This is part 1 of our 10-part blog series on Ecosystems. You can find the other blogs in the series here.

Everything is worth based on what its purchaser will pay for it - Publilius Syrus, Latin Writer

So, what exactly is value? And how can one define value?

While the below definition is comprehensive, it is important to make it relevant to recent times. We can define value as a function of the ‘tangible’ and ‘intangible’ benefits that a customer perceives to receive while buying a product, service and/or on using the product or service. This value can change over time and differ based on the unique characteristics of the customer and is not only dependent on the price that is paid while purchasing it.

Nearly two decades ago, James Anderson and James Narus were in the same predicament when they pondered about value in their HBR article, ‘Business Marketing: Understand What Customers Value’. This article outlined how value can be defined.

“Remarkably, few suppliers in business markets can answer those questions. And yet the ability to pinpoint the value of a product or service for one’s customer has never been more important. Customers—especially those whose costs are driven by what they purchase—increasingly look to purchasing as a way to increase profits and therefore pressure suppliers to reduce prices. To persuade customers to focus on total costs rather than simply on the acquisition price, a supplier must have an accurate understanding of what their customers value and would value.” They finally defined value in business markets as “the worth in monetary terms of the technical, economic, service, and social benefits a customer company receives in exchange for the price it pays for a market offering.”¹

Let’s look at a few key concepts to define value for customers and enterprises:

A Function of Tangible and Intangible Benefits

Imagine a customer who buys the latest version of the iPhone. To buy the iPhone, the customer pays the retail price for the product for which he/she not only gets the iPhone (the tangible benefit) but also gets to experience a high-quality phone along with a potential increase in societal status (the intangible benefit). Or, in this case, an organization which integrates their processes with a software which takes care of the invoicing process. The number of employee hours saved by using the software is the tangible benefit that the software offers, but the intangible benefit that the organization gains can be anything from the increased satisfaction of its employees with automated and seamless processes, or the increased satisfaction for the organization’s vendors and partners because of the ability to process the invoices quickly.

While it is easy to put a monetary value on the tangible benefit (if an organization can carefully monitor and measure every transaction made), it is highly impossible to measure the intangible benefit in an accurate way because of the high number of variables involved.

We must understand that the total value cannot be expressed as a sum of individual tangible and intangible values involved nor can they be expressed in any direct formula. The total value can be a sum of the tangible and intangible benefits and can also be a product of the tangible and intangible benefits.

Here are two facets of value to better understand the concept:

• Value perception
  Value cannot be objectively perceived by putting a mere number on it. This calls for a subjective approach to delve a little deeper into its importance for your organization. As outlined above, every product/service offers a tangible and intangible benefit where the tangible benefit ‘can’ be measured. Just like the benefit associated with any product/service, there is an associated cost for the product/service. At times, even with tools, organizations may inaccurately estimate the costs and benefits with the latter on a higher side for products and services. Customers often perceive value based on their beliefs about the product/service and how well it meets their needs. This is an integral factor that can impact the price and the demand. If the benefits are higher than perceived costs, the customer shows positive perceived value.

The goal for organizations must be to maximize this gap in expectation between benefit and cost and get closer to the positive perception factor as much as possible. It is also important to take into consideration that the customers judge a product’s value not by its actual cost but by the cost they consider for the product.

• Value is subjective and not dependent on the price that is paid
  Imagine three customers Rob, Brian, and Tom. Consider their purchase of a bottle of mineral water – Rob at the 7-Eleven store, Brian at a fancy restaurant, and Tom from his room at a luxury resort. Even though the product bought by all of them is the same, is the value the same? The prices that each of them pays for the same bottle of water may differ even though the primary need was to “quench their thirst”. Here, the value that the bottle of water would be same to the three customers if all of them were equally thirsty. But imagine if Rob, who bought his bottle of water from 7-Eleven was thirstier than the others. Wouldn’t he value the bottle of water more than the others? This is because the context of the purchase differs in each of the three cases.

A small difference in the context of the purchase can change the ‘perceived’ value drastically.

This will be a crucial factor for banks to consider as they embrace ecosystem-driven business models. It’s not just about the products and services they offer, it’s also how good of an understanding they have on their customers, what they value, and how they can contribute to deliver the same. Banks must collaborate with service providers who understand the nuances of delivering value based on the shifts we see in the ecosystem.