The Concept of Value
The concept of value is ever-present in the minds of most consumers. Such phrases as “value for the money,” “best value,” and “you get what you pay for,” are fairly commonplace. The word value is used in a variety of ways by customers and has a number of interpretations.
An important study on the relationship between price and perceived value. Buyers have at least four different definitions of value.
Value is low price.
Some buyers use the word value to refer to situations where they simply pay a relatively low price, such as when an item is on sale. The focus here is purely on what is given up monetarily. When a product is sold at a specialty reduced price, such as at an inventory clearance, or when a customer receives a discount for using a coupon or takes advantage of a one-time rebate, there is a sense of getting value.
Value is getting what I want in a product.
Other buyers look at value in terms of the benefits they receive from the item. They focus on their own subjective estimate of the usefulness or amount of need satisfaction resulting from the purchase. Buyers typically enter into a purchase decision process with specific choice criteria in mind. The extent to which they perceive that a product performs well on those criteria is one way in which value is defined.
Value is the quality I get for the price I pay.
An alternative approach is to view value as perceived quality received from a purchase divided by the price paid. The buyer’s focus is affordable quality. The best value is not the highest-quality item or the lowest-priced item. Instead, quality is divided by price for each available alternative, and the one producing the highest quotient represents the best value. Such calculations may not be very precise, as quality is subjectively estimated in the mind of the customer.
Value is what I get for what I give.
A final perspective is to approach value as a trade-off between what a buyer is going to receive from the purchase and what a buyer is required to give up. The best value is the one that provides the most benefit (in terms of the customer’s desired set of attributes) for the least price. The buyer has a set of attributes which vary in terms of their relative importance. A product is evaluated on these attributes. The result is divided by the price of the product to produce an indicator of value.
Given these different perspectives, we can conclude that value roughly represents a buyer’s overall evaluation of the utility of a product based on perceptions of the net benefits received and what must be given up. From this point of view, what must be given up includes not only the monetary price, but also the time and effort that the buyer must invest. Superior value issues from either offering customers lower prices than competitors for equivalent benefits or providing unique product benefits that more than compensate customers for paying a higher price. Creating and sustaining superior value is crucial for establishing competitive advantage.
Prices actually serve a dual purpose when it comes to value. The amount that a company charges is both a determinant and a reflection of the amount of value a buyer receives. Price determines value because the customer is comparing the benefits gained to the price given up (e.g., value for the money). Price also reflects or is a statement of value in that higher (or lower) prices should correspond with more (or less) valuable benefit packages
Value is Perceptual
A common mistake made by managers is to confuse actual and perceived value. Actual value implies some standardised, objective means of determining that product A offers more value than does product B. This requires objective measures of product performance, product quality, service levels, and any other attributes and benefits. Even if such measures exist, they are not necessarily relied upon by customers. Rather, customers develop their own judgements based on any number of considerations. So even if hard data is available from an independent source that “proves” that Able Company is providing better customer service on its computers than is Baker Company, this can be meaningless. If customers perceive that Baker offers the better service, regardless of why they hold this perception, then Baker does in fact offer better service.
Groocock (1986, p. 42) explained the perceptual nature of value in more definitive terms: “Product value, like product quality, has no clear meaning except in terms of the needs of particular customers. At one extreme, when we say an item has only sentimental value, we mean that it has value to only one or two people. At the other extreme, when we talk about the intrinsic value of an item, we mean that it has at least some minimum value to a very large number of people; we do not mean that it has some value entirely divorced from people.”
The reason managers often miss this point is that they are too close to their products. They are intimately familiar with their own production, distribution, and service operations. Not only are managers apt to be biased regarding the performance of their own products or services, but they place undue weight on any tangible evidence of superiority, such as conformance to technical specifications. Further, they assume customers have all the facts and make rational judgements.
Buyers can encounter considerable difficulty when trying to assess value.
This difficulty may be attributable to the complexity of the product, time constraints, the lack of available substitutes, and market inefficiencies. Further, buyers do not have perfect or complete information, and they ignore and distort much of the available information. Their judgements are often biased and emotional. In addition, customers are usually looking at a combination of factors when judging value, some of which may be different from the factors considered important by managers.
Moreover, to the extent that perception of value is partially determined by price, it is important to note that price is also perceptual. The actual price of a product may differ from the price customers associate with the product. This is because customers often do not pay attention to, or remember, actual prices. Prices are registered in their minds in ways that are easy to remember. They round prices off, recall a range of prices they may have paid over time, remember a price some friend or associate claims to have recently paid, or think in volume terms, such as the price of a dozen units of some item. For many purchases, the customer may recall the price as being nothing more than “fairly cheap” or “pretty expensive.”
Sources of Value
The difficulties that arise when trying to assess value are significant but manageable. Such problems can be simplified by first developing a better understanding of the sources of value. In general terms, value has two basic sources. These are called “value in use” and “value in exchange”
Value in use is concerned with a customer’s subjective estimate of a product’s ability to satisfy a set of goals. It is the estimated gain, satisfaction, or return the buyer believes he or she will receive from an item. The use value of a product is determined by a number of factors, the most important of which tend to be the nature and extent of the buyer’s needs in a particular product area, the buyer’s awareness of available substitutes, and the buyer’s evaluation of the product itself on key attributes.
