Hierarchy of Value: Part I

Process Management

The previous column offered a framework for customer management meetings and mentioned the topic of value. Everyone in business wants to deliver and receive value, but what is it and how is it measured? Here are some useful abstracts from Wikipedia on the topic of value:

Value of a product within the context of marketing means the relationship between the consumer’s expectations of product quality to the actual amount paid for it. It is often expressed as the equation:

  • Value = Benefits/Price or alternatively:
  • Value = Quality received/expectations
For a firm to deliver value to its customers, it must consider what is known as the “total market offering.”

This includes the reputation of the organization, staff representation, product benefits, and technological characteristics as compared to competitors’ market offerings and prices.

Value can thus be defined as the relationship of a firm’s market offerings to those of its competitors.

On the quantitative side, value is the actual gain measured in terms of financial numbers, percentages, and dollars. For an organization to deliver value, it has to improve its value-to-cost ratio.

When an organization delivers high value at high price, the perceived value may be low. When it delivers high value at low price, the perceived value may be high.

Over the years I worked with the management team at Flint Group, which constructed a model to demonstrate value hierarchy. We often had difficulty in measuring and communicating the value of products and services provided to our customers.

To address this, the team at Flint developed the Hierarchy of Values concept. This model sorts the types of value provided into four different levels. The chart below builds from the bottom up, with each succeeding level building on the previous one in value added.

The principles can apply to almost any segment of the converting industry, so while the narrative relates to ink, try to relate the concept to your own products and services.

Level 1: Ink Cost Per Pound
The basic level is called Ink Cost per Pound. It’s very straightforward and considers only the price per pound of the ink. A printer operating at this level considers all the inks available to him as interchangeable, so all he needs to know is price to make a purchasing decision. Certainly, this is the easiest way to buy ink, and if all inks are interchangeable, that is, in fact, a legitimate comparison.

However, this is rarely the case. There is no information on color strength, and the impact on process cost is not defined. So, in the equation:

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