No matter what product or service you provide, it is the customer who defines value. Hence, to succeed, it’s essential to see value from the customer’s perspective. If not, you will not understand the actual needs of the customer.
And the obvious consequence of not understanding the needs of the customer is that they might never return.
From the customer’s perspective, value means the benefit they get from your product or service compared to its cost to them. Put differently, it is benefit to cost ratio.
That’s why, in order to increase value for our customers, we increase the benefit they get and/or reduce what it costs them to acquire the product or service. But we all know that cost is not just monetary and benefit is not just the outcome or the tangible product.
Thus, the customer’s definition of value is expanded and results in the following, known as the value equation:
The value equation
Though not usually explicitly stated, value equation exists for every organization. But having it well stated and understood makes it a vital tool for making key strategic decisions.
Here is a brief explanation of the equation.
R – Result: This is the primary result that the customer needs. If a customer wants to go to Abuja from Lagos on a particular date, did he get to Abuja on that date? Nothing more, nothing less. If a customer who wants to buy a pair of shoes enters a boutique, did he buy one?
P – Process: The customer can achieve the primary result in many ways. The difference is in the way they do it. In the value equation, we call this the Process.
Getting from Lagos to Abuja can be by chartered taxi, by private car, by public bus, by air (economy class), or by flying business class. Buying a pair of shoes can be by going to a boutique, by going to the open market, or by shopping online and having them delivered at home.
While going through the Process of getting the Result, the customer usually encounters some elements like speed (of service/product delivery), competence, reliability, responsiveness, and friendliness.
₦ – Price: Price is, of course, what the customer has to pay for the product or service in monetary terms.
E – Effort: Effort is to which degree the customer makes an effort, him or herself, in getting the primary result.
While going from Lagos to Abuja, if the customer uses a public bus instead of taking a flight, they make a great effort themselves – when they sit in the bus, wait for it be filled, and stay hours before arriving in Abuja. Similarly, if the customer, instead of shopping online, goes to an open market to buy a pair of shoes, they make great effort.
When customers make great effort, monetary price is reduced for them so as to sustain value – their effort reduces the price.
Generally, as shown, the value equation has four variables – Result, Process, Price, and Effort. And to increase value for the customer, organizations can adjust any of the four variables. This is both practically and mathematically correct.
For instance, if you reduce monetary cost (₦) for your customers, value (V) increases. On the other hand, if the customer is made to make great effort (E) to get your product or service, the value they get decreases. Also, value increases if the result(R) is significant or if the elements of the process (P) are favourable.
All services or products are as a result of unique combinations of the four variables. Hence different organizations work with their own combinations and some have multiple value equations operating at the same time – one for each segment of their customers.
What about your organization? Having understood the concept of value as perceived by the customer, what has been your organization’s value equation? With the non-elastic changes that the novel corona virus brought, what will your organization’s new value equation be?
You may want to reflect on that today. And the following prompts will help:
- How have your customers’ primary needs (R) changed?
- Does your process (P) provide the kind of experience that contributes to value increase for the customer? Would tweaking some of its elements help?
- What about the effort (E) your customers must make to get their primary needs met? Is it suitable for the customers?
- What price (₦) will be ideal in the present economic realities to ensure that while you make profit, your customers still get significant value (V)?
As things constantly change for the customer, it’s important to keep a tab, every time, on what your products and services are actually worth to them. And to do this effectively, you must perceive value the way customers do. A requirement that makes the value equation a handy strategic tool.