Understanding the Value Proposition

Every business coach and mentor I have ever had from Robert Kiyosaki to author Phil Laut, stress that a sale occurs when value meets price.  In other words, a person determines how much something is worth to them before they pay for it.  They can evaluate the experience of owing a product or the presumed experience of owning that product before they buy.  Apple gets high margins for its products because the user values the experience he  has owning an Apple product enough to pay a premium for that experience.  I drive a Prius because I place a premium on the feeling I get while driving it.  I buy whole rather than processed food, because I value the overall effect whole foods have on my health.  Ellen Ruppel Schell argues in Cheap: The High Cost of Discount Culture that we have become so focused on price that we have lost sight of the value proposition.  What is the value proposition? When looking at an item or service, that we intend to buy, we determine its value in our lives.   When the value of the item or service exceeds the price we are willing to pay, we have a value proposition.  The value of the item or service we are buying is actually worth more to us than the money we are going to part with.   About 20 years  ago I went shopping for shoes with my friend, Robin.  Her grand parents had just sent her $200 dollars.  Before I knew it we were on 5th Avenue in Manhattan and Robin was handing over the entire sum for a single pair of shoes. I was flabbergasted.  Robin told me that her family taught her that you never skimp on shoes.  Robin bought shoes that could be resoled and repaired, shoes that were intended to last years.  Having a pair of shoes that would last for years was more important to Robin than the $200 dollars in her wallet. I used to be a pretty enthusiastic skier.  Because I have very narrow feet, most ski boots are ill-fitting.  I went to a local shop in Durango about 15 years ago and the boot fitter fitted me with a pair of Rossignols.  The fit was great, but the price tag was $600 dollars.  About a month later, I went to a ski shop in Albuquerque and plopped down $450 dollars on a boot that fit just okay, but had the advantage of being cheaper.  Thus began my boot fitting nightmare.  Six years later I had shin and ankle injuries and had gone to every boot fitter I could find between Taos, Breckenridge, Purgatory, Wolf Creek…you get the picture…trying to make the cheaper boot fit properly so that I could actually enjoy skiing in it.  I finally went to a boot fitter in Aspen and walked out with the Rossignols.  I asked for and got a discount, but that wouldn’t have mattered.  I had learned my lesson:  when it comes to ski boots, the fit is key and trumps everything else including price. I spent hundreds of dollars more than I needed to because I let price trump value when it came to that pair of ski boots.

Several years ago I read The Wal-Mart Effect: How the World’s Most Powerful Company Really Works–and How It’s Transforming the American Economy.  That Wal-Mart is a powerful company is really an understatement.  They can save forests by demanding that their suppliers reduce their packaging, they can support wild-caught fisheries rather than farmed fishing and save coastlines, they can undercut the competition and drive local small business out of business.  Wal-mart is the nation’s largest low-wage employer.  Their current motto:  “Save money, Live better”.  At the time The Wal-Mart Effect was written their motto was “Always Low Prices, Always.”  The Wal-Mart Effect was about the high cost of those low prices.  Catchy isn’t it?

One of the featured stories in the book was of Snapper, maker of lawn mowers.  They stopped being a Wal-Mart supplier because they could not make a quality lawn mower to meet the Wal-Mart price point of less than $100 dollars.  Snapper concluded that there are worse things than not being a Wal-Mart supplier.  Charles Fishman, author of, The Wal-Mart Effect, mused that at the prices Wal-Mart charged for its lawn mowers, you could afford to get one every year.  Which is good, because at those prices, you don’t expect one to last longer than a year and it probably isn’t worth repairing anyway.  We just replaced our lawn mower, purchased in 2006 for $100 dollars with a $200 dollar model purchased last week.  Both from Wal-Mart.  Frustrated with a mower we could barely get to work each year, we were hoping for quality by going with the higher price point.  What is our real cost?  So far $100 dollars per year for lawn mowers with the added cost in frustration and stress of having a product that is difficult to start.

I am not too old to remember the time when a family purchased a lawn mower and that mower lasted season after season with perhaps a tune up every other year.  Not so any more.  In our culture today we value price over performance.  It wasn’t always that way, but it is now.  I have a Poulon Weedeater purchased at, you guessed it, Wal-Mart.  It’s cost was $87 dollars.  Its heart and soul are plastic and therein lies the rub.  Parts that should not fatigue and break from simple use, do.  Why, because they are plastic.  I replaced the plastic choke housing a few years ago, for $18 dollars.  Now there are so many other broken parts, all plastic, that the cost of the parts exceeds the original cost of the machine.  I replaced the Weedeater with simple garden shears, and a lawn service, but I wonder about our land fills being filled with useless and poorly-made equipment.

Is this what happens when price trumps common sense? That we are doomed to pay more for an item over the long haul because we are constantly having to pay for replacements?  By my count, our $100 dollar lawn mower actually costs $300 dollars and counting.

How do you work out your value proposition? Please comment.