When shopping, do you always pick the cheapest alternative? Most of us would say no. When making a purchase for your organization, do you always pick the cheapest alternative? Again, most of us say no.
How then, do we choose? Typically, people pick the option they think will give “The biggest bang for the buck.” Or in other words, we choose the product or service believed to bring the greatest value. In the abstract, value is what remains after one subtracts the sacrifices you must make to obtain and use the item from the benefits you think you’ll get by having the item. I believe that if you understand the component parts of benefits and sacrifices, you can see how your organization currently creates value and you can see missed opportunities to create value. In the end, this should give you the chance to increase value, which in turn should increase the attractiveness of your offering and ultimately make your revenues go up.
Benefits come in three basic types: product, service, and brand. “Product benefit” means the function a good or a service brings; it’s what you’re offering customers. For example, if you have a custodial service business, your product is a clean workplace, and a clean workplace is worth something to your customers. “Service benefits” refers to accompanying services; ones that assist the buyer in using your offering. So, service benefits might come from a telephone help line, or maybe from the self-help section on your website. Finally, “brand” benefits are those intangible positives associated with certain brand images. Prestigious brands may enhance one’s self-image to that person’s benefit.
Sacrifices are of six general types: price paid, acquisition costs, usage costs, ownership costs, maintenance costs, and disposal costs. Often, suppliers are very fixated on their list price, aka price paid, sometimes to the exclusion of anything else. Yet buyers may be considering some of the other costs. I find myself thinking sometimes, “I’m never going back there. That salesperson is just too difficult to deal with.” That’s an indication that the acquisition costs are too high. I place a high enough cost on dealing with the unruly salesperson that the benefits are unable to offset it and so I take my business elsewhere.
Managers are therefore encouraged to examine their offerings in light of the three types of benefits and six types of costs. Perhaps obviously, organizations sometimes identify areas where their organization can increase value by finding new benefits to provide. Perhaps less obviously, sometimes organizations find they are inadvertently creating costs, other than price paid, for their customers and a simple fix to the ordering system, might for example, cost very little but create a large increase in value for your customers. Work both variables: benefits and costs.
Kirk Smith, PhD
Associate Dean Graduate Studies
College of Business and Economics
Boise State University
February 2009
