The Relationship between Value and ProfitFeb 24, 2014
The basic premise of my search for the Grand Unified Theory of Legal Value has been that Value is the gap between what you Invest and the Benefit you receive in a particular transaction. Otherwise stated:
Value = Benefit – Investment
My discussion so far has focused on Value from the customer's perspective, although a friend pointed out that my post on Waste conflated the customer's Investment with the provider's Investment. He has a good point, and I think the best way to differentiate the two is to introduce the concept of Profit.
Fortunately, once you understand Value, Profit is simple:
Profit = Benefit – Investment
Yep, Profit and Value are the same, but Profit pertains to the provider while Value is experienced by the customer.
As with Value, it is tempting to think about this equation in monetary terms. Do so at your peril. Yes, money (a Resource) is a component of profit, but so are many other factors like a sense of accomplishment, motivation, and even fun. I'll come back to the extrinsic vs. intrinsic aspects of Profit and Value, but in the mean time I highly recommend Daniel Pink's excellent Drive: The Surprising Truth About What Motivates Us.
So if Profit = Benefit – Investment, and Value = Benefit – Investment, then what is the relationship between a provider's Profit and her customer's Value? If the answer were easy then I'd probably have a lot more profit myself. I suspect, however, that it's more complicated than a 1:1 equation. For now, I'll just call it a relationship:
Profit provider :: Value customer
Benefit provider – Investment provider :: Benefit customer – Investment customer
What I do know is that there is some connection between the Investment on one side of the relationship and the Benefit on the other. A larger provider Investment should result in a greater customer Benefit (and therefore a greater Value), just as a larger customer Investment should result in a greater provider Benefit (and therefore more Profit).
Of course we all know that this rarely happens in a one to one fashion. The question is, "why?" For now I can think of at least two factors that throw the relationship out of balance:
(1) Waste. Recall that Investment = Time + Energy + Effort + Resources + Opportunity. As I said in my previous post, Waste is any Investment that doesn't lead to some increase in Benefit. This can be true of Investment on just one side of the provider/customer relationship, or it can be true across the relationship. At the end of the day, any Investment you make in time, energy, effort, resources, or opportunity that does not result in some Benefit to you or your customer is Waste.
(2) Value is Emotional. This means that Value is not Rational, which means that calculating Value is harder than just figuring out the fiscal bottom line. But it also means that small Investments that trigger large emotional responses can have a disproportionate impact on Value. This can cut both ways: The small Investment of a mint on a pillow can trigger a disproportionate feeling of luxury, but a small Investment of noting 0.1 hours on a client's invoice for listening to voicemail can trigger a disproportionate feeling of highway robbery.
So a provider's Profit is linked to a customer's Value through the complex relationship between the Investments on one side of the relationship and the Benefits on the other. As usual, this leads to more questions than answers, but I think we're getting somewhere. Join the conversation by commenting below, or you can connect with me on LinkedIn or follow me on Twitter.
© 2014 John E. Grant.
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