Value lies in the eyes of the beholder.........

but is
he getting blind?

We are witnessing a ever shorter product life cycle with "copycats" or maybe "clones" coming up fast
for every new creation we make. While marketing is often talked about with 6Ps the only P you see
dominating the psyche of most companies is Price. Over the past couple of decades, overcapacity in
almost every sector has ensured that there is hunger to make more things than necessary. The online
e-commerce front which has an investment model that believes that price promotion helps growth and
scale. The only word today heard is speed and scale quickly and any investment towards that is
acceptable. Profitability is good but growth is great and comes first! The consumer who is the beholder
of the value you create is blinded by the endless and mind boggling discounts being thrown at him.

Today, imagine a beautiful dress a woman sees on the window of her favourite retailer is at 70% of
Retail Price. She quickly checks around the prices on other channels and finds it at 50% of retail price.
She loves it but she has enough at home as well. She says to herself, maybe I should come here a
week or two later it may be available at a cheaper price! Now imagine this behaviour by a majority of
the population who may make up say about 75% of the GDP and you are creating a deflationary
economy. A way to create zero worth products perhaps.

The surging online business which does not yearn to make any profit but relies on near endless rounds
of funding (at least for now!) to stay afloat relies solely on "marking down" syndrome to "grow". The
capacity glut we have created around the globe is ever happy to feed this downward spiral where
discounting is merely "weapons of value destruction", a necessity to survive.
 What exact is Value
We hear every one speaking that they provide value products, value price, Valuable service etc. What
do we really mean by that? I like to take simple rational approach towards this as well. Value is the
continuum between the cost of creation and price of consumption plus other perceived measures in the
process.

While it is a continuum, invariably most of us try to choose the lower end of the continuum. Perhaps,
the abundance of choice makes it a natural standing point. The product makers often cite a need for
growth and a need to meet the "Street's" demands. Well, any capitalist will say that these are just about
right ways and capital market forces will align and automatically favour the productive, efficient of the
competitors while the others will perish.

I believe in capitalism but I also believe we are very far from perfect capital market forces to wait for
equilibriums. The world is awash with so much liquidity that in its quest to invest the monies have gone
global and we have created capacities everywhere. These capacities just for survival are willing to
produce cheap products (quality and price)! I believe that the "virtual cycle of productivity" will or is
turning into a "vicious cycle of productivity”. The virtuous cycle assumes the ability to infinitely lower
costs, driving ever-higher demand into infinity. Forget it. It is forever impossible in an over-competed
and over-saturated world, where we don’t need more for less. Rather, we need less for more. Less
quantity for more quality and better values.

The best example is that of Walmart which has forever tried to squeeze the costs lower and lower
stripping the value to bare minimums. As if it was not enough, Amazon joined the race and the
competition between them is skimming it further to such an extent that theirs and their entire supply
chain system works on dangerously thin margin levels. Many a times these are propped by excess
liquidity which either perpetually invests in building more capacity or props up their older investments by
"price supporting" them till the competition is vanquished!! A deflationary economy is not far away and
that does not help in building values in anyway!

There is another perspective I believe that is happening in the comsuming world. Perhaps a century
back, every country produced in limited quantities some high high quality products for which they
became famous. In a way they created value products for which the customer was paying the value
price too. The best Sheffield knives, bone china, Chinese Silk, Tibetan Pashmina, a Persian Carpet and
so on. The tasty and elite lapped up the produce always creating a scarcity for these products which
were well valued. For the mass population, they knew they had to wait to move up the ladder to get
these valuable products. But the globalisation and current day capitalism with abundant liquidity
changed it. The mass market was made happy with look alike products which were not as good but
were cheaper. With the aspirational chain broken and lowered the markets for the high quality products
remained small. Desperation and growth desires and necessities forced these premium quality products
to look downwards for volumes and begin a vicious vortex of "mark downs". Today even the best of
fashion from Stella McCartney, Karl Lagerfeld and many others have all relented and redefined
themselves to reach volumes. Their original values are lowered whether it is accepted or not. A cover-
up with larger market share may not be sufficient to justify the truthful value lost. They are tempted to
create lines and use channels to reach to mass/ mid mass markets. The only plausible reason is the
hunger for scale.

The Path to Recapturing Real Value

The answer is yes but it depends on what you want to achieve. When every company wants to be
bigger in scale, and want to be growing in rates far greater than the economy itself (not just in the
beginning years of the firm), we are surely entering into a trap where we are sub-consciously mixing up
the market segments. We are catering to a segment which sees your products value and price well but
at the same time, we are lured by the bigger base of the pyramid below that segment. Our markdown
does attract the segment which does not value the product as much and seeing the discount as the
only reason to buy. Unfortunately, you have build and scaled your capacity to cater to this segment as
well and for optimising your resource you need to continue discounting and perhaps more.

