How to measure customer value?

A simple formula may help you

We all know that any business should create value for customers. Value is what a customer is willing to exchange for their money.

But how can we measure it?

Picture by allanswart, purchased on iStock

If we successfully sell our products and see growing sales, this may serve as an indirect indicator that customers are satisfied. However, they may also consume our goods simply because there are no comparable alternatives – so far. Or, they may do it for other reasons, but it doesn’t mean they are happy with them.

Metrics like NPS, CSI, and others can help us gauge how well we meet customer needs. Yet they measure satisfaction, not customer value.

I use a simple formula for evaluating the value a product creates for customers. It wasn’t derived from scientific research. I came to it empirically, conducting dozens of strategic projects.

It looks like this:

CV = CN*NAC – CF – PPG

CV represents Customer Value, while CN stands for Customer Need.

Similarly, NAC refers to the Need Awareness Coefficient, CF signifies Customer Fears, and PPS denotes the Price Perception Gap.

Let me explain it with an example.

Imagine you offer a piece of software for business customers. How much value do they see in the product?

If your solution solves their problems, then they have a need—referred to as ‘Customer Need’—whether they realize it or not. We can measure it by evaluating the importance of the problems.

For instance, your client, a business, may lose profits because its financial management system is imperfect. If you know it must be essential for the company’s executive, you can measure this on a scale of 1 to 10, where ten means’ critically important.’

But even if you believe that this need is crucial, it doesn’t necessarily mean that the decision-makers see it this way. For some reason, they may underrate the importance of the problem or think they have more critical issues.

That’s why we need NAC, the Need Awareness Coefficient. If your clients are also convinced that the problem is very serious, you may assign a value of 1 to this coefficient.

But it rarely happens. In most cases, the coefficient value ranges from 0,1 to 0,8 or 0,9 at most.

So, this coefficient decreases the value of Customer Need. A seller always has greater faith in the necessity of their product than a buyer does.

The Customer Fears component represents all the concerns that customers may have for various reasons. For instance, they may be afraid to pay too much or not get what they want. You can measure this on a scale of 1 to 10, too. The more fears customers have, the higher the number you get.

In the example with software, customers may be afraid of the complexity of the product, or they may fear that they won’t be able to adapt it to the company’s tasks.

PPG, or Price Perception Gap, is the difference between the actual price of the product and the price a customer is willing to pay. I also recommend that my customers evaluate this on a scale of 0 to 10, where 0 means the consumers believe the price is fair, and 10 refers to an insurmountable gap in price expectations.

Your formula may look like this:

CV = 10*0,7 – 3 – 2 = 2

We may assess all the components or coefficients only by interviewing customers. Sometimes, executives object that customers’ judgments may be biased or subjective. However, the sad truth is that customers make decisions based on their feelings, superstitions, fears, hopes, and beliefs.

Of course, this is a simplified formula, and it doesn’t reflect all the nuances of the customers’ perception of a product’s value.

But we don’t use it as a KPI or strategic goal. We use it only for strategic discussions, and it helps teams focus on their products' specific aspects and features.