How can I resolve the dilemma of delivering a value solution versus profit maximisation?
In an attempt to server the customers most, we strive to deliver the best to the customers. However this would mean low or no profit.
Looking at profit maximizing, we will not able to deliver the best to the customer.
How to strike balance to get the most out of the both perspectives?
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Jun 13, 2014
Both perspectives are not mutually exclusive. Remember that to serve customers the best should always be the top priority. I would cinsider the cost of new business vs client referrals. Seems that service and attaining refferals leads to very sticky business. The money invested in cold advertising may or may not be an added expense that is neccessary.
Compensation to employees should be based of buyin and production. They all need to have an interest in service. That culture surpasses most problems. If you have a very happy client base and very happy employees, it becomes easier to add value added services and new product lines. Maximizing profits at the expense of relationships and quality and service will eventually fail.
Jan 17, 2014
A short term view is to maximize profit. If that's important to you you may want to increase pricing or revise your pricing methods. A long term view is to deliver maximum value to customers. If you cannot do this without a negative cash flow in the process you need to revise your business model. Profit is a snap shot of what happened yesterday. Customer value is the way to build your brand image, increase your customer loyalty and, over the long term, grow your business and profitability. Maximizing both customer value and profit a the same time in the short term is not impossible but it can be challenging if you have not set a specific strategic plan for your business.
Jan 8, 2014
I agree with many of the comments listed, quality will help driv eyour profits. Focus on do the best and the clients will pay a fair price. If you lose sight of the quality, what will you market?
Dec 30, 2013
Make good enough products. Good enough in project management means the best working products possible without any plus, not needed, usually unused features. Take a look at your market and its needs. Do market research. Make a prototype product, do a trial with reduce prices and ask survey questions about the existing and desired features. Based on your customers' answers, develop or change the product, tailor it to your customer needs. In this way, you are not developing a "perfect" product what your customers don't need. You have to be responsive to your customers. A company without good market research and real product development plan can find itself in trouble quite fast. Check out lean and agile project management methods. They will do a world of good for your company.
Dec 30, 2013
JC,
There should be no trade-off between "the best" service and making money. People will usually pay for better service.
The problem is, if your definition of best is not what customers value. For example, you may make custom products, but customers may really like fast delivery. In this case, best=fastest.
I would talk to a few customers about what they really want and be sure you are best at that--even if it is not really what you think is best (or most fun) to do.
Also, check the competition to be sure your best is as good as theirs.
Dec 30, 2013
You need to look at it holistically. Will this client be a long term customer? Are they likely to recommend you to their colleagues?
Dec 28, 2013
Interesting comments from everyone. I think it is useful to differentiate between fleeting value vs. compounding value. A product may provide value to someone initially, but when it is consumed or a cheaper/better alternative is available (or the novelty wears off), that value is greatly diminished. To create long-term value for customer/clients/employers, our actions and relationships must compound. So, numbers like churn rate (in customers, but also employees and partners) help to determine whether we are actually adding value and deepening relationships or just moving through a market, one person at a time. To tie this to a calculation, I would set values for the following factors for each product/ service: 1) time-to-value 2) value sensitivity to repeat business 3) price sensitivity to competition (including consumer opting for nothing). I might set them all as percentages, with the denominator for time-to-value being the duration of your business case/estimation period. How you would use them, would likely depend on the industry framework and competition.
2 examples...
Hot Dog Cart: fleeting value
1) time to value: 5 minutes (< 1% of any business case)
2) value sensitivity to repeat business: low...tourist area (<10% repeat business)
3) price sensitivity to competition: high
So, focus on revenue generation...right pricing model: as high as location/competition will allow (little impact from actual value delivery...more towards perceived value (marketing); so a profit maximization approach has little down side here...unless you want to work ethics into your equation :)
Value (quality) delivery/focus: focus on perceived value, as repeat business doesn't matter much
Airplane manufacturer: compounding value
1) time to value: Several months to several years (10-100% of business case)
2) value sensitivity to repeat business: very high (100%)
3) price sensitivity to competition: medium-low (30%)
Pricing...justify pricing by value delivered to customer over life of product/service. Initial high costs may be offset by lower operating costs (potentially including services from the seller).
