Customer Value: A Beginner’s Guide
When you want to find out how your customers feel about your brand, metrics such as customer satisfaction score, customer effort score, and net promoter score are indicators that always come to mind.
But, have you considered measuring customer value?
Customer value is a metric that holds the answer to understanding the value your customers derive from your business and, therefore, their likelihood of being your long-term customer.
If you’re not sure what customer value is or how to measure it, then read on – this resource covers the A-Z of customer value.
What is customer value?
Customer value measures the net benefit your customers get from your product or service. There’s an emphasis on the word “net” because customer value denotes the difference between the benefits and costs your customers face, not just the benefits alone.
This metric paints a realistic picture of both the costs and the benefits, making it an accurate indicator of how customers feel about your business.
Now that we’ve covered what customer value is, let’s talk about what it’s not: value proposition and customer lifetime value.
Customer value vs value proposition
A customer value proposition is a business’s promise to their customers about the end benefits that customers can get. It is usually presented in the form of a written statement.
On the other hand, customer value refers to the actual value the customer receives from your business.
Customer value vs customer lifetime value
Although these two metrics sound very similar, customer lifetime value (CLV) is a business-oriented metric while customer value is a customer-oriented benefit.
CLV measures the profits that your company makes from a customer. This metric is the difference between the total revenue earned and the initial costs invested in acquiring/onboarding a customer.
Next, let’s get into more important details about customer value – the types, the formula to calculate it, and tips to improve your customer value score.
What are the types of customer value?
Customer value has four types1 or elements:
Functional value: how your product or service meets your customers’ needs.
Monetary value: the value for money or how worthy your product is.
Social value: the opportunities that owning your product or using your service opens up.
Psychological value: the emotions and feelings using your product can instill, such as, happiness, satisfaction, and frustration.
Let’s understand the four elements of customer value better with an example – imagine that you’re an ecommerce brand that sells phone cases.
A customer who buys a phone case will only be satisfied when it has all the features it claims to have, say, a custom print with a matte finish, and does a good job of protecting their phone (functional value).
A few months in, when the case has minimal wear and tear, the customer will feel like they’ve gotten a good deal, and feel good about their decision (monetary value).
They’ll get to talk about the case in their social circles and get exposure to a community of people who custom print their case as well (social value).
Adding all of this together, the new case is sure to make your customer feel happy and satisfied (psychological value).
How to calculate customer value?
Customer value is calculated by subtracting the total benefits from the total costs.
Customer value = total benefits – total costs
But how do you quantify a benefit like the quality of product and a cost like time invested in buying your product, you ask? Let’s find out.
Calculating total benefits
Benefits that your customers get can be grouped into the following four2 categories:
Core benefits – the main functional benefits and features of your product that help customers achieve their goals faster.
Expected benefits – the benefits that can be derived as a result of using your product.
Augmented benefits – the additional benefits that customers get from choosing to do business with you, for example, good customer service or exposure to a user community.
Potential benefits – the long-term benefits of using your product, including rewards and loyalty programs.
Make a note of all the benefits that customers derive from your product or service. A few examples of customer benefits that are common across industries:
- Quality of the product or service
- Affiliation to your brand or company
- Getting to a solution
- Good customer experience
- Success from use of the product or service
Calculating total costs
When you think of the costs that a customer might incur, the first, and perhaps the only thing that comes to mind is the price of the product or service.
However, customers incur costs even before purchasing in terms of the time spent on evaluating different solutions and doing the paperwork once finalized. After purchase, the customer will continue to have maintenance or renewal costs.
Here are some examples of customer costs across industries that you can get started with while documenting customer costs:
- Product or service cost
- Installation/onboarding costs
- Installation/onboarding time
- Maintenance
- Renewal
- Time spent on buying your product or service
- Poor customer experience or UX
- Poor product or service quality
Once you’ve listed the costs and benefits, you can assign numerical values to each cost and benefit.
It’s important to note that not all costs and benefits are the same from a customer’s perspective.
For instance, onboarding cost is typically incurred only once, while issues pertaining to product capabilities or payment might be incurred more frequently. Likewise, your customers might value the benefits they derive from your products more than being affiliated with your brand.
So assign numerical values in such a way that don’t over or undermine any factor. It might help to do this in collaboration with members from different teams in your organization so you can get a better perspective on each cost and benefit.
Why is customer value important?
