Getting to value.

• Author: McLeon, Richard

I get awfully tired of hearing Cooperative employees say that in a restructured, competitive environment, you have to compete on price "because that's all consumers care about."

There is a popular misconception that retail customers only look at price when making purchasing decisions. Unfortunately, this is an appealing misunderstanding because it implies that consumers make purchasing decisions based on tangible, measurable factors.

As distribution cooperatives, this concept is even more appealing because it allows us to shift the blame for our competitive failures to the G&T and away from ourselves.

Further still, the engineer hiding in all of us loves the concept. It tells us that we can define, predict and, in essence, control market behavior because everyone (at least everyone intelligent) purchases items based solely on price.

After all, electricity is an economic widget. Electrons are the same, no matter what lines they come across. This is a scientific fact--all other factors being equal (the economic concept of ceteris paribus). This is also where the lie is exposed. You see, all other factors are not equal and they never will be.

If ceteris paribus held in the real world of consumer behavior, premium clothing stores, restaurants, malls, hotels, and automakers would all be out of business. After all, if people purchased strictly on price then the discount retail stores of the world would be filled with eager shoppers. You can purchase a pair of socks at a discount chain for a lot less than you can at the mall or at your favorite clothier. So why don't you?

The answer is VALUE. Consumers buy items that provide them the greatest perceived value. Price and cost are definitely factors in the decision to purchase, but value is supreme.

Consider the equation: Value = benefit / cost + price

Value is that which the consumer perceives is the total worth of a product. Price is simply the monetary price of the item. The cost component represents what the consumer perceives as the downside of purchasing an item.

In the electric utility industry, costs typically answer questions such as:

* "What are the outage times?"

* "Will voltage fluctuations damage my equipment?"

* "How many times will I have to reset the clock?"

* "What does it cost me (in real dollars) per hour if the power goes off?"

* "Can I find a person to talk to if I have a problem?"

Benefit is what the customer perceives as a competitive advantage of your product compared to your...