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What is customer perceived value?

Posted on: September 1, 2022
Man in a suit with a hologram depicting happy customers in front of him

Perceived value indicates how much a customer is prepared to pay for a product or service. This is determined by a product or service’s ability to meet the customer’s needs and inspire desire, especially in comparison with competitors. 

Understanding the customer’s perception of value through market research can help a business to position itself correctly and use marketing to effectively highlight the benefits that customers are most prepared to pay for. Benefits that attract customers can range from convenience and affordability to how aesthetically pleasing or cutting-edge the design is.

What are the four types of customer value?

The four main types of customer value that influence customers are:

  • Functional value – a product or service that provides a solution.
  • Monetary value – a service or product’s price should be commensurate with the service or product’s perceived worth (this may involve a trade-off between other values and cost).
  • Social value – a product or service which allows the customer to connect with others.
  • Psychological value – customers feel able to express themselves or make themselves feel better with this product or service.

In an article entitled The Elements of Value published in the Harvard Business Review magazine in 2016, Eric Almquist, John Senior, and Nicolas Bloch shared their research which actually identified 30 elements of value. These researchers realised that what consumers truly value is difficult to pin down and goes beyond simply finding value by comparing prices. Their approach to elements of value extends psychologist Abraham Maslow’s “hierarchy of needs” by analysing the underlying reason why a customer classifies a particular product or service as convenient or high quality, for example. 

The four kinds of needs they identified in which the 30 elements sit were:

  • Social impact: Self-transcendence.
  • Life changing: Provides hope, Self-actualisation, Motivation, Heirloom, Affiliation/Belonging.
  • Emotional: Reduces anxiety, Rewards me, Nostalgia, Design/Aesthetics, Badge value, Wellness, Therapeutic value, Fun/Entertainment, Attractiveness, Provides access.
  • Functional: Saves time, Simplifies, Makes money, Reduces risk, Organises, Integrates, Connects, Reduces effort, Avoids hassles, Reduces cost, Quality, Variety, Sensory appeal, Informs.

How do you measure customer perceived value?

Customer value is calculated in two ways, either desired value or perceived value. Desired value is the customer expectation before buying the product. Perceived value includes cost in the calculation. One way of measuring this is: Perceived value = Tangible benefits/Costs paid.

Actual value comes in the wake of the product being bought and used. If actual value goes beyond the perceived value, then the customer value is very high. At the other end of the spectrum buyer’s remorse arises when the actual value is below the perceived value (low customer value) and the customer will likely not purchase again. Customer value is the key metric through which better product and service offerings can come to market.

Another formula to calculate customer perceived value (CPV) is total customer value (sometimes referred to as perceived benefits) minus total customer cost. Cost plays an important role in CPV as it’s one of the main parameters which potential customers use to evaluate competitive brands. Similar products with the same perceived value may have different customer value due to the price range within which they fall (bearing in mind that a higher price can actually make a product seem more desirable with perceived cost higher).

However, the perceived value of a product is not solely dictated by cost (low price can indicate poor quality). Value is also affected by the “total market offering,” which includes emotional benefits such as company reputation and customer experience (service and support). Other factors to consider are whether the company creates quality products overall and offers technological features or advantages over competitors’ market offerings. It could be said that the definition of value is the relationship of a company’s market offerings to those of its competitors.

Customer cost can also be defined as tangible and intangible. Listing these out can help a business owner calculate total monetary costs and compare them to other costs.

Tangible costs:

  • The price of the product or service
  • Installation or onboarding cost
  • The cost of accessing the product or service
  • Maintenance cost
  • Renewal cost

Intangible costs:

  • Time invested in buying the product or service
  • Poor customer experience
  • Physical or emotional stress when buying or installing the product
  • Poor brand reputation
  • Time spent understanding how the product or service works

The concept of value is crucial for marketers because a product or service will only sell if the customer is getting value out of it. For this reason marketing itself can be defined as the creation, communication, and delivery of value.

What is the relationship between customer perceived value and customer satisfaction?

Customer satisfaction is directly linked to customer value perception because value is in the mind of the customer not based on what a brand tells the customer is valuable. If what the customer perceives as value is rewarded by confirming their perception and potentially offering value beyond their expectations, this results in customer satisfaction that can lead to customer loyalty. Loyal customers contribute to word-of-mouth marketing through personal recommendations and online ratings and testimonials on social media (known as earned marketing) which bolster regular marketing campaigns significantly.

An example of perceived value gone wrong – when a brand fails to understand customer value perception – is that of United Airlines’ infamous “passenger ejection” in 2017, which saw a paying customer physically removed from an overbooked flight. United failed to entice customers to voluntarily change their flights with the offer of an $800 voucher for doing this to help the company out of its own mistakes. What the brand didn’t grasp was that a voucher is not the same as cash compensation. In the mind of the customer, using the voucher involves time which is an intangible cost, and vouchers may be perceived as inconvenient to use compared to cash, which doesn’t come with terms and conditions. The brand had already demonstrated that it didn’t value the customer relationship highly and so the customer’s perception of the emotional value of the brand fell sharply.

Discover how to build a solid value proposition with an MBA Entrepreneurship

Understanding how prospective customers in your target market view your brand, and their value perception of particular products, helps with both pricing strategies and marketing strategy. Consumer behaviour takes into account emotional value as much as actual cost in value pricing and is key to building a strong value proposition for the entire brand. 

Find out more about value and customer perception with a 100% online MBA Entrepreneurship from Keele University and take the next step in your career or towards building your own business.

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