For decades, businesses and academics have relied on the fundamental distinction between "goods" and "services" to categorize commercial offerings. This binary classification has shaped everything from business models to organizational structures, accounting practices to marketing strategies. But in today's complex marketplace, this basic distinction has become increasingly problematic and often meaningless.
When we try to categorize a Netflix subscription, a Tesla vehicle with continuous software updates, or a meal-kit delivery service, the traditional goods/services dichotomy simply breaks down. Is software-as-a-service a good or a service? What about a connected home device? The reality is that these classifications no longer serve our understanding of how value is created and experienced by customers.
What's needed is a framework that transcends these increasingly arbitrary distinctions and focuses instead on the fundamental ways customers derive value from offerings. Rather than attempting to place products into rigid categories based on what it “is”, we need to understand what they "do" and the value they "provide" from the customer's perspective.
Consider the modern smartphone. Is it primarily defined by its physical components or by the functions it enables? The device itself provides material value through its design and build quality, but the continuous software updates, cloud storage, and app ecosystem provide different kinds of value entirely–value that is more instrumental in nature. Or consider a meal at a fine restaurant. Is it primarily about consuming the food or about the service provided? What about the ambiance, the social experience, or the convenience of not having to cook? Traditional product categorizations simply cannot capture these multifaceted dimensions of value.
By shifting from what products are to value they provide we move past unsuccessful ontological categorizations to pragmatic value creation–opening up a rich understanding of how businesses actually meet customer needs and create competitive advantage.
The Four Dimensions of Value
Drawing on extensive observation of how customers experience value, I identify four distinct dimensions that transcend traditional product categorizations:
Material-value emerges from consuming the artifact itself. When you bite into a perfectly ripened peach, sink into a comfortable chair, or admire a well-crafted watch, you're experiencing material-value. The value resides in the inherent properties of the artifact and your direct interaction with it. The peach isn't solely valuable because it does something for you or produces some outcome; it has value in and of itself through the act of its consumption. Material-value is immediate, intrinsic, and tied to the artifact's physical or material qualities as they are consumed.
Tool-value comes from the output the artifact provides. Your washing machine’s primary value isn't as an object to be consumed or appreciated; it's valuable because of the output it produces (clean clothes) that makes your life easier. The same is true for your smartphone, your coffee maker, and your automated investment app. The tool-value of an artifact functions to produce outcomes for you, creating value through what it does rather than what it is. The focus shifts from consuming the artifact to benefiting from the output it provides.
Service-value derives from the output delivered from undergoing a process. When you get a haircut, the value isn't primarily in the tools used or the experience of sitting in the chair; it's in the resulting hairstyle that you couldn't create yourself. Similarly, when you hire a consultant, commission a custom piece of furniture, or use a repair service, you're seeking the output—the report, the furniture, the fixed item. Service-value centers on transformation, on an external process changing something from one state to another where you value the end result rather than the process itself.
Experience-value comes from undergoing the process itself. When you attend a concert, take a vacation, or participate in an educational program, the value lies in the journey, not just the destination. The experience itself is inherently valuable, regardless of any tangible output it might produce. This dimension of value is perhaps the most overlooked in traditional frameworks yet increasingly important in today's experience economy.
These four dimensions aren't just theoretical constructs; they're different ways that real customers experience value in the marketplace. And crucially, they're organized along two fundamental axes that help us understand their relationships:
The Production of Value: This dimension looks at how value is created - through either physical artifacts or intangible processes.
Artifact-based value: Value that arises from tangible items or objects that have physical properties (material-value and tool-value)
Process-based value: Value that comes from activities, procedures, or experiences rather than physical items (service-value and experience-value)
The Source of Value: This dimension examines where the (perceived) value actually resides for the customer.
End result value: Value that comes from the final outcome, deliverable, or what you ultimately receive (tool-value and service-value)
Means/activity value: Value that comes from how something functions, operates, or the activity itself rather than just the end product (material-value and experience-value)
These two dimensions organize a matrix that helps explain why different offerings create value in fundamentally different ways, and why traditional goods/services categorizations often fail to capture the nuanced ways customers experience value. In fact, most products deliver value across multiple dimensions simultaneously, though usually with different degrees of emphasis…
The Multidimensional Nature of Value
What makes this framework particularly powerful is its recognition that most products create value in multiple ways simultaneously. A fine dining experience delivers material-value through delicious meals, tool-value through restaurant outputs (nutrition), service-value through the resulting customized meals, and experience-value through the ambiance and social interaction. A smartphone provides material-value through quality materials and design, tool-value through the outputs its apps produce, service-value through communication networks that deliver messages and information, and experience-value through engaging with its interface.
This multidimensional perspective explains why customers often make seemingly irrational choices when viewed through a one-dimensional lens. Why would someone pay $5 for a coffee they could make at home for $0.50? The traditional explanation might focus on product quality (material-value), but the complete answer usually involves multiple value dimensions: the instrumental output from professional equipment (tool-value), the resulting professionally prepared beverage (service-value), and the atmosphere and ritual (experience-value).
By understanding all the dimensions of value your offering provides—and which ones matter most to your customers—you gain critical insights that can drive everything from product development to marketing strategy.
Strategic Implications
The four-dimensional value framework offers transformative insights for business strategy:
First, it reveals how businesses within the same category can differentiate themselves by emphasizing different value dimensions. In the restaurant industry, fast-food chains emphasize service-value (speed and consistency), while fine dining establishments emphasize material-value (quality ingredients) and experience-value (ambiance and service). Both are "restaurants," but they create value in fundamentally different ways.
