The Big Picture…
Instead of seeing the world based on exchanging a final outcome for cash, we are better off (from a growth perspetive) to see it through exchanging how those outcomes are created. And that means through the application of skills and resources (for the benefit of an entity, or the entity itself). In other words, a service.Rather than focus on an outcome, we shift focus to how that outcome comes about – the application of skills and resources (for benefit), i.e. a service. And we see that service is the fundamental basis of exchange Click To Tweet
But it would be wrong to think I now buy a service from you for cash, i.e. that we just swap service for value as some sort of unit of exchange. Rather, service provision is the integration of skills and resources from all entities involved. I benefit from your application of skills and resources at the same time as you benefit, in varying degrees, from me applying my skills and resources. My skills and resource might be as simple as knowing roughly what I want to achieve and spending my time to explain through to semi-active participation in service delivery; through to full participation (self-service).
As such, there is no unit of exchange, rather there is a basis. And so we say that service is the fundamental basis of exchange. Though, sometimes indirect exchange masks this.
Thinking this way frees us to view relationships and interactions as crucial. Opening us up to value creation before any “point of sale”, i.e. customisation for needs. As well as value creation post the “point of sale” through having an interest in what the customer is doing. And importantly, this value is co-created. We also see the “point of sale” melts away as a concept, replaced by a point where both parties agree they want to engage in exploring value creating together (usually based on a value proposition made by one entity)
By observing that service is the fundamental basis of exchange we open a world of growth by naturally expanding spheres of interest away from a single point of sale. Let’s follow the evolution from today’s predominant view – that value is the unit of exchange – to one where service is the fundamental basis of exchange. Our journey is crudly mapped in Figure 1.
We start then with a quick recap of today’s value-in-exchange thinking.
Today: Value is the fundamental Unit of Exchange
Today we mostly look at the world through the all-pervasive goods-dominant logic (logic is shorthand for our ways of thinking, behaving and acting). Where we treat value as the unit of exchange, often refering to this as value-in-exchange.
Simply put, the main focus if the point of sale. Manufacturers focus on creating what they feel will get them the best price (by being seen to embed most value into their outcome). Customers, on the other hand, seek outcomes with greatest value embedded (often with other criteria, such as the cheapest price). At the point of sale, the value embedded by the manufacturer is exchanged with the customer for cash, and he manufacturer records 1 unit of sales. We can see this quite plainly in an example about a car, as represented in Figure 1.
The car manufacturer assembles a car from various components. And we see that car outcome as having more value than the component parts. Marketing have already determined what needs customers have. And of those needs, which consumers will find most valuable, and therefore which have been baked into the car. Then along comes a customer who buys the car (the embedded value). At which point the value is transferred to the customer and cash to the manufacturer.
What does the customer do with the value? Well, they destroy, or use-it up. Driving the car, for example, wears down parts. Eating a chocolate bar destroys the value. However, the manufacturer has little interest in that, since they are busy trying to get the next unit of value exchanged. The only interest they have is that by destroying value, the customer will need a new car in the future – a new opportunity for value exchange.
And this logic has served us well for some 300 years, underlying our capitalism = value exchange world. It was useful to early economists as they attempted to bring economics into a science (see Vargo and Lush’s 2004 paper “Evolving to a new dominant logic“). But this world-view is beginning to fail us – growth is hard to find, for example – and it doesn’t give us the full picture.
What value-in-exchange misses
Goods-dominant logic drives the manufacturer’s approach to be transactional. And typically through a one-off interaction. Their incentive is to maximise the value they have embedded in the outcome and get maximum exchange at the point of sale.
This has implications. And we can divide those implications into pre- and post-point of sale.
Implications – pre-point of sale
There is pressure to be able to inventorize the outcome, to make it consistent, and to be able to create it away from the customer, with limited customer involvement. You may recognise these as the 5Is used in marketing to try and describe services compared to products – intangibility, inconsistency, inseparability, involvement, and inventory.
Now, those factors have been beneficial for a while, but they lead to commoditisation of products. Which may be a good thing – “you can have it in any colour you like as long as it is black”.
Focussing on outcome also removes flexibility – due to the often long lead times from when marketing determines customers’ requirements to delivery of the outcome.
But, these 5Is are not necessarily as problematic as old school marketing will have you believe (see my article “Goods are good; service bad – not quite“). And Vargo and Lush (2004) highlight:
* Unless tangibility has a marketing advantage, it should be reduced or eliminated if possibleVargo and Lush (2004) “The four service marketing myths”
* The normative marketing goal should be customisation rather than standardisation
* The normative marketing goal should be to maximise customer involvement in value generation
* The normative goal of the enterprise should be to reduce inventory and maximise service flows
There are also implications for the post-point of sale period.
