VALUE MAPPING

Marketing Best Practices Forum

Mike Purcell

Topics
Overview of Value Mapping & Value Scorecard Tools Application of tools to Pricing & Positioning Our New Product X in the Y market Implications for Innovation & Profitable Growth

Illustration of Tools to Minivan Market (if time)

Background / For Additional Info

Bradley Gale, Managing Customer Value, 1994

McKinsey & Co., Setting Value, Not Price, 1997

Smith & Nagle, A Question of Value, Marketing Management, July/Aug 2005 Smith & Nagle, Pricing the Differential, Marketing Management, May/June 2005

Others.

Overview of Value Mapping Tools

Value Map measures effective selling prices of competing products in a category versus the composite performance ratings of the products. Value Scorecard shows differential worth that customers attribute to performance features of products in a category. Basis for simulating market entry and repositioning strategies and consequences of competitive response.

Premises
Customers evaluate the differential worth of an offering by comparing the economic value of its benefits against its selling price and also against those of competitive offers. Performance attributes affecting customer purchase decisions can be identified, ranked, and weighted. Customer perception of relative performance on these attributes can be measured.

The Fundamental Marketplace Economics

Premium Segment Economy Segment

$
Total Economic Supply Cost

Product/Service Performance
= The various products introduced to the market

Distribution of Value
Economic Value to Customer Customer Surplus Total Economic Surplus Producer Surplus (Economic Profit) Total Economic Supply Cost Effective Price of Offering

Product/Service Performance

The Fair Value Line

Economic Value to Customer

Fair Value Line Total Economic Supply Cost

Product/Service Performance

Competitive Market Dynamics

Product/Service Performance

Competitive Market Dynamics

Share-Losing

Share-Gaining

Product/Service Performance

Competitive Market Dynamics

Product/Service Performance

Competitive Market Dynamics

Product/Service Performance

Competitive Market Dynamics

$
Share-Losing Share-Gaining

Product/Service Performance

Competitive Market Dynamics

$
In competitive markets, the value of a given technology is relentlessly transferred over time from the producers to the consumers, absent a legal monopoly (e.g., temporary patent protection or wine distributors in South Carolina!).

Product/Service Performance

A Painful Real-World Example

Why did we lose share in Market Z? Should we respond with a me-too?
$0.090 $0.080 Our Premium Product $0.070

The Market Pre-2000

$0.060

Add-On Cost ($/lb)

$0.050

Market disruption: Entrance of new products with premium performance at lower effective cost in use (good for customer).

$0.040 Conventional low-end Product Technology (several suppliers)

$0.030

The New Reality

Entrant 1 Entrant 4 Entrant 2 Our proposed response Entrant 3

$0.020

$0.010

But bad for us.No incentive to embrace this early: lower total sales $, lower variable contribution, and me-too technology that we do not currently practice. Now what? ..TBD

$0.000 6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

Composite Benefit Score

Using Value Mapping for Product Pricing & Positioning

Reposition Along the Value Line Value-preserving Enhance Product at same price Value Destroying Cut Price Value-destroying

Product/Service Performance

Another Real-world Example:

Establishing Price and Positioning Strategy for our New Product X in the Y Market

Inputs from Customer QFDs

Criteria
Weight Our New Product Competitive Product A Competitive Product B Competitive Product C Average Category rating on Benefit

Benefit A

30%

10

6.8 6.0
6.5 8.0 8.8 9.8 9.0 7.4 3.6

Benefit B
Benefit C Benefit D Benefit E Benefit F Benefit G
Average Product Benefit Score

15%
15% 15% 15% 5% 5%

10
10 9 8 9 10 9.5 5.0

2
6 9 10 10 8 7.7 5.5

2
6 9 10 10 8 6.2 2.0

10
4 5 7 10 10 6.1 2.0

Add-on Premium to Customers Product

VALUE MAP Product Category X in Market Y

7.0

Customer captures 38% of differential worth Fair Value Line

Competitor A
Differential Worth = 2.2
Value Advantage =0.8

6.0

COGS Add-On ( / lb)

