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Article | McKinsey Quarterly

Setting value, not price
The first task is to map benefits versus price—as the customer sees them. Bear in mind that equal value doesn’t mean equal market share. The key decision: do you stay on the line of value equivalence, or get off?
February 1997 | by Ralf Leszinski and Michael V. Marn

A m anufacturer of high-quality medical testing equipment introduces a v astly improv ed v ersion of its best-selling diagnostic dev ice at a price 5 percent higher than that of the older model it replaces. For three months, the new model is successful, gaining rav e rev iews from customers and increased market share. One month later, prices in the sector collapse and the company has to discount its superior new product just to maintain its traditional market share. A highly regarded manufacturer of commercial paper prides itself on deliv ering ex tremely consistent quality and serv ice. That consistency notwithstanding, the company is baffled by v acillations in its market share that accompany shifts from tight to loose supply in the industry . A consumer packaged goods company ex ecutes one of the most common business tactics—it matches a competitor's price on a large contract to supply a leading food retailer. In the months that follow, a bitter price war breaks out, destroy ing almost all of the industry 's profitability in this product category . These disparate cases hav e at least one thing in common: apparently sound marketing strategies and tactics that produced unex pected and costly results. But could they hav e been av oided? Here we will ex plore how these and other common and ex pensiv e marketing missteps might be av erted by apply ing a discipline called "dy namic v alue management" to the pricing and product positioning that are at the core of what most marketers do.
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"V alue" may be one of the most ov erused and misused terms in marketing and pricing today . "V alue pricing" is too often misused as a sy nony m for low price or bundled price. The real essence of v alue rev olv es around the tradeoff between the benefits a customer receiv es from a product and the price he or she pay s for it. The management of this tradeoff between benefits and price has long been recognized as a critical marketing mix component. Marketers implicitly address it when they talk about positioning their product v is-à-v is competitors' offerings and setting the right price premium ov er, or discount under, them. Marketers frequently err along the two dimensions of v alue management, howev er. First, they fail to inv est adequately to determine what the "static" positioning for their products on a price/benefit basis against competitors should be. Second, ev en when this is well understood, they ignore the "dy namic" effect of their price/benefit positioning—the reactions triggered among competitors and customers, and the effect on total industry profitability and on the transfer of surplus between suppliers and customers. To illuminate the nature and magnitude of this missed v alue-management opportunity , v alue needs to be defined properly . Customers do not buy solely on low price. They buy according to customer value , that is, the difference between the benefits a company giv es customers and the price it charges. More precisely , customer v alue equals customer-perceived benefits minus customer-perceived price. So, the higher the perceiv ed benefit and/or the lower the price of a product, the higher the customer v alue and the greater the likelihood that customers will choose that product. (We will return to this later.)

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Exhibit 1
Enlarge

lower-priced. their shares might not be equal. the Segmentation Theory v ertical ax is shows perceiv ed price. Higher-priced. So competitors aligned on the V EL say in such a market that "y ou get what y ou pay for." The clarity of that choice almost defines a market in which shares are stable. and by considering how customers are distributed within the map for a giv en segment. At any desired price or benefit lev el. there is a clear and logical choice for customers on the V EL. lower-benefit competitors are at the lower left. then competitors will align in a straight diagonal line called the v alue equiv alence line (V EL). Each dot represents a competitor's product or serv ice. higher-benefit competitors are toward the upper right. Again. If market shares hold constant (and if y ou hav e the right measurement of perceiv ed benefits and perceiv ed prices). The horizontal ax is quantifies benefits as perceiv ed by the customer. (Note that while market shares might be stable for competitors along the V EL. The v alue map ex plores the way customer v alue and the price/benefit tradeoff work in real markets for a Sidebar giv en segment (Ex hibit 1 ). more on this later.) Exhibit 2 Enlarge .Static value management Many marketing and strategic assessments can be made by using a simple tool called a v alue map.