Value in exchange is an objective statement of value that is determined in the open, competitive marketplace. Based on freely interacting sources of supply and demand, a market price is established for most commodities. The market price becomes a statement of exchange value. The value of a product at any point in time is determined by the willingness and ability of a set of customers to buy and the willingness and ability of a set of suppliers to sell. This value can be distorted, however, when the market operates inefficiently. In the absence of sufficient competition, or where regulatory constraints exist, the company may be charging a price which is not reflective of its true market value.
How to Manage Value. Focusing Internally
Regardless of the product in question, companies must carefully manage value to gain maximum competitive advantage. These managerial efforts should focus on both actual and perceived value. Actual value involves concentrating on internal company operations, while perceived value requires efforts directed toward customers.
A useful tool for explaining how companies create value is called the value chain (Porter, 1985). The value chain is based on the principle that value comes from many different places within a company and virtually everyone in the firm has a role to play. So the company is broken down into strategically relevant activities that represent sources of value. The basic components of the value chain are (a) value creating activities and (b) margin.
Value creating activities are subdivided into primary and support activities. Primary activities are those involved in the physical assembly of the product and its subsequent sale and transfer to the buyer as well as any post sale assistance. These are grouped into inbound logistics, operations, outbound logistics, marketing/sales, and service. Support activities provide the supplementary support that enables the primary activities to be accomplished successfully.
These include procurement, (e.g., purchasing of all types of inputs), technology development (e.g., methods for improving products and processes), human resource management (e.g., recruiting, training, evaluating), and the firm’s infrastructure (e.g., general overhead). Support activities overlap with primary activities. For instance, procurement overlaps with operations in that the purchasing department buys raw materials and component parts that enable operations to accomplish the production job. Procurement also purchases advertising and marketing research services, which facilitate the ability of those in marketing to do their job. The exception is the firm’s infrastructure. This includes general management, planning, finance, accounting, legal, and government regulation-related activities, each of which supports all of the other functions within the firm. The end result is a matrix of the potential sources of customer value.
Each cell in the matrix can be further broken down into direct, indirect, and quality assurance activities. Direct activities are those that actually involve creating activities for the buyer (e.g., product assembly, sales force activities) while indirect activities make it possible for direct activities to function on an ongoing basis (e.g., equipment maintenance, sales force training). Quality assurance activities ensure the quality of direct and indirect activities (inspecting, monitoring).
Everything a firm does should be captured in a primary or support activity. By taking the time to look at the company from a value chain perspective, the manager is in a better position to determine:
• What are the potential sources of value in my firm?
• Which departments or functional areas should be held accountable for creating value in each of the value chain categories?
• To what extent are the value-creating activities of functional areas co-ordinated and integrated in a systematic fashion?
• What value-creating opportunities are we missing?
The value chain approach gets everyone in the firm thinking about end users and how their own jobs impact upon the value delivered to the customer. People are rewarded and evaluated not based simply on their functional area efficiency, but instead on their value-creation effectiveness.
Viewed in this manner, the firm may discover significant value opportunities that are underdeveloped and that can serve as a source of market differentiation. An example might be the ability to better utilise computer technology in outbound logistics to improve order accuracy or delivery times. Further, management may identify inconsistencies and conflicts in the activities of various parts of the firm that are undermining the ability to maintain competitive advantage in the marketplace. For instance, the raw materials being purchased for production may be of a higher quality than necessary given that the marketing department is trying to position the company as medium quality and medium priced in its promotional efforts.
How to Manage Value. The Customer Focus
Companies must not only systematically manage their value chains, they must also take responsibility for managing the value perceptions of buyers. That is, the superior value created by the firm must also be recognised by customers. All too often, value is present without ever being perceived. The market-oriented firm is in a position to influence both the value in use perceptions of customers and value in exchange.
Customers typically purchase many different products, and rarely familiarise themselves with all the precise details of each item’s design, production, delivery, and after-sale support. Instead, their value judgements are strongly influenced by an evaluation of basic product attributes, such as weight, size, or convenience. These judgements can also be significantly affected by packaging, advertising, sales and service personnel, the sales environment, brand names, price promotions, product literature, and a variety of other vehicles under management’s control.
Subjective estimates of value are additionally affected by the magnitude and urgency of the customer’s needs. Buyers with very strong needs for a particular product are likely to rate the expected benefits quite high, while giving less scrutiny to the price which must be paid.
Similarly, a 10 percent price reduction may contribute very little to value perceptions when the customer has less need for an item. Efforts directed at heightening the customer’s sense of need for a particular product represent another means of influencing value perceptions.
Another avenue of attack is to influence how the customer evaluates a product relative to available substitutes. When the firm is able to convince customers that there are no acceptable substitutes for a particular item, value perceptions are enhanced.
While more difficult than influencing value in use, firms are sometimes able to affect value in exchange. This requires an ability to manipulate market conditions. For instance, by constraining the available amount of supply or attracting a significant number of new buyers to the market, the firm can drive up exchange values.
While this article has attempted to provide a range of different ways in which customer value perceptions can be managed, the possibilities are virtually limitless. The only real constraint is the manager’s own creativity. Value perceptions should be proactively managed, with pricing programs built around customer value. Otherwise, the firm is taking the chance that buyers will make accurate value judgements of their own.
Dr Brian Monger is Executive Director of MAANZ International and an internationally known consultant with over 45 years of experience assisting both large and small companies with their projects. He is a specialist in negotiation and behaviour He is also a highly effective and experienced trainer and educator
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