What Is Consumer Value?

by Anam Ahmed - Updated October 23, 2018
Happy girl shopping in the fashion store

Customer value, which is linked closely to customer satisfaction and loyalty, is a critical aspect of today’s effective marketing strategies. Businesses need to research and consider what customers care about in order to deliver products and services on which they want to spend their money. To get ahead of the cut-throat competition they face in the market, businesses need to take into account what their well-informed customers are thinking and feeling. Only by doing so can businesses enhance customer value.

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  • Consumer value can refer to what the product is worth to the customer and also what the customer is worth to the business over his lifetime of engagement.

What Is Customer Value?

The term customer value can be seen from two opposing angles: the customer and the business. For the customer, the value of a product or service is what she is willing to pay for what she gets in return. As a result, this value is really what the customer perceives to be the value. It doesn’t matter if the product costs $5 or $500; the customer will only want to pay what she believes to be the value of the product. The customer assigns value toward a product based on a number of factors, including her demographics, esteem, product utility, product quality, social motives and price.

On the other hand, customer value from the business’s perspective refers to the actual value of the customer herself, or what the customer is worth to the business. This involves the process that the business uses to deliver value to the customer and what the customer purchases from the business over her lifetime. The two concepts of customer value are related. The customer will only buy from the business if the business offers the customer something that she values, and the customer will only be worth something to the business if she makes a purchase.

Value is an intangible term. It can refer to both the price of an item or to the benefits the item brings. In more technical terms, consumer value refers to what the product or service is worth to a consumer in relation to the alternatives. The way worth is defined is what the consumer feels she gets as benefits in return for the money she pays. The elements of satisfaction and loyalty are tied to consumer value as well. Satisfaction is an element that leads to repeat purchases from the same business. Customers develop a sense of loyalty when they are routinely satisfied by the business’s products, sales experience and core values.

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In order to create value, businesses need to understand what value actually is to their consumer. In relation to that, businesses need to know how the customer views the product in relation to competing products on the market. For your small business, ask yourself what you can do to create value for your customer versus what you can do that would destroy the concept of value. Does the product create the value or does the experience with your business create the value? What is missing from your business that your customers find valuable? By answering these questions, you’ll be in a better position to know how to create customer value.

There are many benefits to understanding customer value for your business. One of the key advantages is that understanding customer value helps businesses to develop better products and services that more effectively fill a need for their consumers. Securing a leading edge in their market is also a common benefit. Businesses can beat their competitors by knowing and catering to what it is their customers value. Product differentiation is another key benefit to knowing and understanding customer value. Not only can businesses create products that are truly unique, they can tie that uniqueness to actual qualities their customers want to see in a product.

There are some commonly used tactics that businesses can employ in order to create perceived value for customers. One of the most common methods includes establishing a price for the product that makes the customer believe she is getting more than what she paid for in terms of advantages versus competitive offers. Creating value in this way requires the business to focus their marketing message on the benefits and results their product or service offers.

Similarly, businesses can either reduce the price of their product or keep the price the same and offer an extra item that the competition does not offer. The add-on doesn’t need to be related to the product, though that is also an option. Businesses can offer different services related to the product as an add-on, such as a free warranty for a TV or tune-up for a car, or they can offer a differentiating service, like access to an airport VIP lounge that comes with signing up for a credit card.

Another method for creating value is to make the product or service easy to purchase. This may sound like a simple approach, but for some customers, convenience is a key factor that is related to value. Consider if the target customer is a busy mother who works at a full-time job and has several young children to look after too. If your small business is a grocery store, you can offer online ordering as a way to make it easier for your customer to purchase your products. The busy mom can go to your website, buy the items she wants and then pay for them online. This removes the need for her to find time in the day to drag her children to the store and do the shopping. Now all she needs to do is drive up to your store, and you bring out her groceries and put them in her trunk. The whole transaction can be completed in under five minutes, making it truly valuable for the customer.

How to Measure Consumer Value

While value is often quite intangible, there is a tangible way to measure consumer value from a marketing standpoint. In a simple equation, customer value can be calculated with this formula: customer value = benefits - cost. This formula refers to consumer value from the customer’s perspective.

