Customer-dominant logic: foundations and implications. Kristina Heinonen and Tore Strandvik. Forthcoming in Journal of Services Marketing, 2015

Transcription

1 1 Customer-dominant logic: foundations and implications Kristina Heinonen and Tore Strandvik Forthcoming in Journal of Services Marketing, 2015 Abstract Purpose The aim of this paper is to analyze the theoretical and practical implications of adopting customer-dominant logic (CDL) of service, focusing on how firms can become involved in the customers context. Design/methodology/approach Inspired by the conceptual discussion of service logic and service-dominant logic, this paper focuses on the conceptual underpinnings of CDL. Customerdominant logic is contrasted with other service perspectives in marketing; CDL is a marketing and business perspective dominated by customer-related aspects instead of products, service, systems, costs, or growth. It is grounded in understanding customer logic and how firms offerings can become embedded in customers lives/businesses. Findings The conceptual analysis challenges the prevailing assumptions of the key phenomena in service research, including interaction, co-creation, service value, and service. The paper presents five essential foundations of CDL: marketing as a business perspective, customer logic as the central concept, offering seen through the customer lens, value as formed and not created, and the prevalence of customer ecosystems. Research limitations/implications The paper differentiates customer-dominant logic from other marketing perspectives. Further empirical research is needed in different empirical settings to provide guidelines for adopting the perspective on a strategic and operational business level. Practical implications As a firm s holistic and strategic foundation, marketing is based on understanding how providers participate, at a profit, in customers value formation. The paper suggests how firms can successfully conduct business in dynamic markets with empowered customers. Originality/value This paper expands marketing and business logic based on customer dominance. It accentuates the importance of understanding customer logic and stresses the presence of providers in the customer ecosystem. Keywords Customer-dominant logic, Value formation, Customer logic, Customer ecosystem, Presence Paper type Conceptual paper

2 2 Introduction Customer-dominant logic (CDL) is a perspective on business and marketing based on the primacy of the customer. Adopting this view means shifting the focus from how (systems of) providers involve customers in their processes to how customers in their ecosystems engage different types of providers. In other words, emphasizing how customers embed service in their processes rather than how firms provide service to customers. Acknowledging CDL highlights the parallels and differences of marketing perspectives in existing research and practice. Perspectives are important in academic research and business practice. A business is driven by a prevailing perspective, a dominant logic, which is a mind set or world view or conceptualization of the business and the administrative tools to accomplish goals and make decisions in that business. It is stored as a shared cognitive map (or a set of schemas) among the dominant coalition (Prahalad and Bettis, 1986: 491). Perspectives are embodied in concepts and models and influence not only thinking but also actions taken (Strandvik et al., 2014). Some researchers who reflect on the managerial relevance of academic research claim that the most significant and long-lasting impact of academic studies comes from their creation of new concepts and perspectives (e.g. Jaworski, 2011). Various marketing and business perspectives have been discussed in the academic marketing literature. This discussion is useful in light of the theoretical and practical challenges of the emerging business environment, which has undergone radical changes in technology, competition, and customer power as well as a concern for sustainability and welfare (cf. Ostrom et al., 2010; 2015; Anderson et al., 2013). In the service field, service-dominant logic (SDL), service logic (SL), and CDL in particular have emerged as service perspectives (Lusch et al., 2014; Grönroos and Gummerus, 2014; Heinonen et al., 2010). These have different foci but explain the characteristics of service in society and business today. SDL focuses on systems and the co-creation between generic actors on a societal level (Vargo and Lusch, 2004; Lusch and Vargo, 2014), whereas SL emphasizes the interaction between the provider and the customer (Grönroos, 2006). CDL focuses on customer logic and the customer s constellation of activities, actors, and experiences and the role of providers in this context (Heinonen et al., 2010). Because academic research must become more relevant for managers (Jaworski, 2011), the customer is primary. In the 1950s, Peter Drucker (1954:37) argued, There is only one valid definition of business purpose: to create a customer. Customers can choose between alternative offerings; therefore, from a marketing standpoint, knowing how customers choose between different providers is essential. In the service context, the customer perspective is particularly important (Baron and Harris, 2010). Service should focus on value through the lens of the customer (Edvardsson et al., 2005: 118). Understanding customers is commonly seen as a key aspect of business practice for firms to improve their performance in increasingly competitive markets. However, many firms struggle with the issue of the role of customers in their business