Focus on Value Creation and creating value that compounds throughout the value chain...creating and sharing knowledge that grows and bind suppliers, customers and OEMs. Build lifelong relationships over complex technology and millions (or even billions) of dollars.
You can't plot these on the same chart, as they are different ways of approaching value exchange...fleeting vs. compounding. The world needs both, but the key is to understand when you are in a transaction and when you are in a relationship.
Dec 28, 2013
Thanks Pat.
Yes, this is what I am looking for, an approach that trigger decision making in a methodological and practical matter when trying to address the concerns I put forward. No judging for right or wrong, just hope more suggestions coming in to enrich our decision making skill.
Jan 9, 2014
Pat, I like that you touch of a key concept: the value a customer might get by doing nothing, that is a killer in a lot of cases because people think they are only competing against another company, product or service and so tend to forget that every customer always has the option to walk away.
Dec 28, 2013
The fact is that true value leads to good profits all things being equal. The all things being equal bit pertains to the correct infrastructure being in place and that you deliver well.
Dec 27, 2013
I would like to take the liberty to ask you a question to answer your question. Why cannot you be able to deliver the best services to the customer on the profit maximizing strategy and platform? What would be the roadblock for maximizing profits for all parties involved that would mean low or no profit? For me to answer this question more information would be needed.
Dec 27, 2013
The logic of maximizing profit is to set price at the highest level and costs at the lowest to meet the needs of customers, anyone has alternate explanation? By logic explanation, in the attempt to deliver best services, are we saying the costs of delivery need to increase by qualities and features? So the logic flows of the quality of deliver and features need to short change by increasing the costs?
Thus by delivery the best services would also means we are not profit maximizing at the same time, instead we are selling at the optimal level where both buyers and sellers benefits most at the same time. Buyers will come back with repeat sales and sellers are able to gain long term sustained profit making (but not at the maximizing level). If my logic explanation is correct, my question is how to find this equation to achieve the optimal level?
Dec 26, 2013
Value is driven by the customer, profit is driven by you, there is no equation that you need to balance, you need to make sure you have value first and then drive your structure cost to make that solution profitable. If your product can only be sold at 12 dollars a piece and there is no possible way to make it for less than 12 then there is no business model (profitable one that is), that is why a product or service should not ever start from cost to drive value but the other way around. You will maximize profit only after you have a solution that delivers value.
Having said that, I would propose that you focus on value and maximize that instead of profit. Here is a nice article about it: http://www.businessinsider.com/lets-stop-maximizing-profit-and-start-maximizing-value-2012-12
Dec 26, 2013
Thanks Pepe, I had finished reading this great article. It emphases on not to obsessed by short-term maximise profit and overlooked the importance to nurture right people (quality and loyalty) for long-term business success and growth. But this does not answer my question.
Value to customers come from intrinsic value and perceive value. Build necessary features to meet customers' needs form the basis of values to the customers.if we remove certain features (means lesser costs), logically values drop. Sometimes we use brands to maintain the values, but this method only sustain for a short period of time.
I am a strong believer to move in middle path.To achieve the best for both seller and buyer, I am looking the how much values are to created for the buyers are consider "right" and not seeking for value maximisation. This is I suppose why Economist suggests the optimal result is when the supply intercepts demand.
The challenge is we don't know what is the "right" value.
Jan 9, 2014
That's a good observation, although I think that there is a misconception that you only drive value through increased cost (because of added features), when you remove features you lower your cost and it would drive value down (not a bad thing if you happen to have another segment that looks for that value proposition), but the key here is that you find the way to lower cost without removing features to preserve value, that is where you maximize your profit.
