Do You Know This About Value?

March 30, 2015

A diamond and a rock, sitting side by side. Both discovered near the bottom of the Udachny diamond mine in the Sakha Republic region of Russia, one of the world’s ten deepest open-pit diamond mines.

But are they of the same value?

The cost, in materials, labor and equipment of retrieving the two stones, the diamond and the rock, are identical.

Yet, the value of each stone is tremendously different. The diamond might be valued in the thousands to the millions, while the rock is just tossed aside as junk.

Value does not follow cost. Cost has nothing to do with value.

But in healthcare today, the trend is to base “value,” as in so-called value based purchasing, on cost. This is very curious. The technical term for this is “ass backwards.”

That’s not to say that knowing cost isn’t important. It is important because if the value doesn’t exceed the cost, the maker or the supplier won’t be in business very long. But the value is determined outside of the venture, by the customer, who has no concern at all over the maker’s cost.

I can’t remember where I read it, and therefore can’t give credit or verify its truth, but it’s said that in the 1960’s a friend of one of the owners of Aston Martin wanted to buy one of the company’s cars at “cost.” The car was then selling for something like £5,000. The owner’s reply was that he would be happy to sell it for cost:  £7,000.

Cost-plus pricing and the notion of selling your services at a “fair return on cost” are concepts of a bygone era. Actually, of a bygone error. Don’t repeat it.

There are pricing and negotiation strategies for you to avoid the trap.

Your services are a diamond, not a rock.

Comment or contact me if you’d like to discuss this post.

Mark F. Weiss

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