3 3 (McGovern et al., 2004; Strandvik et al., 2014). This paper therefore emphasizes business and marketing logic based on customer dominance. The purpose is to describe the fundamentals of customer-dominant logic and the resulting challenges for managers from incorporating such an approach in contrast with other more provider-oriented approaches. The paper challenges existing service research and contributes to the field by developing fresh guidelines for future academic research and business practice. Approach Inspired by the axiomatic discussion of SDL (Lush and Vargo, 2014) and the comparison of SDL with other central perspectives, such as SL or consumer culture theory (CCT) (Grönroos & Gummerus 2014; Akaka, Vargo, and Schau, 2015), in this paper, we present the central tenets of the customer-dominant logic of service. In contrast to previous conceptual discussions of CDL (Heinonen et al., 2010; Heinonen et al., 2013), this paper goes beyond the discussion of the differences with provider-dominant logic and more specifically contrasts CDL with the two main service perspectives (SDL and SL). It also focuses on managerial issues to connect the essential CDL characteristics to business and research implications. The internal logic of CDL is based on positioning customer insight in the foreground in place of the type of offering (product or service) or the system of providers (service [eco]systems). The key issue is categorizing the perspectives according to their degree of provider customer dominance. Recently, Anker et al. (2015) attempted to extend the discussion of customer-dominant value creation but redirected the focus through using the term consumer instead of customer. Their paper, however, changes the main idea behind CDL as it places the focus on consumption, not business. We maintain the primacy of the customer concept, which we will further elaborate on. The term customer is by no means restricted to a dyadic relationship with one specific provider, but rather from the customer s point of view living their life/conducting their business using a constellation of providers. Furthermore, the term customer is not self-evident in terms of unit, time-frame, roles, and activities. These aspects are import issues when applying CDL in research and practice. Concepts and their definitions are important in characterizing service perspectives. For example, to outline how service logic is different from service-dominant logic, Grönroos and Gummerus (2014) elaborated on the nature of value creation, the role of the parties, and other key concepts used to capture the perspective. In this paper, we position CDL in relation to both perspectives. Similar to discussions on SDL and SL, the paper presents the lexicon of CDL based on five core issues: business perspective, customer logic, offering, value formation, and customer ecosystem. The essentials of CDL emerge in terms of how it contrasts with other current service perspectives. Central concepts are used generically throughout the paper. Provider is used to denote a seller, supplier, firm/organization, or individual who provides an offering to a customer. The term offering refers to products, service(s), solutions, value propositions, and relationships in general, whatever the provider is selling. The term customer has a broad meaning covering the

4 4 actor, buyer, consumer, client, or user who purchases and uses the offering. The buyer, payer, and user need not be the same actor, but these different roles can be separate elements of the customer concept. Moreover, the customer unit can vary from consumers to business customers and from a single entity (consumer, firm, or organization) to a collective (of consumers, firms, or organizations). Similarly, the business customer does not necessarily mean the entire firm, but it can also denote a single person within a firm. Therefore, the perspective can be applied to multiple contexts and levels of abstraction. By distinguishing between the provider and the customer, we highlight the practical reality of both actors in the business setting. Instead of focusing on generic actors (Lusch and Vargo, 2014), we acknowledge the importance of both actors in business practice and stress the primary role of the customer. The remainder of the paper is organized as follows. First, we position customer-dominant logic within the research on dominant logic and relevant service perspectives. Second, by describing the existing research on customer-dominant logic, we identify its key assumptions. We then discuss its five essential features and key phenomena. This is followed by a discussion of key managerial marketing issues that emerge when adopting the customer-dominant business logic perspective. We conclude the paper with theoretical and practical implications and suggestions for future research. Dominant logic in research and practice Dominant logic is relevant in theory and practice. The term dominant logic has been discussed in a strategic context (Prahalad and Bettis, 1986; Bettis and Prahalad, 1995; Prahalad, 2004) as an information filter that directs what managers (and researchers) focus on be it service (Vargo and Lusch, 2004; Grönroos, 2006), networks (Ford and Håkansson, 2006; Håkansson, 1982; Ford, 1980), solutions (Nordin and Kowalkowski, 2010), consumer cultures (Arnould and Thompson, 2005), or something else. Some perspectives presented in the academic literature are seen as pure ideal types of how to approach marketing issues and business (Brown, 2007). In practice, the perspectives used by managers are not ideal types but may be mixtures of many types (Strandvik et al., 2014). All marketing perspectives have advantages and disadvantages and different foci and scopes. Since each comes with its own set of fundamental assumptions, they differ in terms of what they pinpoint and what they put less emphasis on (Strandvik et al., 2014). The perspectives could be metaphorically seen as buildings, each with its own foundation represented by the fundamental assumptions and stories consisting of models, concepts, and methods. For example, SDL is a strong proponent of value co-creation, whereas SL refers to value-in-use (Grönroos and Ravald, 2011; Grönroos and Voima, 2013; Vargo et al., 2008). CDL promotes value formation in addition to value-in-use (Heinonen et al., 2013).

