Marketing in one word: VALUE
Updated: Mar 19, 2022
Defining the Customer’s Concept of Value
So, just what is value? In short, it is all about what customers get and what they have to give up - the difference between the benefits that a customer receives from a product or a service and the costs associated with obtaining that product or service. In principle, customer value is a very simple concept.
Total customer benefit refers to the perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a product or a service because of the products, services, personnel, and images involved.
Total customer cost is the perceived bundle of costs that customers expect to occur when they evaluate, obtain, use, and dispose of the product or use the service, include monetary, time, energy, and psychological costs.
An easy to remember equation that measures the difference between these two values: (V=B-C)
Customer Value = Perceived Benefits − Perceived Cost.
The creation of customer value will always be a challenge—particularly because it almost always needs to be defined on the customer’s terms. Nonetheless, “the number one goal of business should be to ‘maximize customer value and strive to increase value continuously.”
The small business owner needs to be thinking about customer value every day: what is offered now, how it can be made better, and what the competition is doing that is offering more value. It is not easy, but it is essential. All business decisions will add to or detract from the value that can be offered to the customer. If your product or service is perceived to offer more value than that of the competition, you will get the sale. Otherwise, you will not get the sale.
Strong evidence indicates that this focus on making the customer central to defining the business translates into economic success. It has been estimated that the cost of gaining a new customer over retaining a current customer is a multiple of five. The costs of regaining a dissatisfied customer over the cost of retaining a customer are ten times as much. Firms that provide greater customer value relative to their competitors should expect to see higher revenues and superior returns. A large study involving 2,800 businesses showed that firms with superior customer value outperform their competitors on ROI and market share gains.
Given this importance, it is critical to understand what makes up the perceived benefits and the perceived costs in the eyes of the consumer. So, a key question for any business then becomes - how can we make the customer the centre of our business?
How do customers perceive the concept of value?
First, value is not just price. Value is a much richer concept. Fundamentally, the notion of customer value is basic and relatively simple to understand; however, implementing this concept can prove to be quite challenging. It is a challenge because customer value is highly dynamic and can change for a variety of reasons (e.g., the business may change elements that are important to the customer value calculation, customers’ preferences and perceptions may change over time, and competitors may change what they offer to customers). A challenge is to recognise the ever-changing customer needs and innovate to gratify those needs.
From the standpoint of small businesses, what sense can be made of all this confusion? First, the components of the benefits portion of customer value need to be identified in a way that has significance for small businesses. Second, cost components also need to be identified. It is important to highlight that a business should consider the mix of values that it will offer its customers.
As previously pointed out, the notion of perceived customer value has two components—perceived value benefits and perceived value costs. When examining the cost component, customers need to recognize that it is more than just the cost of purchasing a product or a service. Perceived cost can also be seen as having multiple dimensions - monetary, time, and psychic.
Delivering What Consumers Really Value Companies are using the Elements of Value approach to solve challenges such as growing revenue, earning customer loyalty and designing offers. Bain’s new survey of more than 45,000 US consumers shows how the elements link to revenue, market share, customer loyalty and willingness to pay in 22 consumer categories.
Explore the Elements of ValueSM CLICK HERE (Interactive Model)
Table 1.1 “Components of Perceived Benefit and Perceived Cost” summarizes some of the sub-components of perceived value, and the activities that might be necessary to either enhance benefits or reduce costs.
The Power of Delivering Elements of Value® in Consumer Products
Companies that deliver strong performances on more elements than competitors will attract more customers over time and can choose to price higher than rivals do.Adding elements over time also improves loyalty, revenue and market share; adding emotional elements is worth 50% more than adding functional elements.
Brands can thrive by defining, listening, measuring and improving the elements of their value proposition. As they try to rejuvenate growth, consumer goods companies face the challenge of addressing changing definitions of consumer value, as more consumers seek purpose-led brands.
The Elements of Value provides a data-driven way for companies to understand the types and amount of value that consumers experience in their brands, and how that compares with other brands.
The perceived value proposition offers a significant challenge to any business. It requires that a business have a fairly complete understanding of the customer’s perception of benefits and costs. In many cases, customers themselves may have difficulty in clearly understanding what they perceive as the benefits and costs of any offer. How then is a business, particularly a small business, to identify this vital requirement? The simple answer is that a business must be open to every opportunity to listen to the voice of the customer (VOC). This may involve actively talking to your customers on a one-to-one basis, or may involve other methods of soliciting feedback from your customers, such as satisfaction surveys or using the company’s website. Your marketing team may engage in market research projects to better understand their customers or evaluate proposed new products and services. Regardless of what mechanism is used, it should serve one purpose: to better understand the needs and wants of your customers.
Companies can use this deeper understanding of value and consumer needs as the basis for defining their innovation agenda.
If businesses are to become better listeners, what should they be listening for? Marketers should address the following questions when they attempt to make customer value the focus of the business' existence:
What needs of our customers are we currently meeting?
What needs of our customers are we currently failing to meet?
Do our customers understand their own needs and are they aware of them?
How are we going to identify those unmet customer needs?
How are we going to listen to the VOC?
How are we going to let the customer talk to us?
What is the current value proposition that is desired by customers?
How is the value proposition different for different customers?
How—exactly—is our value proposition different from our competitors?
Do I know why customers have left our business for our competitors?
The challenge of offering better and greater value to consumers is a long-term and strategic undertaking. Companies that outperform their competitors will be those that steadily measure the changes in what consumer’s value, carefully track their delivery of that value and continuously adjust their strategy. It is the best way to evolve along with (or ahead of) consumers.
In summary, business owners and marketers need to constantly consider how they can enhance the benefits component while reducing the cost components of the value equation. Simple.
Bain & Company (2018). https://www.bain.com/insights/eov-b2b-infographic/
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