What is value? For the customer, value is the utility (expressed in monetary terms) that they derive from consuming a good or service. “Utility” is the benefits that the consumer receives from using the good or service.
It is important to understand that need underpins value. Customers of a product or service have an underlying need that must be addressed. How well the customer perceives that the product or service will fill that need is a key determinant of value. This is an often overlooked aspect of value – customers’ perceptions of how well their needs will be filled is a key component of the buying decision. Customers will always tend to make a buying decision based upon their perception of the benefits they will receive from using the product or service minus its perceived costs. The product or service which provides the highest perceived value is the one that the customer will likely choose to buy.
Value, then, can de defined as follows:
Perceived Value = Perceived Benefits- Perceived Cost
Because value depends on customers’ perceptions of benefits and costs, there will be variances in perceived value because every customer’s perceptions are different. This idea is what leads firms to segment the marketplace – to subdivide the overall market into groups where customers’ perceptions are approximately equivalent.
A firm can increase value in one of two ways: first, it may increase the benefits that customers perceive the product or service as yielding; or, secondly, it may reduce the costs that customers perceive they will incur from acquiring and using the product or service. Because price is the most obvious indicator of cost for a customer, firms must ensure they get pricing right to ensure that the perceived value to the customer is as high as possible.
Value must be designed. Firms must understand customer needs fully and deeply, and construct value offerings that address those needs by providing a high perceived value surplus.
A word here about value and continuous improvement initiatives such as Lean Manufacturing, Six Sigma, etc. that are aimed at “increasing value.” All of these approaches make the assumption that the design of a firm’s current product or service offering is adequate for satisfying customers’ needs. This may not always be a correct assumption. If a firm’s product or service offering is fundamentally misaligned with customers’ needs, and hence provides little or no perceived value surplus, it may not be possible to improve the value sufficiently to increase the demand for the product.