5 5 In business practice, managing involves applying perspectives to a firm s business (Jaworski, 2011). These perspectives result in different interpretations of events (Lilien, 2011). This may occur implicitly, when managers are not conscious of the set of assumptions that influence decisions or strategies and are thus blinded by their own lens (Prahalad, 2004). When choosing among different offerings, customers also apply their own mental models (Christensen and Olsen, 2002). Providers and customers sometimes apply different perspectives, which can result in inconsistencies between what is important in business practice. In addition, since the business environment is dynamic, businesses must continuously revise or at least consider the underlying perspective to remain competitive (Prahalad, 2004). How these changes in the business environment are recognized depends on whether they are real or perceived, that is, whether they are interpreted and socially constructed by actors (managers and customers). Either way, the perspectives that managers (and customers) apply may be deep-rooted and not easily changed, despite changes in the business environment. As a result, they may generate incorrect interpretations of the marketplace and actions taken by management. Therefore, identifying and analyzing the dominant logic is essential. Different service perspectives The emphasis in service business logic reveals differences between the existing service perspectives and shows how they guide what is seen. To accurately understand the differences between service perspectives, we can examine the emergence of service research. When service perspectives emerged in the 1970s, the discussion circled around the contrast between products and services (Fisk et al., 1993). In the next phase, when service-dominant logic emerged some 30 years later, this traditional service management perspective was seen as a goods-dominant logic, and services were contrasted with service (Vargo and Lusch, 2004). The focus of service research thus shifted to service as a process that involves customers in interactions (Grönroos and Gummerus, 2014) and co-creation processes (Lusch and Vargo, 2014). Currently, the focus of SDL is shifting away from individual providers and customer provider encounters to how value is created within systems of service exchange (Akaka et al., 2015). Still, the basis of exchange within the SDL perspective from a multiple stakeholder perspective of market interactions is service (Lusch and Vargo 2014). CDL emerged as an alternative view of service that moved the focus from the provider perspective to the customer perspective by arguing that goods-dominant and service-dominant logic represent both a provider-dominant logic (Heinonen et al., 2010). The essential difference is that CDL does not emphasize the interaction between the customer and the provider/market. The focus is on the key stakeholder in businesses the customer and how customers embed service in their processes. This is in contrast to how (multiple) providers (and other institutional stakeholders) in service (eco)systems provide service to the customer, which is the basis of SDL (Akaka et al., 2015). CDL stresses the activities and experiences of customers beyond customers perceptions of offerings and market interactions (Heinonen et al., 2010). Further, CDL does not contrast products to service but considers both products and service as the basis for value.

6 6 Figure 1 positions different service perspectives in relation to each other based on their focal focus. As the paper is centered on characterizing customer-dominant logic, the figure gives an initial understanding of how traditional service management (SM), service-dominant logic, and service logic relate to and differ from each other. The key message is that the perspectives have different starting points, leading to different implications, managerially and research wise. Figure 1 shows these alternative service perspectives on two dimensions: 1) the perspective of either outcome (goods-dominant, GDL) or process (service-dominant, SDL) and 2) the perspective of either provider (provider-dominant, PDL) or the customer (customer-dominant, CDL). While SDL and SL problematized the horizontal dimension (product/services vs service), CDL emphasized the distinction between provider and customer perspectives. Therefore, it is quite obvious that CDL cannot be seen as a sub-group of SL or SDL. Figure 1 Characteristics of the offering and actor focus The left side of Figure 1 represents traditional service management research, which focuses on the provider s perspective of service offerings and how they can be managed and designed (Fisk et al., 1993). The role of the customer is to perceive provider-created offerings (Zeithaml, 1988; Grönroos, 1990). The vertical axis separates the provider and customer perspectives. The lower half represents the assumption that the provider controls the value created for the customer. In contrast, the upper half represents the view that customers dominate and control the value creation (Heinonen et al., 2010). The figure shows that although each perspective has different assumptions, traditional service management is very different from the rest and that SL shares some elements of SDL and CDL. SDL is easy to analyze because of explicitly stated foundational propositions, which are currently seen as axioms (Lusch and Vargo, 2014). Other perspectives have been partly defined by comments on and discussions of these propositions (Grönroos and Gummerus 2014; Ford 2011; Holbrook, 2006; Heinonen et al., 2010). CDL takes an entirely different focus on customers, as represented by the vertical axis in the figure. SDL is systems dominant with

