The real value of an item, also called its relative price, is its nominal value adjusted for inflation and measures that value in terms of another item.
Key Takeaways
- The real value of an item, also called its relative price, is its nominal value adjusted for inflation and measures that value in terms of another item.
- Real values are more important than nominal values for economic measures, such as gross domestic product (GDP) and personal incomes.
- The nominal value of time-series data, such as GDP and incomes, is adjusted by a deflator to derive real values.
Understanding Real Values
Real values are more important than nominal values for economic measures, such as gross domestic product (GDP) and personal incomes, because they help ascertain the extent to which increases over time are driven by inflation as opposed to what is driven by actual growth. For example, if personal income is $50,000 in year one and $52,000 in year two, and the rate of inflation is 3%, then the nominal growth rate of income is 4% [($52,000 – $50,000) ÷ $50,000], while the real growth rate is only 1% (4% – 3%).
Real value is obtained by removing the effect of price level changes from the nominal value of a good, service, or time-series data, so as to obtain a truer picture of economic trends. The nominal value of time-series data, such as GDP and incomes, is adjusted by a deflator to derive real values.
In the U.S., the Bureau of Economic Analysis (BEA) maintains the GDP deflator that is used to compute the real rate of economic growth. The deflator currently uses 2012 as the base year, which means that it is set to 100 for 2012, with other years reported relative to the 2012 dollar's purchasing power.
Real Value vs. Perceived Value
Real value is fairly easy to measure. A business must account for the costs of labor, raw materials, shipping, marketing, and product development, which allows it to calculate the product's real value. Perceived value isn't as easy, since many factors that play into it aren't tangible or precisely measurable. Factors such as scarcity (including artificial scarcity), marketing efforts, novelty, and brand associations all play into perceived value.
For example, two businesses may sell similar cars that cost the same amount to produce, giving them identical real values. However, one car will likely have a higher perceived value if its maker has a reputation for reliability and if the car is the center of a national marketing campaign that successfully builds buzz.
The impact of real and perceived values, and the differences between them, become real in sales numbers and in the pricing of products. A higher perceived value will lead consumers to think that a product is better than other items with the same real value selling for a similar price.
At the same time, the price can impact the perceptions of value. For example, businesses that release special limited editions of existing products can sometimes create a sense of a higher perceived value, due to exclusivity and novelty, even if the product has the same real value as an existing item that sells for a lower price.
How do you determine the true value of a product? You might think it is the monetary amount that customers are willing to pay for it. Or you might focus on basic profitability — the total revenue minus the cost to develop. Other methods of product value measurement could include how well the product solves an intended problem, customer affinity or NPS scores, and market position in comparison to similar offerings. But let’s go back to our initial question. The answer is: All of the above.
Product value measures how well what you build serves business goals and delivers what customers need.
Product value is an aggregate of all the work that a company does to strategize, build, launch, market, sell, and support an offering. When you think about it that way, it is obvious that there will be more than one metric by which you measure product value. Teams that follow value-based product development create a shared definition of product value that informs the metrics used to vet what gets built and understand performance.
Value is as value does. Meaning: You can say that your product has a specific worth, but it is only true if it delivers on that promise. There is the value that a product brings to the company, the team that develops it, and the user. There is tangible and intangible value. Understanding the nuances can help you create a more fulsome definition of your product’s value — so that you can make better choices and keep the team focused on what matters most.
How is the value of a product determined?
Value differs from product to product, industry to industry. There is no universal formula for determining the exact value of a product. This is why most product teams spend time evaluating all factors that impact how a customer perceives the worth of a product — from initial concept to well after launch.
The work of documenting product value begins by mapping company, product, and customer attributes to different types of value. Usually this happens as a follow-up to a broader business strategy. Senior product leaders will distill this research into a product value proposition and product value statement — both of which can be used as a north star for the product team during roadmap planning and feature prioritization. Other functional groups such as marketing, sales, and support can use a product value statement to inform messaging and customer-facing materials.
What are different types of value?
Value is not one-dimensional. There are layers to how we evaluate and perceive the benefits of using a particular product. Remember that a customer's experience with a product is contextualized. Every touchpoint they have, from the first advertisement they see to the customer support they receive, combines to inform their value assessment.
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Although a product delivers value to an organization (through market share, revenue, etc.) it is best to start from the customer perspective when you think about determining the true value of your product. Traditionally there are four categories that relate to customer-perceived value:
Functional value: The practical benefit of using a product — how effectively it solves an intended problem.
