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Friday, 2 July 2010

Value-in-use and exchange value

I've been meaning to blog about this for some time now because I get asked this question a lot. What's the relationship between value-in-use and exchange value? Everyone is talking about value co-creation but what about price (exchange value)?

I think maybe because I've actually written an entire book on pricing of services that I seem to get asked about this. Rather than say 'well, I'm covering that in my second edition which is coming out next year', I thought I'll blog about it. Much of it I've already covered in the book although I don't explicitly use exchange value and value-in-use (I will in the next edition).

Service dominant logic and many of the gurus in management have been talking a lot about value co-creation right? that it's experiential, phenomenologically derived and co-created between the individual and the firm either directly through activities and interactions or indirectly through a good, or an item purchased from the firm. I give quite a number of examples of this on the lecture circuit, as well as the potential opportunities for innovation surrounding this concept. So value-in-use is the value in context, experienced by the customer. However, this often happens after purchase, or at least, after the contract to purchase. That means there is a separation of time between purchase and the experience. This happens whether you buy a phone, beer, TV, stay in a hotel or go to the gym. At the time of purchase, you haven't experienced it yet. You may not have any idea what that experience might be like,..... but you are asked to buy. at a certain price.

So..... at a certain price or exchange value, the firm is asking the customer to do a few things at the point of purchase.

First, the firm is asking the customer to imagine what the co-creation experience might be like. That's uncertainty no. 1 for the firm in pricing - I call this the uncertainty from a lack of imagination (economists call it bounded rationality see Herb Simon). Example: If you're trying to sell a concert ticket, your customer will not pay if he has no imagination for what it might be. £100 an hour is now worth... maybe £50 because of your customer's lack of imagination? ouch..

If this is his/her repeat purchase, it's a lot easier BUT the context of experience might still change. That means the context/state of the experience may still change even on repeat purchase. I call this the uncertainty of context. Example: your concert is perfectly well imagined BUT your customer doesn't think the weather is going to be good. A discount of £70 to persuade him/her? more ouch..

Also, the value from the experience is co-created - meaning it depends on the resources of the firm in its proposition, but also the resources accessible to the individual to co-create that value. This is the uncertainty of resources. Example: Your customer has a great imagination and the weather will be good BUT he thinks he may not have time on that day. £100 an hour is now worth £30 or less? even more ouch...

Finally, the fourth uncertainty - that of the uncertainty from cognitive discounting. Remember that exchange value (price) is at the point of purchase and value-in-use is at the point of experience? And that there is a separation of time? Well, finance people are well acquainted with the notion net present value and cognitive discount is principally the same. We discount the value of the future value in different ways. The gradient of the discount changes for different people - those who are more risk averse may discount more, the income effect (how expensive is it) may change that gradient as well. I actually mathematically modeled spot and advance prices in a paper last year where I investigated capacity effects of the firm as well and the role of refunds. (click here for it).

These four uncertainties contribute to a valuation risk at the point of purchase - meaning that the person's idea of value-in-context or value-in-use will not just be what is promised by the firm (through advertising and promotion) but contributed by all these four uncertainties i.e. exchange value carries the risk from these four uncertainties inherent in value-in-use.

Often, the firm only like to promise what they can deliver - which usually mitigates the uncertainty of firm's resources in co-creation for the customer. There are a few more uncertainties in there though - mostly from the customer side. And firms wonder why they can't get the price they want.

All that said, exchange value (price) bears very little resemblance to value-in-use after all that. In layman terms, from a value and value co-creation perspective, don't think your price is necessary a good reflection of your offering.



6 comments:

  1. @ireneclng I like the four uncertainties in value/pricing that you list. As parties negotiate through the uncertainties, they gradually converge to reach commitments (following the language-action perspective.

    In his Adaptive Enterprise work, Steve Haeckel used to prescribe authenticity for business executives, as (i)say what you mean, (ii) mean what you say, and (iii) know what you mean. This third "know what you mean" can be a challenge, as you describe the uncertainties, because commitments are made on a current state of knowledge. The question of relationship between parties comes up when an unforeseen event occurs, and parties return to revisit their commitments in a new light.

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  2. Great article. I will post a response on my site at some point, but you've got a great model that - with tweaks - could be really strong for companies seeking innovative experience design to build more "certainty" into the customer's experience - and therefore more value in the interaction and value creating moments.

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  3. Great blog Irene! I like your classification of the 4 uncertainties. They certainly apply well to the higher education purchase decision and pricing which is what is interesting me at the moment - plenty of 'uncertainty of cognitive discounting' there and a great example of value co-creation (particularly when increasingly it's viewed as a simple instrumental transaction by today's consumer-driven student cutomers!)

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  4. Just love your thinking here. really very interesting way of approaching the problem. For kicks, let me add two more: dynamism. The state of each uncertainty is either stable, decreasing in uncertainty, or increasing in uncertainty. Ambiguity. Sometimes the outcomes are not uncertain, they are ambiguous.

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  5. A wise man once told me that "money may have use-value across infinite contexts, but there are also plenty of contexts in which the use-value of money falls to zero." This is why we need to increase our leverage to maximize and use our set of skills, so that we can practice it in marketing campaigns. Like investing for a POP sign products, that will do. That is surely worth the penny.

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