Perceived Value Framework: Applications to Services and Industry

Prof. Tristan H. MacapanpanVice-Dean, Makati Campus at The RCBC Plaza

De La Salle Professional Schools

Graduate School of Business

• Why did the Ford Edsel fail in late 1950s? • It was supposed to be an innovative car!• Yet the model lasted only three short years.• Its name has now become synonymous to failed car

models.

• Certainly, it faced some odds. 1958 was a recession year and the automobile market was shrinking. Old established firms such as Packard and Studebaker were drifting towards insolvency.

• However, there were other non-economic reasons for its failure.

• Why is the Segway not fulfilling its expectations?

• Time magazine toute it as an innovative “human transporter.

• Yet has only sold 23,500 units since its introduction in March 2003 up to mid-2006.

• The answer lies in understanding the

concept of customer perceived value.

Let us define some terms• Customer – someone who makes use of or

receives the products (goods and/or services) of an individual or organization.– Internal customer: Individuals or units within an

organization that receive or use a good or service from another individual or unit within the organization.

– External customer: Individuals and organizations that receive a good or service in return for compensation, usually monetary

• Customer needs: the product bundle (goods and/or services) a customer requires to achieve specific goals or objectives. – Needs are generally non-negotiable, but may be optional or of

varying importance to the customer. – In any transaction, customers seek value-for-money, and will often

consider a range of vendors’ offers before settling on a purchase.

• Customer expectations are based on perceived values of product bundles as applied to specific needs. – Expectations are influenced by cultural values, advertising,

marketing, and other communications, both with the supplier and with other sources.

– Expectations are negotiable and modifiable.

• Which brings us to the question:

• WHAT IS PERCEIVED VALUE?

Value defined• In general, the value of something is how

much a product bundle is worth to someone relative to other things.– often measured in money– it can either be an evaluation of what it could

or should be worth– or an explanation of its actual market value

(price)

• There are various ways to give valuations.

• Often value is equated to the price of the product. – Economists would say that it is the price that a

product would bring in an open and competitive market.

• Some would say that value of a product is what it cost to produce it or its current replacement value.

• However, all these definitions do not give us any idea on why one product is considered more valuable than another;

• Or why one product is preferred to another even though they may exhibit no significant visible differences in form and function.

A better measure of valuation

• It is better to look at the perceived value of the product when trying to explain why it is successful or not.

• Value in the most basic sense can be referred to as "Real Value" or "Actual Value."

• Webster defines it as the fair return or equivalent in goods, services, or money for something exchanged.

• This is the measure of worth that is based purely on the utility derived from the consumption of a product bundle.

• Utility derived value allows product bundles to be measured on outcome instead of demand or supply theories that are subject to manipulation.

• Illustration: The real value of a book sold to a student who pays PhP 1,000.00 at the cash register for the text and who learns nothing from the content is essentially zero. However; the real value of the same text purchased in a thrift shop at a price of PhP100 and provides the reader with an insight that allows him or her to earn PhP100,000.00 in additional income is $100,000.00 or the extended lifetime value earned by the consumer.

• No single unit has a fixed value.

• Value is intrinsically related to the worth derived by the costumer.

• This worth is very often determined by the customer not the seller.

Customer Perceived Value

• Customer perceived value (CPV) may be defined as the difference between the prospective customer's evaluation of all the benefits and all the costs of an offering relative to perceived alternatives.

• Perceived Value of a product means the relationship between the consumer's expectations of product quality to the actual amount paid for it.

• There are some economists who assert that "value" is always a subjective quality. There is no value intrinsic to objects or things and value derived entirely from the psychology of market participants.

• It is often expressed as the equation  :• Value = Benefits / Price

or alternatively:• Value = Quality received / Expectations

• Value in can be defined both qualitatively and quantitatively.

• Qualitatively, value is the perceived gain composed of individual's emotional, mental and physical condition plus various social, economic, cultural and environmental factors.

• Quantitatively, value is the actual gain measured in terms of financial numbers, percentages, and dollars.

