How to Define and Calculate Value for Customer Interactions

Value, the final frontier.

That is not just a bad attempt at a pun, it is a reality of what people through times have thought of value.  There are many “types” of values: legal, economical, ethical, quantitative, qualitative, and financial value – just to name a few.  There are also issues of perceived, realized, and corroborated value, subjective and objective value, and partial and total value.

This is not an exhaustive list.  If you ask Google for a definition of value, you get a summary page with links to 14 different places where value is defined differently.  There is a web site (http://www.valuequotes.net) which only purpose is to provide quotes related to value, going back to centuries before our time.

There as many definitions of value as there are people in this planet.

Value has become the latest “fuzzy” metric in organizations.  We tried with Satisfaction and Loyalty.  Their definitions were set, but we could not figure out how to measure them correctly.  We are now focused on delivering value to our customers.  Problem is, or rather the opportunity exists because, nobody can provide a clear, transferable definition of value.

My take is that value is a perception of worth, derived from each party that takes part in an interaction.  It can change from interaction to interaction for the same person.  If I am thirsty, I place a higher value in a drink, if I a hungry on food, and if i am tired on a place to sleep. I like Maslow’s pyramid to explain the process humans follow to determine value at different stages in their life – but still cannot be used to explain value in each transaction.  Each person and each organization will see different value in different interactions, often changing from one to the next one.

Value is not a static definition.

You cannot create value for your customers, the way you perceive value, and ask them to take it.  They are going to get value from your offerings, as per their needs and perceptions.  You cannot define value you get from your users as being the same across all interactions, across all transactions.  You are going to get different values from different users at different times.

Is there a way to define value?  You have to follow three steps to define value:

  1. Create two definitions of value.  First, create one to define the type value you’d like to get from a transaction, and another to determine the type of value you want to offer your customers (type of value refers to what category – a lower price is an economic value, a better experience is either an emotional or logical value, etc.).  Focus on what you can measure, that is the value you perceive as receiving.
  2. Define the metrics for the value you are going to extract from each transaction.  When measuring value, and because it changes so easily, it is best to use correlated metrics.  For example, if you want to track the financial value produced by new revenue from a specific marketing campaign, you then have to measure revenue per transaction, then cross-tab it with the revenue produced as a results of a specific marketing campaign, and deducting the costs for producing that campaign and conducting those specific transactions.
  3. Create a benchmark metric.  In the above example, once you measure the financial value of a certain number of transactions you can then create an average value for that transaction.  That becomes the benchmark you use to measure that specific transaction.  As deviations occur you will determine that you are receiving more or less value from that specific transaction and can adjust accordingly.

How do you calculate value? How do you perceive value as a customer? As an organization? Do you have a better way to define value?

17 thoughts on “How to Define and Calculate Value for Customer Interactions”

  1. Esteban,

    Another, interesting, thought provoking post, that will surely lead to some back and forth, as well as the final answer – it depends 🙂

    One possibility relates value to expectations. If I get more than I expected, then I consider it a ‘good’ value – think an extra scoop of ice cream compared with my expectations. If I get less than expected value, think same size box of cereal, with less actual product, then it is ‘negative’ value.

    Simplistically, this could be the same approach a company takes with interactions. This is my visceral reply. No back to read some of the references and links to see what else can be done.

    Cheers and thanks,

    Mitch

  2. This is one of the most ambitious undertaking I’ve seen in a
    while. After all these Greek (and subsequent)
    philosophers failed to come with definition of value, and
    Robert Pirsig, who wrote his famous “Zen” and “Lila” books,
    was subjected to brain fry procedures for attempts to define
    Value – I would be very cautious to enter into the rink :-).
    But warnings aside – definition of value, i.e. perceptions of
    value (if I understood you correctly), per transaction is an interesting approach.

  3. Esteban – Interesting to read your posts, never know where the discussion will go. From my years in the enterprise software services and support business, I tend to view value as a cumulative value, generated over the life of the relationship. You start with some sort of perceived value in the eyes of the customer, and then every interaction you make with them will add to the value or detract from it. The mission of the services organization, over time, becomes to increase the customers’ value beyond the perceived value they had envisioned at the beginning of the relationship.

    Haim

  4. Nice column. I attempted to define value to a customer as being the product of four numbers:
    1. Willingness by customer to treat vendors as partners, and to share with the vendor the benefit received
    2. Probability of success of the solution (aka reciprocal of project risk)
    3. Competitive differentiation (aka reciprocal of number of substitute solutions, including build it yourself and do nothing)
    4. Maximum benefit the customer can achieve from the vendor’s solution (after adjusting for the cost of evaluation and implementation)

    This formula has worked well for me at Oracle, SAP, and a number of start-ups. For more information on this topic, check out my blog at http://dbmoore.blogspot.com/2009/07/enterprise-software-buyers-bill-of.html and http://dbmoore.blogspot.com/2009/07/when-and-why-to-accept-less-than-pmax.html .

