Customers decide whether to purchase a product or service based on the value it offers. No value means no deal, and yet, a remarkable number of business leaders struggle with the basics – How do I define value? How do I measure it? What, specifically, do my customers value?

For many, dollars and cents are the first things that come to mind. But today’s customers consider more than price. The scope of value extends into experience, emotions, and even social impact.

What Businesses Misunderstand About Value

In 2001, a group of 17 people at the Lodge at Snowbird ski resort tucked away in the Wasatch mountains of Utah developed the Agile Manifesto. That was over 20 years ago, and it focussed heavily on maximizing customer value as the goal of product development, even identifying a single role – the product owner – as the representative of the customer (not the business) on the team. Yet, almost every conversation around value today centers, first and foremost, on value to the business, rather than value to the customer.

It’s a mindset everyone is familiar with. Businesses often chase efficiency and pursue cost-saving drives to achieve their profitability goals. Budgets are cut. We’ve all been there. And while leaders do need to measure and assess profit margins, market share, revenue, and other financial metrics, they can’t afford to tether their concept of value to cash and nothing else.

Think about it this way: a company’s cost-saving initiative will not necessarily result in time and money savings for the customer. What’s more, depending on the product or service, the customer may not value time and money savings as much as experience. For example, 86 percent of consumers are willing to pay more for a superior customer experience. By upholding this internal focus, leaders and their teams lose out on the opportunity to think like their customers.

James P. Womack and Daniel T. Jones’s seminal book, Lean Thinking, explains:

“A common error in traditional manufacturing operations is to define value internally (internally focused) and, if the customer fails to respond, the product is modified or the price is adjusted or a different marketing strategy is tried.”

These common misunderstandings must be replaced with an appreciation of the value created for the customer. Customers are smart. They know what they want (although they might not be able to say what they want) and they can quickly find out what the options are.

From this starting point, leaders can define value from a customer-centric position. It’s outside in, and not inside out.

How Can Businesses Define and Measure Value?

If agile teams maximize the delivery of value, how do we define it? Leaders might first assume that value is the work they ask their teams to deliver. It’s project-thinking – value is on-time and on-budget. But, in reality, the wrong project completed on-time and on-budget offers no value to the customer. That’s not to say time and budget don’t play integral roles in the creation of value. The right project completed at the wrong time – think Amazon’s Fire Phone or Microsoft's Zune – aren't useful at all. Opportunity cost is therefore a significant aspect of value, too.

Then, there is customer value, or delivering what the customer needs in a way they can relate to and appreciate. Consider Uber. Uber targeted our frustration with the experience of getting a taxi. Yes, they are burning bridges with things like demand-driven pricing, but they established themselves by understanding and solving our specific pain points and desires with the taxi experience – dirty interiors, rude drivers, and always being asked to pay cash, as examples.

The same concept can be applied to free products, too. You’ve likely heard the adage that if the product is free, you are the product. Measuring value is therefore tied to your experience. Twitter’s popularity, for example, is based on its reach into the marketplace, the customer experience they offer, and the sense of connection users feel when on the platform. Measuring value is less about ad revenue and more about the quality of engagements the social giant enables.

This value is intangible and difficult to define, distil, and quantify. It’s not like other free products, such as productivity tools, where value is directly tied to functionality. Instead, Twitter is tasked with building a platform that people want to hang out on, a place that’s better than Facebook, Instagram, or other networking channels.

This approach requires companies to delight their customers, which demands deep learning and understanding. However, learning and understanding are two things many companies fail to invest enough time in.

Whether or not your product is free, metrics that provide insight into the value being delivered include:

• Brand loyalty
• Brand recognition
• Campaign success rate
• Customer retention
• Customer satisfaction
• Market share

Note that only two of these are relevant to the customer (brand recognition and customer satisfaction).The others are signals that indicate value, rather than measures of value. 

What Do Customers Value?

Often, businesses fall into the trap of making assumptions. “This is what the customer wants,” a leader might declare without building a system to understand whether their proclamation is true. As a result, they unknowingly fall victim to assumption biases, such as stereotyping or confirmation bias, the tendency to draw conclusions based on personal wants, needs, and prejudices.

An effective way of identifying what customers really value starts with a mindset of curiosity and exploration. Like a good detective, a product manager can build a model of customer behaviour that explores how customers might interact with their product and use this to predict behaviour they can measure. They can collect and follow this data to provide hard evidence for their assertions rather than use assumptions to jump to conclusions. But that doesn’t mean they need to reinvent the wheel. Instead, they can leverage existing models and frameworks to pinpoint and pursue leads in their investigation.

