Tuesday, June 29, 2010

On the ‘value’ in business model definitions

As ‘value’ is one of the most common term in business model definitions, the obvious question is what is meant with value? Surprisingly, it is almost never further elaborated or discussed in business model books or articles. In general the term ‘value’ is used to refer to ‘the quality (positive or negative) that renders something desirable or valuable’ (Wordnet 3.0) or ‘something (as a principle or quality) intrinsically valuable or desirable’ (Merriam-Webster).

It seems that when business model definitions refer to value, they mostly mean customer value (such as, Afuah, 2004; Dubosson-Torbay, Osterwalder, & Pigneur, 2002; Tapscott, 2001), while some refer to value for both the customer and the company (e.g., Bouwman, De Vos, & Haaker, 2008; Johnson, 2010). Mostly the value for the company (and other providers in the case of an inter-organizational network) seems to be implicit in the definition by referring to capturing (customer) value. This raises the question what is meant with customer value.

Weinstein and Johnson (1999) state that the concept of customer value is as old as ancient trade practices and refer to the early barter transactions where buyers would carefully evaluate the offerings of sellers. Buyers would only agree to close a deal when the benefits (products received) compared to the cost (items traded) were perceived as being a fair (or better) value. Hence, customer value is ‘the satisfaction of customer requirements at the least total cost of acquisition, ownership, and use’ (De Rose, 1994 cited in ; Weinstein & Johnson, 1999)

Woodruff (1997) defines customer value as ‘a customer's perceived preference for and evaluation of those product attributes, attribute performances, and consequences arising from use that facilitate (or block) achieving the customer's goals and purposes in use situations.’ Woodruff proposes a ‘customer value hierarchy,’ which is a means-end type of model where the desired customer value moves from desired product attributes and attribute performances, via desired consequences in use situations, to customers’ goals and purposes. Woodruff also notes that the use situation plays a critical role in customer evaluation as well as in desires. This means that customer value is highly subjective and contextualized.

Customer value is also described as value-in-use (or use value), which is value created with and determined by the user during the consumption process (Bowman & Ambrosini, 2000; Grönroos, 2006; Lusch & Vargo, 2006). This is differentiated from value-in-exchange (or exchange value), which is value embedded in the product itself (i.e. added during the production process) and determined at the point of exchange (Bowman & Ambrosini, 2000; Grönroos, 2006; Lusch & Vargo, 2006). This brings us back to the definition of business models, as creating value relates to value-in-use and capturing value relates to value-in-exchange (Priem, 2007).

Afuah, A. (2004). Business models: A strategic management approach. New York, NY: McGraw-Hill/Irwin.
Bouwman, H., De Vos, H., & Haaker, T. (2008). Mobile service innovation and business models. Heidelberg, Germany: Springer.
Bowman, C., & Ambrosini, V. (2000). Value creation versus value capture: Towards a coherent definition of value in strategy. British Journal of Management, 11(1), 1-15.
De Rose, L. (1994). The value network: Integrating the five critical processes that create customer satisfaction. New York, NY: AMACOM.
Dubosson-Torbay, M., Osterwalder, A., & Pigneur, Y. (2002). E-business model design, classification, and measurements. Thunderbird International Business Review, 44(1), 5-23.
Grönroos, C. (2006). Adopting a service logic for marketing. Marketing Theory, 6(3), 317-333.
Johnson, M. W. (2010). Seizing the white space: Business model innovation for growth and renewal. Boston, MA: Harvard Business Press.
Lusch, R. F., & Vargo, S. L. (2006). Service-dominant logic: Reactions, reflections and refinements. Marketing Theory, 6(3), 281-288.
Priem, R. L. (2007). A consumer perspective on value creation. Academy of Management Review, 32(1), 219-235.
Tapscott, D. (2001). Rethinking strategy in a networked world: Or why Michael Porter is wrong about the Internet. Strategy + Business, 24, 1-8.
Weinstein, A., & Johnson, W. C. (1999). Designing and delivering superior customer value: Concepts, cases and applications. Boca Raton, FL: CRC Press.
Woodruff, R. (1997). Customer value: The next source for competitive advantage. Journal of the Academy of Marketing Science, 25(2), 139-153.

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