7 7 generic actors (Vargo and Lusch, 2004, Lusch and Vargo, 2014), while SL is focused on the dyadic process of value co-creation and the interaction between the provider and the customer (Grönroos, 2006, Grönroos and Gummerus, 2014). SL is closer to CDL in its attention on the customer, and in this respect, SL and CDL take a very different view compared to SDL. The literature on consumer cultures (CCT), a seemingly related perspective, although not explicitly discussed in comparison to CDL, would also be situated in the upper part of the figure. However, two key issues separate the perspectives. Although CCT studies customers marketrelated experiences beyond firm-customer encounters, it is focused on aggregate cultures, practices, and shared meanings (Arnould and Thompson, 2005). It therefore differs from CDL, which acknowledges the idiosyncratic customer within customer ecosystems. Also, CCT, like SDL, is focused on the dynamic aggregates and market interactions and is not interested in the managerial implications of these market interactions. In contrast, CDL takes a strong managerial approach. The approach in the extensive literature on customer orientation/market orientation (e.g., Narver and Slater, 1990; Kohli and Jaworski, 1990) can be positioned in the lower-left hand corner of Figure 1 since this approach is based on involving customers in providers activities, such as service innovation. In other words, the customer perspective is acknowledged on the provider s terms and the emphasis is on information about customers opinions of issues, which, according to the provider s logic, are essential. In CDL, this represents a provider-dominant view. The opposite, a customer-dominant view, starts from how customers decide to involve providers and how they use providers service. What is essential then is not specific needs but rather the patterns in customers processes (life/business) and the idiosyncratic customer logic driving choices and decisions when customers are striving to fulfill tasks and achieve goals in their business or life. To conclude, CDL as a marketing perspective shares some basic assumptions with the other perspectives, but it has distinct features. As a mental model, CDL focuses researchers attention in a different direction than other common approaches. In practice, the differences between CDL and the other service perspectives are more significant than might be expected. For example, while traditional service management assumes that service is largely controlled by the provider (e.g., Berry et al., 2006), CDL suggests that, in general, the customer controls service situations. Control is a relevant issue in many markets, and due to increasingly empowered customers (Seybold, 2001), this direction will most likely continue in the future. Emphasizing only the interactions between the provider and the customer leads to a focus on instances where the provider has a direct contact point with the customer. Because not all interactions are visible to the provider, interactions that are hidden to the provider but happen in the customer s world should be recognized (Medberg and Heinonen, 2014). Therefore, CDL does not stress the importance of specific contact points but argues that providers must understand and gain insight into customers patterns of activities and idiosyncratic logic. This distinction between the perspectives affects what aspects of service are addressed. As Alvesson and Sandberg (2011)

8 8 argued, studying the underlying assumptions that inevitably drive certain lines of argumentation is thus informative. In the following section, we clarify the main features of customer-dominant logic. Customer-dominant logic Customer-dominant logic (Heinonen et al., 2010; Heinonen et al., 2013) was introduced as a managerial perspective on marketing and business. It is grounded in understanding customer logic and how firms offerings become embedded in customers lives/business. The positioning of CDL as a marketing and business logic recognizes marketing as the foundation for business (Strandvik et al., 2014) and not, as commonly considered, a mere function within a firm. CDL guides managers in understanding markets and customers. CDL has been used in empirical studies, including in the context of consumer communities (Rihova et al., 2013), brand relationships (Strandvik & Heinonen, 2013), customer activities (Mickelsson, 2013) and banking, (e.g. Arantola-Hattab, 2014; Medberg and Heinonen, 2014). However, two studies in particular constitute the main body of the conceptual development of CDL (Heinonen et al., 2010; Heinonen et al., 2013). The paper by Heinonen et al. (2010) represents the first outline of CDL characteristics (as compared to service-dominant logic and service logic). By contrasting the provider-dominant view with the customer-dominant view, five major challenges were identified: provider involvement and control in co-creation, visibility of value, and the character and scope of customer experience. The paper argued that understanding customer logic is the foundation, and it outlined consequences of applying a customer-dominant logic. Heinonen et al. (2013) further conceptually explored the customer value formation process. The main questions of value formation were defined as how, where, when, what and who. An awareness of the mechanism of the customer value formation process provides companies with new insight into service strategy, service design, and service innovations. The paper underlined the need to transcend the visible customer-provider interactions and consider the invisible and mental life of the customer. From this followed the extension of the temporal scope to accumulated experiences in the customer s life and ecosystem. The paper extended the value construct by recognizing value as multi-contextual and dynamic based on customers lives and ecosystems. These two conceptual papers are linked through the value concept. In both papers, CDL is compared to prevalent provider-dominant service perspectives in order to call attention to their differences. Based on an analysis of differences in perspectives on value creation, both papers offered several managerial implications. Through a discussion on the essential lexicon of CDL, the current paper extends these implications by taking a broader scope and emphasizing more directly other managerially relevant issues.