5.0 Our New Product 4.0

Price Differential =1.4

3.0

We capture 62% of differential worth

Competitor C Competitor B

2.0

1.0 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0

Composite Benefit Score

Value Scorecard / Sources of Value

Relative to Category Average ( / lb COGS Premium )
Benefit A Benefit B Benefit C Benefit D Benefit E Benefit F Benefit G Differential Worth (FV - Avg P) Price Advantage (Avg P-Selling P) Fair Value Price Selling Price Total Value Advantage Competitor A Competitor C Our Product Competitor B 0.69 -0.85 1.00 -0.85 -0.62 0.62 0.62 -0.62 -0.08 -0.39 0.54 -0.08 0.15 -0.46 0.15 0.15 0.19 -0.27 -0.12 0.19 0.01 0.01 -0.04 0.01 -0.05 0.05 0.05 -0.05 0.31 -1.88 3.93 5.50 -1.57 -1.29 1.63 2.34 2.00 0.34 2.21 -1.38 5.84 5.00 0.84 -1.24 1.63 2.39 2.00 0.39

VALUE COMPARISON
Our Product vs. Category

Effective Price Differential Total Differential Value

Benefit A Benefit B Benefit C Benefit D Benefit E Benefit F Benefit G

The quantifiable sources of our value proposition Relative to the X Category, and the primary elements our positioning at each tier in the supply chain: - Benefit A plays to brand-owners - Benefit B plays to compounders & converters - Benefit C plays to resin producers & converters

Our product Delivers higher differential value to the customer. And is priced at premium relative to X Category But in a way that fairly distributes the value delivered

-0.500

0.000

0.500

1.000
Add-On Cost ( / lb)

1.500

2.000

2.500

VALUE COMPARISON
Our Product vs. Competitor B

Effective Price Differential Total Differential Value Benefit A Benefit B Benefit C Benefit D Benefit E Benefit F Benefit G
The quantifiable sources of our value proposition Relative to Competitor B, and the primary elements of our positioning relative to B again, relative emphasis and message is tailored to according to target tier in the supply chain.

Our product Delivers higher differential value to the customer. And is priced at premium relative to B. But in a way that fairly distributes the value delivered

-0.500

0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

Add-On Cost ( / lb)

VALUE COMPARISON
Our Product vs. Competitor A

Effective Price Differential Total Differential Value Benefit A Benefit B Benefit C Benefit D Benefit E Benefit F Benefit G
The quantifiable sources of our value proposition Relative to Competitor A, and the primary elements of our positioning relative to A in the Y segment (Benefit B is major differentiator!) Our product Delivers higher differential value to the customer. And is priced at discount relative to A). But in a way that fairly distributes the value delivered (A appears to be mispriced this is why we are gaining share!)
0.500 1.000 1.500 2.000 2.500

-1.000

-0.500

0.000

Add-On Cost ( / lb)

Benefits of Value Mapping Tools

Pricing guidance to balance profit margin and market share growth Estimate differential value of changes to product or service offering Clarified elements of value proposition Enhanced understanding of value and positioning of competitive offerings Aligned organizational view of market and positioning of products/services Framework by which to identify white space opportunities in markets.

Limitations of Value Mapping Tools

Simplified model of economic realities and dynamics of marketplace Encourages narrow definition of market space May not capture switching barriers A tool; not the tool

Implications for Innovation & Growth

For new products, deeply understanding what our customers (and non-customers) need represents the difference between mere invention and true innovation. For existing businesses, we must continually and candidly assess the value we deliver as products mature through their life cycles. The only long-term sustainable competitive advantage we can build is the ability to innovate!

Another Illustration
(time permitting)

The Minivan Example from Bradley Gale

Managing Customer Value, Bradley Gale, 1994

Minivan Example

Price Benefit Profile

Dodge Grand Caravan Chevrolet Venture Mercury Villager Honda Odyssey

Ford Windstar

Toyota Sienna

Mazda MPV

Benefit Attributes Acceleration Transmission Routine handling Braking Ride comfort Seating comfort Convenience Fuel economy Reliability Selling Price ($) D Market Share Emergency handling 6.0 10.0 8.0 6.0 8.0 7.3 8.5 8.0 4.0 6.0 6.0 10.0 8.0 6.0 8.0 8.0 7.5 6.9 4.0 8.0 6.0 8.0 8.0 6.0 8.0 8.1 7.5 8.0 2.0 6.0 6.0 8.0 6.0 6.0 8.0 8.1 6.9 7.1 4.0 8.0 6.0 10.0 6.0 6.0 8.0 7.5 6.5 8.0 4.0 4.0 8.0 8.0 6.0 4.0 8.0 7.9 6.9 8.0 2.0 2.0 6.0 8.0 6.0 4.0 6.0 6.8 6.5 6.9 4.0 6.0 6.3 8.9 6.9 5.4 7.7 7.7 7.2 7.6 3.4 5.7 5 11 10 12 6 15 19 11 3 8 100% 28,840 28,084 29,560 25,900 28,500 29,610 25,530 28,003

