developers or other actors. In other words, Apple is held responsible for any failure and is therefore advised to ensure the quality of each application, no matter the source.

Future research

Our study has highlighted the blurry nature of the value creating process. We would like to see future research that investigates when this process starts, progresses and ends. Can activities that build up the hype around a product be value-creating itself?

The role of the firm in the value-creating process is not always clear. Is value always solely created by the customer while firms only can facilitate such creation? Or is the firm co-creating the value with the customer?

Finally, the participants in our study did not feel they had to work in order to customize the product. How much activities can be outsourced to the customer without them feeling that they have to work?

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Appendix A - Interview Questions

Note that the questions do not explicitly belong to the area in which they are categorized below. The headlines were meant to guide us through the interview and might therefore be misleading.

Introduction

 First of all, are you interested in technology in general?

 Do you know when new products are released?

 Care to a lesser extent?

 Tell us about when and why you choose to purchase an iPhone o How long have you possesed an iPhone? Are you satisfied?

o Why did you purchase an iPhone?

 What is it about the iPhone that is great?

 Fun to use?

 Ability to communicate?

 Music?

 Games?

 Applications?

 Possibility to customize and adapt the product yourself?

 Possibility to exchange experience due to the large user base?

Usage

 What have you used your iPhone for the last day/week/month?

o Games, communication, music, multimedia, calender, productivity etc

o Do you download applications to enable this or were the applications there when you purchased it?

 When you bought the iPhone, what did you think you would use it for?

 Did the usage turn out as you expected?

Customization

 What do you think about downloading applications?

o Troublesome to “work” or entertaining?

o Smooth to be able to do it without interacting with employees

 What do you think about choosing and removing applications? Better to do it yourself than having them pre-installed

o Could it be done by Apple before the exchange?

 How do perceive the process of downloading applications?

o Smooth?

o Annoying o Supply?

o Limitation?

 What do you think you are doing when downloading applications?

o Customize/Adapt?

o Develop?

o Use?

 How has your view on your iPhone changed?

o More personal?

o Troublesome?

Interaction

 What do you think about:

o The purchase of the iPhone?

o Standard telephone features?

o Downloading applications?

o Use of new applications?

o Anything else that you would like to add?

 Tell us about an application that you like o Who is behind the application?

 Apple?

 Developer of applications, i.e. Facebook?

o Who do you blame when something does not work?

 I.e. when you get a message saying ”ERROR”

o Who get credit when something works as it should?

 Apple?

 Developer, i.e. Facebook?

 You?

o If you download an application that you are satisfied with, how does it affect your perception of your iPhone?

 Positively?

 Negatively?

Appendix B - Citation list

This is a list of translated citations presented in the results. These were the citations relevant for the study and have been translated into English by the authors. The citations below have been sorted according to the participants, with the Swedish quote first followed by the translation.

Participant A

A1: “Förut var det så att man köpte en telefon och sen efter ett år så kom det en ny funktion som folk började köpa, och man behövde köpa en ny telefon för att få den funktionen, nu är det bara så att uppdaera ett program. Så man känner sig uppdaterad hela tiden”

A1: “previously you bought a phone and then after a year a new feature arrived and you had to buy a new phone in order to get the new feature. Now, all you have to do is upgrade the software. You feel constantly up-do-date.”

A2: “då såg man inte riktigt det som jag tycker är bra, den här med programmen, då var det mer då var det egentligen att den hade många bra saker, kalender kamera, iPod, alla Apples produkter var integrerade i produkten, sen kom bonusen med att alla andra började göra applikationer också. Men från början var det Apples produkter som jag mest såg fram emot att få i telefonen”

A2: “Back then, you didn‟t really see what I now believe is great - all these applications. I just saw the basic functions such as camera, iPod and the calendar. After a while I realized the bonus in downloading new applications, but from the beginning it was Apple‟s product that I was mainly interested in”

A3: “Jag var verkligen nöjd när jag la vantarna på telefonen”

A3: “I was very satisfied when I got my hands on the phone”.

A4: “kanonbra, att man hela tiden kan hålla sig uppdaterad, det kommer nya saker hela tiden.

Hela applikationesgrejen är jäkligt häftig, det är deras starkaste grej”

A4: “it‟s great, you can always stay up-to-date and new things are released all the time. The whole application thing is just awesome, it‟s their (note: Apple) strength.”

Particpant B

B1: “Ja köpte den när IP 3g släpptes, hängde på låset”

B1: “I bought it when the iPhone 3G was released, and pretty much waited outside the store”

B2: “Att det faktiskt är en telefon som blir bättre med åren fashinerar, det e ju helt sjukt och att den funkar hela vägen. Just anpassningen gör att den passar min farsa lika bra som den passar mig”

B2:“It is actually a phone that gets better every year, and that is fascinating, it‟s sick that it works all the way. The ability to adapt the product makes it fit my old man as good as it fits me.”

B3: “som att man växer ihop med den, ma integreras med den. Den integreras med ens vardag”

B3: “You fuse together, integrate with it. It becomes a part of your everyday life.”

B4: ”telefonfunktionen är viktigast, den hamnar högst upp. Även om jag använder den till annat blir det telefonfunktionen”

B4: “the basic phone functions are most important. Even if I use other features the phone is still most important”

Participant C

C1: “90% är nog FB mejl och SMS, sen är det väl sporadisk använding av internet, och angry birds, men de får nog inkluderas i de 90 %”

C1: “90% is probably Facebook, email and text messaging and then in addition I‟m occasionally surfing the web and playing Angry Birds (note: game), wait – Angry Bids is probably a part of that 90 percent.”

C2: “Jag var exalterad, jag lånade en kompis telefon of älskade den och gick direct till affären och köpte en. Jag var verkligen nöjd med köpet”

C2: “I was thrilled, I borrowed a friends phone and loved it and went straight to the store and bought one. I was really satisfied with the purchase”

C3: “ja tycker det skulle vara negativt om de la in fler applikationer, ja tycker det är mkt bättre att man väljer de själv”

C3: “I believe that it would be something negative if Apple put more applications into the phone pre-purchase and that it is much better to choose yourself.”

C4: “ja va skittagad, för jag hade precis suttit och lånat en annan, och det var typ första gången jag höll i en Ip och då var det typ såhär shit, sen gick ja å köpte den direkt. Jag var jävligt nöjd