9 9 CDL does not focus on consumers but rather covers all types of customers, including consumers, firms, and organizations as customers. The distinction between customers and (systems of) providers is essential since the key assumption is that in order for any business to be successful, there must first be a customer. Therefore, CDL emphasizes the customer as the main stakeholder, not the service, the service system, or other systems of exchange relationships. That said, the focus is not on customer provider interactions (neither on a dyadic nor service system level) but on how customers use and apply different service elements in their own lives or businesses. Consequently, considering how customers use different constellations of service to accomplish tasks acknowledges the existence of a customer ecosystem (Voima et al., 2011). Customer logic denotes customers reasoning and sense making about appropriate ways for achieving their goals and conducting their tasks. The term dominant refers to customers having a dominant role in the firm. Thus, a provider applying CDL is dominated by customer-related aspects rather than by products, service, costs, or growth. This is why customer-dominant business logic has a different focus than service-dominant logic and service logic, which emphasize service (offerings), interactions, and systems (Grönroos and Gummerus, 2014; Lusch and Vargo, 2014). In essence, although CDL emerged as a result of a theoretical discussion, similar to service logic (Grönroos and Gummerus, 2014), CDL represents a managerial approach to business. It was developed to meet complex marketing challenges by addressing core issues in business (Strandvik et al., 2012): What can we offer to customers that they are willing to purchase and pay for? (as opposed to How can we sell more of our existing offerings? ). To answer this question, it was argued that firms must start by understanding customers and their logic.. In other words, the way managers think may become an important competitive advantage. In the CDL perspective, firms should be concerned with how they can become involved in customers lives instead of figuring out how to involve customers in the firms business: There is a need to contrast the established provider-oriented view of involving the customer in service co-creation with a more radical customer-oriented view of involving the service provider in the customer s life (Heinonen et al., 2009:8). The difference between who is involved in whose processes is subtle but central: Companies should try to discover the potential, unrealized value of a service by learning what processes customers are involved with in their own context, and what different types of input, both physical and mental, they would need to support those processes. This means setting out from understanding customers activities, and then supporting those activities, rather than starting from products/services and then identifying the activities where a company can fit in. (Heinonen et al., 2010:545) Figure 2 is intended to further clarify some of the initial characteristics of CDL put forward by Heinonen et al. (2010). Customer-dominant business logic is concerned with all elements in the

10 10 picture, and the figure is constructed to depict the connection between a service provider and a customer in a general sense. Furthermore, the figure is divided into two overlapping worlds : the customer s world and the provider s world. The interaction arena is positioned where the two worlds coincide. Each is described in terms of layers that are relevant as points to connect CDL to other service perspectives. The picture also contains a timeline depicting the inherent time perspective in CDL. A strong emphasis is also placed on activities and experiences in the customer s world in addition to the elements that occur in the provider s world and in the interaction. Figure 2 Customer-dominant logic of service Source: Expanded from Heinonen et al. (2010: 535) The shaded vertical area of Figure 2 depicts a specific service and covers both pre-service and post-service elements. It connects the provider s business model and strategy through actions and interactions with the customer s activities and experiences. This process shares some features of the value-generating process suggested by Grönroos and Gummerus (2014). Service is divided into the focal provider s service context (A), the interactive service context (B), and the customer s service context (C). The arrows in the vertical grey area represent the dynamism of the activities associated with the service, indicating the interplay of the different contexts, that is, that activities and experiences in the customer s world influence the interactive context and the focal provider s processes, and vice versa.

11 11 For simplicity, the vertical grey area shows only one customer and one provider. However, in reality, customers use different constellations of service to accomplish tasks, which often involves several providers, other customers, other actors, and physical and virtual structures. The shaded horizontal area, the interaction arena, illustrates the links between the customer and the focal provider and other providers in the past and potential links in the future. CDL argues that the entire customer s world represented in the area inside the dotted line needs to be recognized. It furthermore suggests that from a managerial perspective, when providers create their service offerings, they should ideally mirror the activities and experiences that occur in this context. At the same time, providers are aided and restricted by capabilities, resources, business models, and strategies in their own world, which is represented by the second dotted line. The main challenge for service providers is to step outside their own world and logic. In the next section, we describe the fundamental elements of the CDL perspective. The essentials of customer-dominant logic The following five essential features of CDL build on and extend previous studies (essentially Heinonen et al., 2010, 2013): 1) business perspective, 2) customer logic, 3) offering, 4) value formation, and 5) context. In the following, these features are described and the resulting managerial and theoretical implications are discussed. 1. Business perspective Customer-dominant logic is fundamentally a marketing perspective. Because marketing can be viewed in different ways, ranging from a simple organizational function to the strategic foundation of the entire business (Drucker, 1974), we stress CDL as a business perspective, moving beyond a limited functional view of marketing. Similarly, there are different interpretations of the term service, from the traditional view of a service as the output of a provider s activities to newer suggestions that consider service a business perspective (e.g. Edvardsson et al., 2005). Both interpretations of service are included in CDL, and it is explicitly a customer-dominant logic of service. The term dominant refers to the customer having a dominant role in the firm. A business cannot exist without customers (Drucker, 1974) and therefore viewing business through the customer s lens is central. This is why the balanced centricity suggested by Gummesson (2008) is only a secondary concern for business practice and actors cannot be generic. Thus, in a firm that applies CDL, the business is dominated by customer-related aspects instead of products, service, costs, or growth. Table 1. Overview of CDL as a business perspective Business perspective Definition Description Marketing is seen as revenue management and as a ubiquitous mental model with customer logic as a foundation for business. A managerial approach based on a conceptualization and realization of how the provider participates in customer value formation and

