Product pricing Cost Recovery or Value to the Buyer

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This is a second part to my Blog on the difference between cost and value, in the first part I was arguing that in fact Business and IT has moved beyond arguments on ‘alignment’, and in fact is now totally converged. The converged situation presents the opportunity to rethink the entire design of processes in a radical manner. We can now abandon the current designs which were established in a paper age, and then computerised as a method of cutting operating cost. The value element comes from turning the process around to focus on how to create extra revenues in the market place.

This leads neatly to the title of this piece and to the work on Value Networks, definable as ecosystems that create value through the improved abilities of individuals and organisations to work together. Value Networks are in themselves a good example of a totally converged business and technology model as they are being developed by a mixture of Business with Business Schools and Technology vendors with Implementers.

The classic definition on product value and cost seems to be clear though a more thoughtful comment moving to focus on value comes from the 37Signals blog.This is closer to what I really want to consider in depth in our new converged Business and Technology world. Something I started to do in my recent Blog on RadioHead giving away their new CD on line, though actually they didn’t give it away, they asked people to pay what they thought it was worth i.e. its value to them. A few gave derisory sums, most paid near to what they would have expected to pay for a download, or even a conventional CD ordered online, some paid more. But did they pay what the music was worth in terms of its value, or what it cost?

I think their reference point was in fact based on what the music as a product is seen to cost as a CD, and that is largely a cost recovery charge. It’s the payment for the resources necessary to have promoted the awareness of the existence of the product so you knew it was available to buy; the cost of the factory to produce the CD; and the cost of distribution. Add in the costs on the shop to stock to support this and still more cost recovery starts to emerge too. So did you want a CD, or did you want to listen to the music?

Then there is the ‘Green’ side to all of this in terms of the amount of energy, and resources used to produce and transport this unwelcome ‘product’, plus the disposal of the packing etc. The real value was to listen to a piece of music, and in a digital economy that’s pretty inexpensive, and fairly ‘green’, or put another way; good value.

My contention is that the rise of the technology literate generation with changes in their behaviour, together with increasing pressures for sustainable ‘green’ initiatives will all make for some serious rethinking of what is the product, and what constitutes the ‘value’ to the buyer, rather than the cost recovery element of the productisation for distribution. If we do get an economic slowdown in the coming couple of years this could well be the trigger for this to happen pretty fast as price constraints start to bite.

And where do Value Networks fit into this? Right now all enterprises use networks built to support the physical cost recovery products, whereas the need will be to find new partnerships based on the digital value model. Having your product stocked by a big retailing group with many geographically distributed outlets may give way to distribution via digital partners who can create awareness, support transactions, and virtual distribution.

Awareness’ is another way of saying social networking where information circulates in communities fast, leading to social tagging that might see your product as a YouTube hit, then we have the online transaction provider before we complete the circle by building a new social group committed to your product. Maybe the two big CRM providers; Oracle and SalesForce.com had a plan in mind when they joined the Open Social standard for applications inside Social Networks? And maybe this explains the very high price tags on buying into Social Networks that we have seen.

Posted by Andy Mulholland on December 27, 2007 | Digg this | Seed Newsvine

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# on January 1, 2008 1:21 AM, Verna Allee said:

Andy, this is one of the most cognizant and thoughtful blogs I have seen on value networks and the real meaning of value. The 27 Signals blog deftly reminded us that value is about a shift of thinking, not a shift in pricing. This is difficult for people to grasp initially but once they get it, they don't want to go back in the narrow box of price. What this shift means is that people realize that the formal business transaction is really only a tiny part of the relationship and the value proposition. it is the intangible value that builds loyalty and relationships.
I also really like your simple but eloquent definition of a value network as "ecosystems that create value through the improved abilities of individuals and organisations to work together." Beautiful. Much of what I have seen on value networks tries to treat them as a "thing" rather than an ecosystem. Then we see exhaustive exercises trying to describe the characteristics of a value network instead of the fundamental attributes and dynamics. Value network dynamics apply to any purposeful organization or group of people engaging in dynamic exchanges of tangible and intangible value to create economic or social good. The "ecosystem" definition you propose encompasses both internally focused value networks within an organization (ignored by most other people working with this concept) and externally focused value networks that play out between different organizations.

# on January 1, 2008 9:53 AM, andy mulholland said:

Hi Verna

For me and for my colleagues when we have been discussing our thoughts and approaches to the new technologies and their value for business use the challenge has been that without realising it you try to apply new stuff to the existing (or old) model.

Its an obvious thing really because you tend to see each peice individually and you need to develop a 'big picture' of the overall shift and context before you can place what you are looking at into a new way of working.

Currently working with Ron Tolido on a new book to follow on from the 'MashUp Corporations - the end of business as usual' provisionally entitled 'Mesh! - business use of the Network of Everything' in which much like Mashup we try to paint the overall scenario around a fictious company. For those who know the first book the second book is a continuation of the Vorpal story of applying new technology.

one last comment - the idea of describing functionaly through attributes is to me the key change. putting web 2.0 and people at the centre rather than technology elements such as applicaitons, computers and networks.

# on January 2, 2008 12:58 AM, John Maloney said:

Andy --

Thanks for the excellent post. Recalls this famous quote on value networks --

"Software must be designed to allow, and where possible support, rapid modification of sophisticated inter-company processes. It must be capable of mapping not only value chains but entire value networks in order to keep pace with changing conditions." - Dr. Henning Kagermann, Chairman and CEO, SAP AG. SAP is the central nervous system of 47,000 companies worldwide.

The value networks communities use this quote and others at there Value Networks Clusters site -- http://www.vncluster.com/

Cordially,

-j

John Maloney
IM/Skype: jheuristic
Blog: http://kmblogs.com/
ID: http://xri.net/=jheuristic

# on January 2, 2008 12:59 AM, John Maloney said:

Andy --

Thanks for the excellent post. Recalls this famous quote on value networks --

The value networks communities uses this quote and others at their Value Networks Cluster site -- http://www.vncluster.com/

Cordially,

-j

John Maloney
IM/Skype: jheuristic
Blog: http://kmblogs.com/
ID: http://xri.net/=jheuristic

# on January 2, 2008 3:43 PM, Verna Allee said:

I agree with you on the importance of putting people at the centre. Years ago when I was working in process engineering the first thing I noticed was that when the environment or processes became really complicated or even the least bit complex that - nobody followed "the process!" Now in the process/lean/reengineering world this was seen as a problem, right? The whole assumption is that if you control the process you will get consistent outcomes. But I asked myself, what if we take this as a given - that people are always changing the process? Isn't variation the key to innovation? If we take that as the starting point - as actually being desirable instead of a problem then how do we help people make wise decisions about the changes they make? How can we assure consistent outcomes when there might a great deal of variation in the system itself?

What grew out of that question of course is value network analysis, which put people (nodes) at the centre of the action as only people can make decisions and initiate action. This also means people can immediately find themselves in the network, which they can't always do with a process map. I like the idea of "mesh" for your title and theme. Sounds interesting.

By the way, the url you have for me is actually an open source and creative commons site for practitioners and researchers who are working in value networks.

# on January 2, 2008 4:57 PM, andy mulholland said:

Hi Verna

my good colleagues Carl Bate and Nigel Green from Capgemini have just published a book called 'Lost in Translation' which is this point and more.

Really does a good job of trying to understand and explain the issues and a way to solve them. well worth reading - see www.lithandbook.com for more details

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