Research Blog - Customer Intelligence

There seem to be two topics in Information System (IS) research that everyone seems tired of talking about: information vs data, and value vs quality. As such, there is not a lot of agreement about how these terms are used. For example, it is very widespread to read such things as "thoughout this article, the terms 'data' and 'information' will be used interchangably". To my mind, this is like using 'heat' and 'temperature' interchangably: acceptable in everyday life, but not if you're a physicist or refrigeration mechanic. They are two different words for a good reason - they are two different concepts. There may be disagreement about how they differ (information theory as compared with semiotics), but we should at least recognise that there is a difference! But, I've got a feeling I'm going to ride this hobby-horse to hell ...

The second term-pair is the object of this text: the concepts of quality and value. They are both seen as "good things" and are some how related yet quite distinct. I will start of by describing how they (seem to be) used and some shortcomings. Then, I will present my conceptual framework of these terms, culminating in the synthetic notion of "value of quality".

Both "value" and "quality" are concepts used for assessment of past, present or future outcomes. While modern management rhetoric is replete with both of them, we sometimes find them being used without any great distinction. The situation is not dissimiliar to when people use the terms "efficiency", "efficacy" and "effectiveness" as synonyms: they are different for a reason and the expressive vocabulary of middle and strategic management is weakened when the distinctions are lost. As such, it is worth pondering the nature of these concepts, and suggest some guidelines for use.

No doubt there are hundreds of sources on this topic, but my simple, almost child-like, probing of Google didn't turn up anything addressing exactly this issue. When people use "value" I think they often have in mind a market price, whereas the term "quality" seems to be associated with customer feedback. That is, the concepts are "operationalised" by the procedure used to determine them (eg a financial transaction or survey response). At a more abstract level, value is defined as "utility" while "fitness for purpose" is a frequent level-head response to the question "what is quality?". Some people seem to attach religious overtones to it. The definition of quality as "reasonably fit for that purpose" seems to be applicable in the Commononwealth legislation, and may have equivalents in other common law countries.

"Utility" is a very abstract concept, rooted in psychology, economics and philosophy. In practice, it is measured in currency using the net present value of a stream of costs and revenue (ie discounted cashflow). There are two other value-measuring methods. "Historical cost" (what you paid for the item) and "market value" (how much it would cost to replace by going to the market; or how much you could sell it for in the market). These may be preferred by accoutants and tax planners for different purposes. Experimentally, "willing to pay" (WTP) and "willing to accept" (WTA) are often used: these are the prices in cash you would be willing to pay/accept to acquire/dispose of the item. It's interesting to note that due to the "endowment effect", people typically price items they already have three times higher than identical ones they don't have.

So the supposition is that the terms are defined by how they are elicited; this often leads to the assumption that value is quantitative while quality is qualitative. I disagree that this is the distinction: quite often quality is measured subjectively through Likert scales and objectively through defect rates, down-time and precision. Another observation is that quality seems to crop up more in public-sector and community organisational jargon, while value crops up more in the corporate and business world. To visit the supermarket, we're left the impression that "value" and "quality" are codewords for "discount" and "premium". Perhaps this is merely what advertisers would like them to mean to retail consumers. One last distinction: people sometimes refer to quality as being subjective and value as objective, somehow tying up the use of these concepts with the postitist/interpretivist methodologies war. I think that both concepts are sufficiently different that they can contribute to discussion in both camps.

Now I would like to present my own modest attempt at explaining the difference. "Quality" is to do with "satisfaction", while "value" is to do with "preference". Please allow me to elaborate: assume that you have an itch that needs scratching. The quality of the someone's scratching is intrinsic to the experience itself. It is only meaningful to talk about the value of the scratching relative to an alternative course of action, such as rubbing up against a wall. So satisfaction is an internal sensation or experience, while value is the expression of a preference by behaviour. To elicit the value of something, you have to have an item (or experience), a person to perform the evaluation and an alternative. At the end of the observation, you can determine the preference. By extension you can repeat the procedure with a number of items and generate a ranking, or partially ordered preference function. This is the basic approach taken by von Neumann and Morgestern in their axiomatisation of preferences for lotteries in their expected utility theory.

So quality is a conceptualisation of the "fit" of the item (or experience) for the purpose at hand. It seems like quality must be a Boolean notion - something either is or isn't quality. Or can there be degrees of quality? If so, how can it be agreed upon within a group, since quality is inherently a subjective sensation of satisfaction? This seems to be the starting point of the "quality movement": defining the dimensions along which quality can deteriorate, and developing instruments to measure the extent.

Value, in comparison, is relative to the alternatives and thus is operationalised and expressed as a ranking. In the case where the alternatives are a small set of discrete behaviours, observation of the subject will only reveal a small amount about the value they ascribe. However, we can make the "granularity" of the choice-set arbitrarily small using currency, and get as precise a ranking as we like by conducting WTA/WTP experiements. That is, when a subject expresses ranking of preferences for $392 cash over a surfboard over $390 cash, we can label this relative preference for the surfboard with the shorthand of "price".

Here is a diagram illustrating the difference between quality and value. The yellow block is the pre-existing need, and the quality of the item is portrayed as how well it fits in the slot. Thus, the amount of daylight could be interpreted as an (objective) measure of the quality. The value, in this case, is the ranking expressed by the consumer over the three alternatives.