One such framework is Bain’s Elements of Value pyramid, which highlights the different levels of value any one product can offer. Much like Maslow’s Hierarchy of Needs, the Elements of Value pyramid starts with the basics, like saving time, simplifying processes, reducing risk, making money, being high-quality, and avoiding hassles. These add functional value.

One level up is emotional value-adds, such as wellness or therapeutic value, entertainment, design aesthetic, and attractiveness. Next comes value that’s life-changing. For example, a product or service might provide hope or motivation, it might be an heirloom that benefits future generations, or it might foster a sense of belonging.

And finally, at the top of the pyramid is social impact through self-transcendence, where value is found in a product or service’s ability to help a customer support other people or society more broadly. For example, a glasses brand might donate a portion of its profits to restoring people’s eyesight in developing countries.

While the Elements of Value pyramid is not comprehensive, it does shed light on the many different, often nuanced sources of value a product or service can offer. Take branded clothing as an example. The customer has met the practical need for warmth and clothing already. Instead, its value is found within the emotional and life-changing levels. The customer might appreciate the design aesthetic, badge value, or what the brand stands for (think Patagonia). If the brand has a loyal following, they might experience a sense of belonging, like joining an exclusive club. The purchasing decision is not founded on practical value but on perceived value. So, the brand must focus its efforts on maintaining that perceived value.

Of course, some people won’t buy into the perceived value of brands. Businesses must recognize that different customers will see different types of value in a single product. Furthermore, customers who see the same type of value will do so for different reasons, allocating a varying weight to that value.

Another interesting example is gaming. A video game’s value lies in its ability to create a situationally specific experience that players cannot have anywhere else. It’s in the narrative, the journey a player goes on, and the fulfilment that comes with participating in the story. Value is almost inevitably tied to entertainment, but it’s also connected to the escape, the “time out” from real life.

Context Is Crucial

Context is an additional consideration to make when identifying what customers value. For example, a person will weigh value differently when purchasing wedding shoes compared to running shoes. Similarly, they will value different things when hiring a cleaning company to tidy their investment property compared to their family home.

Therefore, it’s crucial for businesses to consider the context surrounding their customers’ value allocation and resulting purchasing decisions.

Navigating Subjectivity

In today’s disrupted and saturated business world, customers can drop one product or service and pick up another to fill its place. However, the barrier to switching is typically high. Consider the 10x rule: customers change providers when they perceive a 10x improvement in the service they currently receive.

Despite this, you can be sure there is a competitor lying in wait, ready to capitalize on the opportunity. It’s a customer’s world, and as business leaders, we need to understand that it’s a subjective, not objective, one. That means we can't lean on hard numbers, which is one of the benefits of relying on dollars and cents. Financial statements are black and white. They offer a universally understood proxy of value.

Instead, we have to navigate ambiguity and emotion. Emotion influences behaviour, and people buy on emotion. It’s vital to help customers understand the emotion your product or service creates, such as delight or envy.

In addition, we have to invite uncertainties and risk into our decision-making processes while leveraging data that points to potential value – or lack thereof – within our product or service. Examples include where our customers spend the most time and what they engage with. It can be frustrating, but as business leaders, our goal is the delivery of value to our customers. So, our focus needs to be there, with them.

Defining and Creating Value with Agile

The world is shifting, and businesses have an opportunity to adapt to evolving customer expectations and elevate the value they deliver. This outcome demands a commitment to transformation and change at the cultural level, but with the right strategy, it can pave the way for customer loyalty and sustainable growth.

Agile’s iterative approach to value creation ensures the products or services your teams build cater to real-world needs and pressing customer problems. It creates room for ambiguity and experimentation, allowing teams to explore possibilities, disrupt the status quo, and shape value that’s irresistible to your target audience, just like a bottle of water in the desert.

However, the transition to Agile is so much more involved than following someone else’s methodology to the letter. Agile is a mindset, and success requires enterprise-wide buy-in and the right tools to support teams today, tomorrow, and for years to come.

At IncrementOne, we provide personalized consulting and training that helps your organization move to Agile with ease. We guide you toward an organizational structure focused on customer value by shedding light on new perspectives and additional value streams.

If you are ready to learn more about how Agile could transform your organization, schedule an appointment today.