Value to the customer

There is the most difficult question: “what does the customer consider value / what does he look for when he buys the product?”

Traditional economic theory has answered this question with the one word: price. But this is misleading to be sure there are few products in which prices are not one of the major considerations. But first ‘price’ is not a simple concept.

For a fuse box and switch box manufacturer; his customers, the contractors, are extremely price conscious. Since all the boxes they buy carry a quality guarantee accepted by the trade as well as by building inspectors and consumers, they make few quality distinctions between brands, but shop around for the cheapest product. But to read “cheap” as meaning lowest manufacturer’s price would be a serious mistake. On the contrary, “cheap” for the contractor means a product that has a fairly high manufacturer’s price: a product that (a) cost the least money finally installed in the home(b) achieves this low ultimate cost by requiring a minimum of time and skill for installation, and (c) has a high manufacturer’s cost to give the contractor a good profit. Wages for skilled electrical labor being very high, low installation costs go a very long way to offset high manufacturer’s price. Furthermore under the billing tradition of the trade, the contractor makes a little money out of the labor required for installation. If he is not his own skilled worker, he bills his customer for little more than his actual wage costs. He makes his profit traditionally by charging double the manufacturers price for the product he installs. That product that will give him the lowest cost to the home owner with the lowest installation cost and the highest mark-up on the product that is, the highest manufacturer’s price is therefore the cheapest to him. And if price is value, then high manufacturer’s price is better value for the electrical contractor.

This may appear to be a complicated price structure. In the American automobile industry, where most new cars are sold in trade against a used car, the “price” is actually a constantly shifting configuration of differentials between the manufacturer’s price for a new car, a second hand and third hand used car, a third hand and fourth hand used car, and so on. And the whole is complicated on the one hand by constantly changing differentials between the amount a dealer will allow on a used car and the price he will ask for it, and on the other hand by the differences in running costs between various makes and sizes. Only advanced mathematics can actually calculate the real automobile “price.”

And, secondly, price is only a part of value. There is the whole range of quality considerations: durability, freedom from break down, the maker’s standing, purity, and etc. high price may actually be value- as in expensive perfumes, expensive furs or exclusive gowns. Finally, what about such concepts of value on the part of the customer as the service he receives? There is little doubt, for instance, that the American housewife today buys appliances largely on the basis of the service experience she or her friends and neighbors have had with other appliances sold under the same brand name. The speed with which she can obtain service, if something goes wrong, the quality of the service and its cost have become major determinations in the buyer decision.

Indeed, what the customer considers value is so complicated that it can only be answered by the customer himself. Management should not even try to guess at it. It should always go to the customer in a systematic quest for the answer.