Content
Customer Surplus Value: How to Encourage Customers to Pay More for Your Product
November 26, 2024
10 mins
If you want to build a winning strategy for your company, you need to know how to calculate the consumer surplus value and use this information to make decisions.
But, what exactly is the consumer surplus in economics and how can you find it? And once you do, how can you apply it to your business plan to make the most of it?
Let’s break it into pieces.
In a few words, CSV is the extra value (surplus) a consumer extracts from a product or service compared to what they actually pay for it. This gap is basically the difference between what a consumer is willing to pay for something (how they value it) and the actual price it costs them.
For example, if someone would be willing to pay $100 for a jacket, because it’s exactly the type they were looking for, and it suits them perfectly, but the jacket’s price is only $80, then their Customer Surplus Value equals $20.
Or, let’s say a person pays $15 a month for a meditation app. After several months of using it, their sleep improves, their health benefits from better stress management, their relationships strengthen, because they can better understand and communicate their emotions, and they become more productive at work, eventually leading to a promotion. If we could hang a price tag on all these priceless benefits, the tremendous difference between that value and the $15/month would represent the Customer Surplus Value.
While the meditation app example might be too vague—since we can’t necessarily tell if the life quality improvements were directly tied to the service in that imaginary person’s case — most of the time, people can clearly tell when they’re receiving more than what they paid for. This realization builds trust and loyalty, which is why people often stick with a brand. The emotional connection created by this surplus is incredibly powerful.
Perceived value is also likely the driving force behind people choosing any subscription-based service. How many times have you bought a gym membership after quickly calculating that, if you visited the gym daily, each session would cost you just $1? That’s customer surplus value in action.
For your business, it means:
At first glance, Customer Surplus Value (CSV) and Net Promoter Score (NPS) might seem similar because both are customer-centric metrics designed to assess satisfaction and loyalty. They share a common goal: helping businesses understand how customers feel about their products or services and how likely they are to stay engaged. However, while they overlap in purpose, the way they measure customer sentiment and the insights they provide are fundamentally different.
The Similarities
Key Differences
For a more detailed breakdown of NPS, along with practical examples, read NPS and CSV: How to Gauge Customer Loyalty Without Fussy Surveys?.
To measure CSV, you have to know two things, the willingness to pay and the actual price paid.
This is the maximum price a consumer would be willing to pay for your product or service. You can estimate it through surveys, focus groups, and consumer behavior analysis.
As its name shows, this is the price consumers are actually paying for your product or service.
Knowing both of these figures you can then calculate the consumer surplus value by using the following formula.
Consumer Surplus Value (CSV)=Willingness to Pay (WTP) – Actual Price Paid
When you can find the CSV you can get precious insight into how much value customers feel they’re getting from your products and how competitive your pricing truly is.
Here is how to find consumer surplus, the old-fashioned way:
Imagine a business selling a product, such as a premium water bottle, in a competitive market. The following information is provided, based on the graph:
Step-by-Step CSV Calculation:
Substituting the values:
Even though CSV is a powerful tool, it’s essential to understand that it also comes with some limitations. Here is what it can and can’t do:
CSV data can reveal which product/service features customers value most, allowing you to enhance those aspects, create new traits and packages, and adjust pricing accordingly.
By making the most of CSV data, and improving your end product, thus increasing the surplus value, you can retain more customers and strengthen your clientele’s loyalty. People are more likely to stick to a purchase if they feel they’re getting a good deal for what they pay.
Consumer Surplus Value can give you insight into how your offerings stand against your competitors. If your CSV is significantly higher, then you are selling more value compared to your cost, which is a strong selling point.
CSV alone can’t predict nor ensure that your customers will stay for the long haul. That depends on many factors such as after-sales support, brand reputation, and overall experience.
Not all customers value product features equally. Some may find a feature indispensable, while others may not give it a second thought or even miss it if it ceases to exist. And the CSV might not reflect this variability.
Whilst CSV can indicate general consumer satisfaction, it doesn’t cover all the bases. Poor customer support, delays in delivery, or technical problems are issues that can still impact satisfaction, regardless of surplus value.
Overall, for the Consumer Surplus to offer a more holistic view of customer health should better be combined with other metrics, like the Net Promoter Score (NPS) – a figure that reflects the likelihood of customers recommending your product/service to others.
Customer Surplus Value gives you precious information about how much customers value your products or services relative to their cost. Measuring and analyzing CSV can help you make informed decisions on product development, pricing, and customer satisfaction strategies. However, like any metric, CSV works best as part of a larger toolkit, helping you balance value with satisfaction and loyalty.
[[FAQ-START]]
Producer surplus is the difference between the lowest price a producer would accept to sell a product and the selling actual. On the contrary, consumer surplus is the difference between the highest price a consumer would pay and the price they actually pay.
When looking at a supply and demand graph, the point where supply meets demand – the equilibrium point – is, in fact, the point where these two surpluses meet. And this point reflects a win-win scenario for both producers and consumers.
Yes, there is a way: Raising the price of your product/service. This change will make room for you to gain more profit if customers are willing to pay above the equilibrium price.
Even though a higher price may shrink the demand the increased profit per unit can compensate for this, thus enabling you to gain more surplus by selling at a higher price than the minimum you would accept.
There’s no fit-to-all rule, but a good idea is to measure CSV at least two to four times a year.
This is considered to be a good frequency that allows you to keep up with trends in customer behavior and perceptions along with pricing changes that may occur.
No actually, because it varies among industries and end products. Scoring a positive CSV though, is a good indication as it implies that customers perceive your product as valuable.
Consistently high scores can suggest strong product-market fit and customer satisfaction. Which is something you should aim for.
[[FAQ-END]]
You may also like
Choose quality and trusted services to improve the presence of your company on the Internet, and feel free to contact our UK team if you have any questions.
We at Promodo are ready to help you improve your performance across all digital marketing channels.
Get started
.svg){kind=logo}
