The Hindu Business Line : The notion of value

The PRICE INCURRED IN REALITY varies depending on the product or service - if you include the real costs of searching, verifying and getting expert opinions before actually buying.

The notion of value is the fulcrum around which all of economics, and, therefore, business revolves. Since business is nothing if not delivering value to the customer, marketing too is focused on maximising value. Yes, value must be secured for all concerned, which seems an obvious commonplace, until you try to make it work.

There are two reasons for it: measuring value is very difficult to do in practice. Obviously, it is not the same as price paid for a product or service in rupees; yet it is inevitably used as a signal and a surrogate for value. And it is entirely a subjective matter, and is mostly in the eyes of the beholder.

Perceived value can be defined by those mathematically inclined as the difference between the price and the benefit experienced, or V = B - P. Products, compete not on the price tag but on the perceived value. Still, that doesn't help solve anything really until we appreciate that all three variables are in some sense a matter of feeling and perception - a fact of life which makes engineers and accountants very uncomfortable.

The price paid, for example, for a midsize car may seem reasonable and affordable to a senior manager, especially with access to easy credit, but it would appear out of reach of a self-employed insurance agent, with uneven flows of income, who might thus settle for a smaller car, even a used one. The price incurred in reality does vary depending on the product or service if you include the very real costs of searching, verifying and getting a number of expert opinions on the price and performance characteristics of the product in question before making the purchase.

All of these are real costs to the person who experiences them. The benefit too is a personal perception. It involves the extent and criticality of the need, the expectations, and the prior experience with the same or similar products and so on. All of us unconsciously apply the principle of opportunity cost too, when we debate within ourselves or with our spouses whether a purchase can wait until after our next holiday or the chances of the daughter's admission to a coveted course is known.

Our starting point of this handbook series was with the value chain idea but it did not take into consideration so many nuances in the concept of value that we have outlined briefly here. It has been the tradition with economists to assume much relevant reality by treating differentiation as incidental and price as the centre of the economic equation. Demand and supply alone were of consequence in arriving at the price in classical economics. It took someone like the famous Austrian economist Joseph Schumpeter to underline the importance of innovation as the powerful force behind the economic system both at the firm level and at the macro level. He showed creative destruction and breakthroughs made the customer experience a very different benefit and, therefore, a value compared to what was obtained earlier and it was this that justified the price premium charged by a new, modern product. In textbooks of economics, however, the very starting point was the market comprising innumerable buyers and sellers, none of who individually could affect the price.

Price discovery is the chief contribution of a fully informed market mechanism, which brings the eager buyer and reluctant seller (or vice versa) to the same table. One intriguing aspect of the value exchange process that is not sufficiently stressed in management courses even today is the role of marketing itself in making the consumer see greater value - usually through superlative customisation and service. Today, technology and the open standards approach have made all competitive advantage temporary. This makes it all the more essential for managers to think of the non-price elements of value and differentiation; this implies continuous creativity in business.

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