Value is the perception a person puts onto an item or service. The transaction requires a seller and a buyer. The seller often values his item or service at a level that gives him the return on his investment and effort he seeks. The buyer’s valuation is based on how well the item or service will solve his problem or meets his desire.
Sellers often add a percentage to the cost of producing their item or service. That defines the price of the item.
The buyers’ values will be all over the map. The range of values will often be from zero to a number higher than the seller’s cost-plus calculation.
I found the following on a page about Lean:
“Value is always defined by the customer’s needs for a specific product. For example:
- What is the timeline for manufacturing and delivery?
- What is the price point?
- What are other important requirements or expectations that must be met?
This information is vital for defining value.”
This definition does not consider customers’ varying needs and valuations. Managers need to know the needs and valuation ranges they should target. If a business sets a price, what part of the market will it forego?
Can a business sell to customers from all the available ranges? Do they even want to? They probably would like to address the complete range. It becomes essential that customers willing to pay higher prices are not tempted to buy at lower prices. Good market segmentation is essential.
Our business produced an identical product for all markets from consumer toys to aviation and military products. It met the highest specifications. Consumer product specifications were very low. Aviation and the military have the highest specs. Our product met all specifications. The value of our product was directly related to the market’s specifications.
Our problem was to have the right price for all available markets. We wanted to sell the product to the military (and all other segments) at the value they saw. We did not want all market buying at prices valid for toys. We also did not want to give up the toy market.
We needed a good way to segment the market.
What we did was guarantee the product. We guaranteed the military specifications to the military. We guaranteed nothing to the consumer market. We had different guarantees for the markets in between. It worked.
We were able to sell to all markets at significantly different prices. The higher price segments knew the consumer product was the same as theirs. For them the guarantee was essential. The onus for performance was on us and not on them.
The customers all got the value they perceived.
We were able to sell much more products all at a good margin. The consumer product had a small calculated profit margin. But it was sold at a price significantly above the materials cost. The gross margin all went to our profit since we needed no added equipment or personnel to produce and sell it.
It is important to look at the value of the product to the selling company AND its value to the buyer.
The Lean definition I found above is not enough. Good but not enough.
Have a look at Toyota cars. Do they segment their market? Do they segment within a brand e.g., within the Corolla or Lexus brands? How do the other auto brands approach segmentation?
How about food companies? Textile companies? How do their prices relate to the calculated cost of manufacture? What is the cost of a car?
A car costs all the materials that go into it. What about all the other costs of an automobile manufacturer? How do these and other companies determine prices? Is it by cost plus? Is it by the value markets put on them?
Levers for Profit and ROI 