As we've seen, by introducing cash alternatives we can assign a price to the quality. Note that this price may not be related to the geometry of the fit at all, and in general it would have to be experimentally determined with preference experiments. However, in some circumstances a consumer would agree to use a rule, or formula, to analytically derive their price (to accept or to pay), which necessitates an objective measure. In physical markets, this measure is most often quantity (amount or count). In non-physical markets it is typically risk or probability. This approach is also important in organisations, where decision-making is distributed and accountability requires that decision-makers can justify their valuations.

Next, we consider the use of these terms. Earlier I remarked that quality and value enjoy a loose public/private sector dichotomy. I suspect that the above framework may explain this. In the business world, the phrase "value-added" is used to death. To impart some meaning, I choose to interpret it as the "value gap" between your offering and that of your nearest competitor. This is because businesses understand that consumers make choice: the goal is to picked first. You only want to win the auction by $1: winning by $100 is a waste. Afterall, it's the ranking that matters, not the score. Hence, businesses are focused on shaping their value proposition to the customer relative to each customer's alternative choices (ie the competition, substitutes or the "do-nothing" option).

This approach doesn't pan out to well in the absence of alternatives. Many public and community sector organisations perceive themselves to be in this position. There's nothing to rank against if your a monopoly provider of an essential service. It's not reasonable to ask what the next best alternative to air is, or what price you are willing to accept to have it taken from you. To the individual consumer, I suspect that they are more interested in the quality of the ambulance service than it's value. (Still, some people will for different reasons prefer to hail a taxi cab to take them to hospital.)

There is one point of view where the value of such services is considered: that of the government. They are concerned with valuation in addition to quality because they must make resource allocation decisions across disparite activies. To decide if money should come out of roads and go into child protection, they consider the impact upon the quality of transport and safety, respectively, to citizens. We in turn express our view of the quality of the government's efforts at this task via polling of the electorate. Note that it is only during an actual vote that we express our value of the government: our behaviour reveals our preferences.

So people operating in a market focus on value. Quality is important to the extent that it influences value. If you are a supplier currently coming second in the auction, there are two ways you can improve your value (ie preference ranking). You can increase your (perceived) quality or decrease that of your competitor in first place. An interesting question is: would you prefer a change X in your quality, or a change Y in your competitor's quality? A rational supplier would answer this by considering the value of each change ie the effect on consumer ranking and choose the one that maximised the expected utility. By introducing cash bundles (or lotteries) and asking the supplier to rank them, we could determine the price of X and Y ie where abouts they fit on the ranking from $0, $1, ... , $infinity. Further, we could describe a change X by some objective measure of degree (say, parameter t), then we could experimentally create a price curve of X(t) by determining where each of X(1), X(2) etc fit.

This is how we measure the "value of quality": it is the supplier's estimate of the consumer's preferences for realising satisfaction. To recap:

In the beginning was the need, or requirement or "itch" of a consumer. They seek things to satisfy this need (or scatch the itch) from a set of suppliers. They rank the offerings and make a selection, and then experience satisfaction associated with the outcome. The consumer can assess this experience using two concepts:

  • Quality: the subjective satisfaction experienced by the consumer. It is elicited via qualitative feedback, Likert scales or agreement on indirect objective measures such as number of defects and probability of failure. Quality can be decomposed into dimensions which can measured and compared.

  • Value: the relative preference of the consumer for that alternative. It is elicitied via observation of ranking of alternatives in experiments. If a range of cash bundles are introduced as alternatives, it possible to determine the consumer's Willing to Accept/Pay prices for each alternative.

It only makes sense to talk about value relative to at least one alternative, otherwise no preference can be discerned. In a competitive market suppliers are interested in their value (ie relative standing) to all their consumers. They will compete on (perceived) quality to the extent that it will improve their value in the eyes of the consumer. It may be more effective to change the (perceived) quality of their competitors. Suppliers are interested in the sensitivity of consumer valuation to perceived quality; that is, the value of quality.

A possible approach is to use qualitative research methods to determine quality dimensions and surveys to determine scalings and calibration. Then, determine the subjective value of alternatives by conducting WTA/WTP experiments. Fit a model that estimates the consumer's value for any set of quality inputs. For a given auction, determine the cheapest quality dimensions to improve to win by $1. If it's cheaper than winning the bid, go for it.

In practice, quality meets value at the point of Service Level Agreements (SLAs). Typically, you find a quality measure associated with a value measure (bonus/penalty). Due to the organisational and legal requirements, objective measures are used. While the consumer could in theory fine-tune the bonus/penalty structure to work for the quality definitions the supplier comes up with, this isn't practical. Instead, they agree on quality dimensions and scales, and associated payments, via often very simple formulae. Further, the objectivity requirement means they often use simple technical measures. These crude constraints mean that for any point on the quality scale, it's likely that at least one party will feel agrieved by the corresponding bonus/penalty. This can quickly destroy goodwill and lead to "playing to the numbers" instead of focusing on subjective quality.

In situations where there are no alternatives (such as monopoly provider of essential services or an internal suppier), it is not possible to talk meaningfully about the value of the good or service. However, it is possible to describe the value of quality by considering the preference for alternative possible quality changes. Candidate quality changes are often parameterised, such as failure rate or response time, to allow the comparisons (for reporting and budgetary allocations) to be analytic. This approach is at the heart of modern quality management practice. It is exemplified by the way we run specialist security services and professional sports teams.

By seeing quality as subjective satisfaction and value as relative preference, we can understand the role they play in organisational decision-making, and where we're likely to encounter each. It's also useful for understanding the role of quality and quality measures in competitive markets.