The cost of the product doesn’t only refer to money. It also refers to other things, such as the time and effort the customer spent to research and buy the product or the energy spent to actually get to the product. Inconvenience is also an aspect that is a cost.

The product benefits include more than just the advantages the customer receives from the product itself. It also refers to the buying experience as a whole. The customer’s morals and ethics play a role in the product benefit too. For example, if a customer cares about saving the environment, he will want to purchase products that are sustainable. He may only want to engage with organizations that have ethical practices that are environmentally friendly as well.

From a business’s perspective, there is another formula that shows the value of a customer to a business over the customer’s lifetime of engagement. This is commonly referred to as customer lifetime value. This formula is: CLV = transaction size × transaction frequency × retention length. For example, if your company sells high-end running shoes that cost $200 a pair, and on average customers purchase a pair every year for 10 years, you can calculate the CLV of each customer using the formula CLV = 200 x 1 x 10. In this example, the customer lifetime value would be $2,000.

In addition to this formula, businesses need to take into consideration the cost to serve the customer. How much money does the business need to spend on marketing costs in order to incentivize the customer to make the purchase? Does the company have to offer discounts, and if so, how much and how frequently? Then, that number needs to be divided by the total number of customers served and subtracted from the CLV to give a clear picture of what each customer is worth.

How to Increase Customer Value

Every business hopes to increase customer value. Businesses can employ strategies that help to increase the perceived value for the consumer while also increasing the customer’s lifetime value for the business.

One of the best ways to increase the value for the consumer is to exceed her expectations. In order to do this, businesses need to know what their customers expect of them in the first place. Detailed market research can help businesses understand what customers are hoping to get out of a product so they can then figure out how they can go above and beyond. Consider delivery times, for example. With online ordering being commonplace in many industries, a way that businesses can exceed customer expectations is to reduce delivery times for free. Free shipping is offered at many online stores but often takes up to a week or more in many areas. What if your business could promise one-day shipping at no cost? If that is something your customers were not expecting but care about, then your business would go a long way to build customer satisfaction and value.

Incorporating customer feedback is also a great way to show customers your business cares about what they think. This method can help to build value for your customers. Every product or service can be improved in some way. By asking for your customers’ feedback, taking it into account and crediting them for it, your business can increase the value customers place in your products.

Offering something your competitors don’t is a great way to increase customer value. This can include offering an additional item with the purchase but can go beyond products. For example, for some customers, service and experience are paramount. If your business can personalize the experience by learning more about each customer, you may go a long way toward increasing customer value. If a small business owner runs a bookstore, for example, it is tough to compete with chain bookstores that offer books for bargain prices. Instead of competing on the price, the small business owner can compete on the aspect of customer service. By learning what kinds of books regular customers enjoy and setting them aside for them in advance, the business can increase loyalty and satisfaction, which are directly related to consumer value.

Selling more to each client is a way for the business to increase the lifetime value for each customer. In order to do this, businesses need to up-sell and cross-sell items to customers who already buy from them. For example, if a small business sells handmade baby blankets and is soon releasing handmade baby clothes, they do not necessarily need to find new customers to purchase the baby clothes. Instead, they can cross-sell their new products to their existing customers. This can help to increase the perceived value for the customer as well because it makes things more convenient for her. She can purchase two products from the same business instead of having to spend the time and effort going to two different businesses to do her shopping.

About the Author

Anam Ahmed is a Toronto-based writer and editor with over a decade of experience helping small businesses and entrepreneurs reach new heights. She has experience ghostwriting and editing business books, especially those in the "For Dummies" series, in addition to writing and editing web content for the brand. Anam works as a marketing strategist and copywriter, collaborating with everyone from Fortune 500 companies to start-ups, lifestyle bloggers to professional athletes. As a small business owner herself, she is well-versed in what it takes to run and market a small business. Anam earned an M.A. from the University of Toronto and a B.A.H. from Queen's University. Learn more at www.anamahmed.ca.

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