howev er. discrete choice analy sis. The opposite is true for competitor E. for ex ample) allow an accurate quantification of the perceiv ed benefit dimension and its tradeoff against price. That said. since A prov ides greater benefits than C but at the same price. then share gainers will be positioned below the V EL in what is called a "v alue-adv antaged" position. and therefore more customers prefer it. adv anced market research techniques (conjoint analy sis.If. These adv ances make the effectiv e application of v alue maps easier than ev er for marketers. While the marketing concepts that underpin the v alue map are basic. Competitor E will be a share loser if the v alue map has been constructed properly . ex amples abound of costly positioning errors that could hav e been av oided through the use of this tool. market shares are changing. then he or she would be more likely to choose A. So A. positioned below the V EL that B and C reside on. Competitor A in Ex hibit 2 is v alue-adv antaged and should logically be gaining market share. offers more customer v alue than B or C. Exhibit 3 Enlarge . and multistaged conjoint analy sis. Likewise. he or she would probably choose A ov er C. which finds itself in a v alue-disadv antaged position abov e the V EL. since A prov ides the same lev el of benefits as B but at a lower price. if a customer were searching for a product in the price range of A and C. If a customer is searching for a product in the benefit range of A and B.

howev er. In an attempt to diagnose unex pectedly poor market acceptance of its new line of minicomputers. processor speed and secondary access speed ranked only fourth and six th on their list. They thought their product was superior to Key comp's at a lower price. Ev en quality of user documents (the manual that accompanies the hardware) ranked abov e secondary access speed. static fashion. Alpha. Much to Alpha's surprise. The opposite was occurring. Alpha was understood by customers to be slightly better than Key comp on processor speed and secondary access speed. v endor support. how quickly the computer accessed data from an ex ternal storage dev ice such as a hard disk driv e. So. reliability . The research also showed that Key comp was highly rated on compatibility . fell short on these. and quality of v endor technical support ranked abov e raw processor speed. and itself (Ex hibit 3). and they could not understand why it was not a huge success. Some remembered reliability problems with an earlier generation of Alpha's minicomputer that tainted their perception of its new product. Howev er. processor speed was indeed important. perceiv ed reliability . Alpha's marketing department commissioned research to try to confirm its hy pothesis that processor speed and secondary access speed were indeed the most important features. It did not understand the customerperceived attributes that really drov e customer choice of minicomputers. and secondary access speed. but also the highest price.Illustrative case: Alpha Computer Company The Alpha Computer Company 's ex perience illustrates the v alue map's power. the nature of most network applications made secondary access not that important. ev en when applied in a simple. Alpha's problem was a common one. Alpha created a v alue map that reflected its perception of the price/benefit positioning of competitors Ace Computer and Key comp. Alpha believ ed customers chose minicomputers on the basis of two technological attributes: processor speed in MIPS (millions of instructions per second). then Alpha should hav e been gaining market share and Key comp losing it. Alpha's technical support was considered difficult to get hold of and its user documents were seen as the weakest in the industry . that is. Its operating sy stem software and hardware plug configuration created compatibility problems for many customers. Software and hardware compatibility . In fact. and Alpha's managers were baffled. and user documents. Ace Computer was the premium competitor: it had the highest processor speed and secondary access speed. Six ty buy ers were questioned about their criteria for selecting a network minicomputer supplier. Alpha prided itself on its engineering skills and ability to deliv er high lev els of technological performance at reasonable cost. As it turned out. Alpha Computer supplied minicomputers for use primarily as serv ers in network applications. Key comp not only had slower processor speed and secondary access speed than Alpha but was also priced 1 0 to 1 5 percent higher. Exhibit 4 Enlarge . on the other hand. If Alpha's perception of the v alue map in Ex hibit 3 were correct. but most customers had a minimum processor speed requirement that all competitors easily ex ceeded. but these features just did not matter that much to them. Alpha thought that Key comp was v alue-disadv antaged and that Alpha itself was v alue-adv antaged.

The company then mounted an aggressiv e market information campaign to demonstrate the improv ed reliability of its latest model. Alpha performed so poorly on attributes most essential to customers that. The insights from this properly constructed v alue map prescribed a clear course for Alpha. A minor rewrite of operating sy stem software and a simple redesign of the hardware plug configuration fix ed the compatibility issue. despite its higher price. it was v alue-adv antaged and therefore justifiably gaining market share. Exhibit 5 Enlarge . and user documents were redrafted. It mounted a crash program to correct the important attributes on which customers had rated it so poorly . It showed that Key comp performed so well on the attributes most important to customers that. Conv ersely . despite its low price. it was still v alue-disadv antaged and predictably losing share.Ex hibit 4 shows how the v alue map was redrawn to reflect customers' perceptions of benefits and performance rather than Alpha's. Additional serv ice representativ es and toll-free access lines were put in place to enhance technical support.