Implications – post-point of sale
A focus on value-in-exchange drives manufacturers to move on once the sale is made. Since they need to make the next sale (unit of exchange) to the next customer. And, if we’re honest, the post-sale destruction of value by the customer is useful. It means they will be looking for a replacement in the future.
It means, however, that the manufacturer misses out on three aspects.
First, they have limited feedback loop in which to address implications of co-value destruction (such as when customers use public platforms to damage the brand based on a perception of not being heard when problems arise).
Secondly, there is post-sales value co-creation lost – such as servitization.
And thirdly, the manufacturer is not incentivised to design their products for the circular economy. Where we talk of prolonging and sharing; reuse and redistribution; refurbishing and re-manufacturing; and recycling. This also means that the manufacturer is blinded to alternative business models and continues being myopic.
We need to shift from a one-off transactional approach to a more relational approach that looks beyond (melts away) the point of sale. And to do that, we reconsider what we are exchanging.
This afternoon: Service is the fundamental unit of exchange
So, instead of focussing on the units of outcome of a manufacturer, let’s focus on what they do to get that outcome. We’re evolving our thinking, not making a revolution, from a black box view to a glass box one.
Naïvely then, instead of the outcome, with its embedded value, being exchanged, we could talk about exchanging the value created when the manufacturer applies their skills and resources. And that means service, since service is defined as:
the application of specialized competences (knowledge and skills) through deeds, processes, and performances for the benefit of another entity or the entity itself.Vargo & Lush
Thinking this way – that service is the unit of exchange – is useful. We start having questions such as what does benefit mean? And what are the knowledge and skills needed? Or what are these deeds, process and performances?
We are more relational
We have a more relational definition. It implies there could be the involvement of both parties. That not every output is going to be the same. Our evolution of the definition still allows me to do the same thing time and time again.
We are more lean, agile, focussing on jobs to be done
But it also opens up the thinking process that if I’m going to apply some skills and resources, it makes sense to ensure I have the right configuration each time. I might want to have an ongoing discussion with the entity that is going to benefit from my deeds, processes or performance. What job are they hiring me for (jobs-to-be-done theory)? Am I applying the right mix of skills and competencies? Do I need to alter my application as I progress? Is the beneficiary changing their needs (either to external influence or through what they see I am doing)?
And we start to think of wider solutions
It is a perspective that also helps reduce Levitt’s marketing myopia. If I focus purely on value-in-exchange then I get myopic (short-sighted) in my solutions. I only look to apply my existing skills and resources more efficiently.
Levitt talks about how the railroads of the US missed the opportunities brought by aircraft. They were too focused on being railroad companies, rather than transportation companies. Very few of them exist today.
We begin to focus on value-in-use instead of value-in-exchange. But we’re still talking about exchanging units. And we have one more step to take.
Tomorrow: Service is the fundamental basis of exchange
By using “unit of exchange”, we are still thinking in a goods-dominant way. As Vargo & Lush (2016) note, we are still talking “in terms of units of output, whereas service-dominant logic revolves around processes”.
Ballantyne & Varey’s paper “Introducing a Dialogical Orientation to the Service-Dominant Logic of Marketing” prompted the needed change. They took the view that marketing is a dialogue. And that dialogue underpins co-generation of value through:
- communicative interaction,
- relationship development, and
- knowledge application
Service provision is the integration of skills and resources from all entities involved. I benefit from your application of your skills and resources. And, at the same time, you benefit, in varying degrees, from me applying my skills and resources. Together, through interactions, we co-create value My skills and resource might be as simple as knowing roughly what I want to achieve and spending my time to explain through to semi-active participation in service delivery; through to full participation (self-service).
There is no measurable unit of exchange in those dialogical actions. Rather, using them creates a basis for exchange. And so we arrive at the final definition for service-dominant logic’s first foundational premise:
Service is the fundamental basis of exchangeVargo & Lush (2016) – Foundational Premise #1
Service-dominant logic is not a competitor to goods-dominant logic. Instead, it emerges as we observe how the economy is really working. Goods-dominant logic has been sufficient, but deficient, for a few centuries. But we now find economies stagnating in growth, and we have poor our innovation performance.
No longer are we looking at a world where a manufacturer decides what value is and embeds it in a good; looking to exchange that for maximum cash at the point of sale.
We are in a world where we have dialogues with our customer and where service (the application of specialised skills and resources) is the basis of exchange.
Well, if service is the basis of exchange, then we should be able to see the next two foundational points in our updated order, that: all economies are service economies and indirect exchange masks the fundamental basis of exchange.