Value lies in the eyes of the beholder...or not?

Value lies in the eyes of the beholder...or not?


Vishwanath Krishnamoorthy

Vishwanath Krishnamoorthy

368 week ago — 14 min read

We are witnessing an ever shorter product life cycle with 'copycats' or maybe 'clones' coming up fast for every new creation we make. While marketing is often talked about with its many Ps, the only P you see dominating the psyche of most companies is 'Price'. Over the past couple of decades, overcapacity in almost every sector has ensured that there is a hunger to make more things than necessary. The online e-commerce front has an investment model that believes that price promotion helps growth and scale. The only words heard today are speed and scale and any investment towards that is acceptable. Profitability is good but growth is great and comes first! The consumer who is the beholder of the value you create is blinded by the endless and mind boggling discounts being thrown at him.

Today, imagine a beautiful dress a woman sees on the window of her favourite retailer is at 70% of retail price. She quickly checks around the prices on other channels and finds it at 50% of retail price. She loves it but she has enough at home as well. She says to herself, maybe I should come here a week or two later it may be available at a cheaper price! Now imagine this behaviour by a majority of the population who may make up say about 75% of the GDP and you are creating a deflationary economy. A way to create zero-worth products perhaps.

The surging online business which does not yearn to make any profit but relies on near endless rounds of funding (at least for now!) to stay afloat relies solely on 'marking down' syndrome to 'grow'. The capacity glut we have created around the globe is ever happy to feed this downward spiral where discounting is merely a 'weapon of value destruction'- a necessity to survive.

What exactly is value?

We hear every one speaking that they provide value products, value price, valuable service etc. What do we really mean by that? I like to take a simple rational approach towards this as well. Value is the continuum between the cost of creation and price of consumption, plus other perceived measures in the process.

While it is a continuum, invariably most of us try to choose the lower end of the continuum. Perhaps, the abundance of choice makes it a natural standing point. The product makers often cite a need for growth and a need to meet the 'Street's' demands. Well, any capitalist will say that these are just about right ways and capital market forces will align and automatically favour the productive, efficient of the competitors while the others will perish.

I believe in capitalism but I also believe we are very far from perfect capital market forces to wait for equilibrium. The world is awash with so much liquidity that in its quest to invest, the money has gone global and we have created capacities everywhere. These capacities, just for survival, are willing to produce cheap products (quality and price). I believe that the 'virtuous cycle of productivity' will or is turning into a 'vicious cycle of productivity'. The virtuous cycle assumes the ability to infinitely lower costs, driving ever-higher demand into infinity. Forget it. It is forever impossible in an over-competed and over-saturated world, where we don’t need more for less. Rather, we need less for more. Less quantity for more quality and better values.

The best example is that of Walmart which has forever tried to squeeze the costs lower and lower stripping the value to bare minimums. As if it was not enough, Amazon joined the race and the competition between them is skimming it further to such an extent that theirs and their entire supply chain system works on dangerously thin margin levels. Many a time these are propped by excess liquidity which either perpetually invests in building more capacity or props up their older investments by 'price supporting' them till the competition is vanquished. A deflationary economy is not far away and that does not help in building values in anyway.

There is another perspective I believe that is happening in the consumer world. Perhaps a century back, every country produced in limited quantities some high high quality products for which they became famous. In a way they created value products for which the customer was paying the value price too. The best Sheffield knives, bone china, chinese silk, Tibetan pashmina, a Persian carpet and so on. The tasty and elite lapped up the produce always creating a scarcity for these products which were well valued. For the mass population, they knew they had to wait to move up the ladder to get these valuable products. But the globalisation and current day capitalism with abundant liquidity changed it. The mass market was made happy with look alike products which were not as good but were cheaper. With the aspirational chain broken the markets for high quality products remained small. Desperation and growth desires and necessities forced these premium quality products to look downwards for volumes and begin a vicious vortex of 'mark downs'. Today even the best of fashion from Stella McCartney, Karl Lagerfeld and many others have all relented and redefined themselves to reach volumes. Their original values are lowered whether it is accepted or not. A cover-up with larger market share may not be sufficient to justify the truthful value lost. They are tempted to create lines and use channels to reach to mass/ mid mass markets. The only plausible reason is the hunger for scale. 

The path to recapturing real value

Is there no way today to create and build value? Can we not sustain value without falling into the endless spiral of markdowns and discounting?

The answer is yes, but it depends on what you want to achieve. When every company wants to be bigger in scale, and wants to be growing in rates far greater than the economy itself (not just in the beginning years of the firm), we are surely entering into a trap where we are subconsciously mixing up the market segments. We are catering to a segment which sees your products value and price well but at the same time, we are lured by the bigger base of the pyramid below that segment. Our markdown attracts the segment which does not value the product as much and sees the discount as the only reason to buy. Unfortunately, you have built and scaled your capacity to cater to this segment as well and for optimising your resource you need to continue discounting and perhaps more.

