Four levers that drive customer value
People don’t buy the product, they buy the result
In a TED Talk, Rory Sutherland suggested how people perceive value doesn’t depend on objective reality so much as how they view the thing or situation. We are inclined to put too much faith in engineering or Newtonian Physics solutions, e.g. saving time on a journey, rather than psychological solutions. He illustrates this with a somewhat mischievous example. Why spend £6 billion on rail network upgrades to reduce the journey time from London to Paris by 40 minutes when you could hire all the world’s top male and female supermodels, pay them to walk up and down the train handing out free Château Pétrus? You'd have five billion pounds in change and passengers would ask for the trains to slow down.
The value equation
In his book, $100m Offers, Alex Hormozi explains how to make offers so good, People feel stupid saying no. Key to this is maximising the customer perceived value of what is being offered. His value equation is:
Value = (Outcome * Likelihood) / (Delay * Effort)
where:
Dream Outcome = The ideal result or transformation a user desires.
Perceived Likelihood of Achievement = User confidence in getting that result.
Time Delay = How quickly the user expects to see results.
Effort & Sacrifice = How much work or cost the user perceives is required.
To increase value, we amplify the first two factors (Outcome and Likelihood) and minimise the second two (Delay and Effort). While the value equation is not a strict mathematical formula, it is a useful framework to understand how to maximise customer perceived value. Each component of this equation plays a critical role.
Dream Outcome
The dream outcome is what turns a simple product into a life changing offer. – Alex Hormozi
The first component of the value equation is the Dream Outcome. This represents the ultimate result customers want from using a product. This is the most desirable, ideal state that they are aiming to achieve, e.g. losing weight, making money or acquiring a skill. The Dream Outcome is often driven by deep emotional desires rather than logical needs. The more aspirational, the higher the perceived value, the more people are prepared to pay. We should clearly articulate the dream outcome and make it a central part of our marketing message.
A businesses service which transforms long-term prospects, e.g. via strategy and operational scaling, holds more value than that offering minor, short-term improvements, e.g. bookkeeping.
Perceived Likelihood of Achievement
Believe you can and you're halfway there. - Theodore Roosevelt
The Perceived Likelihood of Achievement is how confident the user is in achieving their desired outcome by using the product. No matter how significant the dream outcome, without confidence there is no value in the offer. Increasing the perceived likelihood of achievement relates to building trust and credibility. Users need to believe that your product can deliver on its promises.
We can enhance this perception by showcasing proof via testimonials, case studies, guarantees and live demos.
Time Delay
All great achievements require time. – Maya Angelou
Time Delay refers to how long it takes users to achieve the dream outcome. The shorter the delay, the more valuable the product becomes. People are impatient. The quicker users get to benefits, the higher the value. We should look for ways to reduce the time between purchase and results, e.g. faster delivery, quick wins or a fast, streamlined process.
Software companies can offer free trials or immediate access to premium features to give customers a taste of the benefits right away.
Effort and Sacrifice
Dreams don’t work unless you do. – John C. Maxwell
The final component of the value equation is Effort and Sacrifice. This is the amount of work, time or discomfort users need to invest to achieve the dream outcome. The lower the perceived effort and sacrifice, the higher the perceived value. People want the easiest, most frictionless path to their desired results. User effort and sacrifices can be minimised by providing simple step-by-step processes, well considered defaults and automation. The easier it is for customers to achieve their desired outcomes, the more valuable the offer.
A productivity app that simplifies task management and requires minimal user effort is perceived as more valuable than one that demands extensive manual input.
Other resources
Life Lessons from an Ad Man talk by Rory Sutherland
Find our Initial Customers post by Phil Martin
Help Users Do Things post by Phil Martin
Alex Hormozi sums it up. Customers will pay you based on the amount of perceived value you create for them.
Have fun.
Phil…
Lovely article 👌