Understanding Customers: Customer Value22nd November 2020
Customer value models are based on assessments of the costs and benefits of a given market offering in a particular customer application. Depending on circumstances, such as availability of data and a customer’s cooperation, a supplier might build a value model for an individual customer or for a market segment, drawing on data gathered from several customers in that segment.
Customer value models are not easy to develop. But the experiences of suppliers that have built and used them successfully suggest several guidelines that we believe will be useful to any company attempting to define and measure value for its customers.
Customer value is a fundamental concept in the study of marketing and is usually covered in the opening chapter of a marketing textbook.
Customer value measures a product or service’s worth and compares it to its possible alternatives. This determines whether the customer feels like they received enough value for the price they paid for the product/service.
We can look at customer value as insight into buyer’s remorse. If customers feel like the total cost of an item outweighs its benefits, they’re going to regret their purchase. Especially if there’s a competitor who’s making a better offer than yours for a similar product or service.
Understanding customer value and how to calculate it can help your business price products fairly and reduce friction within the customer experience.
How to Measure Customer Value
For some businesses, customer value boils down to dollars and cents. However, it’s important to remember that customers give more to your company than just what’s listed on the price tag. There are also time costs, energy costs, and emotional costs that customers weigh when making a buying decision.
Similarly, there are different types of benefits that influence customer decisions. Some examples include tangible benefits like how the product will help them achieve goals as well as image benefits like how owning this product or service will change one’s social status in the eyes of their peers and colleagues.
To measure customer value, we first need to recognize these different types of costs and benefits. The graphic below can help by summarizing the factors you should be addressing when calculating customer value.
Virtually all organizations strive to deliver good overall value for both their current and potential customers value. Without providing true customer value firms will be unable to attract and retain customers. And without customers there is no functioning business in the long-term. Customers need to perceive that value exists for them that is, they will receive more benefits than the costs they incur.
Many customers, like the commercial grower, understand their own requirements but do not necessarily know what fulfilling those requirements is worth to them. To suppliers, this lack of understanding is an opportunity to demonstrate persuasively the value of what they provide and to help customers make smarter purchasing decisions.
A small but growing number of suppliers in business markets draw on their knowledge of what customers value, and would value, to gain marketplace advantages over their less knowledgeable competitors. These suppliers have developed what we call customer value models, which are data-driven representations of the worth, in monetary terms, of what the supplier is doing or could do for its customers.
Therefore, in simple terms, customer value is when a customer perceives that the range of benefits, they receive from a transaction exceeds the cost and effort undertaken to participate in that transaction.
Customer value = all benefits received less purchase costs and time and effort
Understanding customer value
When considering customer value, it is important to understand that it is much more than simply a price/quantity view. That is, value is simply is not necessarily more getting more for your Money.
- Identify customer benefits.
While the graphic above highlights some general benefits, here are some specific one you can consider:
- The quality of your product or service
- The ability to provide a better solution
- Your brand’s reputation
- Your unique customer experience
- The quality of your customer service team
- The social advantages of partnering with your business
Total customer costs.
When measuring customer costs, it helps to differentiate between tangible and intangible. That way you can calculate the total of your monetary costs and compare it to your other costs.
- The price of your product or service
- Installation or onboarding costs
- The cost of accessing your product or service
- Maintenance costs
- Renewal costs
- Time invested in buying your product or service
- A poor customer experiences
- Physical or emotional stress induced from buying or installing your product
- A poor brand reputation
- Time spent understanding how your product or service works
Find the difference between customer benefits and customer costs.
To calculate customer value, we can use the equation below.
Customer Value Formula
The formula for customer value can be written as: (Total Customer Benefits – Total Customer Costs) = Customer Value, or (B – C = CV).
Tips for Increasing Customer Value
1. Evaluate your customer experience.
When increasing customer value, the best place to start is by analyzing your customer experience. Create a customer journey map that outlines each step your customers take when buying something from your business and look for interactions that might cause friction within the experience. Once you can visualize every action your customers are taking, it’s easier to identify opportunities to add value.
2. Focus on more than price.
For some businesses, it’s tough to compete through price alone. Sometimes the cost to make a product is static, and there’s not much room for a business to lower their price tag.
But, that doesn’t mean you can’t create a competitive offer in your industry.
This is where you should look for alternative ways to add value to your customer experience. Keep in mind that customer needs range from convenience to performance and there are plenty of non-monetary benefits that can convince people to buy your product.
3. Collect customer data.
It’s hard to make effective changes if you’re only looking at customer value from the business perspective. Instead, you should be centering your focus on the customer’s perceived value of your product or service.
To do that, you’ll need access to quantitative and qualitative customer data. With it, management teams will have facts and statistics that justify their proposed changes. Leadership can make decisions confidently knowing their perception of customer value aligns with your customer base.
Additionally, it’s important to collect both quantitative and qualitative data as this will give you a diverse data set that includes insightful statistics and captures the voice of the customer.
4. Target your most loyal customers.
You might think that because a customer is loyal, they’re already receiving value from your business. And, you’d be right.
However, just because someone is loyal to your business, that doesn’t mean you can’t or shouldn’t outsize their customer value. Encompassing additional benefits through customer loyalty programs can generate even more value for these customers.
While this approach not only retains your most valuable audience, it acquires new customers as well. For example, you can leverage benefits in exchange for customer advocacy. Have customers submit feedback or write a testimonial that shares their positive experience with potential leads. Since 93% of consumers use reviews when making buying decisions, this will add another benefit to your customer value equation.
5. Segment your customer base.
As we mentioned earlier, customer value can vary depending on who you’re surveying, and a customer’s needs and goals influences their definition of “value.” Since not all customers are alike, this creates discrepancies when measuring value at your business.
That’s why it’s important to segment your customer base into specific target audiences. Start with your buyer personas and use customer data to identify specific purchasing behaviors. Once your groups are established, you can measure customer value for each.