" nontechnical attributes (perceiv ed reliability . ease of doing business) are often as important as or more important than precisely measurable technical features. Alpha increased customerperceiv ed benefits so much that it was able to increase its price by 8 percent and still gain its fair market share. • "Softer. rely on customers for this critical information. • Trusting internal perceptions of which attributes driv e customer choice can be a fatal mistake. In only six months. 1 990"). that of car maker Mazda's ex perience with its Miata sports model. The case also shows the opportunities v alue maps offer v alue-disadv antaged companies to understand their markets better.The results are shown in Ex hibit 5. Exhibit 6 Enlarge . quality of v endor support. Another case. The Alpha Computer case illustrates sev eral important points about v alue management: • The key to success often resides in gaining a clear understanding of the real attributes driv ing customer choice and their relativ e importance. "US economy sports car market. The price and v olume increase more than doubled Alpha's operating profits. demonstrates the kind of opportunity that a v alue-adv antaged company can easily forgo if it does not fully appreciate its position (see sidebar.

Understanding v olume distribution along the V EL is therefore crucial to making an intelligent decision about product position. will not accept deliv ery reliability below a minimum lev el. If so. a gap can ex ist between customers' perceptions of a product's benefits and the benefits that it actually deliv ers. Some computer buy ers. Some buy ers of automotiv e components. This phenomenon. Ev en in a perfect world. howev er. ev en though performance has improv ed sharply . for ex ample. or their salesforces might not adequately communicate benefits to customers. Sometimes this can be ex plained by historical reasons. A more important and probably more common ex planation of market share differences among competitors on the V EL is the distribution of customers along this line. car market. Companies might use different channels to reach consumers. Market research shows that break-points ex ist for some products and serv ices at which a small increase in the benefits offered will lead to a large increase in the v alue a customer perceiv es. if they were. There are sev eral reasons for this. ev ery competitor on the V EL could be ex pected to hav e the same market share. 1990 customers are not spread ev enly along the line. and the effects of competitiv e mov es Sidebar away from it. Ev en for a well-defined segment. This could indicate that there are price-capped customers at around this lev el who are unwilling to spend more ev en if they could get more features. Ty pically they are not distributed ev enly . History play s an important role: how long a competitor has held its position with customers often ex plains large market share differences among companies with otherwise the same v alue proposition. benefit-bracketed or price-capped. In many cases. do not v alue additional memory bey ond a certain lev el because ex isting memory more than satisfies their needs. A second group is price-capped custom ers who are unwilling to spend more than a fix ed amount for a particular product or serv ice.000 for sev eral y ears. Sometimes consumers are not equally aware of the true nature and av ailability of competing products.Distribution of customers on the value map In discussing the stability associated with a position on the V EL. on the other hand. howev er. mostly . Only customers who fall into neither category . it is due to the distribution of customers along the V EL (Ex hibit 6). it is poorly . There are benefit-bracketed custom ers who ex plicitly want minimum or max imum benefit lev els and find positions on either side unacceptable. consumers would be unev enly distributed along the V EL because they do not necessarily v iew benefits and prices in a linear way . The price of the av erage home PC has held at about $2. A new competitor offering similar or ev en slightly better v alue than an incumbent telephone or electricity company will not prov oke the significant changes in consumer purchasing that might be ex pected." can be seen in its ex treme form in deregulated utilities. This is US economy sports not the case. also called "order of entry . but clustered. are actually willing to consider the full range of tradeoffs along the V EL. we hav e implicitly assumed that all positions along the line are equally attractiv e.