12 12 simultaneously earns money. Focused on customer uniqueness. Pinpoints the need to understand customer logic in order to create appropriate, profitable business processes and designs. Key managerial implications: A key managerial issue is to continuously consider not only customers activities, experiences, and preferences but also their goals, tasks and reasoning. This implies understanding customers subjective logic. From a CDL perspective, marketing is not a function but rather is a holistic strategic foundation of the firm. It involves managing the business to secure short- and long-term revenue and remaining competitive. Managers achieve this goal by identifying customer logic, creating suitable business models and offerings, engaging in activities that will ensure value-in-use for the provider, creating superior value-inuse for the customer, and continuously monitoring and aligning the overall processes. Key theoretical implications: There is a need to further explore the differences between marketing perspectives and recognize the ontological roots of different concepts and vocabularies. Problematization in terms of challenging assumptions is important because current theories and concepts are mainly provider-dominant. Possible research themes include a customer-dominant logic of service innovation, customer experience, pricing, sales, communication, e-service, or branding. 2. Customer logic A central concept in this marketing perspective is customer logic. The customer s actions, reactions, practices, preferences, and decisions are assumed to be grounded in an idiosyncratic logic (Heinonen et al., 2010). Customer logic is a coordinating concept in which the patterns of customers overt and covert activities, experiences, and goals are integrated. All customers are, by definition, subjectively rational, that is, informed by their own logic. No single logic is better than another it is only different. In a business sense, customer logic forms a customer-specific pattern of how they live their lives or conduct their business, including their allocation of focus, energy, and involvement in relation to offerings in the marketplace. Customer logic can change and may be influenced, but it tends to show inertia because it is anchored in customer experiences and the whole pattern of customer activities, customer tasks and goals, and customer context. Similarly the customer jobs school of thinking (Ulwick, 2002; Ulwick and Bettencourt 2008) and the demand first school (Christensen, et al. 2007; Joachimsthaler, 2007; Joachimsthaler and Pfeiffer, 2010) stress that customer tasks and activities are essential to understand. Thus, the customer context is viewed as individually constructed by the customer. Another assumption of CDL is that customer logic can be identified. Table 2. Characteristics of customer logic Customer logic

13 13 Definition Description Customer logic is defined as customers idiosyncratic reasoning of and their sense making about appropriate ways for achieving their goals and conducting their tasks. An idiosyncratic logic that informs customers behavior. Customer logic is cognitive and affective and only partly explicit. Customer logic influences how customers choose among available offerings and how customers experience the value of different offerings. Key managerial implications: In the provider s world, customer logic influences the design and provision of offerings. In the customer s world, customer logic has an impact on how the offering is used embedded in the customer s activities life/business. It is also necessary to consider changes in customer logic and factors influencing it. Although customer logic is idiosyncratic, for managerial purposes, customer logic can be classified into a usable number of groups. Key theoretical implications: Future research may focus on developing approaches and categorizations of customer logic. The emphasis on idiosyncratic customer logic contradicts research perspectives that focus on aggregate concepts such as customer cultures, practices, and collectives. Customer logic contrasts traditional customer behavior and decision-making research, which is focused on decision making concerning specific purchases and products, by addressing the individual s use of different providers over time and in different contexts. It represents a holistic alternative to traditionally used concepts like needs, wants and expectations. An agenda for future research is to explore the interconnectedness of customer activities, customer reasoning, and the idiosyncratic patterns of customer behavior. 3. Offering CDL defines offering as what the provider offers and sells; this term incorporates traditional concepts such as products, services, solutions, promises, and value propositions (Grönroos, 1990; Nordin and Kowalkowski, 2010). By using the generic term offering, we indicate that the important distinction is not between products/services or service (as a perspective) but between provider and customer perspectives. This distinction between provider and customer perspectives with an emphasis on the customer s perspective is relevant because what providers sell is not necessarily what customers buy. Understanding the customer perspective that is, how customers decide to use, and do use, and experience the input they get from service providers is challenging for providers. Therefore, the offering is essentially a recipe for how a provider can be involved in a customer s value-in-use, driven by the customer s configuration of activities, perceptions, and emotions. In practice, companies cannot provide tailored support for customer value formation, but they must make choices regarding what they are able to offer while

