Understanding Value

The concept of value is something that I find fascinating

The value that a person puts on anything is a matter of perspective and is unique to that person – whether that person is a customer, supplier, founder, investor or even commentator.

The diversity of these ‘unique’ perspectives creates an interesting dilemma for businesses and is one of the factors contributing to business uncertainty and shaky consumer confidence.  Only this week, the iconic Oroton announced that after a period of poor performance it was moving into voluntary administration.  It’s since been reported that customers have flooded the online and outlet stores to find themselves a bargain. 

It’s the customers’ behavior that provides some insight into value.  There’s still clearly demand for the product, but not at the price the company is offering to customers.  Oroton’s perception of value and their customers’ perception of value are clearly not aligned.   I wonder whether the viability and credit risk of Oroton would have been different if they acknowledged the misalignment in value and adopted a pricing strategy that aligned more closely to their customers’ views.  

Since the GFC we’ve become conditioned to an endless stream of sales and the messages inherent in those sales.  Businesses are essentially screaming out to customers that their products aren’t worth the RRP, but wait a few weeks and they’ll be discounted by 25% - 40% (a more realistic value).  Businesses are admitting that they have the value proposition all wrong. If a business is constantly spruiking heavily discounted sales on 6-8 week old inventory, what’s the impact on the brand and brand equity?  

I can’t help but think, “how are businesses surviving when they seem to keep getting the basics wrong?”  Harsh?  Perhaps.  But consider this – if you know your customer and price your products in alignment with their perception of value then, arguably, constant discounted sales will be redundant. Current inventory will move at full price.   Inventory holding costs will reduce.  Cashflow will improve and the health of your business will begin to recover.

Just as fascinating is the tension between founders and investors when assessing the value of an Early Stage Venture (startup or scaleup). 

Raising funds to start and scale is grueling and can be really confronting for many founders.  Generally speaking, many founders overestimate the value of their venture and haven’t really considered or understood value from the perspective of their potential investors.  There’s typically an emotional attachment to the concept, a substantial optimism bias and little desire to be (and massive fear of being) diluted.  It’s also true that the perception of value among investors can vary wildly which is why it’s critical that founders focus on understanding what value means to each of the investors they meet.  The same principles of aligning value apply to founders and investors, although investors are acquiring an undefined probability of future returns instead of a physical product.

Ultimately there’s a responsibility to communicate value effectively – because when it’s not, customers and investors walk away and move onto the next opportunity.  Done well, there’s a 2-way ‘conversation’ that will either result in a sale (or investment) or valuable feedback that will help shape future interactions.