Saving Customers Money Is Good. Creating Value For Them Is Better.

I received an insightful comment on my posting, “The Hidden Truth About Creating Value.” The reader took issue with my definition that value, in business, can only be defined as creating something that customers are willing to pay a premium for. Here is what he said:

I am currently in the process of building my own company and I will be not only providing a greater value for my American customers [he is international], but I'll be doing it at a lower price. What I'm doing is truly creative destruction, so perhaps that should be added as the 'exception to the rule' of your value 'definition'. Otherwise, I'd be inclined to agree with it.

His comment brought to my attention a clarification I need to make in my definition of value. For more details on this, read this article. ‘Paying more’ is more about margins more than it is about price. For example, Wal-Mart sells things for more (even though their customers pay less there than at many of their competitors). Wal-Mart is capturing more profit per transaction than their competitors. Therefore they are creating value.

There is a critical point for any business to understand about this issue. The comment and clarification deal with fundamental value buyers. Fundamental value buyers only see value from within the offering. A company selling to these buyers would not call itself a ‘value-added’ provider. The focus is on removing costs and passing a portion of the savings to its customers (the rest of the savings is left to add to the margins).

The definition of value from my previous post is directed toward company’s that sell to total value buyers; for companies who claim to ‘create value’ for their customers. The advantage of this approach is that the upside is unlimited and it allows for more innovation. As Thomas Freidman, noted New York Times columnist likes to say:

“A commodity is any good, service or process that can be produced by any number of firms and the only distinguishing feature between these firms is who can do it cheapest. Having your product or service turned into a commodity is no fun, because it means your profit margins will become razor thin, you will have dozens of competitors and all you can do is every day make that product or service cheaper and sell more of it than the next guy, or die.”

Thanks for pointing out the inconsistency. As always, please feel free to e-mail me your comments.

Until next time, Doug