Apr. 21, 2011—Last year, I wrote about research that Pankaj Sood, the founder of McMaster University‘s RFID Applications Lab, is conducting at Cambridge University, in the United Kingdom (see The Value of Information). Now, Sood has started a blog to share his thoughts and solicit feedback from readers (see Quantifying the Value of Information).
It’s a complex issue, and one that relates to the use of radio frequency identification, which is all about capturing accurate, real-time information to improve the way in which a company does business. Sood’s research raises some interesting questions. For a retailer, what is the value of knowing that a pair of jeans in a certain style and size is unavailable on the shelf? It’s a difficult question to answer—and yet, how can you know the value of your RFID system if you can’t assess the value of the information it will provide?
Calculating the value of knowing an item is not on the shelf can be measured, in part, by comparing sales of that item at stores for which you lack out-of-stock data with those for which you have such information. But that is only part of the story. How many sales did you lose when customers walked out without buying anything because the one item they came in for was out of stock? And how much incremental revenue was realized when customers found the jeans they wanted, and then also bought a shirt or belt? Even more important, what is the long-term value of being able to satisfy those customers?
The University of Pennsylvania’s Wharton School was once asked to study out-of-stocks for an unnamed retailer. That company estimated that perhaps 5 percent of the time, its customers would entire its stores and fail to find what they were looking for. But Wharton’s researchers, surveying shoppers leaving the premises, found that 30 percent of them did not find at least one item they sought. Forget, for a moment, the immediate cost of lost sales in these cases—what is the impact of this problem on a retailer’s long-term health?
My own view is that information is a commodity. But while most commodities are valued based on supply and demand, information is valued based on perceived risk and reward. Let me explain: With traditional commodities—let’s use water as an example—value is based on supply and demand. Where there is a lot of fresh drinking water but few people, water’s value is very low. But in a place where there is a high population but a lack of fresh water, its value is very high. In fact, if you are dying of thirst (high demand), you will pay almost anything for water.
It’s similar for information, which, in many cases, is cheap, abundant and not valued. The Internet is awash in information, much of which has very little perceived value. But there are Web sites on which experts offer stock tips that some investors perceive could help them invest more wisely. They perceive a reward (“If I subscribe to this stock-tip site,” they hope, “I will make more money in the stock market.”), so they are willing to pay upwards of $10,000 for an annual subscription.
The challenge for an RFID vendor is to convince a potential buyer that there is value in the data that its solution provides. Currently, many companies question that value. Perhaps Sood will develop a formula for calculating the value of information, so that executives will know what RFID data is worth—and how much they can justify investing in systems to provide it.
Mark Roberti is the founder and editor of RFID Journal. If you would like to comment on this article, click on the link below. To read more of Mark’s opinions, visit the RFID Journal Blog, the Editor’s Note archive or RFID Connect.