“In this world, you get what you pay for.” – Kurt Vonnegut, Cat’s Cradle
Open any marketing textbook or go to a marketing conference, and you will find that customer value is one of the most cared-about and talked-about concepts. Marketers spend their time thinking about exactly what their product or service’s value is, and how to provide more of it to customers. In fact, one of my favorite definitions of marketing is “a set of processes for creating, communicating, and delivering value to customers”. This is one important reason I love this profession, and am delighted and proud to be a marketer. It’s great to be able to spend one’s life thinking about how to provide more value to people. After all, isn’t this is the essence of serving somebody?
How is it possible then that the media reports stories of confused, upset, and outraged customers so often? Here are some recent examples:
We read and hear about these stories just about every day. People get upset when prices go up, when companies discontinue products, when they change formulations or features, or start charging for things that were free before. Some of this outrage is manufactured, but much of it is genuine, creating real negative feelings in people. It feels like instead of delivering value, marketers are taking away value from customers. What’s going on?
In this blog post, I want to argue that this outrage and negative feelings may be tempered once customers understand what value means to customers and what it means to companies are two different ideas. And these two concepts of customer value, one from the customer’s perspective, and the other from the company’s perspective, clash with each other.
At its heart, every product and service provides two kinds of benefits to customers: functional and hedonic. Functional benefits are those that the customer derives from the actual product performance and which is related to its core purpose. When staying in a hotel room, for example, the functional benefits received by the guest include having a safe place to stay and being able to sleep peacefully in a quiet and comfortable environment. These are the basic functions of every hotel room, the essence of what it is supposed to do. Hedonic benefits are indirect, intangible, and emotion-producing. Such benefits may include a sense of pride from staying in a nice hotel, or the sensual pleasure from sleeping on a comfortable bed. For a customer:
Customer value is the sum total of all functional and hedonic benefits derived from the product’s bundle of features.
For a company, the definition of customer value is very different. Professor Russell Winer defines it as “Customer or perceived value is a measure of how much a customer is willing to pay for a product or service” and pricing expert Hermann Simon provides this definition: “The price a customer is willing to pay, and therefore the price a company can achieve, is always a reflection of the perceived value of the product or service in the customer’s eyes. If a customer perceives a higher value, his or her willingness to pay rises. The converse is equally true: if the customer perceives a lower value relative to competitive products, willingness to pay drops.”
Customer value is defined in dollars and cents, simply as how much money the customer is willing to pay for the product. This is a fundamental difference from the customer definition. To appreciate this point, let’s conduct a thought experiment.
Imagine that the aforementioned hotel wants to increase the value it delivers to its guests. There’s one guaranteed way to accomplish this: add more and more features to the hotel room. It can provide free parking, plush bathrobes, a delicious breakfast, a rocking chair in the room, and so on.
Even as the thought of getting all these freebies may excite us as customers, from the company’s perspective, we can quickly see just how infeasible doing this is. Adding every new feature to the hotel room costs money. More features provide greater customer benefits and value, but they also increase costs. For the company, functional and hedonic benefits have to be translatable into economic value, as measured in dollars and cents. The company can only provide features that the customer is willing to pay for. To the company:
Customer value is the total amount of money that the customer is willing to pay for the functional and hedonic benefits received by the product’s bundle of features.
In a nutshell, the difference in the two definitions boils down to this. Customers want as many functional and hedonic benefits as the product or service can deliver. They are always hankering for more. However, companies can only deliver benefits that customers are willing to pay for, and nothing more.
It’s a simple economic calculus for the company. If the customer cannot pay for a feature, take it out of the product, or stop offering the product altogether. The chocolate chip cookies aren’t selling well, so discontinue them. The prices of cacao beans and sugar have gone up, so raise the price of the candy bar. If not enough people are watching the TV show, then cancel it.
In the end, every ethical marketer wants to deliver the maximum possible value to their customers. However, they are constrained by being able to only offer benefits that customers are willing to pay for. Once customers understand this basic truth about business decision making, I think a lot of their confusion, anger, and frustration will be reduced. They will understand where the company is coming from.
This blog post is an excerpt from my forthcoming book, “How to Price Effectively: A Guide for Managers & Entrepreneurs.” I teach marketing and pricing to MBA students at Rice University. You can find more information about me on my website or follow me on LinkedIn, Facebook, or Twitter @ud.