Perceived Value Is Key To Customer Experience. Can It Be Computed? 

Seth Grimes | Apr 25, 2017 694 views 9 Comments

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We’ll be discussing the United passenger ejection for years, the incident was that bad. Worse, it was unnecessary. Circumstances were stressful, but the whole mess could have been avoided, had United cared to evaluate and respond to flyer expectations.

Those of us concerned with customer experience (CX) – every manager, business analyst, and executive policy-maker should be – need to examine what went wrong in Chicago. Why did United’s procedure for overfull situations fail? Why did no passenger voluntarily accept the offer of a flight voucher and rebooking to leave the plane? Every frequent flier knows the answer. Vouchers aren’t cash. Actually, they’re a pain to use. So while $800 is a fair sum, a strings-attached $800 voucher isn’t worth that much. The perceived value – the value that mattered – was far lower than the value of keeping a seat, hence no volunteers, hence failure.

CX practitioners should factor Perceived Value into evaluations. This article will examine why and how, proposing a Perceived Value Score (PVS) score to complement customer satisfaction, net promoter, customer effort, and sentiment measures.

Defining Perceived Value

Perceived Value (PV) is qualitatively defined as “the worth that a product or service has in the mind of the consumer.” Let’s quantify it as Cost weighted by Expectation. My definition of expectation is going to be a bit complicated, but the basic PV notion is simple: Combine fact and attitude to determine whether or not people think they’re getting – or will get – their money’s worth. Evaluate PV pre-sale to understand intent, how likely you are to close the deal. Or do it post-sale as a satisfaction, loyalty, and advocacy predictor, and to suggest a customer’s transaction-effort tolerance.

Perceived Value post-sale is similar to satisfaction, which is often measured via a customer satisfaction (CSAT) survey: How did your stay at the Ritz rate on a scale of 1 to 5? Say Richie Rich rates that Ritz a 5 overall, Superb! Nice going if the typical (median) rating for a comparably upscale room is a 4. But say Richie paid a third more than he’s used to paying for this quality, $800 rather than $600. We have an expectation factor of 1.2 (rating) times .75 (cost), or .9. So the perceived value is $800 times .9, $720. But at $800, the room cost is about 11% higher than that $720 Perceived Value so Richie feels slightly taken.

Factor in Customer Effort and Sentiment

Customer effort could be factored into expectation. What value did United’s passengers ascribe to an $800 voucher, given both the inconvenience of switching to a later flight and the strings attached to a flight voucher? I’d bet that United employs smart data scientists who could create a suitable model. After all, the exercise is very similar to price modeling, which also responds to very dynamic conditions that involve seat inventory, demand modeling, costs, and temporal factors. Maybe they would have found that a voucher, in conditions like those in Chicago, gets a .4 effort factor: An $800 voucher would have $320 Perceived Value.

You could also factor in sentiment, which quantifies an customer’s opinion – or the aggregate of customer attitudes – about a product or service. Sentiment is often expressed as a positive or negative valence coupled with intensity although the state of the art is rapidly moving toward emotion AI, noting that emotion categories – angry, happy, sad, and so on – are often better customer-behavior predictors than are cruder positive/negative evaluations. (For more on all this, covering the range of customer and market insights factors, check out a conference I organize, the Sentiment Analysis Symposium in New York.) I will add, finally, that for PV computations, we’d hope to be able to discern fine-grained sentiment, at a product or aspect level – See my 4 AI startups that analyze customer reviews for a take on aspect-level sentiment – but that brand-level sentiment could also be useful. At the risk of oversimplifying: Brand Equity is pretty much the Perceived Value of a brand.

From Measure to Score

Each of the measures I’ve cited has a formalism behind it.

The Customer Effort Score (CES) was introduced by the Corporate Executive Board. The CES core question is “How much effort did you personally have to put forth to handle your request?” and the CEB claim the resulting score “is 1.8x more predictive of customer loyalty than customer satisfaction measures, plus it is two times more predictive than Net Promoter Score (NPS).”

