How do you Create Value?

stick_figures_scale_300_clr_6319In order to create value you have to understand how a buyer thinks.

The buyer’s formula for determining the relative value of two competing service offerings  is:  Relative Value = (P + S) x (PV)

A consumer decides to buy or not buy a service by intuitively calculating the relative value of the different services she can spend her money on.  This calculation includes three components.  In Latin they are:

Price (P)- What does it Cost?

Service (S)- What benefits do I get from this purchase?

Perceived Value (PV)- How do I perceive the value of this purchase?

The consumer compares the cost to acquire your service versus competing products or services. And this cost calculation includes not only the dollars but the expenditure of time, energy and effort.


If the cost of a product was the only factor a consumer considered then no product could remain in the market unless it was the lowest price option. Since we know that a variety of products persist in the marketplace, and that these products are not all priced identically, there must be something besides price alone that buyers consider.

The second piece of this mental puzzle is the benefit received by utilizing the service


With this component the consumer introduces a new variable to her thought process that modifies the simple cost comparison.  Benefits encompass all the factors associated with the professional service offering that are ancillary to the product itself. These factors will include such business practice decisions as; the satisfaction guarantee, the level of service provided after the initial sale, The quality of the training and support staff, the quality of the pharmacists professional certifications, the integrity with which the business will operate, the compassion shown to Clients, the ease of use of the business system, the convenience of the location, the hours of operation, and the availability during off hours.

Perceived Value

The buyer’s mental value analysis is an internal calculation rooted in their own individual perspective.  How do they perceive this purchase ? Does it make me feel better, more powerful, or enhance my self-esteem? Understanding how to enhance this element of the equation will allow you to create higher priced, more valuable products, with extremely loyal customers. By far the perceived value element dominates the buyer’s decision process.

Let me give you an example. If a pharmacy makes a serious dispensing error on a patient’s prescription and then mishandles the follow up encounter a patient may decide never to patronize that pharmacy again. For this patient the Perceived Value of that pharmacy may be zero because they believe the pharmacy is dangerously inaccurate. If the PV is zero then no price reduction or service enhancement that will entice a customer to return.

There are three ways you can increase the value of your offer relative to competing services.

1)      Price it correctly

2)      Improve the benefits of your offer

3)      Improve the perceived value of your service

Price reductions are the unimaginative road to sales and always require further price reductions to maintain sales. That is not a great strategy in my opinion. Offering more benefits or improving the perceived value of your offer leads to higher profitability.

In order for you to provide a quality service that buyers will freely choose in the marketplace, your RV value will have to be higher than competing products in the mind of your potential buyers. The price needs to be competitive but not necessarily lower than other options. If the buyer perceives your benefits to be better or your perceived value to be greater they may overlook a higher price.  If you want to ensure your professional practice succeeds, you have to ensure that you have balanced the value equation in your favor.

The Academic Version of this formula as Published in, Research in Social and Administrative Pharmacy

Greg L. Alston, Joseph C. Blizzard, The Value Prescription: Relative Value Theorem as a Call to Action, Research in Social and Administrative Pharmacy, Available online 30 August 2011, ISSN 1551-7411, 10.1016/j.sapharm.2011.06.004.
Keywords: Relative value; Perceived value; Service; Price; Stakeholder; Economics; Cost; Opportunity cost; Value; Accountable care organization; Health care reform