Customer Value

“Your offering to the market may be a physical good or an intangible service…. It can be a consumer product sold to the end-user or an input factor sold for further production. It does not matter. Your company's very existence is based on the premise of whether it can create value for its customers. A company can extract value from customer, only when it can deliver value to its customers.”

These words are what marketing scholars say.

Consequently, creating and sustaining value for customers happen to be at the heart of business in general.

However, as common sense dictates, what constitutes a value for a customer is highly heterogeneous and within individuals. The value of a cold drink (whether a bottle of cold water, lemonade, ice tea, or coke) might be perceived very differently by you vis-à-vis your spouse. Or even by yourself, as its value will depend on the time of the day, the location, the temperature, the number of drinks you have already consumed, etc.

Hence, when we talk about “value to the customer," we talk about the value of the offering perceived by the customer or simply the “perceived customer value."

Besides, the “value to the customer” or “perceived customer value” concepts incorporate not only the benefits derived from the offering but also the sacrifices (or costs) incurred by the customer to reach those benefits.

The Components of Perceived Customer Value

“Perceived customer value” can be deconstructed into two parts: total perceived benefits and total perceived costs.

The customer's total perceived benefits are the customer's perceptions of the offering’s ability to satisfy his/her needs. The perceived benefits can be functional (also called useful), including the offering's attributes related directly to its performance. For example, in an automobile, the engine size, maximum speed, fuel consumption, gearing style (stick shift or automatic shift), accessories (a/c, power windows, etc.) will be the functional benefits.

The perceived benefits can also be psychic, which are the personal or social satisfactions derived from the offering -like knowledge, experience, pleasure, achievement, status, reputation. Continuing with the automobile example, design, brand name, color, etc., will be the psychic benefits. The total perceived benefits will be the sum of perceived functional and psychic benefits.

Meanwhile, customer’s total perceived costs are the sacrifices required to reach the offering's perceived benefits (functional or psychic). Thus, the total smelled costs are the sacrifices perceived to be needed to acquire and use the offering.

Total perceived costs include the monetary costs as reflected by the price and non-monetary costs, which include time, cognitive or physical efforts needed to acquire the benefits from the offering. While the money paid to purchase an automobile will constitute the monetary cost, efforts, and skills required for driving a stick shift (vis-à-vis an automatic shift), a car will be a non-monetary cost. As you may guess, the total perceived costs will be the sum of monetary costs and non-monetary costs.

Net Perceived Customer Value

Customers do not consider the benefits (functional or psychic) and costs (monetary or non-monetary) in isolation. They aggregate and compare them as a whole. In other words, customers compare the total perceived benefits (functional plus psychic) and compare it to total perceived costs (monetary plus non-monetary) and come up with a net perceived customer value.

The net perceived customer value could be defined as the difference between the total benefits derived from the offering that is perceived by the customer and the total costs sacrificed by the customer to obtain and use the offering. (Figure 1)

Does higher value to the client lead to greater profits?

The customers would prefer the offerings which provide the higher net perceived customer value. So, it is plausible that a higher net perceived customer value (or higher value for the customer) will lead to greater profitability. Despite the almost self-evident looking nature of this positive link, the empirical evidence from research shows only mixed support as the additional costs incurred by the company to increase the net perceived customer value may be more than the additional revenue acquired.

Thus, the companies that pursue higher profits should be concerned about increasing the client's value and how to do it efficiently.

References

Day, G. (1990), Market-Driven Strategy: Processes for Creating Value, The Free Press, New York, NY.

Holbrook, M.B., (1999), “Introduction to consumer value.” In M.B. Holbrook (Eds). Consumer value. A framework for analysis and research. London: Routledge. Pp: 1–28.

Huber, F., Herrmann, A. and Morgan, R.E. (2001), "Gaining competitive advantage through customer value-oriented management," The Journal of Consumer Marketing, Vol. 18 No. 1, pp. 41-53.

Khalifa, A. S. (2004), "Customer value: a review of recent literature and an integrative configuration," Management Decision, Vol. 42 Iss. 5 pp. 645 – 666.

Kumar, V., and Reinartz, W. 2018. "Customer Relationship Management - Concept, Strategy, and Tools," 3rd ed., Springer, Berlin Heidelberg, Kindle edition.

Kumar, V., & Reinartz, W. (2016), “Creating enduring customer value," Journal of Marketing, 80(6), pp. 36– 68.

Zeithaml, V. A. (1988). “Consumer perceptions of price, quality, and value: A means-end model and synthesis of evidence." Journal of Marketing, July, 52, 2– 22.

Zeithaml, V. A. (2000), “Service quality, profitability, and the economic worth of customers: What we know and what we need to learn," Journal of the Academy of Marketing Science, 28, (1), pp. 67– 85.

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