And NPS, developed by jointly by Bain & Company and vendor Satmetrix? The Net Promoter Score quantifies “willingness of customers to recommend a company’s products or services to others” (citing solution-provider Medallia’s definition). NPS is often used as a customer satisfaction proxy. It dismisses satisfaction surveys as simplistic and instead asks about a possible behavior, “How likely are you to recommend…?” NPS is computed by subtracting the percentage of “detractors” from the percentage of “promoters,” resulting in a score ranging in normalized value from -100 to +100, from 100% detractors to 100% promoters.

Similarly, i-SCOOP proposes Net Easy as an aggregate, normalized CES value.

These index values facilitate comparisons, important because ability to compare – to relate and rank multiple values – conveys insights that single, isolated quantities can not. It’s competitive position, changes over time, and correlation of values with events that’s interesting.

So let’s turn Perceived Value into a score, similarly scaled to a normalized -100 to +100 range.

Perceived Value Score, Barriers, Motivation, and Activation

The perceived value of a product or service is a cash quantity. For instance, the PV of an $800 United Airlines voucher might be $320 cash. That gives us a Perceived Value Ratio (PVR) -0.6, computed by ((Perceived_Value – Nominal_Value) / Nominal_Value) equals -480/800. That’s a Perceived Value Score (PVS) -60%. Consider another example, a $100 restaurant Groupon deal that cost $50. Here the PV is $90 given the expiration date, but since the cost was $50, we get a PVR of 0.8, an 80% PVS. Those Groupons are going to be popular, unlike the vouchers. If the aggregate PVS is above zero, you have positive motivators in place. If it’s negative, barriers to action overcome motivating factors.

Those barriers could be price, customer effort, availability limits or delivery delays, quality perceptions, competition, or any number of other factors. The key point is that they demotivate the consumer. The joy is that the same techniques used to quantify sentiment – text analytics via natural language processing, applied to reviews, survey verbatims, social postings, contact-center audio and transcripts, and the like – can be applied to study barriers. So model barriers as contributors in the Perceived Value = Cost * Expectation equation, and adjust the cost and improve expectation factors until your PVS goes positive, or at least better than the competition’s.

If a product or service over-delivers for the price paid, the customer is happy. We have positive PVS, making more likely a positive customer experience. If the product or service under-delivers, the PVS and CX are negative. (One caveat, however: Deficient perceived value will have little effect on purchase – just as low satisfaction will not affect loyalty – when the consumer has few choices for a must-have product or service. That’s one reason Why Companies Like United Think Customer Experience Is Irrelevant, per an article I published recently.)

A Perceived Value Score will quantify over/under-delivery, using attitude-measurement text analysis techniques that can be extended to discover motivations, behavior root causes, activating factors, and barriers. A Perceived Value Score, as sketched out here, will nicely complement Satisfaction, Net Promoter, and Customer Effort initiatives to anticipate, and not just react to, challenges both extraordinary and ordinary.

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9 Responses to Perceived Value Is Key To Customer Experience. Can It Be Computed?

  1. Ryan Esco April 26, 2017 at 5:12 am (6 comments) #

    Understanding the perceived value of a product or service is critical to pricing models and customer experience. Quantifying the data points to determine the value can be difficult but it provides real value when strategically managing your business or brand. Being proactive in determining these factors could definitely mitigate the exposure businesses have to negative feedback and customer experiences.

  2. Howard Lax April 26, 2017 at 7:07 am (23 comments) #

    Great idea, Seth . . . although I hope you can simplify it a bit for more practical implementation.

    But you’re spot-on: perceived value and expectations are central to decision making and satisfaction with a given experience.

  3. Gautam Mahajan April 26, 2017 at 7:39 am (166 comments) #

    Dear Seth, how is it different from Customer Value Added (see my book on Customer Value Investment)?

