What is Customer Value?
Customer value refers to the perceived benefits that a customer receives from a product or service in relation to the cost of obtaining it. It is the difference between the total benefits received and the total costs incurred by the customer.
In other words, customer value is a measure of how much a customer believes that a product or service is worth to them. It is based on their perception of the benefits they receive, which can include functional benefits (such as solving a problem or meeting a need) and emotional benefits (such as feeling happy or satisfied).
Table of Contents
Benefits of Market
Emotional Benefit
Benefits that are specifically attached to brands, their particular features, and advertising, which arouses the customer’s interest in buying that product or availing the services.
Example: Cadbury usually comes up with advertisements that arouse the customers’ instincts emotionally to buy the chocolate. The emotional benefits of product purchase such as the occasion of Rakshabandhan, eating sets after dinner, etc. showcases numerous reasons for buyers to make a purchase.
Service Benefit
The benefit derived from a service that provides the customer time, place, and ease of task as the convenience in form of benefit.
Example: Banks started ATM service at convenient locations for customers. This made accessing money 24×7 possible for customers without standing in long queues for customers.
Performance Benefits
Benefits on the basis of which a customer can measure the value of the product. The customer lays various attributes of a product based on which he compares his purchase with the ones of competitors. Those attributes define the performance of the product.
Example: When Samsung launched low-priced mobile phones that had more features as compared to competitors’ mobile phones, it became a hit in the market due to its performance and other mobile players faced stiff competition from Samsung.
Brand/Company Benefits
The benefits offered by the company’s brand name, symbols, product attributes, and the distinct features which make the product/service distinct from that of competitors’ products is the brand/company benefit.
Example: McDonald’s sells burgers that are preferred by all segments of Indian customers as the brand carries an assurance of quality snacking in it. People buy burgers from this brand as it has been proven and tested for making available quality food at affordable prices.
Product Benefit
The actual factor of a product i.e. its design, usage, and performance, and the perceived factors of a product i.e. its brand image, popularity, etc. when satisfying customer’s needs and wants is termed as product benefit.
Example: When a new product is launched in the market customer develops an expectation of some benefit that he/she will derive from that product. When after using that product, his perceived level of expectation matches the actually derived benefit, the customer is said to be satisfied.
Performance-related benefits are utilitarian benefits. Each product comes with a certain level of service benefit also. Above all these benefits, customers get emotional and self-expressive benefits. In the purchase of an LG refrigerator, ownership of the refrigerator is the product-related benefit, followed by benefits arising out of the brand being from the LG group of industries.
Then comes the service level benefit through the after-sales service of the company and finally self-expressive benefits of acquiring an LG refrigerator, which is one of the best brands in the Indian market. The brand itself shows the class of people who buy such a premium product. Associated with this set of benefits comes a set of costs.
The customer has to pay for the product, which includes the price that covers the company’s price and the margin of the dealer. Ownership of the product also involves costs that include the cost of acquisition and inventorying, the cost of maintaining and repairing the product, and the cost associated with using and disposing of the product.
A person who purchases an LG television set has to pay for the product, transportation of the product to his own premise, cost of electricity in running the television, cost of maintenance and repair of the set beyond the warranty period, cost of buying a proper display for keeping the television and cost of insulation of the television from frequent electricity fluctuations.
A customer will take into account all these costs with the cost of procuring the product from the marketer. So customer value is the net benefit over all the costs involved in the purchase. A marketer needs to evaluate this cost assertion beyond the mere price of the product while delivering his product proposition in the market.
In a market like India, customers are likely to compare prices with the final product value before they take a decision.
Classification of Customer Value
- Customer Delivered Value
- Total Customer Cost
- Functional Value
- Social Value
- Emotional Value
- Epistemic Value
- Conditional Value
- Performance Value
- Financing Value
- Personal Values
- Steps in Value Creation Process
Customer Delivered Value
It is the difference between the total customer value and the total customer cost. Total customer value is the bundle of benefits that customers expect from a given product or service.
Total Customer Cost
It is the bundle of costs customers expect to incur in evaluating, obtaining, using, and disposing of the product or service.
We have defined the concept of value as the net of the customer’s expected benefits over the cost of the product as explained in the Figure. We will now try to classify consumer expectations and find out consumer-relevant values that explain why consumers choose one product type over another type or brand.