14 14 considering competition and their own capabilities and strategies. This is not emphasized in service perspectives other than CDL. Table 3. Offering as seen from the CDL perspective Offering Definition Description Offering is a generic concept for the holistic entity the provider has designed and intends to provide/sell, containing material and immaterial elements in order to achieve its own goals. Offering as a concept covers traditional concepts such as products, services, service, solutions, value propositions, and relationships. It also includes outcome aspects (products/services), process aspects (service), and extension over time (relationship). Service is different for the provider and the customer: From the customer perspective, service denotes how providers participate in customer value formation through interactions and presence, considering technical (what), functional (how), temporal (when), spatial (where), and actor-related (who) aspects. From the provider perspective, service is how a provider chooses to design its offering based on customer logic to achieve appropriate value. Key managerial implications: The starting point for innovating offerings is the outcome customers envision in a specific context, rather than what providers themselves see as an offering that could provide value. The offering becomes what the customer gets out of the connection with the provider. This necessitates beginning with an understanding of customer logic rather than attempting to understand how customers fit into the provider s logic. The emphasis is on matching the provider s capabilities and resources (offering) with customers tasks and goals (needing). Key theoretical implications: A key issue is to focus on needings not needs (Strandvik et al., 2012), where needing is a customer-focused concept that corresponds to the provider-oriented offering concept and that demonstrates what the customer intends to achieve and to acquire. 4. Value formation Value formation is the term used to describe the process in which value emerges as opposed to being deliberately created, and it is based on use, including physical and mental experiences. Value is formed in use separately for customers and providers (or any other actor involved) (Heinonen et al., 2013). The customer evaluates value-in-use based on the outcome of the provider s domain, the outcome and process of the interactive domain, and the outcome and

15 15 process of the customer s domain. In contrast, the provider s value formation process is driven by the provider s business logic and activities influenced by other actors actions. In addition to functional use, use may be symbolic and emotional and can reside within or outside interactions (Heinonen et al., 2013; Medberg and Heinonen, 2014). Value-in-use can also be individual, collective, deliberate, unintentional (Heinonen and Strandvik, 2009), imagined, or lived (Jaakkola et al., 2015). The context in terms of location is customer-specific and socially constructed. Value is formed not only in the provider s world or in the interaction arena but also in the customer s world. In terms of time, the context is customer-specific and socially constructed. The temporal dimension can include the present and the future as well as the past through value heritage. Value formation has predominantly been viewed as being based on interactions and the interactive contact points between the provider and the customer. This view originated in the early development of services thinking, which focused on functional (process) issues (of quality) (Grönroos, 1990). Interaction is only one of the factors that enable providers to influence the formation of customer value-in-use. Co-creation gives limited insight into customer value formation because only some interactions are co-created. Co-creation may also be asynchronous. CDL defines co-creation as intentional goal- and task-oriented activities. In addition to interaction, CDL introduces presence as a novel aspect of value formation. Presence denotes being in a specific place (i.e., the state of being present) in a physical sense and also in an abstract sense. The antonym of this term is absence, or the state of being absent. Presence shifts the focus from value formed by interactions to the value of offerings that customers experience as present in their lives. Presence may occur in many different forms, ranging from physical presence to mental presence. This concept transfers providers attention from managing the visible interactions they control to ensuring presence in customers lives or businesses. Provider presence needs to be understood from the customer s point of view as potential for use (top of customer s mind, easy and immediate access, trusted). CDL recognizes providers specific capabilities and skills as limitations for how they can support customer value formation in a profitable way, which is in contrast with other service perspectives that do not focus on the managerial reality of profitable business. Table 4. Essential features of value formation Value formation Definition Description Customer value formation is defined as customers emerging behavioral and mental processes of interpreting, experiencing, and integrating offerings in their everyday lives/businesses, with either positive or negative outcomes. Provider value formation is defined as the provider s evolving process of strategizing, designing, and implementing offerings based on its capabilities and skills and interpretation of customer logic, with either positive or negative outcomes. Value formation is used rather than value creation to stress the