The way out is to clearly define what you want to be and what you will not want to be. What features of your product are uncompromising and which customers of yours are worth so much as to leave all others who may have also loved you for your discounts! Brands are built on values and ultimately enhance the value of your product. You invest a lot on it and hope that the sustainability of these benefits helps your business. By marking down you will fritter away all your previous investments in brand building. Brand building is not merely making the name popular. If that were so, I would advocate having them pasted on the most used items like tissue paper. Everyone will know you for sure but not for what you want to be known for?

Ensure that there is always a gap between supply and demand. A small shortage not only helps in increasing the cravings but also gives you adequate time to study and analyse the consistency of demands and carefully plan capacity additions. Price your product based on value and not on competition. You may get your competitors wrong more often than estimate the value of what you create passionately. Don't throw away your labour chasing your neighbour.

I am an accidental retailer myself. I am an engineer first and will always remain that way as my mind is trained to think in that manner. My approach I feel is therefore more tuned to such analogies although necessities to speak different languages and buzz words sometimes get the better of me too!

I want to sum up this great retail conundrum of value destruction and perpetual downward spiral for value of products. I learnt much of retailing by relying on rational sense, fundamental finance and more by observation of consumers in every market I worked. It has never failed me. There is no replacement for your eyes and ears on the ground and what you learn is profound. Actually it never ends and you keep doing it every day.

Imagine the retail chain as a big network of pipelines with a retail POS as the tap at the end of it. Your investments are in the pipeline network and deciding the appropriate places on the network to place the taps. The next important thing is to decide the size of the pipes and taps to ensure the fluid runs nearly full on the pipes and the taps are sized just right for the size of pipes feeding them and buckets that needs to be filled in by these taps. If I can ensure this, and send a consistent high quality product through it my cash flows are well managed and if well optimised, I can actually work on negative working capital (which I had done in quite a few situations in practice as pure retailer/trading model). If cash flows are in control, profitability is automatically achieved. The need to track profitability is hardly there when you optimise this network. Now being discrete products, add in accumulators in the piping network with an aim to minimise the number of accumulators and capacity of accumulators. You have figured a retail model as well.

Price your product strictly based on the cost you add to build tangible value to end users and not based on your overheads. Add the perceived premium for the delivery experience to arrive at a value. Stand firm to it and keep looking upwards to grow your business. Growth is not a sin but looking downwards is only an easier way out, and not always the right way. Moving upwards allows you to stimulate your product creators further as well and adds much to the motivational needs for all in the system. Your customers look forward to your creations to move up aspirationally too.

I do not disagree with the great management gurus who have spoken on the huge markets in the bottom of the pyramid. They are right too but they never said you need to pursue the markets along all sections. The larger the market you seek the more capital you need. The more capital you seek, the more is the expectation for you to grow in scale! Time is another silent gunman you bring along into the game and he will force you to throw value for growth faster and faster lowering the perception of value to your own loyal customer in every round. It is a black hole which will hurt the entire business unless you have super powerful VC willing to throw money perpetually and ensure he overpowers the forces that may want to pull you into the black hole like vortex of downwards value spiral.

Change the approach to 'value first'

Make creating value as the first priority and ensure that this priority always remains at the highest level. Other objectives of your business like numbers should be secondary to this. If you are unable to do so, look back again at your product and build value and keep doing it, numbers will flow by itself.

I see the current craze in discounting and mark down as an opportunity too. While it is a disaster when you look at how values are being destroyed in the name of growth and scale, it is also for us to see the other side which is getting cleaned up. The superior value space is getting created once again and that any clutter that was existing there has moved downwards into the markdown spiral clearing the way for genuine new businesses to offer good value. Provide and focus on value, your need to price will be gone. You will be valued and worth it.

As I close this post, I reckon that these thoughts may sound to many as less ambitious or trying to be shy of scaling up etc. After all there is a thin line dividing greed and ambition. Your emotion is the difference, A positive and negative emotion alone is the change and you have too distinct words. Riding the growth path is more like holding the tiger by its tail. Do it by all means only when you know how to play the 'tiger' game and tame it well as once you have begun, you don't have options of leaving it without being mauled. Being ambitious is a virtue when you charter into the unknown but only as far as you can have resources to return to safety or conquer your quest completely. These may not be necessary for those businesses which have nothing to lose or risk of their own and their adventures are fully financed by others.

Valuable creations always have takers and generate sufficient premiums for you to do well and be content. Keep raising your value bar higher. Ask Apple if it ever is bothered by Samsung. For a couple of years every quarter, the 'Street' was busy trying to draw comparisons and catch up with Samsung. Apple was least concerned and was only working creating better value and moving higher. Today the comparison bug is finished. Apple with its creations has continuously taken its customers' aspirations higher. Moving markets higher. If it were not for value it would have never been possible. Stem the downward spiral.


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Vishwanath Krishnamoorthy

My professional experience over the last 23 years has spanned the areas of heavy engineering, investment banking and Lifestyle Consumer Retailing in India and across South East...

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