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What is value and How to measure it Published by: The Hauppauge Reporter, January 2009, Volume 28 - Issue 1 Written by: Frank Gallucci
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Value Understanding value is a critical component to understanding a business. What it is value and how do we measure it? How do we create it? What destroys it? When and how can we confiscate it? The following is the first of four articles that will address these concepts. This first article addresses what value is and how to measure it. Webster’s dictionary defines value as the monetary worth of something, or a fair return for a product or service. As you may sense, value will differ from person to person. At different times, the same person may view the value of something differently. For example, if you are very thirsty, you may pay $6.50 for a bottle of water at an airport. Three hours later, in your hotel room, if you are thirsty, you may simply turn on the faucet in your room for a drink of water. You would not even think of buying a bottle of water from your hotel mini bar. As a business person, you can see the difficult but you can also sense a potential opportunity. Why not sell your product, service or business, if you are divesting it, to the entity that will value it the most? Another element impacting value is the unit of payment. Will it be in dollars or euros? Is the currency paid immediately or over time? What does that currency buy now and what will it buy in the future? All these elements impact how you measure the value of the transaction you are engaging in. We should always consider the strategic elements of value. By this I mean, the value to a person or business may not simply be in the goods or services being acquired, but rather in the complementary value it brings to the other goods or services you currently control. For example, an owner of a non-US manufacturing company acquires a US distributor of the products they are manufacturing. The value of the distributorship to the buyer is strategic. It allows the non-US manufacturer access to a market it currently does not have. This manufacturer is not simply valuing the distributor as a stand alone business, but rather as a complement to the existing business it currently owns. When determining the value of something, we must view it from both sides of the transaction equation: as both the buyer and the seller. This will allow you to better understand the value proposition you are offering and how it will be perceived. A one sided view of a value proposition will almost always be unsatisfying. You will be either leaving money on the table, or you will fail to satisfy your customer’s needs. When determining value, always consider the impact of time. Time can have a positive or negative impact on value. Payment over a period of time always increases the risk to the seller. Yet, with prudence and judgment, a seller may maximize the value of their transaction by spreading a payment over time. Value depends on where you are now and where you are going. It means different things to different people and different enterprises. It does not remain constant. It changes from market to market and from time to time. Realizing this will assist you in maximizing the value of your next transaction, whether you are the buyer or the seller.
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