Identify Competitive Products

Determine Effective Selling Prices

Source: Bradley Gale, Callaway Gardens POE Callaway, Feb 2002

Average

Weights (%)

Minivan Example

Price Benefit Profile

Dodge Grand Caravan Chevrolet Venture Mercury Villager Honda Odyssey

Ford Windstar

Toyota Sienna

Mazda MPV

Benefit Attributes Acceleration Transmission Routine handling Emergency handling Braking Ride comfort Seating comfort Convenience Fuel economy Reliability Selling Price ($) D Market Share 10.0

Identify Key Performance Attributes

6.0 8.0 6.0 8.0 7.3 8.5 8.0 4.0 6.0 6.0 8.0 6.0 8.0 8.0 7.5 6.9 4.0 8.0 28,084 6.0 8.0 8.0 6.0 8.0 8.1 7.5 8.0 2.0 6.0 6.0 8.0 6.0 6.0 8.0 8.1 6.9 7.1 4.0 8.0 6.0 6.0 6.0 8.0 7.5 6.5 8.0 4.0 4.0 8.0 8.0 6.0 4.0 8.0 7.9 6.9 8.0 2.0 2.0 10.0 10.0

6.0 8.0 6.0 4.0 6.0 6.8 6.5 6.9 4.0 6.0

Average

6.3 8.9 6.9 5.4 7.7 7.7 7.2 7.6 3.4 5.7

5 11 10 12 6 15 19 11 3 8 100%

Determine importance Weightings of Attributes

29,560 25,900 28,500 29,610 25,530

28,840

Customer Input !!!!

28,003

Source: Bradley Gale, Callaway Gardens POE Callaway, Feb 2002

Weights (%)

Minivan Example

Price Benefit Profile

Dodge Grand Caravan Chevrolet Venture Mercury Villager Honda Odyssey

Ford Windstar

Toyota Sienna

Mazda MPV

Weighted Average
6.0 8.0 8.0 6.0 8.0 8.1 7.5 8.0 2.0 6.0 29,560 6.0 8.0 6.0 6.0 8.0 8.1 6.9 7.1 4.0 8.0 25,900 6.0 10.0 6.0 6.0 8.0 7.5 6.5 8.0 4.0 4.0 28,500 8.0 8.0 6.0 4.0 8.0 7.9 6.9 8.0 2.0 2.0 29,610

Benefit Attributes Acceleration Transmission Routine handling Emergency handling Braking Ride comfort Seating comfort Convenience Fuel economy Reliability Selling Price ($) D Market Share 6.0 10.0 8.0 6.0 8.0 7.3 8.5 8.0 4.0 6.0 28,840 6.0 10.0 8.0 6.0 8.0 8.0 7.5 6.9 4.0 8.0 28,084 6.0 8.0 6.0 4.0 6.0 6.8 6.5 6.9 4.0 6.0 25,530 6.3 8.9 6.9 5.4 7.7 7.7 7.2 7.6 3.4 5.7 28,003 5 11 10 12 6 15 19 11 3 8 100%

Source: Bradley Gale, Callaway Gardens POE Callaway, Feb 2002

Average

Collect Customer Ratings

Weights (%)

Minivan Example

Price Benefit Profile

Dodge Grand Caravan Chevrolet Venture Mercury Villager Honda Odyssey

Ford Windstar

Toyota Sienna

Mazda MPV

Benefit Attributes Acceleration Transmission Routine handling Emergency handling Braking Ride comfort Seating comfort Convenience Fuel economy Reliability Selling Price ($) D Market Share 6.0 10.0 8.0 6.0 8.0 7.3 8.5 8.0 4.0 6.0 28,840 6.0 10.0 8.0 6.0 8.0 8.0 7.5 6.9 4.0 8.0 28,084 6.0 8.0 8.0 6.0 8.0 8.1 7.5 8.0 2.0 6.0 29,560 6.0 8.0 6.0 6.0 8.0 8.1 6.9 7.1 4.0 8.0 25,900 6.0 10.0 6.0 6.0 8.0 7.5 6.5 8.0 4.0 4.0 28,500 8.0 8.0 6.0 4.0 8.0 7.9 6.9 8.0 2.0 2.0 29,610 6.0 8.0 6.0 4.0 6.0 6.8 6.5 6.9 4.0 6.0 25,530 6.3 8.9 6.9 5.4 7.7 7.7 7.2 7.6 3.4 5.7 28,003 5 11 10 12 6 15 19 11 3 8 100%

Source: Bradley Gale, Callaway Gardens POE Callaway, Feb 2002

Average

Weights (%)