The three central propositions behind this classification include the following:
- Consumer choice is a function of a small number of consumption values.
- Specific consumption values make differential contributions in any given choice of situation.
- All the consumption values are independent of each other.
These sets of values are classified as functional or utilitarian value, social value, emotional value, epistemic value, and conditional value. These values are often found in the purchase of categories like food, grocery, computer peripherals, sporting events, and games.
Functional Value
The functional value of a consumer choice is the perceived functional, utilitarian, or physical performance utility received from the chosen product’s attributes. It is associated with economic utility theory, popularly expressed in terms of rational economic reason. At the heart of such a value definition is the set of attributes like reliability, durability, and price.
Example: When somebody purchases a bar of soap, he is buying it for the purpose of washing.
The social value of a choice is the perceived utility acquired because of the associations between one or more specific social groups and consumer choice. A consumer’s choice gains social value by being linked with positively or negatively stereotyped demographic socioeconomic and cultural-ethnic groups i.e. reference groups.
Choices involving highly visible products like bicycles and food, and services to be socially shared like gifts, and products used in entertainment are often driven by social values.
Example: When someone is buying a washing soap, he also expects that the soap will make him presentable in a societal setting.
Emotional Value
The emotional value of a choice is the perceived utility acquired from its capacity to stimulate the consumer’s emotions or feelings. A choice acquires emotional value when associated with specific feelings or when it triggers or sustains those feelings.
Products and services are frequently associated with emotional responses. What can be the emotional value associated with a detergent cake? It is definitely related to the health of the consumer’s children and the protection that it provides to his/her family members.
Example: A consumer buying ‘Dettol’ or ‘Lifebuoy’ soap in lieu of safeguarding the health of his children is an emotional value of the product.
Epistemic Value
The epistemic value of a choice is the perceived utility that comes from the choice’s ability to foster curiosity, provide novelty and satisfy a desire for knowledge. New purchase and consumption experiences, especially, offer epistemic value.
However, even a simple change like a shift from one ice cream flavor to another also provides the consumer with epistemic value. Since all new products provide some novelty, marketers should try to build some novelty around the product.
Example: Companies such as Amul keep on adding new milk products to it are to its portfolio for customer offerings. It keeps the brand young and fulfills epistemic values.
Conditional Value
The conditional value of a choice is the perceived utility acquired by a choice as an outcome of some particular situation or circumstances facing the customer. Products associated with a particular time or event like coffee at breakfast.
Some products have specific climate or location benefits like sunscreen lotions; some are associated with once-in-a-lifetime events like the purchase of their first car. And some are used only in emergency situations like a dentist on a Sunday afternoon. Conditional value is served best when we associate the brand with usage situations.
Example: Nescafe, which is served at the end of a hard day or on a lazy afternoon. The ambiance and service delivery in stores and restaurants is an example of how conditional value can be served with core products or services to enhance the product value.
Value is also defined as a quantitative measure of the power one good or service has to attract another good or service in exchange. But this definition is very primitive and is defined in the context of a physical exchange, known as a barter system.
Customer value is summarised as ‘the be-all and the end-all’ of business activity; the only purpose of all organizations, all business enterprises. It is the only path to sustained growth and to winning the battle for market leadership. A market value is the potential of a product or service to satisfy consumer needs and wants.
Customer value is created only if the product or service has the capability to satisfy a customer’s needs and wants. A product may be very valuable for one customer and less for another, so it is difficult to standardize the offer for all. The marketer can look at the majority of customers and create a customer context to make the product more valuable.
For example, a bicycle in an urban area has a lesser value proposition compared to a rural area. So when marketers have to create a context for increasing the value proposition, they need to make it more trendy, catchy, and fashionable for urban markets. The sturdy nature of the cycle can be kept as it is for rural markets.
The value expectation may undergo a change depending on what role the consumer is playing. According to Seth and Mittal, customers can play three roles namely user, payer, and customer. The user is the person who actually consumes the product or receives the benefits of the product and service.
The payer is the person who finances the purchase and the buyer is the person who participates in the procurement of the product from the marketplace. Each of these roles may be carried out by the same person or can be done by different people.
