Financial Value isn’t the Most Important Value in Business
There is more to business and the world than merely function and price
Contrary to most of how traditional business understands value, there are more kinds than merely financial value. The myopia of only recognizing financial value leads many companies astray when they try to create value for themselves and others (their customers, partners, etc.) or when trying to mitigate all kinds of risks (legal, political technological, market, and especially social).
The Five Kinds of Value
Recognizing that there are more kinds of value than just money is the first step in building more and better value. (It’s difficult enough to build what you cannot see, let alone what you don’t recognize as existing.)
The first two kinds of value are much easier for people to recognize, understand, and measure. That’s why business is so focused on it. But, that doesn’t mean they’re the most important. In fact, they routinely represent less economic value than the other three.
Functional Value is what products and services do for people in a, yes, functional sense: features and performance. This is where most product development processes focus. If you were buying a car, for example, you might look for the features that you need and want (how many can ride along, how much storage, a truck vs. a car, etc.) as well as the performance (how fast, how many miles per fill-up, etc.). These are all important but they aren’t the only reasons that people buy things.
Financial Value, of course, is measured in money. It’s the easiest to understand because it’s the easiest to measure. Some features don’t exactly equate so they’re difficult to compare sometimes, but money is money (as long as it’s in the same currency). The vast majority of business is focus on these two: price and performance — especially in the technology industries.
Emotional Value is where things get more ambiguous. Most people knowthere’s more to value than merely features and performance but because the other three kinds of value are largely invisible and can’t be easily counted, they’re skeptical to what these are and how to work with them. Many businesspeople even bend over backwards to ignore or claim this kind of value isn’t important, because it’s more difficult to work with or doesn’t fit their worldview. The qualitative values are routinely discounted as unimportant or “irrational” but, believe me, they aren’t.
Emotional value is exactly what it appears: the emotional reaction that someone feels when they see, buy, use, or have something. Sometimes, this lasts only a little while (which can turn into buyers’ remorse). Other times, it lasts for years and even decades (and become heirlooms kept in a family). There are more than one kind of emotion, with many shades, and little agreement about how they’re structured. But, every sales person can tell you that if the buying decision is truly based on price or features, they’re role isn’t really needed and they’ve probably already lost the sale.
This is distinct from Identity Value. The things we associate with ourselves, surround ourselves with, buy, and use help define us. That may or may not be a healthy thing but it’s a human thing. When these aren’t consistent with our sense of identity (whether our sense of ourselves is accurate or not), we aren’t comfortable — we feel “off.” Identity value is why there are “Coke” people and “Pepsi” people, “Mac” and “Windows.” It’s why some people wouldn’t be “caught dead” in certain shoes or clothes or neighborhoods but others would. It’s why sports teams are so popular and personal, triggering fights between fans. It’s also where the concept of “brand” lies — both for customers and brand owners.
Lastly, there is Meaningful Value. Similar to identity value, we are more comfortable and feel more “whole” when certain criteria are met in our lives — when the things that mean the most to us are engaged. In the research for our book, Making Meaning, my co-authors and I found 15 “core meanings” that form the basis of the spectrum of meaning in people’s lives. Therefore, with the right customer research, people and organizations can better understand these meaningsin order to build products and services (and other kinds of experiences) that trigger and engage these meanings in the customers and others. Organizational can even align their values along these core meanings in order to build better strategies, more engaged employees, differentiate themselves better from their competitors, and more value overall.
These last three kinds of value are qualitative, making them more difficult to measure than the first two (which can usually easily be measured with numbers). Because traditional business people don’t understand what they can’t measure and qualitative values are difficult to measure in numbers, these last three are lumped together (when they’re acknowledged at all) and called “emotional” or “brand.” However, they’re distinct. And, building them requires different approaches.
All of these kinds of value flow in both directions between stakeholders. They are all exchanged for one another. For example, the possible cars you’re interested in purchasing might have specific features along which you narrow your choices. You may have a price range, as well, based on what you think you can afford. For products and services, we often narrow our initial choices using features (and performance) and then price. This is called “rational” decision-making and represents important drivers for customer decisions. But, these aren’t the only decision-drivers.
