Published by MBA Skool Team, Last Updated: January 22, 2018
What is Value For Money (VFM)?
The utility that a customer derives from the product/service in return for the economy (money) spent on it. It is a measure of the effectiveness and/or the efficiency of the product. It is an assessment as to whether the customer has derived the maximum benefit possible from the good/service, within the constraints of the resources (time, money, materials) available to him/her.
The parameters used to measure the utility of the good/service include: cost, quality, convenience, resource use, fitness for purpose, timeliness/availability, among others. Some of these elements, being intangible, may be difficult to measure on an objective basis. So, the evaluation of these parameters will be subjective and may vary from person to person and from time to time.
Vfm can be best described in terms of three Es: economy, efficiency and effectiveness.
• Economy: Carefully using the resources to save money, time and/or effort.
• Efficiency: How much you can improve your production parameters in order to be able to deliver the same level of service at lower cost, quicker time and with lesser effort (linked with economies of scale) or to deliver more (quantity and/or quality of service) for less (money, time or effort)
• Effectiveness: How successfully have the intended outcomes of the activity been achieved
Nowadays, a fourth ‘E’- equity has been added to the above three in order to account for the differences in customer groups and how well the service provider is able to bridge those differences.
(According to an Organisation for economic cooperation and development (OECD) report).
Some of the tools used to measure Vfm are cost-benefit analysis (to evaluate the net economic impact of a project; most commonly used in major infrastructure investment) and cost-effectiveness analysis (for more intangible outcomes such as health).
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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