A person can be a buyer for the family and pay the money whereas a child may be the user of the product. Marketers are aware of such roles and target their marketing programs to each of the roles. Customer value can be classified on the basis of customer roles and values.
| Universal Values | User | Payer | Buyer |
|---|---|---|---|
| Performance Values | Performance Value | Price Value | Service Value |
| Group Specific | Social Value | Credit Value | Convenience Value |
| Individual Specific | Emotional Value | Financing Value | Personalization Value |
Seth and Mittal have classified product or service values to be universal, personal, or both. Universal values are defined as values that satisfy the needs of the consumer. This universal value is related to the basic purpose of buying a product or service or doing business with the organization.
They are termed universal because all customers invariably seek them in a product or service. Personal values are those that satisfy the wants of the customer. This value is something beyond the basic or universal reason for which the customer transacts with the firm.
They are more diverse and differ from person to person and are least similar in a segment. Other personal values called individual specific are more individualized, more internal, and more related to one’s personal comfort.
Performance Value
Performance value is the quality of the physical outcome of using the product or service. It refers to how well the product fits into its desired physical function consistently. It comes from the physical composition of the product or from the design of services.
For example, fuel efficiency is one of the key expectations in a 100 CC bike. The level of personal value is also moderated by social value and emotional values.
Example: A strong tea provides emotional value whereas all the tea brands should deliver similar performance value.
The market value sought by payers is the price proposition. He looks at a fair price and other financial costs incurred in acquiring the product or service. In the role of a payer, customers expect the freedom to acquire the product by paying cash or taking credit.
They receive a credit value when the seller gives the product with a promise that he will collect the cash in a future period of time. It provides convenience to the payer in making the payment.
Financing Value
Financing value consists of offering the terms of purchase that make the payment more affordable by distributing the liability over an extended period of time. It allows customized payment schedules, designed to suit individual payers’ convenience.
The universal value sought by the buyer is the service value. This is the assistance customers seek in purchasing a product or service. This has three elements viz. Pre-purchase advice and assistance, post-purchase advice and assistance in maintaining the product’s use, worthiness, and freedom from the risk of a mis-purchase by being able to refund or exchange the product or service.
Personal Values
Personal values expected by the buyers are convenience and personalization. Acquiring a product or service requires time and effort. The effort includes the distance traveled between residence and shop; time spent in selecting the product and completing the transaction.
Customers also seek convenience value in the way the service is delivered. Today banks are open for longer hours for providing convenience to customers so that they can transact for longer hours.
Example: The hero in the movie ‘The Cable Guy’ is popular because he provides convenience in his service to his customers. Buyers also want personal attention, as they would like to consummate the transaction in a personalized or individualized manner. Personalization value has two dimensions viz. customization and interpersonal relation.
Customization refers to receiving the product or service in a manner tailored to an individual customer’s expectations. The customer expects that he should be treated properly and through pleasant and interpersonal interaction.
Customers seek this value in the form of positive experiences in interacting with sales or customer service employees. Behavior, attitude, and training of employees interacting with the customers determine this value. Shoppers always expect positive interpersonal experiences while shopping.
Steps in Value Creation Process
- Understand Customer Needs
- Design Value Driven Segments
- Develop Value Propositions
- Link Customer Knowledge and Business Strategy
- Develop New Products and Services
- Deliver Customer Value
- Measure and Monitor Customer Satisfaction and Retention
Characteristics of Customer Value
Customer values are typical in nature because they show distinctive characteristics viz. they are instrumental, dynamic, hierarchical, diverse, and synergistic and vary across customers. Customer satisfaction is the end-state value, whereas product value is an instrumental value through which customers reach the end-state value.
These values are instrumental in fulfilling customer needs and want. So it is not only important to create values in their offerings but also needs to associate these values with products and services. A customer will find the instrumental value of a product when he can establish the usefulness of the product in achieving the desired value from the exchange.
Market values are dynamic in nature because they change over a period of time. As the customer undergoes change in his life cycle and availability of financial resources, his need structure also changes. The product or service value should remain relevant over a period of time and should evolve over a period of time to match customer expectations.
A product needs to satisfy the basic reason for its existence. If it does not deliver the universal value, then other values will not be well perceived by customers. If universal values are not found in the product, customers will not care for the next levels of value. Hence, value is hierarchical in nature.
A market segment, which is presumed to be homogenous, is often found to consist of customers whose value expectations match at the universal level. In a fragmented and heterogenous market, there may exist differences in customer expectations of universal value, making other values complex and diverse.