Minivan Example

Data for the Value Map

Price ($) 28,840
28,084 29,560 25,900 28,500 29,610

Make/Model*

Performance (1-10) 7.60

7.54 7.24 7.06 6.88 6.44

Honda Odyssey
Toyota Sienna Dodge Grand Caravan Mazda MPV Chevrolet Venture Ford Windstar

Mercury Villager
Average Model
Source: Bradley Gale, Callaway Gardens POE Callaway, Feb 2002

25,530
28,003

6.24
7.00

Minivan Example

Value Map Minivans

30,000

Ford Windstar
High
29,000

Dodge Grand Caravan Honda Odyssey Toyota Sienna

Average Category Price

28,000

Chevrolet Venture

price
27,000

Fair-value line

Low
26,000

25,000

Mercury Villager Average

6.0 6.2 6.4 6.6 6.8

Mazda MPV

Category Benefit
7.0 7.2 7.4 7.6 7.8

Worse
Slope of FV Line = $3,000 per benefit point Source: Bradley Gale, Callaway Gardens POE Callaway, Feb 2002

benefit score

Better

Minivan Example

Value Map Minivans

30,000

Ford Windstar
High
29,000

Dodge Grand Caravan Honda Odyssey

28,000

Chevrolet Venture Toyota Sienna

price
27,000

Fair-value line

Low
26,000

Mazda MPV
25,000

Mercury Villager
6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4 7.6 7.8

Worse
Slope of FV Line = $3,000 per benefit point Source: Bradley Gale, Callaway Gardens POE Callaway, Feb 2002

benefit score

Better

Minivan Example

Distribution of Value
To customers
30,000

$29,803
Ford Windstar Dodge Grand Caravan

$963 $837 - $28,803 $1,800 $1,800

54% 46%

High29,000

Honda Odyssey
28,000

Chevrolet Venture

price
27,000

Fair-value line

Toyota Sienna

To Honda

Low

Relative Value: Amount of fair value 26,000 transferred to customer for a given Mazda MPV benefit level.
25,000

Mercury Villager
6.0 6.2 6.4 6.6

6.8

7.0

7.2

7.4

Differential Value: Amount by which the fair price at a given benefit level exceeds the average price for the product category. 7.6 7.8
Better

Worse
Slope of FV Line = $3,000 per benefit point

benefit score

Source: Bradley Gale, Callaway Gardens POE Callaway, Feb 2002

Minivan Example

Value Metrics
Differential Worth ($) 1,800 1,620 720 180 Fair-Value Price ($) 29,803 29,623 28,723 28,183 Selling Price ($) 28,840 28,084 29,560 25,900

Make/Model Honda Odyssey Toyota Sienna Dodge Grand Caravan Mazda MPV

Relative Value ($)

963 1,539 -837 2,283

Chevrolet Venture
Ford Windstar Mercury Villager Average Model

-360
-1,680 -2,280 0

27,643
26,323 25,723 28,003

28,500
29,610 25,530 28,003

-857
-3,287 193 0

Source: Bradley Gale, Callaway Gardens POE Callaway, Feb 2002

Minivan Example

Value Metrics
Chevrolet Venture Mercury Villager Honda Odyssey Ford Windstar Toyota Sienna Mazda MPV Average 0 0 0 0 0 0 Differential worth of each model versus the average model ($) Dodge Grand Caravan -43 -283 343 206 51 206

Benefit Attributes Acceleration Transmission Routine handling Emergency handling Braking Ride comfort -43 377 343 206 51 -154 -43 377 343 206 51 146 -43 -283 -257 206 51 206 -43 377 -257 206 51 -94 257 -283 -257 -514 51 86 -43 -283 -257 -514 -309 -394

Seating comfort
Convenience Fuel economy Reliability

754
146 51 69

154
-214 51 549

154
146 -129 69

-146
-154 51 549

-386
146 51 -411

-146
146 -129 -891

-386
-214 51 69

0
0 0 0

Differential Worth
Price Advantage Total Value Advantage Selling Price ($) Total Value Advantage

1,800
-837 963 28,840 963

1,620
-81 1,539 28,084 1,539

720
-1,557 -837 29,560 -837

180
2,103 2,283 28,183 25,900 2,283

-360
-497 -857 27,643 28,500 -857

-1,680
-1,607 -3,287 26,323 29,610 -3,287

-2,280
2,473 193 25,723 25,530 193

0
0 0 28,003 28,003 0

Fair-Value PriceGale, Callaway Gardens POE Callaway, Feb 2002 29,803 29,623 28,723 Source: Bradley