The Value Equation is a formula which guides ALL purchasing behavior. Every customer purchases or does not purchase a product or service based on the following equation:
VALUE = Benefit – Cost
Value being defined as that which determines if a purchase is “worth it.” For example, if you go into a consumer electronics store to buy a TV and the price is $800, you may decide not to buy it because at $800 it is not “worth it.” However, when the salesperson offers you a $300 off coupon, you decide that at $500 ($800 – $300 coupon) it is now “worth it” and you purchase the TV. The TV did not change! The Value of the TV went up because the price or cost went down. Here is the example in equation format:
You decide the Benefit of this particular TV is 700. Therefore the Value of the TV is negative (i.e. 700-800= – 100). However, when the price drops to $500 the Value increases to 200 (700-500= 200). In other words the higher the Value the more likely the customer will buy what is being sold. This should not be a surprise since we all want things that are VALUABLE and by definition Valuable means the product or service has high Value. So, if you want to have a customer buy what you are selling you just need to increase the Value. Which brings us back to our equation:
Value = Benefit – Cost
Cost is the price – the Transactional aspects
Benefit is what the customer personally receives as a result of doing business with you. These are the Experiential aspects.
Value is the likelihood of the customer doing business with you. The higher the Value, the more likely he or she will do business with you.
Once again, the higher the value the more likely your customer will do business with you. You can increase value by either increasing benefits or decreasing cost or a combination of both. For example, consumer electronics companies use a combination of lower cost and high benefit to build value. This combination takes place over time. When flat screen televisions were introduced, the quality of the picture was superior to traditional televisions. In other words, the benefits of the flat screen TV were high. However, so was the price or cost. Therefore, the value was not very high. Eventually, as with all technology, the cost came down and the benefit stayed high which increased the value so much that the only televisions that are currently for sale are flat screen.
Since I am sure you want to remain or become profitable, you only have two choices as it relates to the Value Equation. First, you can increase the benefits of your products or services. Keep in mind, creating a great experience (as opposed to a transaction) for your customer will increase the benefit as will making your product better. Second, you can improve the efficiency and productivity of your company which can reduce your business’ cost structure allowing you to reduce your price (thereby increasing value) while also remaining profitable. The worst action you can take is to just reduce your price without first reducing your cost structure. This will increase value, but will put you out of business as you lose money.