constantly changing in important and often predictable way s. leading to wrong decisions. PZJTech. V alue maps are not static but dy namic. Unfortunately . Ev en though the company 's ev er more powerful machines remained on the V EL. Companies that master this discipline can reap huge rewards and av oid equally huge pitfalls. be it cutting price or improv ing features. What it had not realized was that there was no significant v olume between the two ex tremes. hoping to pull in customers not entirely satisfied with these. there was no longer a customer imperativ e for all that processing power to be concentrated in one machine. either to preempt shifts in market share or to react to them. Dynamic value management Alpha Computer and Mazda Miata illustrate the pitfalls of failing to understand the "static" v alue positioning of a product or serv ice. MTE was the recognized premium supplier (with the highest price and benefits) in a stable market that included three other leading competitors (Jackson. neither competitors' positions on a v alue map nor customers' perception of products and suppliers are frozen in time. . Exhibit 7 Enlarge Illustrative case: MTE MTE is the manufacturer of high-quality medical testing equipment mentioned at the beginning of this article. because each answered a specific speed requirement of downstream customers. We apply the term "dy namic v alue management" to the discipline of managing price/benefit positioning not just in a static fashion. forced the manufacturer to take a multimillion-dollar writeoff. ev en one that was competitiv e on technical specification and price. Positioning a product too high or too low on the V EL. as more broadly distributed processing had become preferred by most users.understood. will lead others to mov e. Its primary product was a blood diagnostic testing machine used in high-v olume hospital laboratory applications. but with ex plicit and thoughtful consideration of likely changes in competitiv e v alue positions and customer v alue perception. Failing to understand that there was no demand for a medium-speed machine. Any change in product positioning by one competitor. The drastic fall in demand for one company 's supercomputers is an ex ample of this. and Labco) positioned squarely on the V EL (Ex hibit 7 ). Ty pical mistakes are: Positioning an apparently competitiv e product at a low-v olume part of the V EL and not getting the ex pected v olume gains. A maker of metal-coating machinery positioned a new product technically half way between two competing products. thereby inadv ertently ex cluding a large portion of price-capped or benefit-bracketed customers. But getting a product to the right position on a static v alue map is only part of managing v alue effectiv ely .

and risks. but the suppliers got less for their products. But MTE was in a dilemma ov er how to price its terrific new model. they took the only measure they could to defend their market shares—they lowered their prices by at least 5 percent (Ex hibit 8). requires a company to understand where customer clusters are on it.As is often the case. MTE would hold its market share. but at the lower prices. Could MTE hav e managed the v alue dy namics of this situation better? Possibly . It represented a wholesale transfer of market surplus from suppliers to customers. PZJTech. and Labco. was at the ex pense of Jackson. Exhibit 8 Enlarge This success. and Labco. raising its price by 5 percent. PZJTech. The machine sold well and immediately increased MTE's share of the market. Faced with falling sales. the V EL had simply shifted downward and MTE's v alue-adv antaged position was essentially nullified. would probably not hav e reacted at all. The market shares of all four companies quickly returned to their prev ious lev els. profits. it would hav e held its traditional share but at a 5 percent higher price. v olumes. Repositioning along the VEL Repositioning a product along the V EL. of course. As Ex hibit 8 shows. Changing your position in a dynamic world Marketing managers hav e two basic options for improv ing their products' position. as the premium supplier. These different mov es engender v ery different outcomes—different competitor and customer reactions and different prices. Customers recognized the 5 percent increase was a small premium to pay for enhanced accuracy and cy cle times. MTE decided on a compromise. MTE. usually a less aggressiv e mov e. and MTE's profit would hav e risen significantly . or mov e off it. it could keep the price the same and position the new model in a highly v alue-adv antaged position in the hope of gaining significant market share. Jackson. equally . Research showed the added benefits would justify a 1 0 percent price increase and still keep the model on the V EL—that is. none of which had the ex pertise or resources to introduce products to riv al MTE's new model. regardless of whether they are in a proactiv e or reactiv e situation. If it had raised the price of its new model by 1 0 percent and positioned it on the ex isting V EL. But. ex periencing no loss of market share. The response was instant and positiv e. They can reposition their product along the V EL. The improv ed v ersion of its blood diagnostic testing machine was more accurate and had faster testing cy cle times. was the real innov ator in this market. The lowered V EL was good for customers because they got more for their money . and how other . a meaningful increase that still kept it in a v alue-adv antaged position (the dotted circle in Ex hibit 7 ). Industry prices would hav e been maintained.

