Making more profit and money is the main benefit of creating value for customers. Businesses make a profit by satisfying customer needs and wants through their products by adding value. Thus, they process inputs into higher value outputs.
What is value creation to customers?
Creating value means the business adds value to the inputs used. How much value is added? It equals the difference between the selling price of the product and the input costs.
Is the company successful in creating value? We can see it from whether customers are willing to pay a higher price than the input costs used to make goods or provide services.
And, creating value is the reason why a business exists. Without it, businesses won’t be able to survive because they bear the loss. Consumers do not want to buy if the product has no value to satisfy their needs and wants.
Take the tire manufacturer as an example. They buy raw materials such as rubber latex to be converted into final goods. To do so, they need locations for factories, machines to process inputs, and labor to operate machines and factories. Then, after the tires are finished, they sell them to consumers. And tires cost much more than the rubber used.
Because they have to compete in the market, tire manufacturers have to do better than competitors. So, for example, they may be more efficient at producing to sell at lower prices than competitors. That way, they can attract customers to keep buying.
Well, creating value for customers benefits businesses because it allows them to:
- Setting a high price
- Creating differentiation
- Fostering customer loyalty
- Growing market share
- Building customer equity
- Saving costs in the long term
Setting a high price
Businesses add value by processing inputs to become more valuable outputs in satisfying consumer needs and wants. In the end, by adding value, they can sell the output at a higher price.
Take car manufacturers as an example. By processing aluminum and making it into a car frame, they could sell cars at a much higher price than aluminum.
Likewise, processing wood into various furniture and household furniture can make its value increase many times over. Or, turning cotton into yarn and then into clothing can be a multi-million dollar business.
So, in short, by creating value, businesses can sell goods and services at a higher price than the dollars they paid to buy inputs. And, businesses succeed in creating value when customers are willing to pay for the product at a higher price than the cost of the input used.
A business can stand out from its competitors by delivering superior value. It doesn’t just make consumers willing to pay a premium. But, it also allows them to prefer the company’s products over competitors’ products.
Another important aspect of creating differentiation is branding. It is the company’s way of influencing customers to perceive the value of the product. We can see, many luxury goods companies spend millions of dollars on branding. Their product prices are very expensive, but people are still willing to buy. That’s because they managed to influence customer perception.
Fostering customer loyalty
Creating value is a way to form bonds between companies and their customers. First-time customers buy the company’s products because they offer better value than competitors’. When they are satisfied, they are more likely to buy again in the future. They may also recommend the product to their colleagues or family.
When successfully maintaining customer satisfaction over time, businesses build strong relationships with their customers. And, through good customer relationship management, they continue to create customer satisfaction.
Satisfied customers continue to pour money into the company. They are loyal and continue to buy the company’s products.
Growing market share
By creating value, businesses satisfy customers. It’s important not only to retain customers and encourage them to keep buying. But, it is also strategic to seize competitors’ customers. Then, it is also easier for companies to attract new customers, for example, thanks to recommendations from existing customers.
Retaining existing customers contributes to maintaining market share. Meanwhile, adding new customers and capturing competitors’ customers is a way to increase market share and strengthen the company’s market position.
Building customer equity
When companies manage to sustain superior value creation, they can build strong customer relationships over the long term. Finally, they can maximize customer equity, the total lifetime value of all of their customers. And that means money continues to flow into the company in the long term.
Apart from offering superior products, companies also need other efforts to increase customer equity. For example, they offer superior customer service to make consumers even more satisfied. In addition, they build the popularity and value of their brand through advertising and branding, generating valuable goodwill. Branding is also important to increase customer confidence in the company’s brands.
Saving costs in the long term
When customers are loyal to a company’s products, they will continue to buy. They are reluctant to switch to competing products, which may be offering promotions. And, they can save on advertising and other promotional costs in the long term once they build strong relationships with their customers.
Loyal customers are more likely to promote the product to other customers. For example, they recommend products to people around them. They provide positive comments and feedback. On the other hand, some customers are willing to actively search for the company’s products without waiting for the product to be advertised. And, all such efforts can save the company’s promotional costs.
What to read next
- Value Creation: Definition, Shareholder Value, Customer Value
- 6 Benefits of Creating Value for Customers
- How does your company create value along the value chain?
- Added Value: Definition, Why It Matters, Formula
- Why is adding value important for a business?
- Value Added Formula and How To Calculate It
- Value Added: Meaning, Formula, Importance, Way to Create