Michael Porter defines value as;
“A firm is profitable if the value it commands exceeds the costs involved in creating the product”.
Your customers will understand the concept of value intuitively. It is therefore difficult to measure value dispassionately. Every customer will have a different concept of value. They buy on the basis of value and they spend much of their lives as consumers searching for it.
Value does not mean lowest price and you should not confuse the term value with the cheap and nasty end of the market. In my former career in local government; where local authorities are legally bound by the concept of best value, I was continually frustrated that managers and councillors confused value with the lowest bid or price for a product or service. It was part of my job to procure the services of test laboratories. My managers were keen that I only accepted low bids. However, I recognised that the expertise of the laboratory and the status of the evidence they could provide was important value criteria. I would always see more value in a test report signed off by a recognised specialist in say, Toy standards, than a laboratory which could provide a test certificate but who could not provide the Bona Fides of the specialist lab.
What is important in the consumer’s calculation in value is their perception of the utility of your offer i.e. what they believe the product will do for them.
When consumers are considering buying a product or service, they spend a considerable part of the decision process trading off different perceived values of different offers for the goods or service demanded. The more expensive or complex the goods or services being purchased; the more complex the decision process and the trade-offs.
Value is a critical concept in any market offer but it is still one of the most over-used and least understood terms in business. All too often, senior management only link value to price. They ignore other concepts of value. They forget value means different things to different people.
There is a formula which is often used to represent value:
Value = Benefit – Effort – Risk – Price
The more value you are able to offer, the more likely your ability to create profit.
Value is not about price and it is not about being cheap. It is about what the customer perceives about a product and that your offer will meet its promises. It is the value of a job being done in the way your promise demands.
Consumers see benefit as the ability of a good or service to provide the perfect solution to their specific problem. The closer to the perfect solution you are able to provide, the greater the customer will perceive value in your offer. The greater the benefit the customer perceives in your offer, the more they will be willing to pay.
To understand perceived customer benefit, you need to find out:
- The nature of the consumer’s problem.
- What the consumer perceives to be the perfect solution to their problem
- Where your product and service fits on the scale of the consumers perception of ‘a perfect solution’ i.e. does your product fully meet their needs or will it just about do, or is it useless.
- If your product won’t provide the perfect solution, where does it fall down.
As every consumer’s perception is unique, these are difficult questions to answer.
Effort is how much work the consumer has to put in to solving their problem when they use your product. It is the question of ease and convenience. We live in a convenience society. So the greatest value for consumers is the product or service which is most convenient.
Consumers see risk in many facets of choice and value criteria. The greater the risk inherent in the decision to purchase a particular product, the lower the perceived value of that product. Consumers ask themselves, if I buy X brand of a product:
- What can go wrong?
- What are the downsides?
- How long will it take to choose?
- How long before benefits will begin to flow?
- How will that product affect my image?
- What utility will the product offer?
- If the product doesn’t meet its promise, how will I feel?
Price is a more complex issue than just whether consumers feel they are paying too much or whether goods may be cheaper elsewhere. If a product or service seems to be too cheap, consumers will wonder if your offer is unfit for purpose or that your goods are of inferior quality.
You also have to consider the opportunity cost of a consumer’s purchase. This isn’t just the cost incurred in arranging to buy the product. There is the opportunity cost of the time taken to buy the product; transportation costs, etc. There is also the thoughts in the minds of consumers of what they could buy if they chose not to purchase your product.
So to maximise customer value:
- You can cut prices. This is the dinosaurs method of maximising value; offering more for less. It is crude and it can be expensive. It can drag you into expensive price wars out of which no-one can win.
- Perhaps it is better to increase the benefit from usage, You can add more benefits to your products. But these must be real benefits your customers want.
- You can reduce the effort required by consumers to buy your product. Make it easier for consumers to acquire the benefits of your offer.
- You can reduce consumer risk through guarantees and warranties, you can offer free trials and use your brand reputation to build consumer trust. You need to become a brand that can be believed in. Your branding effort can reduce risk.
All stakeholders in your business, both external and internal, from shareholders to prospective customers, need a value proposition. If you cannot easily describe your value proposition to them, you may have trouble convincing them that your offer is something in which they can invest.