Customer value is a reflection of the holistic experience a customer has, right from discovering your brand to purchasing your product and using it. Given below are three main benefits of measuring customer value:
#1 Guides product and business roadmaps and strategies
By shining light on customer needs, preferences, and problems, customer value helps ensure that your business is headed in the right direction. You also get to understand the trade-offs customers are willing to make to do business with you and fuel that into your decision making.
#2 Improves customer loyalty
Today, there are low-price alternatives available in almost every industry that cause customer loyalty to waiver. However, when you create high-value experiences, your chances of retaining customers are much higher. Aligning with your customers also helps you build long-lasting customer relationships.
#3 Boosts brand value
Improving customer value is all about minimizing costs wherever possible so customers can take home more benefits and memorable experiences. This can have a positive ripple effect on the customer experience you deliver and your brand value.
5 ways to increase customer value
Product management, marketing, and customer service are actively involved in creating the product, educating the customer, and keeping them happy. So these teams need to work together to increase the customer value score. Here’s how you can go about doing that:
#1 Improve your customer experience
The customer experience you deliver needs to be consistent and friction-free across all touchpoints for your customer costs to come down.
To get started with improving your customer experience, note down all your customer touchpoints. Here’s what a typical customer journey looks like:
Next, focus on personalization. A single message might not resonate with all your potential customers and existing customer base. Tailoring your marketing campaigns, offers, and content based on different customer personas is a great way to improve your customer experience. This way, each customer group will receive messaging and support that’s relevant to their wants, goals, pain points, and purchasing decisions.
Further reading: The complete guide to customer experience (CX)
#2 Be transparent with your communications
When your customers choose your business, they are putting their trust in you. It’s important that you are able to honor that. If you hide or hold back information, you are only increasing costs. Additionally, hiding information in fine print and making false promises are costs to your brand and reputation that can outweigh even the most important benefits.
One of the best ways to build customer trust is by being transparent with your communication. Keeping the promises you make at the time of sale, offering periodic updates about changes (both good and bad ones), and documenting useful information are a few steps you can take to improve transparency.
Further reading: 6 ways you can build customer trust & loyalty
#3 Constantly ask for feedback and work on it
Asking for customer feedback creates a platform for customers to voice their opinions. Everything from a quick rating after each customer service interaction to an NPS survey can offer invaluable insights.
When you gather feedback regularly, you get a constant flow of information about what you’re doing well and what needs improvement. This information can fuel your strategic decisions, communication strategy, and product roadmap in a way that puts customer benefits first.
It’s also important not to silo data. Customer service teams get real-time feedback about new products, features, and launches while the product management team has information about usage and propensity to upgrade. All teams can benefit from sharing customer data to improve customer value effectively.
Further reading: The complete guide to customer feedback
#4 Work on reducing customer effort
The more obstacles you add to your customer’s way, the more you contribute to the total costs. More specifically, the difficulty of completing an activity or interaction reflects on the customer value score.
So you need to create low effort and seamless experiences. Here are a few steps you can take to reduce customer effort:
– Be where your customers are
– Offer proactive assistance
– Launch a range of self-service options
– Create context-rich, personalized experiences
Further reading: What is customer effort score? [Free CES survey template included]
#5 Deliver the best customer service
When a customer reaches out to you for help, they are already on the course of incurring a cost. To salvage these situations, you need to ensure that the customer gets a fast, personalized solution. Here are a few ways in which you can do that:
– Go omnichannel: Unifying customer communication across channels can help you streamline customer data, personalize customer service, and most importantly, create seamless customer experiences.
– Offer 24/7 support: Providing customer service around the clock is a great way to ensure that customers are able to get assistance whenever they run into issues. An intuitive customer portal and an AI-enabled chatbot are two low-cost, high-return options for delivering 24/7 support.
– Empower customer service agents: Your customer service team needs access to the right tools and resources to assist customers. Be sure to leverage productivity boosters such as workflow automations, canned responses, and an internal knowledge base to equip your team.
Further reading: How to improve customer service: top 10 practical tips
Investing in the right technology can go a long way in improving your customer service and your customer value score. A customer service software like Freshdesk can help your business optimize customer experience and deliver friction-free experiences.
If you’d like to take Freshdesk for a spin, you can sign up for free here.
Source:
1 – https://en.wikipedia.org/wiki/Value_(marketing)
2 – https://princetoncreative.com/blog/?p=31