competitors will react. success depends on a thorough understanding of the size and needs of the latent demand that the new product or serv ice is designed to meet. or to mov e to a new position bey ond the current ex tremes. leading to an unwanted industry price decline (as with MTE). or looks as if it will be. Being sm art about choosing the right attributes to v ary . Repositioning a product is likely to lose some customers who preferred the old positioning. and opportunities than do mov es along the V EL. Mov ing below the V EL often threatens all competitors. there is therefore more "bang for the buck" in changing some attributes rather than others. The knack is to select the features that will attract new customers without losing old ones. If the repositioning is successful. competitors will probably react to their declining sales. As the ex periences of many companies show. Equally . such a mov e requires an ev en better understanding of the dy namics. risks. Customers do not consider all product attributes to be equally important. offering increasingly superior benefits ov er competitors that chose to mov e only along the price dimension. and probably more competitiv e. to do so would require customers to accept the actual v alue reduction and most suppliers to mov e in the same direction. the supplier countered with an improv ed v ersion of its product at the same price. Not increasing the price enough will force competitors to match the new positioning. Failure to understand this tradeoff could lead a company to surrender a good customer franchise in ex change for a reduced. raising the price too high will lead to a v olume loss. howev er. Moving off the VEL A mov e off the V EL into v alue-adv antaged territory might seem attractiv e on the surface. which often leads to price cuts across the industry and lower profits for all. If the aim is to stay on the V EL. Knowing what price change is appropriate for a giv en attribute change. Ev ery time a competitor dropped its price. and that the company can prov ide cost-effectiv ely . Choosing the new position along the VEL. Exhibit 9 Enlarge . because such mov es usually define new and lowered V ELs that force them to reconsider their own positions. One manufacturer of medical supplies alway s reacted to competitors' price cuts by improv ing benefits. There are differences in risk and potential competitiv e mov es between the two: The success of a new positioning within current competitiv e ex tremes depends on locating the right customer concentration and standing out from competitors. and least desirable. In this way it gained a distinctiv e market position. While the upside opportunities can be greater (and the threat of retaliation lower). The decision of w hether and how far to mov e should include the following steps: Understanding and weighing the risks and opportunities. Market research tools such as conjoint analy sis can determine the magnitude of change required. new franchise. that hav e the greatest impact on customers. What is different about mov es off the V EL? A repositioning along the V EL is likely to threaten only one or two neighboring competitors currently on the line. it will gain customers who prefer the new positioning. any change in benefits must be accompanied by a price change. but on the new V EL. Only rarely does the V EL mov e upward. Mov ing to a new position along the V EL outside the ex isting ex tremes can ex pand a market. As this approach seldom ex pands a market.competitors are positioned in relation to them. Choosing those changes least likely to prov oke undesirable com petitiv e reactions. The likeliest. There are two options: either to mov e to a new position within the ex tremes defined by current competitors. reaction is a price cut.

A first mov er's repositioning along the benefits ax is tends to damage profits less than price reductions would. While the industry is competitiv e. the salesforce will want to offer something similar.When a product is repositioned below the V EL. and the lev el of serv ice high and rising. Likely competitive reactions to moves off the VEL In today 's highly competitiv e markets. They usually react by try ing to improv e their products by selectiv ely adjusting attributes. How they will react is a function of a number of parameters. If a competitor introduces a new serv ice. howev er. not just empty space. In the past fiv e y ears. the two leading companies hav e about 40 percent of the market. including: T he ty pe of change that set the whole process in m otion. They and their customers recognize that there are no real technical differences between the two suppliers' products. The new product appeals not only to customers who initially bought it. neither leader has reacted to a competitor by reducing its price—a mov e that would surely hav e made the industry less profitable. If the salesforce reports massiv e price cuts by a competitor. riv als seldom passiv ely accept v olume or market share losses. or by dropping price. In a US specialty chemical segment. than to try to raise prices after a round of reductions. Just mov ing off the V EL to ex pand the horizon of customers does not guarantee success. prices hav e also risen and profits hav e remained strong. for ex ample. Market research must first establish that the ex panded horizon does indeed include new concentrations of customers. its "horizon" of potential customers grows (Ex hibit 9). The ty pical reaction to a competitor's mov e is to try to counter along a similar ax is. an electric drill whose power was increased but which was sold for the same price. Exhibit 10 Enlarge . It is also easier to retract benefits that are rejected by the market or are uneconomic to prov ide. Take. but also to those who had prev iously paid more for a drill with the higher power rating. there are ex amples of manufacturers successfully improv ing their products and serv ices rather than cutting prices. The degree of v olume and profit pressure a competitor is under and its understanding of the economics of price changes (for ex ample. Ev en in commodity -like industries. So when one competitor increases its support serv ices. Com petitors' strategic m indset. the other improv es its serv ices too. for ex ample. how price and v olume trade off against profit) will driv e the ty pe of reaction it makes. they will want to reciprocate.

