How to quantify value

Smiley face businessman

People always say to me, “But value is just like beauty, it’s in the eye of the beholder”.  OK, so one man’s value can be another man’s poison (to mix metaphors) but there are ways in which you can start to quantify value.  We always use the equation ‘Value = Benefits minus Cost’, where cost can be price, risk, loss or any other downside.

This equation isn’t quite as rationally straightforward as it might at first appear, as demonstrated by the 2002 Nobel Prize winning work of Daniel Kahnemann in his Prospect Theory.  Simply put, people will work harder to avoid losing something than they will to gain it.  In fact, behavioural economics tells us that the psychological effect of a loss on us can be at least twice the effect of a gain, if not more.  Think about it -­ how would you feel if you lost £200 today versus how you would feel if you had a windfall of £200?  Chances are that the way you would feel at losing the money would be stronger than the emotion you would feel at gaining it.

Most significantly, the effect of this cannot be shown by conventional, rational, market research, as these non-rational behaviours largely affect us unconsciously.  You have to dig deeper into the human psyche before this can be uncovered, using good question probing and a more qualitative approach.

In their book ‘Nudge’, Thaler and Sunstein describe their idea for the “save tomorrow pension”; a new pension format designed to appeal to young people, a group who are famously averse to saving. Using the concept of Prospect Theory (more commonly called loss aversion), they created a pension plan where investors signed up for a pension that cost nothing until they receive a pay rise, at which point a percentage of their pay rise is automatically directed into the pension fund.  Through making sure the person never saw a reduction in his or her disposable income, the plan was very clever and very effective.  Pension contributions among this group were 200% higher than normal schemes.

So if we were to re-write our equation it should look like:  Value = Benefits minus COST2

This is why, when you’re convincing yourself that your Client Satisfaction Surveys or Voice of the Customer Programmes are telling you everything you need to know about your clients/customers, they’re not.  You need to ask people to talk about how they feel – not just what they think.  Otherwise you’re never going to understand the value you provide or how to mitigate the emotional ‘losses’ that your clients may perceive.

The lesson learnt from behavioural economics is that value is rooted in our emotions – in our psychological responses – which are not rational… but then most of human behaviour isn’t rational, is it?  We shouldn’t be so surprised.