As you point out (quite rightly) value is perceived by the customer but it doesn't have to be a soft measure of your product's features, value is equal to the benefit the customer receives from your product or service and it can (must in the case of B2B) be translated into a dollar value (i.e. increase in market share, new contracts, reduction in cost, improved profitability, etc)
Now, my message from the article is that when we focus on building value it'll be much easier to keep and improve your profits
Dec 26, 2013
Hi J.C. I suggest that there is no choice to be made or equation to balance. The objective must be not only establishing customer value but continuous improvement of that value proposition. Your next task is to fully understand the costs involved in delivering those values best found by conducting an ABC (activity based costing) analysis. Only then can you address the question of how to reduce the costs, alter your delivery processes that provide the value and rethink pricing policy, all components of profit maximization. A value pricing strategy rather than cost based pricing may help as you proceed through the analysis. Good luck.
Dec 26, 2013
Thanks Gray. ABC needs to define costs drivers and cost pools before estimate costs of the activities by associating them to the costs drivers. This is provided the organization has relatively stable business and has a proper way of capturing costing information. However ABC always falls into the trap of costs allocation arguments and the determinants of transfer pricing. I would be very selective to adopt ABC. In term of value management I would see ABM + VBM combine would be a better choice ... managing activities leads by value based management framework. Still without a balance equation between the value to customers vs profit generates really feel like missing of something :(
Dec 27, 2013
ABC shouldn't get you into an allocation argument since you should be looking only at variable & assignable costs. The burden still falls on you to look at how to manage/reduce the costs involved in service delivery. But thank you for reminding me about ABM.
Dec 26, 2013
Thanks for all the inputs so far, these are insightful suggestions. The point I would like to draw upon is that how can we find the intercepting between the value delivery and profit gain so that we can get the optimal of both. I am looking at whether there is such a equation to work on. The suggestions received so far are very useful techniques to apply but do not have sufficient capability to form a decision tool in guiding how to get the optional of both at a particular point of time.
Dec 26, 2013
Hi JC,
Generally from a technology point you have 2 main customer groups.
Group 1 - Technology Evangelists - love technology, dont care about budget concerns. This is where you maximize your profitabiliy.
Group 2 - the budget conscious technology implementors, these guys are always concerned with how much they are spending versus the delivery of the scope of works which they have designed. These people soon learn that there is no short cutting tecbnological solutions.
Dec 26, 2013
You needn't chose between providing value and being very profitable. Look around: some of the most valued products are also the most profitable. Consider the iPhone or iPad.
If you provide a quality product or service that people value, they will be willing to pay a price that yields you a substantial profit.
I could cite many examples where small entrepreneurs struggled with lower prices, making a low margin, working their fingers to the bone. Then they raised their prices. As their prices increased, they got better quality customers who were more satisfied, and more interesting to work with.
Because they were suddenly more profitable, they could provide even better service. They could hire better support, so that they were more focused on serving the needs of the customers, and less on the day-to-day details of running their business.
Raise your prices, get more profitable, pull in better customers.
Dec 26, 2013
You get conceptual agreement first on the intervention needed and identify the cost savings to the client over a period of years, say up to 5 years and then create you value proposition using that backdrop - but not until you actually present the proposal. Do not get drawn into "ball park figures", "estimations" or "rough costing" and gain commitment to the work first before you discuss any prices. Then offer three value options, basic, basic Plus and Basic Plus Plus
Dec 26, 2013
Sometimes you have to chose value over profit, the referrals you get in return will more than make up the difference. Now you just need to put a referral system into place to track the feedback! Also consider rewarding customers that refer in new prospects, your top customers can generate more fresh leads than your best sales person or any paid lead service! Give your customers a chance to build your business, many will and that will justify the increase in expense to keep them happy! It is much easier to keep a current customer than to go out and find new ones, just make him/her happy and they will return your service with their referrals.
Yes, this may be one approach. Lean and agile project management methods are more suitable compare to water fall method for younger market where minimum viable products play a bigger, where the earlier adopter willing to accept lower quality. I would say this is a very good technique especially for a Startup who in a less mature market.
I think a mature product in a mature market where people (buyers & sellers) have good product knowledge, low costs via efficient production normally is the main competitive advantage, agile project management methods will be harder to use. The main reason is that when more comparison can be made for a product to it competitors', the perceive values from the customers will change. Take e.g. when only one apple in world, people can accept it a lower quality of it, but if a basket of apples exist in world, people will select the best within the basket. The lower quality apples will have lower quality.