Monetary value: The price of a product relative to its perceived worth — how much a customer is willing to pay.
Social value: The way a product enables customers to connect with others — how being associated with the product impacts them.
Psychological value: The way a product makes a customer feel — how it aligns with their identity.
Once you have explored these areas, you can further organize the different types of value into two categories: tangible and intangible.
Examples of tangible value for a SaaS product:
Convenience: You can access a full version of the software on a mobile device.
Reliability: The product works quickly and performance outages are rare.
Cost: Pricing plans offer more affordable options (or more features) than other solutions.
Examples of intangible value for a SaaS product:
Status: You gain respect in your community by association with the product.
Causes: You align yourself with social actions the company takes.
Emotions: Interacting with the product or company gives you a boost.
What is a product value proposition?
A product value proposition summarizes why a customer would choose your product over any other. It is a succinct statement that reveals the value customers will enjoy when they buy from your company, use your product, and interact with your team.
A product value proposition is typically an output of the overall business strategy. There will be a separate session to ideate and capture all aspects of the company, product, and customer to inform the eventual product value proposition. While you are capturing a wide swath of information, the goal of this exercise is to answer one question — what are people really buying?
Product-focused questions:
What does it do?
How does it look and feel?
What unmet need does your product fill?
What is the benefit to choosing your product over others?
Customer-focused questions:
What is the problem you are trying to solve?
How are you currently solving this problem?
What are the practical criteria for choosing a new solution?
What emotions drive purchase decisions?
What will you lose by not buying?
Company-focused questions:
What policies impact buying?
How do we support the user post-purchase?
What other products or services do we offer?
Product value proposition template
If you are writing a product value proposition it can be helpful to start with the main challenge your product solves and then create a list of features and benefits that customers will gain. You can use the template below to organize your information.
Product value proposition vs. positioning
A product value proposition is sweeping in scope. It is the overall promise of what customers will gain when using your product. Positioning is more targeted. You can write positioning for specific components or aspects of a product and you can write positioning that targets discrete users. Product marketing will typically write positioning for a launch of new functionality — along with core messaging, these are the basis of most marketing efforts. Put simply: You only have one product value proposition, but you could easily create multiple positioning documents over the lifetime of your product.
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What is a product value statement?
A product value statement encapsulates exactly what makes your product special. Once you have documented all of the customer challenges, how the product features solve those challenges, and the benefits the user gains from purchasing from your company, you can refine your list down to a sentence or two:
Company-led product value proposition: “[Company] helps [target audience] [solve X challenge] with [features offered].
Customer-led product value proposition: “[Target audience] use [features offered] to [solve problem] with [product name]”
For emerging companies that are not yet well-known (and where the product may have the same name as the company), it is typical to choose a company-led structure to help build awareness. For larger enterprises that may have a portfolio of many products across many customer segments, it is much more common to drop the company name and focus on the target audience.
Product value statement vs. mission
A mission statement encompasses everything the company stands for — the reason that it exists and what it hopes to achieve. A product value statement is specific to an individual product, of which a company may have many. Unlike a mission statement, a product value statement is typically internal only. This means that it is a reference guide available to functional teams who impact the success of a product (such as marketing, sales, and support) but is not communicated externally to customers.
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Product value statement vs. slogan or tagline
A product value statement deeply informs the creation of a product’s slogan or tagline. Marketing teams and external advertising agencies will rely on the product value statement along with a creative brief to conceive of an original and attention-grabbing slogan. This is because the product value statement conveys the full picture of why a customer would choose a product. However, that comprehensiveness is why a product value statement may be a few sentences — way too long for a tagline.
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Why measure product value?
You may have heard the phrase “what gets measured gets managed.” If you are able to define what value is then you will be able to estimate, measure, and increase your product’s value over time. This is the — assigning an initial value score pre-development then updating and tracking how that score changes through the development process, ultimately through to delivery. Once you have determined the value of your product you will be able to select metrics that can be used to track that value over time.
Related: How to measure product value?
If your team is still using static tools like spreadsheets to manage product work, it can be challenging to keep scores updated from version to version of your roadmap and backlog. That is why most modern product development teams rely on purpose-built software that includes dynamic value scoring functionality — you can track the initial value estimate all the way through and measure how it changes over time.