The Progress Economy

The value model that built industries and economies (but its blind spots are increasingly stalling your innovation and limiting your growth).

value in exchange key concepts: Embedding and Exchanging value

Let’s review our traditional model of value – value-in-exchange – to understand both its long-standing success and its emerging limitations.

value-in-exchange – value is progressively added throughout the supply chain by manufacturers, exchanged at point of sale, and subsequently used-up/destroyed by end customer

Value-in-exchange sees value as something embedded in goods or services by manufacturers. Value is realised at the point of sale, exchanged for cash. Once the customer takes ownership, they proceed to use up or destroy that value.

This model is deeply familiar. Manufacturers:

• successively embed value in products through the supply chain
• signal value through price
• exchange the embedded value for something else of value (usually money) with an end customer
• once a cutomer buys the product they destroy (eg eat a chocolate bar) or use-up that embedded value (eg wear and tear).

We see this everywhere: buying food, paying for transport, subscribing to media. It’s central to what Vargo and Lusch describe as goods-dominant logic, to contrast with their service-dominant logic that emphasises value-in-use.

defining value: the greatest amount of money a customer would pay for a product

A value-in-exchange mindset, leads us to McKinsey’s view that value equates to price.

A product’s value to customers is, simply, the greatest amount of money they would pay for it.

Golub, H., and Henry, J. (1981) “Market strategy and the price-value model” via “Delivering value to customers”, McKinsey (2000)

Value is measured on the output – the goods or services. And price is the proxy for that value.

Anderson & Narus (“Business Marketing: Understand What Customers Value”, HBR, 1998) observe the customer’s incentive to buy is seen as the gap between value and price, encapsulated as the equation:

Academic literature provides variations on this equation, typically balancing benefits and costs:

$$value = \dfrac{\text{relative sum of weighted benefits perceived}}{\text{relative total costs perceived}}$$

$$value = \text{relative sum of weighted benefits perceived}-\text{relative total costs perceived}$$

$$value = \dfrac{\text{relative sum of total consequences}}{\text{relative total costs perceived}}$$

Woodside, A.G., Golfetto, F., Gibbert, M (2008) “Customer value: theory, research and practice”; Advances in Business Marketing and Purchasing 14:3-25

Porter’s classic strategies are rooted here ((Porter (2004) “The Competitive Strategy: Techniques for Analyzing Industries and Competitors“):

• Differentiation: Embed more value and maximise price per exchange.
• Cost leadership: Minimise price to maximise transaction volume.

It’s also not uncommon for manufacturers or service providers to provide a base product and offer additional features at extra cost. Low-cost airlines provide a notable example, with a base fee for a seat and additional fees for baggage, printed tickets, assigned seats, and so forth. Each option taken is an additional exchange of value – how valuable are they to you.

creating value: embedding

The traditional value-in-exchange model sees manufacturers embedding value as products move along the supply chain.

This is easy to visualise:

Raw materials → (sale →) Components → (sale →) Products → Sale → Customer uses/destroys the value.

Take a car. It holds more value than its parts, which hold more value than the raw materials. Each step embeds more value. Even services get squeezed into this model: providers design services, deliver them, and exchange those units of service for cash—just as if they were selling goods.

In this view:

• Value is a property of goods and services.
• Value increases through the supply chain.
• Value is exchanged at transaction points.

Once the customer buys, the provider’s job is done. All attention shifts to chasing the next transaction.

But what happens after the sale? The customer destroys the value they purchased.

destroying value: Using Up or destroying

Once the sale to the end customer occurs, we see them begin to consume/use-up or destroy that embedded value.

Drive a new car off the lot – it instantly loses a large amount of its perceived value. Then, over time, you further diminish its value through use. Eat a chocolate bar and you instantly destroy the embedded value. In services, this is often called consumption – using up the value as it’s delivered, which is often seen as a single moment in time.

Implications of value-in-exchange

Prahalad and Ramaswamy, in their 2004 book The future of competition – Co-creating unique value with customers, neatly summarise the strategic implications of the value-in-exchange model.

Their key diagram lays out the premises, implications, and manifestations of value-in-exchange. Strikingly, the customer’s perspective is largely absent. They show the model is heavily inward-facing, driven by firm-centric priorities.

Prahalad and Ramaswamy start with the foundational premise that value is created by the firm. From there, their logic unfolds both horizontally and vertically.

For example:

• Horizontally, if you accept that value is created by the firm, you naturally align with the idea that products and services are the core units of value. This leads to the assumption that consumers merely represent demand for the firm’s offerings.
• Vertically, starting with the same premise leads to the belief that the point of exchange is the focus of value creation—what they call the firm-consumer interface. This flows directly into a focus on value chains and internal process quality as the core levers of improvement.

This helps explain why the customer often becomes an afterthought in the traditional value model. Even though the right side of their framework briefly references customisation and staged experiences, the overriding focus on the point of exchange systematically leads us to the blind spots of the model.