Sources of business value. What are they?

I meet lots of business owners, often at networking events. When I tell them that I help businesses create, validate then communicate their real value, I quite often a slightly quizzical look. Many business people intuitively understand the need for a great value proposition, but too often it’s put in the ‘too difficult’ file. Value is worth something, surely?

To me, the starting point is to understand what value really means and the sources of ‘value’ you can offer a prospect or customer.

Michael Porter of Harvard Business School [1], says value is the “price someone is willing to pay”; others that it’s a simple return on investment equation of benefit minus cost; Malcolm McDonald of Cranfield Business School [2] says that value can be stated “as a source of impact on the customers’ business, less the total cost of ownership”.
All are right.

Value, like beauty, is in the eye of the beholder. You need to work with your customers to understand what they value so you can match what you’re selling… to what they want to buy.

Most commentators agree that there are several different types of value and they are all inter-related. I’ve found the five sources of value, in the book Value-ology [3], make the most sense to me.

  1. Economic Value
  2. Perceived Value
  3. Relational Value
  4. Experiential Value
  5. Social Value

Here’s my take on them.

1. Economic Value

Economic Value often concerns the cost of a transaction. It’s generally what most people think of when discussing value. Something is usually considered better value if it is cheaper than something similar. However, Economic Value can be broader than that; it’s also an economic term that means the amount of money a company will make or save by using the product over a more extended period of time. Economic Value could also benefit any part of the value chain such as sales and marketing, operations, logistics, customer service post-sales support. Remember, purchasers will often pay more if you’re offering something unique or can demonstrate a fantastic return on investment.

2. Perceived Value

Have you ever wondered why people spend millions of pounds on a painting at Sotheby’s when it only cost a few hundred pounds to create? Why they buy a top of the range BMW, not a Ford Focus, when the core purpose of a car is to move from point A to point B?

It’s because buyers are often looking at the perceived usefulness of a product or the boost in their self-esteem that they got from purchasing it… and then showing it off to their friends. As another example, my mother once bought a car simply because it had heated seats! Make of car, colour or safety features didn’t matter… it had to have heated seats.

This sense of status and need to boost self-esteem also works in business to business as well. As was often said in the 1990s, ‘nobody got sacked for buying IBM’.

Buying the right brand is sometimes really important to us individually even though financially, it might not make logical sense. Why? Well, to paraphrase the famous singer, Rag ‘n Bone Man – “we’re only human after all”.

3. Relational Value

Relational Value is particularly important with repeat purchases and in business to business activities. This is where the relationship itself adds value to the customer so you can now offer services that complement your core proposition. A great example of this is co-creation where the supplier and customer work together to create an offer that adds value to the customer’s business at a price they are willing to pay. This is where being an expert could be useful or providing new ideas, contacts or advice as part of your professional expertise.

4. Experiential Value

The fourth type of value is gained from the whole experience with the supplier. It could include how nice, helpful and supportive you are.

Do your staff answer the phone politely, return calls promptly or spell check their emails. You may have even heard the apocryphal story about a CEO checking out the toilets provided to visitors to see how clean they were, as part of his due diligence on a potential partner. He wanted to check out the customer experience himself.

5. Social Value

The final type of value, and probably less well known, is social value. This is where corporate and social responsibility is important and showing that you are giving back to your community in a positive way. It’s saying your business isn’t just about profit anymore; its purpose is equally, if not more, essential.

How do you validate your value proposition?

Ok; that’s what value is… however, in reality, value is what your customer says it is. So, how do you find out what they value about your business? Well, why not set up a ‘value conversation’ with your closest customers.

Let’s be real. Having a value conversation is not easy, but it is so useful. One idea is always to ask your customers why they bought from you WHEN they have just signed the contract. At this point, your customers will want to share their thoughts with you, as they often want to justify their decisions to themselves. Please don’t assume they bought what you think you sold them; they may have purchased from you for reasons you have no idea about!

 Ask them what they valued and why? If they say, “well I bought you personally”, ask them what that really means. Any insight is useful, even if it’s just to reinforce your own thoughts… but they might identify something you didn’t fully know about or fully appreciate.

Communicate your value

Finally, communicate your value. The purpose of your business is to solve or fulfil other people’s problems or needs.

Don’t just say you’re the best company in your field, explain how your products and services have helped your customers to become more effective and more efficient as well as saving them time to do other things like create new products or enter new markets. Do that consistently over and over again, and you’ll be communicating your true value.

So, there you have it.

  • You need to create value to stand out in today’s marketplace. Value can be economical, perceived, relational, experiential and social
  • You need to validate your value proposition regularly as your customers decide what value you offer, not you
  • You need to communicate your value because if you do, it is likely you will grow more quickly and more profitability.

Delivering real value is the holy grail - create it, validate it and communicate it. 

[1]   Competitive Strategy: Techniques for analysing industries and competitors ~ Michael Porter, Harvard Business School

[2]   On Value Propositions: Malcolm McDonald, Cranfield Business School and Grant Oliver

[3].   Value-ology by Simon Kelly, Paul Johnston and Stacey Danheiser