What Is Value Worth and What Price Are You Willing To Pay For It?
Customer value is the essential ingredient to creating successful new products. It is also the central theme of lean product development: Creating customer value while driving out waste.
Customer value seems like a simple concept that everyone in your organization should understand, right? But what exactly do we mean by a customer value? How do we define it? What makes something valuable? Can we measure it?
The first thing we need understand is that customer value isn’t defined by us. It’s defined by the customer. Seems obvious but it often gets lost in the NPD process. It’s very easy for us to think we know what customers value. And indeed, overtime as we penetrate our targeted markets, we do gain insights as to what our customers want and expect.
But when we make a strategic decision to expand outside our current markets, be it with a new product category or into a new market segment, it’s highly probable that our new targeted customers will value things differently than we do. And if we don’t take the time to understand what they truly value, we waste a lot of time, money and effort launching products that the target market simple doesn’t value or want.
The second key concept of value is that it is more than just an economic value. Economic value, let’s call it price for now, is of course important, but it’s not the only thing a customer considers when purchasing a new product. I am sure you have heard the old saying “people buy on emotion and justify with logic.”
The emotional component of value may be less an issue for B2B products where purchasing processes are involved, but never-the-less; emotions definitely affect purchasing decisions for large organizations. Remember the old saying “no one was ever fired for recommending IBM?” Indeed, avoiding risk is as much emotionally driven as financially driven.
Value is how much benefit a person gets from something. And that something must also be “worth” the price to achieve that benefit or function. Thus value is the perception of benefits received for what someone must give up.
Value has three basic properties:
Use Value – Properties that make something functional
Esteem Value – Properties that make something desirable to own (or consume)
Exchange value – Properties that make it possible to exchange one thing for another.
Use value is the essential function or purpose a person derives from consuming a product or service. So for example, when I decide to take a trip and “hire” an airline, the core use value I seek is going from point A to point B. If all I want is simple transportation, I probably will look for the cheapest price available and travel coach class.
But what if I really want to travel in style? I value being treated special, and value extra perks including more leg room, free drinks and priority boarding. If these are important to me, I am willing to pay a higher price. Of course I also believe the extra price is worth the extra benefits, and that the price seems affordable to me.
The last component of value is exchange value. For airline travel, I might decide it’s worth it for me to pay a bit more for an exchangeable ticket because my schedule might change. But if I am confident that my schedule won’t change, a non-refundable ticket is a better value.
Context and circumstances also determines value. In the airline example above, if my flight time was less than 2 hours, chances are I would be very comfortable riding in coach class. But if my flight time was going to be more than 8 hours, it would now be worth it to me to fly business class or first class.
The first step in creating value is to discover and define the customer’s job-to-be-done, their desired outcomes, and the constraints and circumstances preventing them from achieving their desired outcomes. Recall from previous articles where I discussed the Jobs-to-be-done marketing lens as an innovation framework to discover and define what customers want.
When we understand what a customer’s desired outcomes are in executing a job, we can determine value. When we create a value proposition that addresses desired outcomes and constraints, we can determine a price that our target customers will perceive “worth it.”
To conclude: value is determined by the perception of benefits (desired outcomes) received for what a customer must give up (cost and effort to achieve desired outcomes). Using the jobs-to-be-done marketing lens, we can systematically determine the most important desired outcomes for a targeted market and how much value the market places on achieving them. One we know what the market values we can determine a price that will be worth the cost for our customers to hire our products.
Hope this article provided value for you!