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Friday, 22 January 2010

Understanding Value Part 3

And if life cannot get more complicated, let's talk about expected and perceived value.

I use the example of buying mobile phones... don't you just love it when they ask you if you want 500 minutes and 500 texts or 1000 minutes, 100 texts etc. etc. etc. when you buy mobile phone packages..? Yes, OF COURSE I know how many I need. I know for certain I texted 236 times last month and can foresee needing to go up to 268 texts next month..! And why dont you ask me when I need to text as well? mmm... let's see... 215pm, 340p, 5pm and only on tuesdays and thursdays....

Get real... If I truly can predict this, I might as well predict the lottery. What I pay for is really the availability of use. The idea that IF I need it, it's available because NOT being available is a terrible thought and being availability at a more expensive rate is a slightly less terrible thought. Human beings seek to minimize costs (and maximize net value i.e. benefit minus costs) even if the benefit is in the future. So when we decide to BUY, ie. at point of contract, we weigh the EXPECTED VALUE in the future and decide how much to pay NOW. When we actually consume the service, we develop a PERCEPTION of the value and we compare that to what we expected when we purchased. And then evaluate if we want to renew the contract. Could there be a more efficient way of doing this? Of course! Mobile phone companies are hopelessly inept at designing contract mechanisms for information revelation. It's pay-as-you-go (prepaid) or contract (pay monthly)....there are so many ways they could increase revenue if they knew better how to incentivise segments to reveal their use patterns - in mathematical terms, we are no where near the pareto boundaries for the most efficient contract. Want to know what is a good pareto optimal pricing design? look at the oyster card and learn.....or read my book.


  1. Great post Irene! I just stumbled on your blog and have to say it's a great intro to the idea behind value and value creation.

    Management for the "shareholder value" - I was wondering what are your views on that? Perhaps an idea for another blog post? Especially in the light of the debate around the "MBA Oath" that sprung some time ago, for example here:

    Good luck and keep at it, I subscribed!


  2. Hi Wojtek
    Thanks for your comment and the link. It was amusing to watch! I think the world is getting a little more complex than merely shareholder value. I am constantly amazed that we are still in a cause-and-effect world where the presence of one stakeholder (e.g. shareholder) necessitates a complete exclusion of other stakeholders. That is just testimony of a lack of skill, technique or technology in dealing with complex systems. I'll be blogging on it next!