A Proposed Perceived Value Equation

• Perceived value = Benefits gained from the product – Price paid for the product – Sacrifices made to purchase the product.

• This includes qualitative and quantitative measures.

• Psychological factors often play a major role in the qualitative measures.

• From the equation, we can see that only the price can be measured precisely and unequivocally.

• Our problem then is how to measure benefits and sacrifices.

• But first, let us understand what are the psychological factors involved in determining benefits and sacrifices.

Benefits• Benefits are what is commonly called the value-

added to the product.• At the least, these are the specific functionalities of

the product (e.g., cellphone features).• However, it may be defined as the “total market

offering”:– the reputation of the organization, staff representation,

product benefits, and technological characteristics as compared to competitors' market offerings and prices.

Sacrifices• These are the psychological barriers that may

deter the customer from purchasing the product bundle.– The benefits foregone if the customer were to use the

money to purchase a different product bundle– The endowment effect bias – people tend to value

products they already possess more than what they don’t have but could obtain. Often the presently owned items are valued much more and people will demand up to 4x more compensation than what they are willing to pay to obtain these goods in the first pace.

Sacrifices

– The status quo bias – the losses customers will incur in switching will often have a greater psychological impact that will the gains from using the new product.

Measuring benefits and sacrifices

• It is difficult to measure these factors but we can infer using some experiments and instruments:– The SERVQUAL instrument which tries to measure

the gap between customer expectations and perceptions

– The Thaler experiment to measure the “endowment effect bias”

– The Knetsch experiment to determine “status quo bias”

SERVQUAL

• This was basically designed for services but may be adapted for product bundles.

• Consists of a questionnaire containing 22 expectation and matching perception questions.

Thaler Experiment• Richard Thaler tried to measure the magnitude

of the endowment effect by having two groups –the Sellers and the Choosers.

• Sellers are given a good and asked at what price point (within a range) they were willing to part with the good.

• Choosers were asked whether they would choose the mug or the money at each price point.

Knetsch experiment

• Three groups:– One group is given a choice of two goods

(A & B).– Second group is given one good A and later

allowed to exchange for the other good B.– Third group is given the other good B and

later allowed to exchange for good A.

Lessons

• We can go around these barrier by understanding the psychology of consumers.

• In his article, Eager Sellers, Stony Buyers, John T. Gourville, provides some possible actions.*

*Harvard Business Review, June 2006. John T. Gourville is associate professor of marketing at the Harvard Business School.

Possible Actions• Accepting the reality of resistance:

– Be patient– Strive for a 10x better product– Eliminate incumbent products

• Minimize resistance– Make behaviorally compatible products– Seek out the unendowed– Find believers

Conclusion

• Perceived value can be maximized by improving benefits and minimizing the psychological barriers to the purchase.

• Firms must be aware of the level of resistance consumers may have for their products and institute necessary measures to counteract or minimize resistance effects

A parting word

• In researching for this talk, I came across this website of Larry Dotson that features 10 Ways to Increase the Perceived Value of Your Product.

• They are shown in the next two slides.

• What do you think? Are they feasible?

• 10 Ways To Increase The Perceived Value Of Your Product!by Larry Dotson

• Sell your product at a higher price. This increases the perceived value because people usually associate the higher priced product as being better.

• Offer a free trial or sample of your product. This increases the perceived value because people think you're confident in your product, so it must be good.

• Include tons of testimonials on your ad copy. This increases the perceived value because you have actual proof of other people's experiences with your product.

• Load your ad copy full of benefits. This increases the perceived value because people think they are getting solutions to a number of problems.

• Offer an affiliate program with your product. This increases the perceived value because people can also make money with your product.

• Give people a strong guarantee. This increases the perceived value because it shows that you stand behind your products.

• Package your product with a lot of bonuses. This increases the perceived value because people feel they are getting more for their money.

• Get your product endorsed by a famous person. This increases the perceived value because people think that famous people wouldn't want their name associated with a poor product.

• Include the reprint/reproduction rights with your product. This increases the perceived value because people can start a business and make money.

• Get the word out about your product and brand it. This increases the perceived value because people believe the brand name products have better quality.