For example, all commodities and necessities show universal value whereas brands show personal and other situation-specific values. The existence of one value is not detrimental to another value. One value enhances the utility of another value.
Performance value, service value, and price value are at an optimum level when there is no trade-off between them. When social and emotional value, convenience and personalization, and credit financing value are not in the trade-off, the personal value is found to be optimum.
Values are specific to the role of the customer. So the roles differ among customers as a buyer, payers, and users of the product or service. Consumers may change their value priorities depending on the kind of role they play in the exchange process.
For example, when people buy things for their own consumption, the value expectation will be different than when they buy for their children. It is also observed that when people travel on a government or company purse, their choice of hotel or restaurant will be different than when they travel on their own.
We have already pointed out that what is important to a customer or a set of customers may be useless or of lesser importance to other customers. A product or service is more versatile if it can generate a larger set of values for a variety of customers and satisfy their different needs.
Delivering Customer Value
A value delivery system includes all the experiences the customer will have on the way to obtaining and using the product or service offer. The value delivery network is a connector between the resources and the end user. As mentioned, customer satisfaction is the end result of the value delivery process, so it is a goal as well as a tool.
If a company has a highly satisfied set of customers, it should also make people aware of this. A company can also achieve higher satisfaction by lowering prices or increasing services but that should not be the sole strategy of the firm.
Maybe a sales-oriented firm would like to follow such a strategy, but this may hit the bottom line and slow down the growth process. Hence, the value delivery system should make customers aware of its distinct capabilities, through which it attempts to deliver higher satisfaction and incremental product value.
Customer satisfaction cannot be delivered in isolation. There are many stakeholders in business and one has to satisfy all these stakeholders in order to satisfy the end customer. These stakeholders include employees of the organization, suppliers, intermediaries, and stockholders of the firm.
Any attempt to increase customer satisfaction by increasing marketing expenditure may hurt the other players like increased marketing expenditure will hit the bottom line making stockholders unhappy. So a business should strive to bring a balance between the goals of different stakeholders in the business, which is possible by managing and linking work processes.
Companies are focusing more on managing the core business processes more efficiently, which includes new product development and introduction, customer acquisition and retention, and managing the order-to-purchase cycles. These core business processes should be aligned with the organization and its culture.
There is a need to have adequate resources, available market opportunities, and value delivery channels for long-term business success. Resources for the company can be in the form of financial resources, manpower resources, materials and machines, market and product information, and energy.
The business model of the last century suggests that a company should own all these resources but today, companies are trying to build efficient business processes by outsourcing less critical resources and processes for better quality and lower cost.
But the key to business success is acquiring critical resources and nurturing these resources for future benefits. The relentless pursuit of excellence helps the designers of Bajaj Auto to come up with frequent, new product designs in the market.
Companies survive because they build their business around core competencies. A core competency has three characteristics; namely, it is a source of competitive advantage in that it makes a significant contribution to perceived customer benefits, it has a breadth of application to a wide variety of product market situations and it is difficult for competitors to imitate it in the market.
Core competencies help in building distinctive capabilities. Reliance as a company has spread its broadband network throughout the country, which gives it mileage like no other player in the telecommunication business. This distinct capability has helped it to offer products in markets at a cost lower than the other players in the business.
Many companies have their distinct capabilities but they are often found lacking in harnessing them for the benefit of the organization. So, there is a need to rejuvenate the organization for achieving higher goals. Organizations are sum total of people, policies, structures, and a strong corporate culture.
An organization may go defunct very quickly in the changing economic environment unless it attempts to reinvent itself through a process of building good corporate culture. Corporate culture is the shared experiences, stories, myths, beliefs, and norms that represent the character of the organization.
A great leader initiates a new cultural pattern or modifies the dogmatic culture to such an extent that organizations take a U-turn in business performance and achieve great heights. Leaders and CEOs like Jack Welch in GE, Ratan Tata in Tata Group, and Narayan Murthy in Infosys inspire employees as well as generations with their clarity of goals and leadership power.
In a successful organization, powerful organizational culture and shared vision among employees help to deliver superior customer value and greater customer satisfaction.
For business success, a company needs to undergo value orientation in today’s competitive world. It should understand customer value, create higher customer value compared to competitors, deliver customer value through efficient value networks, capture evolving customer value, and sustain customer value by incorporating the evolving value into its product and service offers. This is popularly known as customer life cycle management.
