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Methodology Metrics Value Matters as a Key Metric for Six Sigma Initiatives

Value Matters as a Key Metric for Six Sigma Initiatives

A key measurement of Six Sigma effectiveness is the application of appropriate metrics. Mikel Harry and Richard Schroeder, two pioneers of Six Sigma, state in their book Six Sigma that, “An organization’s profitability is determined by what it chooses to measure and how it measures it.” They point out that most companies need to change what they measure. Many companies use customer satisfaction to measure success. They believe that the metrics of customer satisfaction can lead to the identification of Six Sigma projects, and that the results of those projects should increase customer satisfaction.

But now, some business organizations have come to recognize that measures of customer satisfaction may not be the best metric of business performance. They realize that satisfaction has little to do with the conventional metrics of business performance – such as revenues, market share or profitability. The reasoning is this:

  • Satisfaction is an emotional response, not the sort of cognitive or evaluative response used by companies in most purchase situations.
  • Satisfaction ignores the interaction among quality, image and price. This is essential for understanding the nature of the buying dynamic.
  • Satisfaction has little, if any, linkage to an organization’s performance.

As a result, more companies are beginning to use the more actionable metric of customer value.

Customer Satisfaction and Customer Value

Customer satisfaction frequently involves a comparison of expectations to actual experience. The customer’s emotional response is typically captured as individual satisfaction attributes through measurements such as surveys. Customers are asked to rate their satisfaction on individual items such as responsiveness, price, fit and finish, taste, etc. These ratings are then treated independently by reporting satisfaction scores for each attribute. As a result, the items that customers are least satisfied with typically go to the top of the list, and are the issues that receive the most attention.

Attempts to correlate the individual attribute scores with overall satisfaction tend to neglect interactions among the attributes. These interactions create real-life buying situations where tradeoffs occur. For example, a customer may give a low survey satisfaction score to the price of a product, thinking it too high. Yet, when purchasing the product, the customer is willing to accept the higher price in order to gain greater product quality.

Measuring customer value requires a cognitive calculation of tradeoffs. Determining the value of something requires thinking through and evaluating the benefits received from a product or service relative to its alternatives. Value addresses the question of whether the purchase or interaction was worth the tradeoff from the customer’s perspective. To answer this question, customers must evaluate the performance of a product on its key quality drivers and then relate that performance to an evaluation of price.

Measuring and understanding market definitions and perceptions of customer value require metrics that are completely different from those used for measuring customer satisfaction. The best quality at the best price is the very essence of what value is all about. Value is a proactive measure where satisfaction is a reactive measure.

Customer value is a better fit with Six Sigma than customer satisfaction metrics for two reasons.

  • First, the metrics of customer value explicitly recognize the importance of quality to success and lead to identification of specific critical-to-quality (CTQ) characteristics.
  • Second, perceptions of price competitiveness are highly related to quality, and high levels of quality (low defects) are inversely related to cost. In other words, the more a company improves quality by reducing defects, the lower the cost of producing its product, and the more it will be able to charge for that quality, thereby increasing profit margins.

The Linkage with Performance

Six Sigma initiatives should directly relate to the organization’s strategy. Regardless of the strategy – market penetration, market development, product development or diversification – a key performance metric is market share. And one of the best leading indicators of market share is value, according to Bradley T. Gale, nationally known marketing consultant and author of Managing Customer Value. Consequently, customer value is a critical metric that should be driving Six Sigma initiatives.

Likewise, if a company’s goal is to increase its ROI (return on investment), ROA (return on assets) or ROS (return on sales) then its ability to differentiate its product or service offerings on the basis of value is essential, according to Gale. A company cannot manage what it does not measure.

Research indicates that satisfaction lacks a consistently demonstrable connection to actual customer behavior and growth. This finding is borne out by the short shrift investors give to such reports as the American Consumer Satisfaction Index. The index, published quarterly in The Wall Street Journal, reflects the customer satisfaction ratings of some 200 U.S. companies. In general, it is difficult to discern a strong correlation between high customer satisfaction scores and outstanding sales growth.

To illustrate the lack of linkage between customer satisfaction and market share, Gale pointed out that in the 1980s, customer satisfaction scores for Cadillac and AT&T were soaring while at the same time, their market share was dropping.

Customer value has a strong linkage to loyalty – the willingness of a customer to recommend a company’s products or services to another and the willingness of the customer to continue to do business with the company.

One reason for poor linkage between satisfaction and organizational performance is that customer satisfaction typically focuses on the organization’s own customers and not the market. How can a metric that does not account for the competitive nature or dynamics inherent in the give-and-take of market share, predict market share? It cannot.

Conclusion: Critical Metrics for Six Sigma

Companies that employ the metrics of customer value are able to identify the precise drivers of quality most important to customers. Value also is a key indicator of market share. The metrics of customer value also reveal how markets perceive the tradeoff between the improved quality and current price competitiveness. Customer value has a strong linkage to loyalty. Thus, customer CTQs and customer value are critical metrics for identifying Six Sigma initiatives.

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Comments

Luke Wissmann 15-06-2010, 18:02

Indeed, how customers value products is the key to innovating using Six Sigma. Nevertheless, the word value is used loosely in many domains and sometimes these definitions are clear only within specific organizations. “Customer Value” in the marketing domain refers to “what is the value of the customer to the organization”, i.e. value in retaining a customer. In my consulting practice I help business leaders measure their customers’ willingness-to-pay for products, which is product value– “what is the value of a product or service to to the customer?” I think this is what you are referring to in this article. Why measure product value? There are three metrics of innovation: better (product value), cheaper (product cost), and faster (cadence of product or service improvements). These are the fundamental metrics that can be managed directly to influence bottom-line metrics.

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Ge mwf 08-11-2010, 18:00

Good comments, Luke. I took a look at you site. Nice compliment to what’s happening over here.

Reply
Sarmistha 30-01-2011, 09:54

I am a quality analyst with IBM. I was involved in conducting the customer satisfaction survey. Projects also setup CoS (Conditions of satisfaction) Card with the customer’s consent and it is reviewed quarterly. But how to measure customer value?

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