it is not automatic that the "old" pattern of customer distribution follows suit. the V EL can quickly drop without affecting market shares. how competitors will react. which follow such mov es closely . howev er. reap some benefits. Unfortunately . others might use the changes to rethink their own price/benefit tradeoffs. If consumers do not perceiv e enough difference to make them switch supplier. The established manufacturers in one consumer durable industry assumed most customers were price-capped. This negligence can lead to profit declines where once there were high hopes. and therefore had not offered increased benefits. Some consumers had been looking for more benefits after all. or both? Distance. In the case of a company that installed heating equipment. 30 percent of the v olume shifted to that new product. lower my price. and. if ex ecuted well. this company did not adequately consider the basis on which architects and contractors compare bids—that is. If the distribution of demand changes. In many cases. a shift off the V EL will not alway s bring the desired v olume increase. new offers could stimulate latent demand. What are the customer v olume elasticities of mov es along the price ax is and the benefit ax is (by attributes)? Do I want to increase my benefits. finally . Marginal mov es often backfire. Using dynamic value management to respond to external changes . the total installed costs. but lowering price and profit. the information that its key competitor had cut the cost of installation labor by 5 percent led it to cut its own price too. How far do I hav e to mov e from the V EL to ex pand my horizon of customers sufficiently ? How far do I hav e to mov e to differentiate my self from competitors in the ey es of a group of potential customers? How strong will competitors' reactions be? How many additional benefits can I afford to deliv er and what price cut am I willing or able to absorb? Mov ing below the V EL is alway s a risky strategy that can. Some customers might be benefit-bracketed. too little thought is giv en to what customers actually want. The selectiv e 5 percent drop in labor reduced the total installation cost by less than 1 percent—too slight a difference for the market to notice. But when a new competitor introduced a new product at a significantly higher price. but competitors. A mov e off the V EL has to be large enough for customers to notice and attractiv e enough to make them want to try the repositioned product. As the line is shifted downward through improv ed combinations of price and benefit.Effects on demand and volume distribution Competitors' behav ior can actually shift the distribution of demand along the V EL (Ex hibit 1 0). decide to copy it. Mov ing off the V EL therefore requires two decisions about the direction and the distance: Direction. and how demand might change as a result of competitors' mov es.

The following case illustrates the enhanced challenge of dy namic v alue management in highly cy clical businesses. this would be a mistake. the easiest lev er to pull in the short term is price. Demand for this high-grade paper tended to v ary wildly with the ov erall economic cy cle.Dy namic v alue management can also be a powerful tool to help prescribe reactions to changes in competitiv e position or customer needs. again there is no need to react. If the competitor has mov ed off the V EL. If the primary threat is to somebody else's customers. Competitors' moves Being on the receiv ing end of a competitiv e mov e demands an approach similar to the proactiv e stance abov e. In most cases. let them react. If the salesforce is sending panicky messages about competitiv e price cuts. or across the board? Should it entail price changes. Illustrative case: Pace Paper Company The Pace Paper Company produced high-grade paper for business forms. channel. or market. brochures. All competitors will be likely to react ev entually . But it found itself gaining market share in down markets when there was ex cess supply and losing it sharply in times of tight supply . If a reaction is needed. If new customers are buy ing the competitor's offering. but also because of changes in customer needs ov er the course of the cy cle. And in all too many cases. pressure is created to act quickly . and corporate annual reports. Pace produced paper of unsurpassed quality and consistency and prov ided equally consistent deliv ery serv ice. are they our customers or somebody else's? The answer to this question determines not the need for a reaction. If the mov e is not perceiv ed to be a wholesale jump to a new V EL. A set of questions should be answered: Do customers perceiv e the competitor's mov e as a mov e off the V EL? To find out. Too often this question is answered hastily and wrongly on the basis of hearsay from the field. Dy namic v alue management is as useful in determining reactions to such mov es as it is in initiating them. benefit changes. Marco Paper and V alentine Paper. A competitor's actions can set in motion the same set of dy namics. but the speed and ex tent of it. sold directly to large regional and national printing companies. Pace could not understand the drastic market share shifts it regularly ex perienced. A gradual cascade of reactions not only will prev ent panicky ov erreactions. the v alue map can change not only because of competitors' mov es. has its "horizon" ex panded sufficiently to draw in new customers? If market research shows it has not. Giv en its consistency and quality throughout the economic cy cle. but timing is important. there may be no need to react. A series of thoughtful decisions using the dy namic v alue-management approach can help formulate a more effectiv e and less costly response. but can also create opportunities to observ e informativ e customer buy ing behav ior. ask the customer. Exhibit 11 Enlarge . It also requires a cool head. or a combination of both? Cyclical markets In cy clical industries. Pace and its two main competitors. how strong should it be? Should it be a surgical strike on one product.

