By Robert F. Lusch and Stephen L. Vargo
If you had told me a few years ago that I would be reading marketing books, I would not have believed you. But marketing turns out to be a fascinating and oddly parallel area of study for someone interested in professional communication—and it's also a vital field for me to understand due to the research study I'm currently conducting.
Like any other field, marketing has differences, disagreements, and controversies. One recent fissure has been in how people define the value proposition, which is (roughly) the promise of value that a good or service can offer a customer. The value proposition is often discussed, but rarely defined or investigated rigorously in the marketing literature; it's a rather vague term, like "context." But traditionally, ever since the term was first used in the 1980s, the value proposition has been understood as built into the good or service by the supplier, then offered to customers, who might then accept or reject it.
But in 2004, Vargo and Lusch published an article that challenged this understanding of the value proposition and the logic that defined it:
In their 2004 piece, Vargo and Lusch argued that marketing had assumed what they call goods-dominant logic (GDL) in which value was embedded in goods and offered to consumers. Instead, they argued, marketing should be understood in terms of service-dominant logic (SDL), in which value emerged from a dialogue among resource integrators. They and others developed this line of thinking in a series of articles. In this book, they summarize and extend the discussion further.
In Chapter 1, they argue:
Problems emerge immediately when constructing simple theories of exchange, business, and society. Arguably, the most difficult of these problems is the dominance of an institutional logic with serious limitations, which is deeply rooted in a discipline and thus monopolizes associated thought processes. One such worldview is G-D [goods-dominant] logic. This logic frames the world of exchange in terms of units of output (goods). Others have referred to it as “old enterprise logic,” “manufacturing logic,” and other, similarly descriptive tags.
G-D logic views the production and exchange of goods as the central components of business and economics. That is, it frames the purpose of the firm and the function of economic exchange in terms of making and distributing products – units of output, usually tangible. It is closely aligned with neoclassical economics, which views actors as rational, firms as profit-maximizing, customers as utility-maximizing, information and resources as flowing easily among economic actors, and markets as equilibrium-seeking – scholars within and outside economics have challenged all these perspectives. (p.4)G-D logic, they say, developed from economics and inherited economics' focus on exchange-value, a focus that can be traced back to the limitations and peculiarities that Adam Smith dealt with in his famous treatise The Wealth of Nations (pp.6-7). But, the authors argue, Smith used exchange-value as a proxy for use-value:
The early scholars, including Smith in his original analysis of economic exchange, had it right all along: value is created at the point of what we have been calling “consumption” and, more recently, “experience”, rather than during production. (p.7)Focusing on use-value means that we must acknowledge that "value is cocreated" among all entities involved in the transaction (p.8). That entails seeing each transaction as a service rather than a good, a service in which we must recognize "the most important resources being integrated and doing the integration – human actors with their skills, knowledge, and innovative and entrepreneurial abilities. What is needed is a logic that, rather than abandoning goods logic, transcends it, by recognizing the primacy of human resources applied for the benefit of others (and ourselves) – service" (p.8). Whereas G-D Logic saw the relationship as being between producers and consumers, S-D Logic removes that distinction: "Fundamentally, all actors (e.g., business firms, nonprofit and government organizations, individuals, and households) have a common purpose: value cocreation through resource integration and service-for-service exchange" (p.10). For instance, rather than focusing on the goods being exchanged (say, a fisherman and a farmer exchange fish for grain), we should examine the services that are involved (say, "the application of protein-producing competences for the application of carbohydrate-producing competences," p.11). "This service-oriented interpretation focuses attention on the only resource the actors really possess to take to market: their own knowledge and skills" (p.11). And thus, the authors say, we get to the key difference in understanding the business process: between "selling things to people and understanding it as serving the exchange partner's needs. This difference is a key difference between G-D and S-D logic" (p.11).
Following from this distinction are four axioms:
- "Service is the fundamental basis for exchange"— implying that "(1) goods are appliances for service provision, (2) all businesses are service businesses, and (3) all economies are service economies."
- "The customer is always a cocreator of value."
- "All social and economic actors are resource integrators," that is, agents in combining and integrating resources to produce value.
- "Value is always uniquely and phenomenologically determined by the beneficiary" (pp.15-16)
To capture these dualistic, dynamic, resource-integrating (through service exchange), enabling, and constraining value-( co-) creating structures, we use the term “service ecosystems.” A service ecosystem is a relatively self-contained, self-adjusting system of resource-integrating actors that are connected by shared institutional logics and mutual value creation through service exchange. By including shared institutional logics we point towards a link between S-D logic and structuration theory which describes human actions within social systems as enabled and constrained by social structures – that is, as contextual and contingent. (pp.24-25)
Therefore, a value proposition under S-D logic is how an actor co-proposes to positively affect another actor. This recognizes that value is obtained when an actor experiences through engagement with the firm the unfolding of the interactive market offering. Stated alternatively, firms and other actors can offer potential value through value propositions; however, they cannot create value but only cocreate it.
Value propositions are therefore promises but they must be fulfilled. Firms and actors, in general in developing exchange relationships, should view their role as offering more compelling value propositions than other competing actors but then making sure, to the extent possible, that actual value as experienced by the beneficiary meets or exceeds promised value. (pp.72)