What is value?

S. Ram Kumar

Theoretically

I Total customer costs are

1. Monetary cost – The $ amount spent.

Eg: A particular model of a car costs US$ 100,000

2. Time cost – The amount of time a customer has to invest in

understanding, sourcing, acquiring the product/service Eg:
Buying a car involves a significant amount of time in
information search, comparison of brands and offerings for
the car, insurance, extended warranty, registration etc

3. Physical cost/energy cost - The sheer physical cost incurred

in pre-purchase, purchase, use and disposal.
Eg: To by a car you would visit various dealerships, go for
test drives and so on.

4. Psychic cost - The ‘mind’ aspects involved

Eg: Will the car work, will it suit your status, will it be
economical to repair, is the dealer trustworthy? Is the car
worth it at all?

II. Total Customer Gains are:

1. Product Gain - what the product does.

Eg: headache pill banishes headache, cockroach spray kills
roaches.
2. Service Gains - Customer education, demonstration, repair,
maintenance, warranty, guarantee.
Eg: Sonim Cell Phones have an unconditional three years
warranty !!!! In India, a Maruti can be repaired at thousands
of locations

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 3. Personnel gains - Staff, phone desks, helplines etc.
Eg: TATA companies worldwide benefit from the integrity of
their staff. Singapore airlines is personified by the ‘Singapore
Girl’ who will go to extraordinary lengths to make sure the
passengers are comfortable.

4. Image Gains - Brand value, status, pride of ownership,

ingredient brand. This may consist of two facets; how you
feel when you experience the product and people’s
perception of you when you use a certain product
Eg: Though both offer transport from A to B, one would
rather buy a Mercedes than a Proton.

III. The sum total of the costs and Gains determines customer decisions.

A. If the costs are more than gains = no purchase

COSTS > GAINS ------- No Purchase

B. If gains are more than costs = Purchase

COSTS < GAINS ------- Purchase

C. Gains=Costs then indifference

COSTS = GAINS ------- Indifference

Components of value:

The main costs and gains above are broad areas. Customer-specific
vectors could include myriad choices; cost of product, installation, service,
maintenance, use, disposal, short- and long-run costs, delivery, packaging,
ergonomics, style, design, weight, size, reliability, reparability, resale ……
a truly endless list

Note to engineers and those with a technical background:

© 2014, Last Resort, (www.luckfogic.com) S. Ram Kumar, All rights reserved

Engineers / people with a technical background need to be convinced that
ALL the above arguments and examples hold for engineering, technical,
and industrial goods. The table below should drive home this point.

If you thought that Applied only to Think again !!

consumer products
like

Design clothes Jaws of Life an

industrial tool for
emergency rescue

Color cars Industrial roofing

Compact size Cell phones Solsons tools

Lifestyle Exercise equipment Green buildings/power

Ingredient branding Laptop computers – Nynex-fire resistant

Intel inside fabric

Weight suitcases Sidearms for the

military

Low-noise Stereo equipment Wide bodied passenger

aircraft

Reparability air conditioners Heidelberg – printing

presses

After sales service refrigerators Heavy earth moving

equipment.

Creating, Communicating, and Delivering value

CREATING VALUE:

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A set of values – for different customers is created by the firm.
An iPod is, for different customers, a music player, music on the go, music
warehousing, external Hard Drive, style statement, belongingness to a
group, a way of creating a personal bubble, entertainment
The B-52 Boeing Stratofortress with its eight engines is a Strategic
Command Centre or a super heavy bomber, a communications centre, or
an amazing workhorse - since it can be aerially refueled and can work on
just 4 engines at a time; it can fly for months on end!!!!!!
COMMUNICATING VALUE:
Once value is created it has to be communicated using diverse message
strategies across diverse media.
DELIVERING VALUE:
After being communicated it has to be delivered to customers.
E.g.: Toyota creates value - utter reliability. This is communicated using TV,
Print, Internet, Kiosks, Dealers, Demonstrations, Road Shows, Tradeshows
etc etc. This is then delivered to customers as a Toyota Hi-Lux. Customers
who would find value in a large-load capacity, reliable, pick-up truck would
be construction crews, maintenance staff, armed forces, law enforcement
etc. Thus value is created, communicated and delivered.
CAPTURING VALUE
After creating, communicating and delivering value the firm needs to
CAPTURE value in the form of profits. Remember the first page - customer
gains and costs are related.
 Customer wants maximum gain for no cost
 The firm wants maximum cost (price) for no gain (to customer)
 At equilibrium, firm gains profits and customers gain value
Therefore once value has been created, communicated, and delivered it
needs to be sustained. The Firm needs to focus on managing this process
to maximize profits for the value it has delivered to the customer.
Customer Lifetime Value

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CLV = Actual Value + Potential Value
Where
Actual value is customer’s current and future value if current level of
business is maintained over time
Potential value is the measure of unrealized opportunity.

This can be measured in terms of:

Value
Profitability
Volume
Cross selling
Upselling
Referrals etc etc

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