  4. Andrew Rudin April 26, 2017 at 8:29 am (169 comments) #

    What an innovative idea! I hadn’t thought about things this way. Your article highlights the stupidity of having a single compensation policy for passengers who are inconvenienced by being bumped from a flight, or asked to exchange seats.

    Of course passenger compensation should depend on the airport, the destination, the hour of the day, and the day of the week. And it should consider another variable you didn’t mention – the value to the airline. Asking passengers to give up seats to provide crew to an aircraft in another city that would otherwise be grounded should be more valuable than, say, accommodating a passenger with a high frequent flier point total who wanted to re-book his or her flight.

    The irony is that airlines have honed yield management and variable pricing for ticketing, but they have stuck to outdated, arcane, one-size-fits-all comp policies for bumped passengers. What happened in Chicago was a loud and clear message not only to United, but to every airline: you haven’t shown us enough money!

    So, why don’t the airlines put their great operations research methods to work to offer passengers the sweetest deals when a) the passenger inconveniences are likely to be highest, and b) the value to the airline for re-purposing the vacated seat is higher? I don’t have the answer to the question. Maybe such initiatives are stifled by functionaries who say, “It’s not our policy to . . .” or, maybe it’s ossified C-Level executives who think, “The industry just doesn’t do things that way.” ? Or, maybe it’s regulation . . .

    It would be interesting to learn whether there’s a legal prohibition on the variable comp you’re proposing. It seems that implementing that might create opportunities for enterprising people to arbitrage the payouts for getting bumped. Then, too – that might be a good thing for everyone involved. A new job title would be spawned: Professional Bumpee.

  5. Seth Grimes April 26, 2017 at 8:44 am (2 comments) #

    Ryan & Howard, thanks for the comments!

    Gautam, please do post a summary description of Customer Value Added. Nonetheless, I’ll respond that Perceived Value a) applies to both the base product or service AND any add-ons or adjustments (such as the United voucher), b) it can accommodate cost subtractions as well as value additions, and c) it accounts for measurable associated factors such as customer effort in a transaction.

  6. Gautam Mahajan April 26, 2017 at 8:49 am (166 comments) #

    Same as CVA, and it is measured versus competition

  7. Michael Lowenstein April 26, 2017 at 12:53 pm (1238 comments) #

    Antecedent measurement formalism notwithstanding (anything can be formalized and institutionalized, irrespective of whether it is real-world and/or actionable), we have been measuring and evaluating drivers of perceived value, and resultant impact on downstream customer behavior, for years. The recent United Airlines issue you cited like Wells Fargo and others, involves systemic and cultural concerns deeper and broader than tangible perceived customer value.

    Apart from sentiment/text analysis, I’d also challenge whether measures like satisfaction (attitudinal and tactical, with little connection to actual behavior), NPS (analytical and application flaws too numerous to cite here), and CES (principally about service, which is just one component of experience), really complement perceived value. Again, we’ve seen that these measures have been formalized and institutionalized, but with extremely inconsistent results.

    Perceived value, as you defined, is about ‘worth in the consumer’s mind.” To be measured effectively, value must take into account both the rational and, as you note, emotional components of experience and delivery. Your scoring approach is one way to do it. Although financial impact of perceived value can be measured, projected, and communicated (we utilize an extremely well-proven, stable structured equation modeling technique, paired with other multivariate devices), price is only part of the equation (if it were more, we’d still be evaluating price/value the way Kordupleski and Gale did with CVA 20+ years ago).

  8. Seth Grimes April 26, 2017 at 3:06 pm (2 comments) #

    Michael, I think your comments are very apt. Let’s call my article a thought piece, aimed at starting a discussion and not intended to be the final word on the topic of perceived value and how to quantify it.

  9. Gautam Mahajan April 26, 2017 at 10:22 pm (37 comments) #

    Seth, I forgot ot add the CVA link:

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