The Business Acceleration Free E-Newsletter Series
Volume 11, Issue No. 12
By Dan Coughlin
Apply the Value Formula Every Day
In giving a speech at Boeing, I shared my definition of value. I said, "Value is anything that increases the chances that the other person will achieve what he or she wants to achieve." An audience member then asked me, "How do you measure value?" That stumped me. I realized right away that my definition was insufficient. Something could be of little value or great value to another person, but my definition wouldn't be able to differentiate between the two.
Then I thought about my years of working with executives at McDonald's. I always admired the way McDonald's people worked to make every part of their business processes simpler and simpler. I recalled their simple formula for value to a customer. It reads:
V = QSC/P
Value equals quality times service times cleanliness divided by price. Value to the customer is equal to the quality of the product times fast, accurate, and friendly service times the cleanliness of the restaurant divided by the price of the transaction. I watched many times as executives at McDonald's used that formula to determine what future products and services to provide to customers. I loved how it made the conversations so much more practical than they otherwise would have been.
As much as I liked that formula, I needed something simpler and more universal that could be applied to every business regardless of the industry. I landed on the following Value Formula:
V = I/C
Value to the customer equals the improvement in his or her desired outcome divided by the cost of achieving that improvement. Cost to the customer includes his or her investment of money, time, and energy.
Questions Derived from the Value Formula
There is nothing remotely complicated or new about that formula. However, like jogging and doing pushups, the power is not in its complexity, but rather in us actually using it every day.
The fundamental questions for you to think about in your business every day are:
- What outcome does your customer want to improve in his or her life?
- How can your organization help that customer improve that outcome?
- How can your organization reduce the amount of money, time, and/or energy that person has to invest in order to achieve that improvement in his or her desired outcome?
Many times I hear people talk about massive transformational efforts to improve their organization's brand, innovations, leadership, and talent management. Rather than launching into a long-term, highly expensive, and intensely complicated commitment, I encourage you to gather a group of key decision-makers and just talk about their answers to these three Value Formula Questions. Your answers will largely determine your brand, your innovations, the types of people you hire and develop, and the tactics you want to influence your employees toward accomplishing.
Applying the Value Formula Looking Backward
Look at past examples where products shifted because of the increased value for the customer. Take the shift in the 1980s from vinyl records to compact discs. Let's assume for the moment that the price stayed the same for an album on a vinyl record and a compact disc.
First, let's look at the top half, the numerator, in the Value Formula. Customers wanted to be able to hear their favorite songs throughout the day. The compact disc was much more mobile than the vinyl record. You couldn't very well carry a turntable around with you, but you could have a compact disc player with you at all times.
Now, let's look at the bottom half, the denominator, of the Value Formula. The price wasn't reduced, but there was a savings in terms of the cost of storing compact discs versus vinyl records. It was a lot easier to store them and to carry them around.
By improving the "I" and lowering the "C" the "V" went way, way up. Consequently, compact discs replaced vinyl records almost overnight.
Applying the Value Formula Looking Forward
You can apply that same mindset to any industry. First, identify the customer's desired outcome, and then work to improve that outcome while simultaneously reducing the cost in terms of money, time, and/or energy on the part of the customer.
As the residential real estate market heats up in the U.S. and continues to be strong in Canada, think of how the Value Formula can be applied in that industry. Customers want their ideal home in their ideal community. Anything that can be done to improve the customer's result within that desired objective will improve the "I" in the formula, and anything that can be done to reduce the customer's investment of money, time, and/or energy to achieve that improvement will lower the "C".
Looking at the Value Formula through the Perspective of Two Very Valuable Companies
Recently there's been a lot of talk in the media about how Apple is now the second-most valuable company in the world and Exxon Mobil is once again the most valuable. This is based on the market cap of each company, which was over $400 billion for each of them.
Exxon Mobil helps customers to have the freedom to travel in their own cars. By constantly searching for and refining oil, they provide the fuel for freedom. As they make the gasoline higher quality and work to reduce its price, they are reducing the cost in terms of money, time, and energy for people to maintain the freedom they want in their lives. Sometimes people complain about the cost of a gallon of gasoline, but they don't very often look at the work that is done to find the oil, refine it, and supply it so that individuals have the freedom to go where they want to go.
Through its constant commitment to innovation, Apple has produced a mind-boggling 27" iMac desktop computer with 32 GB of memory that sells for $1799. In 1984, a guy down the hall from me in my college dorm bought a Macintosh personal computer with 128 kB of memory for $2,495. Now think about the value formula. Customers want to be able to do their creative work fast and store it in reliable ways. Think about how Apple has dramatically improved the "I" while equally dramatically reducing the "C" in just the one example of a desktop computer in the last 29 years. Not only is the computer much, much less expensive in dollars, especially when you factor in the inflation over the past 29 years, but it is also a much lower cost in terms of time and energy wasted due to the computer freezing up or running into an error. The customer can do much more with far less invested in time, energy, and money than he could have done in 1984.
Business Strategy Happens at the Intersection of Value
When you make a business investment, there are actually two ways to look at value. First, what will increase value for your customers? Second, what will increase value for your company? Both perspectives need to be taken into consideration as you determine your strategy for moving forward.
Look at the Value Formula from the perspective of your business. What are your desired business outcomes? What can you do to improve the achievement of those desired outcomes? What are you willing to invest in terms of money, time, and energy in order to try to achieve those desired improvements for your business? That last question is the critical parameter that you have to keep in mind as you determine your strategy for the immediate and long-term future. The good news is that this parameter can keep you from ruining your business.
In his fascinating book, The Strategy Paradox, Michael Raynor makes the point over and over that the primary approach for businesses succeeding is also the primary approach for businesses failing. In other words, going all out to support a long-term committed strategy can produce spectacular successes for a business as well as the collapse and extinction of the business.
In order to thrive as a business, you first have to survive as a business. This means that you have to apply the Value Formula from your business's perspective as well as for the customer. If you go all out to create greater value for your customer with the hopes of improving your desired business outcomes while ignoring the cost to your business, you may very well destroy your business. Consider the cost to your organization in terms of money, time, and energy to produce the improved value for your customer and decide if your organization can realistically handle that cost before moving into action. If it cannot, then be willing to reduce the improvement in your desired outcomes so that you can survive as an organization and still improve the value to the customer, even though it might be to a lesser degree than you wanted.
Remember, Apple didn't build the iMac, iPod, iPhone, and iPad in one summer. They did what they could do a little at a time.
It is important to measure the value you are producing both for your customers and your organization. You do want to improve the desired outcomes while working to reduce the cost in terms of money, time, and energy. Keep the Value Formula at the center of your decision-making each day.
Each month my e-newsletter on Business Acceleration gets republished in approximately 40 trade magazines, on-line publications, and internal publications for businesses, universities, and not-for-profit organizations. If you would like to republish all or part of my monthly articles, please send me an e-mail at firstname.lastname@example.org with the name of the article you want in the subject heading. I will send you the article in a word document.
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