The way out is to clearly define what you want to be and what you will not want to be. What features of
your product are uncompromising and which customers of yours are worth so much as to leave all
others who may have also loved you for your discounts! Brands are built on values and ultimately
enhance the value of your product. You invest a lot on it and hope that the sustainability of these
benefits helps your business. By marking downs you will fritter away all your previous investments in
brand building. Brand building is not merely making the name popular. If that were so, I would advocate
having them pasted on the most used items like tissue paper. Everyone will know you for sure but not
for what you want to be known for?

Ensure that there is always a gap between supply and demand. A small shortage not only helps in
increasing the cravings but also gives you adequate time to study and analyse the consistency of
demands and carefully plan capacity additions. Price your product based on value and not on
competition. You may get your competitors wrong more often than estimate the value of what you
create passionately. Don't throw away your labour chasing your neighbour.

I am an accidental retailer myself. I am an engineer first and will always remain that way as my mind is
trained to think in that manner. My approach I feel is therefore more tuned to such analogies although
necessities to speak different languages and buzz words sometimes get the better of me too!

I want to sum up this great retail conundrum of value destruction and perpetual downward spiral for
value of products. I learnt much of retailing by relying on rational sense, fundamental finance and more
by observation of consumers in every market I worked. It has never failed me. There is no replacement
for your eyes and ears on the ground and what you learn is profound. Actually it never ends and you
keep doing it every day.

Imagine retail chain as a big network of pipelines with a retail POS as the Tap at the end of it. Your
investments are in the pipeline network and deciding the appropriate places on the network to place the
taps. The next important thing is to decide the size of the pipes and taps to ensure the fluid runs nearly
full on the pipes and the taps are sized just right for the size of pipes feeding them and buckets that
needs to be filled in by these taps. If I can ensure this, and send a consistent high quality product
through it my cash flows are well managed and if well optimised I can actually work on negative working
capital (which I had done in quite a few situations in practice as pure retailer/trading model). If cash
flows are in control, profitability is automatically achieved. The need to track profitability is hardly there
when you optimise this network. Now being discrete products, add in accumulators in the piping
network with an aim to minimise the number of accumulators and capacity of accumulators. You have
figured a retail model as well.
Price your product strictly based on the cost you add to build tangible value to end users and not based
on your overheads. Add the perceived premium for the delivery experience to arrive at a value. Stand
firm to it and keep looking upwards to grow your business. Growth is not a sin but looking downwards is
only an easier way out, and not always the right way. Moving upwards allows you to stimulate your
product creators further as well and adds much to the motivational needs for all in the system. Your
customers look forward to your creations to move up aspirationally too.

I do not disagree with the great management gurus who have spoken on the huge markets in the
bottom of the pyramid. They are right too but they never said you need to pursue the markets along all
sections. The larger the market you seek the more capital you need. The more capital you seek, the
more is the expectation for you to grow in scale! Time is another silent gunman you bring along into the
game and he will force you to throw value for growth faster and faster lowering the perception of value
to your own loyal customer in every round. It is a black hole which will suck the entire business unless
you have super powerful SUN like VC willing to throw money perpetually and ensure he overpowers the
forces that may want to pull you into the black hole like vortex of downwards value spiral.

Change the approach to VALUE FIRST

I see the current craze in discounting and mark down as an opportunity too. While it is a disaster when
you look at how values are being destroyed in the name of growth and scale, it is also for us to see the
other side which is getting cleaned up. The superior value space is getting created once again and that
any clutter that was existing there has moved downwards into the markdown spiral clearing the way for
genuine new businesses to offer good value. Provide and focus on value, you need to price will be
gone. You will be valued and worth it.

As I close this post, I reckon that these thoughts may sound to many as less ambitious or trying to be
shy of scaling up etc. After all there is a thin line dividing greed and ambition. Your emotion is the
difference, A positive and negative emotion alone is the change and you have too distinct words. Riding
the growth path is more like holding the tiger by its tail. Do it by all means only when you know how to
play the tiger' game and tame it well as once you have begun, you don't have options of leaving it
without being mauled. Being ambitious is a virtue when you charter into the unknown but only as far as
you can have resources to return to safety or conquer your quest completely. These may not be
necessary for those businesses which have nothing to lose or risk of their own and their adventures are
fully financed by others;)

Valuable creations always have takers and generate sufficient premiums for you to do well and be
content. Keep raising your value bar higher. Ask Apple if it ever is bothered by Samsung. For a couple
of years every quarter, the "Street" was busy trying to draw comparisons and catch up by Samsung.
Apple was least concerned and was only working creating better value and moving higher. Today the
comparison bug is finished. Apple with its creations has continuously taken its customer' aspirations
higher. Moving markets higher. If it were not for value it would have never been possible. Stem the
downward spiral.