16 16 Outcome (what) Process (how) Location (where) Time (when) Customer (who) Provider (who) emerging characteristic of value-in-use in contrast to the notion value creation. Customer logic, tasks, and needing (not needs) determine how the offering is experienced and forms value-in-use. Value is formed in two separate but related processes, one for customers and one for providers. The customer value formation process is driven by customer logic and activities and is influenced by the actions of other actors. The provider value formation process is driven by the provider s business logic and activities and is influenced by other actors actions. Value-in-use always emerges for a customer in a certain context. In the customer s world, activities and experience s occur that are related and unrelated to a specific provider and may lead to value formation. Value-in-use evolves as a process that extends over an indefinite time, including favorable and unfavorable phases and elements. Value-in-use is interpreted and re-interpreted, and it is a relative evaluation at different points of time. There are many types of customers, such as consumers, firms, organizations, or other actors represented as individuals, groups, or other units. Customers orchestrate value formation. Providers may be firms, organizations, persons, or other actors who provide offerings to customers. Key managerial implications: Value formation implies going beyond the notion of value propositions to understand how value emerges for customers. Customer value-in-use is a key issue in how firms manage their own value formation processes. Neither customer nor provider value formation can be completely controlled but both must be closely monitored. Providers may influence customers in many ways, but they compete with other providers and their offerings must be relevant to their customers. Value formation raises questions for providers about their presence and relative involvement in customers lives, including when, where, and how they should be present and potential problems based on the provider level of presence. A focus only on interactions will include only activities, whereas presence emphasizes customers experiences of the provider s involvement beyond activities to capture the provider s potential influence on customers. Key theoretical implications: Value-in-use is formed in two separate but intertwined processes (the customer s and the provider s) and cannot be captured by simple means. The key issue is to understand who the customer is and what the customer units and logic are. The significance of presence needs to be further explored. The positive and negative aspects associated with five generic dimensions should be the focus: content (what?), process (how?), time (when?), location (where?), and actor (who?). Value-in-use formation is a complicated process that cannot be captured with traditional methods.

17 17 5. Customer ecosystems Value-in-use always emerges for customers in their context. In the customer s world, related and unrelated activities and experiences may lead to value formation (Mickelsson, 2013; Medberg and Heinonen, 2014). This context is based on customer ecosystems, which have been defined as a system of actors and elements related to the customer that is relevant in a specific service (Voima, et al. 2011:1015). Customer ecosystems include service providers, other customers (individuals or businesses), other actors, and the physical and virtual structures related to the service. Consequently, although customer-to-customer interactions are important elements of service experiences (Baron and Harris, 2010), this concept is not merely a social value creation system. Moreover, despite the prevailing primacy of customer provider relationships in the current service research (Baron and Harris, 2010), customer ecosystems are not equivalent to service ecosystems. Service (exchange) or service providers and larger institutional structures are at the core of service ecosystems (Akaka et al., 2013), whereas customers are at the core of customer ecosystems. Customers, not providers, define the relevant components of customer ecosystems. Table 5. Main characteristics of customer ecosystems Customer ecosystem Definition Description A customer ecosystem is defined as a system of actors and elements related to the customer and relevant to a specific service. This includes service providers, other customers (individuals or business actors), and other actors (such as communities), as well as installed physical and virtual structures related to the service. Service ecosystems are only a part of a customer ecosystem. Customer ecosystems are not only social, but they also have commercial, physical, and virtual features. Customer ecosystems can be described at different levels of abstraction. Key managerial implications: A key issue is to understand providers position and influence in customer ecosystems. For customers, the provider s influence and input can vary from extensive to minor. Key theoretical implications: Further research about how customer ecosystems differ from service ecosystems is required, and the specific characteristics of customer ecosystems should be further examined. It is also important to explore further the customer concept in terms of unit, time-frame, roles, and activities.

18 18 How CDL makes a difference for marketing practice What are the implications of adopting customer-dominant business logic? What should firms do differently if they adopt such an approach? First, providers must be aware of their secondary role in customers lives (or businesses) and strive to be invited into customers lives/businesses, ecosystems, activities, experiences, and practices. Second, provider activities are driven by an understanding of customer logic. In other words, customer orientation, which guides firm strategies toward the creation of superior quality and customer satisfaction (Narver and Slater, 1990), should be substituted with customer dominance and a mindset of listening to customers in their own context (Strandvik, et al. 2012). Customer-dominant business logic means that customer issues drive managerial thinking at all levels, from the boardroom to everyday interactions with customers, production, supply functions, and organizational issues. Additionally, instead of focusing on collective customer behaviors and cultures (Arnould and Thompson, 2005), CDL promotes an understanding of idiosyncratic logics. Figure 3. Factors influencing the formation of customer value-in-use Figure 2 represented the general playing field for CDL and the different important elements, such as the time dimension. Figure 3 further highlights the key managerial marketing issues that emerge by applying a CDL perspective. The picture is naturally a simplification, but it depicts how a customer and a service provider connect. In the provider s world, the provider is involved in strategy processes (S) and service design activities (SD), and these are mostly invisible to the customer. Overlapping in the interactive service context are the provider s activities involving the collection of information about customers and markets (I), direct and indirect service activities (A), and marketing communication of all kinds (C). Conversely on the customer side, the customer is involved in communication with the provider and others (C), in activities in