    Thanks for your thoughtful blog!

  5. Hi Estaban

    Interesting and important ideas. I think that it’s generally right to explore the relationship between value and expectation – it’s expected value which is likely to attrract a customer, but there is a dynamic which means that every expectation exceeded is likely to increase the expected value of the next transaction (and conversely if the expectation is dashed by the actual transaction).

    For the agents attempting to create the value for the customer, a key issue is how much value is created over and above the transaction cost of dealing with that customer – transactions which generate less value than the transaction cost are of little or no interest.

    Of course, for the customer there is a similar calculus – for them their is little interest if the transaction cost to them (including the price at point of sale) is greater than their expectation of the value of the transaction. In that sense, we have a choice of defining customer value as either the total value of the service to them (over the full number of years in which it is likely to bring benefits) or the net value (i.e. net of cost) – what was called for many years ‘consumer surplus’, which is what makes the offer from one service provider overall more interesting than that from another. Marketing staff tend to use the first approach to value, economists and strategists tend to use the latter but in the end they both derive from the same thinking (just giving different emphases to customers’ costs).

    However, there is another calculation for the service providers to make – even if they can easily provide a lot more service to a lot more people, and capture a significant proportion of that value, it may not be worth doing if it entails setting a relatively low price – this is where the profit maximising routines of microeconomics kick in.

    So I don’t think that it’s likely to be very valuable to benchmark ‘average value’ – although it is always valuabe to know the distribution of values experienced by customers. The two most interesting benchmarks are those around where customer value is about equal to the provider’s transaction costs in provision and, secondly, where extra customers can only be tempted to buy the service by cutting the price to a level where the net revenue actually falls (because some customers now pay less than previously).

    What’s more interesting in many cases, of course, is how to explore the unextracted value – how to get at those customers who have huge ‘consumer surplus’ and make offers to them which allow the service provider to capture some of this value, without having to impose a similar (potentially penal) price on all service users. This is, of course, much easier with personal services than with manufactured goods!

    Does this fit in with your thinking?

  6. First there was Customer Satisfaction, then Customer Loyalty, then Customer Experience Management. Next comes Customer Value — you heard it here first! Looking forward to seeing your future posts on this topic, Esteban.

    1. Jeffrey,

      Thanks for the comment. I am focused on value because I see an inkling of possibility here. You know how I feel about NPS, Loyalty, CSAT, etc. Actually, everyone probably knows by now.

      The thing is that value has no fixed definition and can adapt from transaction to transaction. From my reading I am inclined to believe that if you use cross-tabbed values and relate metrics to biz operations you can indeed find some value and measure it. This is pretty early though… will see how it develops.

      Thanks for posting.

  7. Hi Esteban and Friends

    An interesting post.

    Like many others, I have been looking intensely at the value question for over 15 years (ever since I bought Woodruff & Gardial’s excellent book on ‘Know Your Customer: New Approaches To Understanding Customer Value And Satisfaction’, in a little bookshop in Zürich in 1991). A handful of books and dozens of papers later, I still don’t think there is a robust definition of value. Let alone value metrics.

    Since reading Vargo & Lusch’s 2004 paper on Service-Dominant Logic (and the dozens that have followed it), I have changed my own view on what value is and how it is created. As I set out in a blog post on How Customer Co-Creation is the Future of Business, I now look at value as something that is co-created with customers at the point of consumption. This is quite a change from the dominant model of value as being something that is exchanged at the point of purchase. But it is an important one, as it liberates us to see value much more in line with how customers see it (as products, services and experiences that help them get important things done).

    As for metrics. They will have to wait until we have developed a robust definition and operating logic for value that meets companies’, their partners’ and customers’ mental models of how the world works.

    Graham Hill
    Customer-centric Innovator
    @GrahamHill

    1. Graham,

      A pleasure as always to read your stuff. I am glad you mentioned your post – I have been recommending it left and right and it is what got me thinking about value. I think there is lots of work still to do, but there may something there.

      I am using your post as one of the sources for trying to figure how to define and calculate the “value” of that co-design. I am not a big fan of co-design, but I am seeing something there that can work for my research. Lots more still to come, nowhere close to where I want to be, of course, and I am not sure if this will end up being something… but more posts coming in the following few weeks on this.

      Thanks for reading and commenting.

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