Customers will buy from the firm that they see as offering the highest perceived value. Customer perceived value (CPV) is the difference between the prospective customer’s evaluation of all the benefits and all the costs of an offering and the perceived alternatives.
Total customer cost is the bundle of costs customers expect to incur in evaluating, obtaining , using, and disposing of the given marketing offering.
An example will help here. Suppose the buyer for a large construction company wants to buy a tractor from Caterpillar or Komatsu. The competing salespeople carefully describe their respective offers. The buyer wants to use the tractor in residential construction work. He would like the tractor to deliver certain levels of reliability, durability, performance, and resolve value. He evaluates the tractors and decides that Caterpillar has a higher product value based on perceived reliability, durability, performance, and resale value. He also perceives differences in the accompanying services – delivery, training, and maintenance – and decides that Caterpillar provides better service and more knowledgeable and responsive personnel. Finally, he places higher value on Caterpillar’s corporate image. He adds up all the values from these four sources – product, services, personnel, and image – and perceives Caterpillar as delivering greater customer value.
Does he buy the Caterpillar tractor? Not necessarily. He also examines his total cost of transacting with Caterpillar versus Komalsu, which consists of more than the money. As Adam Smith observed over two centuries ago, “The real price of anything is the toil and trouble of acquiring it. “Total customer cost includes the buyer’s time, energy, and psychic costs. The buyer evaluates these elements together with the monetary cost to form a total customer cost. Then the buyer considers whether Caterpillar’s total customer cost is too high in relation to the total customer value Caterpillar delivers. If it is, the buyer might choose the Komatsu tractor. The buyer will buy from whichever source he thinks delivers the highest perceived customer value.
Now let us use this decision-making theory to help Caterpillar succeed in selling to this buyer. Caterpillar can improve its offer in three ways. First, it can increase total customer value by improving product, services, personnel, and / or image benefits. Second, it can reduce the buyer’s no monetary costs by reducing the time, energy, and psychic costs. Third, it can reduce its product’s monetary cost to the buyer Suppose Caterpillar concludes that the buyer sees its offer as worth $20,000. Further, suppose Caterpillar’s cost of producing the tractor is $14,000. This means that Caterpillar’s offer potentially generates $6,000 over the company’s cost so Caterpillar needs to charge a price between $14,000 and $20,000. If it charges less than $14,000, it won’t cover its costs; if it charges more than $20,000, it will price itself out of the market. The price Carterpillar charges will determine how much value will be delivered to the buyer and how much will flow to Caterpillar.
For example, if Caterpillar charges $19,000, it is creating $1,000 of customer perceived value and keeping $5,000 for itself. The lower Caterpillar sets its price, the higher the customer perceived value and, therefore, the higher the customer’s incentive to purchase. To win the sale, Caterpillar must offer more customer perceived value than Komatsu does.
Some marketers might argue that the process we have described is too rational. Suppose the customer chose the Komatsu tractor. How can we explain this choice? Here are three possibilities:
1. The buyer might be under orders to buy at the lowest price. The Caterpillar salesperson’s task is to convince the buyer’s manager that buying on price alone will result in lower longterm profits.
2. The buyer will retire before the company realizes that the Komatsu tractor is more expensive to operate. The buyer will look good in the short run; he is maximizing personal benefit. The Caterpillar salesperson’s task is to convince other people in the customer company that Caterpillar delivers geater customer value.
3. The buyer enjoys a long-term friendship with te Komatsu salesperson. In this case, aterpillar’s salesperson needs to show the buyer that the Komatsu tractor will draw complaints from the tractor operators when they discover its high fuel cost and need for frequent repairs.
The point of these examples is clear: Buyers operate under various constraints and occasionally make choices that give more weight to their personal benefit than to the company’s benefit. However, customer perceived value is a useful framework that applies to many situations and yields rich insights. Here are its implications:
First, the seller must assess the total customer value and total customer cost associated with each competitor’s offer in order to know how his or her offer rates in the buyer’s mind.
Second, the seller who is at a customer perceived value disadvantage has two alternatives: to increase total customer value or to decrease total customer cost. The former calls for strengthening or augmenting the offer’s product, services, personnel, and image benefits. The latter calls for reducing the buyer’s product, services, personnel, and image benefits. The latter calls for reducing the buyer’s costs by reducing the price, simplifying the ordering and delivery process, or absorbing some buyer risk by offering a warranty.
Here is a video by Marketing91 on Customer perceived value.