The Biggest Value is Invisible
It’s not uncommon for someone to create a clear picture of their options. It’s also not uncommon for us to mostly abandon these when we see an option, in person, that moves us in some way. Because the qualitative values can overcome our functional and financial choices, they are usually called “irrational” because being emotional instead of purely intellectual is seen as a negative. But, if you drive out of the car dealer in a red convertible that costs more than you budgeted and without all of the features you said you needed, instead of a staid sedan that had all of the necessary features at a price you said you could afford, that doesn’t mean that you’re being irrational, just that your emotional value was more important — more valuable — to you than your functional and financial ones. What’s at work seems foreign to many people, because the mechanisms are often invisible and sometimes even subconscious, but it’s very clear: perhaps you had a need to feel more successful, virile, or younger. These are valid decision-drivers, too. It buying a car that made you feel those things, fulfilled those decision-drivers, they truly are logical and “rational.”
Where traditional business processes have been mistaken for a long time is the over-emphasis on features and price, and the avoidance of the other kinds of value. By focusing on only two kinds of value (and the two least lucrative types), organizations of all types have missed offering (and reaping) the best possible value. Understanding these mis-steps and adopting better tools that build better value helps businesses better compete and build more stable, lucrative, and mutually-beneficial relationships with customers.
Most people, and especially businesspeople, have trouble with the invisible. And, qualitative value is invisible, which is why it’s so easy to discount and ignore. But, it’s incredibly lucrative, not just meaningful and important. I’ve used the analogy of an iceberg for over a decade, now, because it highlights the difference between what is easy to see (and measure) and what isn’t. The financial value that is left on the table when companies only focus on quantitative value is usually larger than they realize. In fact, qualitative value is the holy grail startups and established companies, alike, are trying to build.
For example, consider Instagram. Though many companies bid to buy it in 2012, Facebook outbid everyone. This was a company with less than 15 employees and revenue, yet sold for $1.1B (at the time, seemingly a ridiculous amount until just a couple years later to see the valuations of other startups). This is a great example because we can look at the “books” for the company before and after the sale and what we find is fascinating: before the company sold, it is worth $86M on its balance sheet. After the company is sold to Facebook, it is suddenly worth $1.1B!
Imagine a situation in your life where people just decided to give you loads of money simply for being you.
That’s over $1B of “missing” value that wasn’t accounted for, literally, before the company sold. Accounting practices are great at tracking financial value and yet they missed $1B in financial value! And, please take note of how big each amount is, relatively. The “hidden” qualitative value far outweighs the “tangible” quantitative value. And, this isn’t an aberation. You can go pull the balance sheets for any successful purpose or IPO and you’ll find the exact same thing—a sudden escalation in value that was previously unaccounted for. It doesn’t even have to be a tech company.
This creates a good kind of problem to have, of course, but a challenge, nonetheless, for accounting. Where do you put all of this new value in the balance sheet? How do you account for it? The answer is, you don’t, really. You just shove it into a category called “good will” and forget about it. Really, this is what accountants do. Imagine a situation in your life where people just decided to give you loads of money simply for being you. That’s “good will” and there’s never any attempt to understand why it exists (other than “we;re great and people really like us.” There is no business practice validation for what created it, why, how, or what contributed to it. The single most important (and biggest) value that gets built isn’t seen beforehand and isn’t analyzed afterward. And this is considered professional in an industry where “what gets measured gets managed.”
The point is that organizations that run with traditional tools and practices are managing and making decisions that usually hurt qualitative value—the very thing they most want to build. Traditional business tools, like the accounting practices mentioned above, don’t “see” qualitative value so if all business decisions in an organization are made without seeing it, how could these decisions possibly contribute to building it? In fact, most business decisions suppress qualitative value, killing chances to build it.
This is just another reason why we need to be building and using better tools in business if we want to build more and better forms of value.