Services participate in the creation of value in five different ways. It is useful to understand these different paths to value, as each has its own optimization techniques. I call these five types of value market value, business value, returned value, relationship value and replacement value.
The simplest type of value to understand is the service’s market value. Services are made available and are delivered in market spaces that are of greater or lesser size. The market value of a service is the price paid for the service within a market space.
The price is influenced by many factors, including the historical amounts, the competition, the costs, and so forth. For new services, the price might be influenced by the price for a service that is being displaced. However, if the new service become successful, the price of the old service becomes largely irrelevant.
Normally, market value is measured per service act. However, it is possible to negotiate retainer payments for an unspecified or even unlimited number of service acts within a given span of time. For example, we do not generally pay per email delivered. We pay a fixed price, or nothing at all, for that service.
When a service provider and its customer are parts of the same organization, it is often the case that no price is fixed for the service. In this case, the market value may be determined based on the funding provided to the service provider. If that funding does not explicitly refer to the services provided, it may nonetheless by prorated to estimate the service’s market value.
The business value of a service concerns the value of the service to the customer, in the context of the customer’s own activities or processes. It depends, in part, on the utility and the warranty of the service. However, the business value may be very highly leveraged by the use to which the consumer puts the output of the service.
For example, a service provider might offer an electronic messaging service. One consumer might use that service to send a message to invite a colleague to lunch. Its business value is therefore modest. Another consumer might use that service to submit a last-minute offer for a multi-million dollar contract. The business value of that message could be enormous, due to the way the business is able to leverage the service. And yet, the service act itself, as performed by the service provider, is identical in both cases.
It should be clear that the market value of a service is strongly influenced by the business value of the service.
The fact of offering and especially, delivering services return values to the service provider. Returned value should not be confused with market value. By contracting to deliver services, or by performing service acts, a service provider receives the price for the service, which is the market value.
But the service provider obtains another type of return on the investment it has made in its service system and the service acts. It gains knowledge about the marketplace, about the customers and about how to optimize the delivery of the service. This value is used, in turn, to develop strategies, to reduce costs, to improve service quality and to improve the positioning of the service provider in the market spaces in which it does business. What is more, the knowledge acquired may also have resale value. This, of course, is the basis for the business model where a service provider provides free services, but then sells or exploits the knowledge gained about the often unwary customers.
A service consumer may obtain a type of value from a service other than the return value or the business value. This is the value of having a stable, profitable, comfortable relationship with a service provider. Service value based on the relationship between provider and consumer is probably the most complex type of value, with many facets.
The relationship value of a service is likely to evolve over time. When a consumer first contracts for a service, the relationship is largely theoretical and does not yet have any value (in most cases). As the provider multiplies the number of service acts performed, the relationship value develops and matures. It is positive if the service acts provide business value. But it can also be negative, if the consumer’s expectations are not met.
Relationship value is realized at the consumer by reducing the costs associated with finding and managing service providers. To the extent that it is positive, it allows the consumer to reduce business risk. A good example of this would be the value of a provider whose services are always available, just in time, to a consumer that also manages the flow of its activities in a just in time manner.
Relationship value may also accrue to the service provider. It may be accounted for as good will. It is the value of a good image in a market space, where numerous, prestigious organizations are counted among the long term customers of the service provider.
Relationship value is also critical to the service provider, especially in the on-line world of commerce. It is well known that the cost of obtaining a new customer often requires multiple sales before that cost of amortized. A high churn rate among a provider’s customers is indicative of low relationship value.
Relationship value can exist even when a service has no business value. We should remember that service relationships are not purely economic in nature. Daniel Kahneman has disabused us of the concept of idealized, rational, economic actors. In Thinking, Fast and Slow, he has amply demonstrated the psychological aspect to economic activity that puts the lie to “rational” economic behavior.
The anthropological aspect of relationships and their value has been studied in great detail. In his book Les Structures élémentaires de la parenté (The Elementary Structures of Kinship), Claude Lévi-Strauss analyzed the custom of a simple service regularly performed in southern France (at least, at the time of writing in 1949). Customers in bistros would perform the service of pouring each other a glass of wine, rather than simply pouring the wine for themselves. In terms of the net result of the service acts, the two cases are identical. The output is the same, the intoxication is the same, and so forth.
But there is a world of difference between the cases regarding the value of the service act itself. When you pour wine for your neighbor, a social relationship between the provider and the consumer is established, one that might not exist otherwise. By virtue of the service provided, the provider is positioned within a framework of social values and customs.
In some cases, a relationship may have a derivative value. Imagine the case where a service provider is the sole vendor of a service with a very high business value. As always, providers have a certain limited capacity. By establishing a relationship with the provider and by using up the capacity of the provider, a consumer thereby limits access to the service by the consumer’s competitors. The consumer thereby benefits by improving its market positioning.
Another second derivative of the relationship is the case where a very large customer leverages its relationship with the service provider to force ever lower prices. This, however, is a delicate game to play. It can quickly evolve into a win-lose relationship or even a lose-lose relationship.
A consumer generally decides to use a service for one or more of a variety of reasons. These reasons boil down to:
- the consumer does not have the know-how required
- the consumer lacks the resources required
- the consumer prefers to use its limited resources for other purposes
- the provider can provide the service more cheaply or at a more appropriate quality than can the consumer.
The difference between the cost of providing a service internally (including the opportunity costs of internal provision) and the four types of value described above represents the replacement value of the service.
For example, suppose an organization wishes to decide if it should develop an internal capability to deliver a service or if it should outsource that service. The business value of the service would potentially vary according to the capabilities of the internal and the external providers to deliver a certain level of utility and warranty. The returned value would go to the organization itself if the service were in-sourced, but to the service provider if it were out-sourced. The relationship value could be similar, or could be very different for the two scenarios. The market value of an out-sourced service would be compared to the cost of internal provision plus a possible opportunity cost.
The replacement value of the service is equal to the difference between the sum of these values for each scenario. The net value could be positive, thus favoring the external provider, or it could be negative, indicating that internal provision would provider greater value to the organization.
Service value and goods value
It has become common to compare goods and services, only to learn that the more we analyze them, the more we realize that they are two sides of the same coin. It is not surprising, then, that goods have the same types of value as services.
Goods clearly have a market value, which is the price we pay for them. They also have a business value. As the service dominant logic school has shown us, goods are often bought in order to allow the consumer to deliver services based on them. And those same services are often involved in the creation of yet other goods. The returned value of goods is similar to the returned value for services. Indeed, the internal know-how of a goods manufacturer is often realized in terms of the internal services it provides to manufacture those goods. Finally, relationship value is just as applicable to goods as to services.
What service value is not
In common parlance, services are said to deliver value to customers. I do not expect that people will change the way they speak of services and value. But we should not take this expression literally. Value is not stockpiled at the service provider and then delivered to the customer, as if a service act were a form of virtual conveyor belt.
The principal value of a service to a consumer is its business value which, as we have seen, is derived from how the consumer uses the service. This use is largely out of the control of the service provider. The secondary value of a service to a consumer is the relationship value. This value is goes in both directions, toward the provider as well as toward the consumer. It is derived from the use by both parties made of their relationship, rather than something transferred from one party to the other party.