Second, it illuminates new paths for innovation beyond traditional product improvements. Rather than just enhancing your core offering (material-value), you might strengthen your tool-value through better outcomes from using your goods, your service-value through more valuable delivered results from your processes, or your experience-value through more engaging, immersive activities. Innovation can occur along any of the four dimensions, often without changing other aspects of the product itself.
Third, it suggests more nuanced approaches to competition. Instead of competing head-to-head on the same value dimensions as your rivals, you might emphasize different dimensions where you have unique strengths or where customer needs are underserved. If everyone in your market is focused on material-value, you might differentiate through superior experience-value.
Fourth, it offers a more sophisticated lens for market analysis. Beyond broad market segments, you can identify customer microsegments based on which value dimensions they prioritize. Some coffee drinkers might prioritize material-value (taste quality), while others emphasize tool-value (caffeine delivery) or experience-value (the ritual and atmosphere). Understanding these differences allows for more precise targeting and positioning.
Example #1: Restaurants
Restaurants provide a compelling example of how the four value dimensions manifest in a familiar context:
Material-value in a restaurant comes from the food itself—its flavor, presentation, nutritional value, and quality of ingredients. This is value derived directly from consuming the physical artifacts (the dishes).
Tool-value in a restaurant comes from the outputs that the consumed artifacts (food and drinks) produce in your body and mind—the energy and nutrition from a well-balanced meal, the alertness from the coffee, the relaxation from the wine, or the satisfaction from a full stomach. These are the functional outputs that the consumed artifacts provide, beyond just the immediate pleasure of consumption.
Service-value lies in the outputs delivered from undergoing the restaurant's processes—the customized dishes created by the chef, the utilization of professional equipment, the specific meal combinations assembled to your preferences, the cleaned and arranged table setting. The value is in these specific outputs that result from the restaurant's processes.
Experience-value encompasses the enjoyment of being in the restaurant environment—the ambiance, the social context, the lighting, the seating, the service interactions, and the overall sensory experience of dining out. Here, the process of dining is valuable in itself, beyond any specific outputs.
Different restaurant concepts emphasize different value dimensions. A ghost kitchen delivery service maximizes service-value (streamlined professional food preparation outputs) while minimizing emphasis on experience-value. A celebrity chef's establishment might emphasize material-value (exceptional ingredients) and experience-value (unique atmosphere).
Understanding these distinctions helps explain why restaurant concepts succeed or fail, and why customers choose one establishment over another even when the core offering (food) might seem similar.
Example #2: Tool Rentals
Some business models reveal particularly interesting interactions between value dimensions. Consider a tool rental shop. When you rent a power tool:
First, you receive service-value from the rental process—the output delivered is temporary access to an expensive tool without requiring full ownership costs. The rental company's processes (inventory management, maintenance, checkout systems) deliver this valuable output to you.
Then, you receive tool-value from the outputs the rented tool provides—the holes drilled, the wood cut, or the floor sanded. These are outputs that the artifact produces, making your work easier and more efficient.
The example reveals an important nuance: different value dimensions can be sequentially experienced in a single customer journey. The rental transaction first delivers service-value (access to the tool) which then enables tool-value (outputs from using the tool). This demonstrates why customers might choose rental over purchase (prioritizing temporary access over ownership) or over hiring a professional (prioritizing doing it yourself with a quality tool over having someone else do the job entirely). Each choice represents different prioritizations along the value dimensions.
A New Language for Value Creation
The four-dimensional framework of value liberates us from the constraints of traditional product categorizations. Instead of trying to force Spotify into a single ontological category, “service”, we can recognize that it creates value across multiple dimensions: material-value through its content library that users consume, tool-value through the outputs of content (feelings of happiness or inspiring new thoughts), service-value through the streaming delivery of specific songs on demand, and experience-value through the process of discovering and enjoying music.
This perspective is particularly valuable in today's digital economy, where complex offerings are increasingly common. Software-as-a-service, connected products, digital marketplaces, and platform businesses all create value in ways that transcend traditional categories. The four-dimensional framework provides a more accurate and useful lens for understanding and optimizing these multifaceted value propositions for a given product.
Perhaps most importantly, this framework gives us a new language for discussing value creation—one that's more aligned with how customers actually experience value. Instead of trying to categorize offerings into rigid boxes, we can ask more productive questions:
How much material-value does our offering provide through its consumable qualities? How can we enhance it?
How valuable are the outputs our artifacts produce (tool-value)? Can we improve the effectiveness of the outputs?
How valuable are the outputs delivered after undergoing our processes (service-value)? Can we improve their quality or customization?
How meaningful is the experience of undergoing our processes (experience-value)? Can we make the process itself more valuable?
These questions lead to more nuanced strategies and innovations than traditional product categorizations allow.
Conclusion: Value-Centered Thinking
As customer expectations grow more sophisticated, businesses need frameworks that reflect the complex reality of value creation. The four-dimensional model presented here—distinguishing between material-value, tool-value, service-value, and experience-value—offers a more accurate and useful lens than traditional categorizations.
By focusing on the different aspects of what products do rather than what they are, this framework provides clearer guidance for product development, marketing, and business strategy. It acknowledges that most offerings create value in multiple ways simultaneously and helps businesses identify which dimensions matter most to their target customers.
In an increasingly complex marketplace where traditional boundaries are blurring, this value-centered approach offers both theoretical clarity and practical utility. It's time to move beyond rigid categorizations and embrace a more nuanced understanding of how businesses create value for customers.
The four dimensions of value aren't just a new way of seeing products; they're a new way of seeing business itself—not as the production of objects or the delivery of services, but as the creation of multidimensional value that enhances customers' lives in diverse and meaningful ways.