1.4 Value Creation

Have you ever stopped to think about what a company is actually selling? Sure it's the products and services, but what is it about those products or services that make people want to buy them? Is it quality? Most of us have eaten at McDonald's. In fact, McDonald's boasts billions and billions served. Is McDonald's food quality food? No. You buy McDonald's because it is fast and cheap. What is attractive about a Mercedes automobile or a Nike tennis shoe? Image. How about an iPod? What makes it attractive? Instant take-anywhere music.

In order for an organization to sell anything, it must create value for the customer. The value of McDonald's food is that one can get food fast and go about his business. The value in a Mercedes automobile is the cool feeling you have driving it. But you can get from point A to point B in any brand of vehicle. And if you don't have a lot of money you are less concerned about image and more concerned about getting to where you need to go. Maybe a good reliable low-price car is what creates value for you. A manager needs to understand the value that their organization creates for the customer and recognize that that value often changes. But what exactly is value and how is it created for the customer? The following is an example. Many people like cold cereal and milk for breakfast in the morning. Have you ever considered the value of milk? You don't think twice about it. Depending on where you live, the current price of milk at the grocery store is between two and three dollars a gallon. But how much would you be willing to pay to have your cereal in the morning? What if you couldn't get milk in the grocery store? What is the alternative? Well, ultimately, it would be to buy a cow, have enough land to graze that cow, and then milk it twice a day. With that scenario in mind, two to three dollars a gallon seems a pretty good deal. Given the alternative, if one really wanted milk, paying five to ten dollars a gallon may be a better alternative than herding a cow. So, milk producers have created a real value for milk consumers. They have literally alleviated the pain of a consumer having to maintain his or her own cow. The value created is the value in the eyes of the consumer. A product or service must always be priced less than the perceived value to the consumer. Then that price (with its corresponding volume) must cover all costs and provide a return on investment. A manager needs to understand what value their organization creates for their consumers.