The Categories of Value

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What is the value of the above item to you?

What might be the value to other people?

I intend to dedicate a number of posts to Strategy, which I define as a plan to achieve more of the goal. In order to achieve our goal we need to deliver value, which is what causes clients to buy, and by that generates value to ourselves. The value to the clients has a major impact on the competitive status of the organization, and thus it has a major impact on Strategy.

Comment: My analysis of the riddle, and the good answers I have received, would appear during the weekend. You are invited to submit answers by August 7th. There is a certain relevancy of this post to the riddle.

I suggest recognizing three different categories of value. The importance of the categories is their different impact on marketing.

Category 1: answering a practical need.

I use Goldratt’s “The Six Questions for Assessing the Value of New Technology” to define a practical need: It eliminates, or reduces, a current limitation!

Goldratt referred to new technology, but I claim his logic can be applied also to products and services. The reduced limitation could be something small like: the size of the regular package is too small, forcing me to buy two. Another example could be that the product does not contain Gluten, which exists in other products and causes health problems. We can also recognize “being easy to purchase”, due to availability at the nearest store as answering a practical need.

Category 2: Radiating a certain status.

The idea is that by owning the product other people appreciate it and by that have an opinion on the owner, which is the essence of the value. Rolex watches, Porsche cars and Gucci suits yield status of being rich. Driving an old Volkswagen Beetle creates a different image that could be desirable in certain situations. We all wear clothes that we think radiate the right image of us. You could claim that creating status is, many times, a practical need. But, being an indirect kind of practical value makes it worthy to stand as a category of its own.

Organizations also try to radiate status through their offices, the design, the space and the decoration.

Category 3: Personal pleasure of any kind.

Art, esthetics, games, watching landscape – anything that we, human beings, like to enjoy. There is no practical need for those. A picture hanging on the wall at home does not eliminate any limitation. However, a picture, like many other things give us joy in a subjective way. The big difficulty is that forecasting the demand is problematic.

Many of things that give us pleasure were originally made for a need. A watch has a certain practical need, but most watches are not carried just to show the time.

The vast majority of B2B sales are based on practical needs of the client-organization. However, there is a twist when the product targets consumers for pleasure, but the client-organization buys them to make more profit, in other words, for practical need.

B2C can be based on any of the categories of value above. The full value could be a combination. Most food products are consumed for pleasure, but the basic need is there as well. Apple’s products have the rare characteristic of providing all three categories of value.

A characteristic of the third category of value is that the customer might already have many similar products and still wish for more! Books are an obvious example. This means the basic competition in this field is about delivering high value, no matter what the competition offers. Competition exists only because clients are limited by cash or time.

This is certainly not true for the practical-need products. If you have already a coffee-machine you don’t need another. Just to be clear on the practical need: the coffee itself might be just for pleasure; the coffee-machine removes the limitation of having to go out to a coffee-house. Thus, the machine itself yields practical need.

Can you comment whether you see a practical value in considering the categories of value when you struggle with key decisions for your organization?

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Published by

Eli Schragenheim

My love for challenges makes my life interesting. I'm concerned when I see organizations ignore uncertainty and I cannot understand people blindly following their leader.

4 thoughts on “The Categories of Value”

  1. The question of “what are the sources of value” was addressed by Larry Miles and others beginning in the 1950’s with the development of Value Engineering. [The University of Wisconsin-Madison has an excellent Center of Value Engineering, for those who wish to study this topic seriously.] To summarize a great deal of research in value analysis, there are four basic sources of value:
    1. solve a problem [of the customer]. When you reduce the frequency, duration, or impact of a problem (an undesirable current state, or effect). You create value. The most you can do is completely eliminate the problem.
    2. seize an opportunity [of the customer]. When you enable the customer to achieve what they want to do, their opportunity (a desired future state, or effect) — you deliver value. Note that they are currently NOT doing this opportunity, and that there may be no discernible upper bound on the value of achieving it.
    3. look good [in the eyes of someone the customer wants to impress]. So the value in this case is determined by the “reflection” of the impression made on those the customer wants to impress. If someone you value highly walks in, picks up the teapot above, and says, “When did you get this? I had no idea you had the eye (or the wallet) to acquire such a marvelous piece. May I examine it closely? This is amazing!” That’s big-time value for YOU.
    4. feel good [themselves]. None of your friends know or care anything about teapots or antiques — but YOU do. And when you see this special teapot you found years ago (after much research and hunting), when you reflect on who made it, it’s history, when you hold it close and note all the artistry that went into it — a smile comes to your face and you feel good deep inside.

    In Value Engineering (VE), you take different actions to analyze and engineer value for each of the four cases. Quality Function Deployment (QFD) builds upon this foundation, to assure the efficient delivery of value to targeted customers.

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  2. GOOD, I have been talking in the last three years on the categories of value asking my listeners whether they know of such categories. Thank you Richard for bringing that up.

    The comparisons between the four sources and my own three categories is easy and straight-forward. My first category, practical need, meaning eliminating or reducing a current limitation is EXACTLY the combination of the first two sources. The third source is EXACTLY my category of Status, and the fourth is EXACTLY my category of Pleasure.

    Is the difference between solving a problem and offering an opportunity a helpful distinction? I find Goldratt’s definition of practical need as overcoming a limitation very helpful. What could be beneficial is to distinguish between a practical need that the client is well aware of and a need that the client is NOT currently aware of. I admit that I missed recognizing the huge value of text messages, SMS, when it was invented for cell phones. Now I understand.

    Value Engineering is a very poor name. Part of the problem of the academia failing to truly impact management is not being able to market their ideas and not fully understand who is making the decisions. The academia and, to my mind, QFD, don’t really know how to focus on the ONE, certainly very few, elements that truly yield the vast majority of the value.

    Engineering is not the right function to truly assess the value to customers and certainly not how to radiate the value to the customers. It has to be Marketing, and if marketing is not active than Sales has to do this. They understand the meaning of the specific market-segment and what pain (in the case of practical needs) the customer feels now.

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  3. A problem is a current undesirable state (regardless whether it is a limitation, or not). [The customer is not interested whether their problem is caused by a limitation — but the solution provider may be interested.] An opportunity is a desired future state (a benefit). Either can be known, or unknown, to a given customer segment (persona, avatar, etc.). There is a significant difference between the two, as research by Noriaki Kano showed over twenty years ago, in terms of impact on customers. Focusing just on problems, or even more narrowly on limitations, is an unnecessarily restricted view of what customers find valuable. For a decisive competitive edge with clearly superior products, shouldn’t we be open to taking full advantage of ALL possibilities for delivering value to customers? [Even if we have to expand our thinking outside of the traditional ToC box?]

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