An Economic Definition of Value

The term value can have as many definitions as the people you ask. In most questionnaires, the concept is viewed as the relationship between quality and price — a service or product gets higher value ratings as the benefits offered are expanded or the price is reduced. However, does satisfying this definition of value really guarantee a customer’s loyalty? Often, this is not the case since every strong competitor in a marketplace will offer a decent package of services at a competitive price.

Rockbridge has approached the concept of value from a more classical economic perspective. The best value is one that offers the best¬†economic advantage, which can ultimately be quantified on a discounted cash flow basis. This is easiest to understand in a business-to-business context where decisions tend to be more “rational.” The following true example illustrates this concept…

A corporate customer of a long distance company needs to break out its $50,000+ annual expenses by cost centers. The long distance company does this for the customer as part of its billing procedure — before the long distance company agreed to do this, the customer utilized an employee for one week a month to figure out the charges. A competing long distance company can offer substantial savings, but is not able to organize the billing for the customer. The customer refuses to switch because the labor expenses exceed the savings.

Thus, when customers review their relationships, they look far beyond satisfaction and price. They tend to ask, “in dollars and cents terms, will I be better off staying with this provider or switching to the best available alternative?” Firms that do the best job of holding onto their customer relationships do two things in this regard:

  • They seek out and offer features that are both unique and worth a lot to customers. For example, many of our clients in technology-driven industries are seeking “leap frogs” that are unmatched by competitors.
  • They actively communicate these benefits, building a conviction by the customer that they are better off continuing their relationship. For example, insurance brokers who deal with large corporations provide an annual “stewardship” report to document the value provided. A consumer market client mails customers statements telling them how much they have saved by the client instead of competitors.

These lessons hit home in an analysis where we measured performance of a client on two dimensions: “satisfaction” and “competitive advantage,” i.e., the perception that the company was “better, worse, or no different” from competitors. One important finding: customers often told this firm that they were highly satisfied with their performance, but that things would not be much different using a competitor. The most significant finding was that satisfaction did not correlate with brand loyalty. On the other hand, competitive advantage turned out to be a significant predictor. Reinforcing the importance of communication, it was found that customers who were met by a representative to explain the value-added they received were more likely to believe that the overall quality would suffer if they switched to a new service provider.

Answering the Question

How do you conduct research to determine whether you have “value-driven” relationships with your customers? Below, we note two approaches, one for a business-to-business marketer, and one for a firm that provides consumer services.

NET BENEFIT ANALYSIS. This methodology, which has been used as far back as the 1950s on high technology processes (e.g., document reproduction), quantifies the economic value of a service or product to a business customer. The process consists of determining the benefits of a product/service and attaching a cash value to each one. Many items are “tangible” and easy to quantify, such as labor savings, increased revenue, reduced capital needs, etc. Other benefits are “intangible,” such as “building better teams,” and require special methods for translating into cash values. The process of developing a net benefit model usually starts with a management workshop to identify service benefits. Ultimately, a financial model is developed that projects benefits over time. A market survey is used to provide objective, projectable input to the models. The outcomes of this kind of study include: an enhanced understanding of how your services deliver benefits, identification of benefit drivers, and an assessment of competitive advantage; the results are also used sometimes as a sales tool.

VALUE QUADRANT ANALYSIS. Consumer decision-making is better explained by attitudes than pure economics. One approach for determining whether customer relationships are value-driven is to ask customers in a survey about the relative advantage that using your brand has over competing alternatives. This can be done on a feature by feature basis, and importance ratings can be derived statistically for the features by correlating them with a measure of brand loyalty. By plotting features according to their importance and competitive advantage, it is possible to (1) identify the value drivers that solidify relationships and (2) determine which features warrant building a perception that you are superior.