The Value Ramp

When considering the impact of value, there are a few useful concepts to understand.Value Ramp

This reflects how value increases the further downstream the impact of a product or service is felt.

Value in Use

As the term implies, Value in Use is the immediate value from using an item or service e.g. cutting timber with a saw, driving from A to B in a car, locating an item in a warehouse. However, the value of that item is likely to increase when you look beyond its immediate utility to consider the long-term impact of it. That is, provided it lasts or keeps performing for the long term.

Value at Risk

This is the value you won’t get over time if a product or service or it doesn’t perform as expected e.g. a lower-quality item may cost less and be just as useable (now) as the higher quality item. However, there is a risk that it might not last as long. Thus the value you’re expecting to get from it in later years say, is at risk.

Let’s now look at a simple example to see how those come together. In this case a saw blade in a timber mill

Product:
A saw blade with tungsten tips lasts five times longer than a non-tungsten blade. That is value

However, a tungsten blade costs eight times as much as a regular blade. On the surface, not a good deal. However, let’s look at Value In Use

Because a tungsten blade only needs changing every five hours instead of every hour like a regular blade does, there is:

  1. saving in labour to change the blade
  2. saving in saw downtime while the blade is changed

That is value, which may offset the added cost of the tungsten blade. There is more to it than that though when we look longer term:

Process:
Because the saw has less downtime the production process is faster and the output of cut timber is higher. Let’s say 20% for this exercise. That is more value.

Performance
Because timber output is increased 20%, we ship 20% more finished product and so make 20% more gross margin e.g. extra $ thousands for only $ hundreds increase in cost. That continues year after year. That is far far more value.

Whilst the difference in cost of blades is $800 vs $100 say, the added volume and margin in finished product is an order of magnitude greater.

The point here is that value is not inherent in a product (hence it has no ‘value proposition’). It’s what a Buyer receives depending on how s/he uses the product.

Bottom Line

In inventing a solution, look to value being generated as far downstream as possible, but not so far that it becomes nebulous and stretches credibility.

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