Improvement costs more doesn’t it?
We all know the phrase “you get what you pay for” and we all know from experience that higher quality goods and services cost more. So, it follows that if we improve the quality of our product or service then we’re always going to have to charge our customers more for it. But is that always the case? If we add extra value to the product then it is likely that it will cost us more to do that and we may have to pass that cost on; but improvement often comes from removing something that was preventing a higher quality output. When we remove something our costs are likely to go down and this reduction in cost can be passed on to the customer. Unfortunately the idea that lower costs mean lower quality is also deeply engrained into our thinking – so if a supplier offers what appears to be higher quality at a lower price we get suspicious. There must be a catch or a trick. So, to avoid disappointing your customers when you make an improvement by removing an impediment to quality - increase the price a bit. That way your costs go down, the price goes up, the customers expectation is met and everyone is happy; your customers and your accountant! Surely there must be catch?
I suspect that companies like Toyota see waste elimination and cost reduction as something that goes on separately to the marketing of a product and how the price is set. I notice that there’s little room for negotiation when buying a new Toyota compared with their competitors – they seem to know what the product’s worth is.
I know from my own experience of pricing my consulting work with clients, that I don’t get valued properly unless I charge at a level that meets the customer’s expectation that I’m going to add lots of value. I’ll work for very little, or even nothing, if that’s what is needed to get good things to happen provided I am valued. I aim to reduce the cost of my product regardless of what I’m going to charge for it, and this makes it easier to price my product at whatever level is needed to meet the customer’s expectation.
We’ve just employed someone from industry here at Derby Hospital and he can’t believe we think this is a paradox at all. He says quality improvement in industry almost always means at a lower cost, they always go hand-in-hand. It seems we are starting at a very different place in this debate in the NHS.
Most economists can’t agree on much of anything BUT the one thing they nearly all agree on is a definition of value. “The value of something is defined as what you are prepared to give up to get what you (think) you want”.
Therefore the value is always in the eye of the beholder. No one can deny that Toyota is a successful company yet over decades how many Toyota cars will hold let alone increase their value. Most Aston Martins older than twenty years are actually worth more now than when new. Yet the company that built those cars went bankrupt many years ago.
Our perceptions of “cost” and “value” are very subjective and can change in an instant depending on what way the cultural wind blows.
Toyota is a wonderful example of how different people perceive value differently. Their hybrid car is very expensive for what it is and less “eco friendly” than many cheaper comparable sized cars .. yet because the technology is “sexy” to some they can charge a premium. What will be the value of those cars in a couple of years?
I don’t even begin to understand how anyone can work out the value/cost of healthcare. Most people don’t give a stuff about their health as long as it’s okay… if they did, they would eat, drink, exercise differently and not smoke. Yet when it all goes wrong we have a different perception and another one where it concerns other peoples health.
To go back to economics we can consider the “opportunity cost”: to get the thing we want, what do we have to give up? And this is the rub, one of the things we may have to give up is our time to investigate the choices.
If we don’t have much time we may rely on past experience, someone else’s experience, cultural norms, expert opinion.
Oh I could go on about perceived value for ever .. one of my mates used to buy in cheap watches and sell them round the pubs as ‘falling of the back of a lorry” .. the guys in the the pub wanted to think they were getting an expensive watch cheaper than the mugs that pay full price (and the only way they perceived this was possible was if they were knocked off).
In summary people set a value based on their experience/bias/world view. Changes in production cost may or may not have any impact.