This week’s guest post is by Peter Prevos, creator of The Invisible Water Utility blog.
Father of economics Adam Smith identified the so called diamond-water paradox in the Wealth of Nations. This is the idea that some commodities without value in use, such as diamonds, have a high value in exchange and vice versa, water has a high use value, but demands a low price.
Smith acknowledges the common sense idea that water is valuable, but how valuable is water exactly? The simplest definition of value is that it is the difference between perceived benefits and perceived cost. In this article I propose a model to determine the value of water to customers.
The benefits of water
To describe consumer benefits we need to distinguish between needs and wants for water. The marketing definition of needs and wants is very different to the common sense understanding of need as a necessity.
Based on Maslow’s humanistic psychology, human beings need a lot more than just that which is needed to survive. Human beings have sociological needs and psychological needs and they all have to be met. They are all necessary in order to be a complete human being.
To say that water used for gardening is not a need is wrong. People need water to grow their gardens because they have a sociological need or psychological need. People have a garden because they want to invite friends and have a good time. Gardening also provides a sense of achievement, an important psychological need.
Needs are a psychological state of felt deprivation. There is no threshold whether something does or does not classify as a need. Needs are psychologically innate within us; they can not be changed or created. Hand in hand with psychological needs, customers have ‘wants’, which is the manner in which a need is satisfied. If somebody has a need for self-fulfilment, some people might do a PhD in marketing, other people might enjoy working in their garden, for which they need water.
Everybody fulfils their psychological needs differently. The core task of a service provider is to understand these needs and wants and create a value proposition that matches customer expectations. Marketing can not change or create needs, but it can influence what people want. Wants are culturally determined and can be shaped through communication,and education.
The traditional Aussie backyard is disappearing because customer’s values are changing. People now are no longer interested to express themselves through their garden, possibly because the younger generation has experienced the prolonged drought and has developed alternative ways to satisfy their needs.
The cost of water
The other side of the value equation is cost. Far too much has been said about the cost of water, but most of this discourse is about money.
However, the cost of water is multi-dimensional. Besides a monetary price people pay a psychological price. The psychological price encompasses the mental effort customers need to expense in purchasing or consuming the service.
With water the psychological price is generally very marginal, but as soon as the service fails, the psychological price increases dramatically, thereby decreasing the perceived value and leading to unhappy customers.
Third is the sociological price, which relates to how the purchase impacts how we are perceived by other people. Sociological cost is relevant to water users in that, for example owning a nice garden or swimming pool enhances the customer’s prestige in their social network.
The type of price that I want to focus a bit more on is time. People need to spend time to obtain water and around the world things are very different. The worst possible water service imaginable you would find, for example, in arid parts of Africa where women spend hours every day to get their daily ration of water. There are some estimates that, collectively, around the world women, because you never see men carrying water, spend about 200 million hours every day to obtain water.
In developed countries the amount of time needed to obtain water is negligible, except in cases of service failure when customers need to spend extra time or delay their activities because water is not available or not of a potable quality and needs to be boiled.
The value proposition of water utilities
Understanding how the value of a service is assessed by your customers is the first step in developing a value proposition enhances customer experience. Water is an interesting service because in developed countries it is taken for granted. The price of water, monetary, psychological, sociological and time, is so low that any disturbance in the value equation will lead to dissatisfaction. This leads to a previous proposition I made, the best possible water utility is invisible to the customer.
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About the Author
Donna Vincent Roa
Donna leads high-stakes, social impact organizations and projects. Her track record shows a relentless focus on results and innovative strategies that favorably impact the bottom line, operational efficiency and organizational culture. She is a driver of positive and disruptive change and brand transformations that outperform business objectives. A leader in international development, a champion for social innovation and environmental issues, Donna thrives in organizations that see the world through an environment, water, sustainability, agriculture, public health, and social impact lens.
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- New Realities Needed for Water Sustainability
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- Water Utilities Own the Value of Water Equation