V alentine would shift to a position of v alue adv antage (and thus gain market share). and their likely reactions to price and benefit mov es by y our company . customers changed through the cy cle. adv ances in market research techniques make the ex ecution of effectiv e dy namic v alue management easier than ev er. As the v alue map at the upper right of Ex hibit 1 1 shows. Ex hibit 1 1 shows the v alue map for this market at different stages of the cy cle. customers had no problem obtaining enough paper. they could increase plant throughput enough to cut order lead times. for instance). Armed with the insights prov ided by the v alue maps in Ex hibit 1 1 . V alentine Paper could not match Pace's quality and consistency . They discov ered that if they relax ed their product consistency slightly (in a way that was almost imperceptible to customers). and return to v alue equiv alence in tight markets. increase order fill rates. and tougher local and ev en global competitors emerging in most markets. The result was that in times of tight supply . At the bottom of the cy cle (when supplies were plentiful). since printers usually had ample safety stocks of paper in their own warehouses. thanks to a richer. while Pace would slip to a v alue-disadv antaged position (and. Pace rev erted to its original lev el of paper consistency to reinforce its traditional v alue-adv antaged position. lose share). Order lead times (the number of day s between an order being placed and the paper being deliv ered) and order fill rates (the percentage of the total order carried on the first shipment) did not much matter. Pace's paper quality and consistency were so superior that it was v alue-adv antaged in times of ex cess supply and gained market share—as shown at the lower left of the v alue map in Ex hibit 1 1 . printers often found their stocks depleted. Fortunately . They therefore relax ed quality and consistency requirements in fav or of deliv ery performance. When supplies loosened. including: More genuine closeness to customers. This fine-tuning ov er the course of market cy cles enabled Pace to maintain its share in tight markets without cutting prices or jeopardizing future positioning in down markets. customers becoming more sophisticated and demanding. They therefore demanded high and consistent quality so that printing jobs would run efficiently through their plants with minimum rejects. The discipline of dy namic v alue management not only promotes sustainably improv ed market performance and profitability . Looking ahead With product life cy cles shrinking (measured in months rather than y ears in the computer industry . paper quality and consistency slipped to third place behind order lead time and order fill rate. more ex ternally driv en understanding of the benefit attributes that really matter to customers An enhanced understanding of competitors: their strengths in the ey es of customers. their strategies. Despite being slightly higher priced than Marco and V alentine. They became increasingly concerned about running out and hav ing to shut down their printing plants temporarily .The problem was that while Pace stay ed the same. howev er. but its order lead times and fill rates were better than Pace's. v alue maps are shifting at faster rates than ev er. Pace's managers embarked on a project to determine how they might improv e their order lead times and fill rates in times of tight supply . but also y ields a number of attractiv e side benefits. of course. As supplies tightened.

dy namic v alue management is prov iding a compass for nav igating the increasingly unstable seas of change and uncertainty that challenge most marketers today . We publish our insights and those of external experts to help advance the practice of management and provide leaders with facts on which to base business and policy decisions.More integrated product/market strategy formulation. where the linkages between price. the consequences of getting it wrong. lasting. and substantial performance improvements. nev er more dev astating. benefit deliv ery to customers. For a growing number of companies. respectively. PDF Print E-mail Share About Insights & Publications The creation of knowledge supports McKinsey's core mission: helping our clients achieve distinctive. and changing customer preferences are ex plicit. . About the authors Ralf Leszinski and Mike Marn are principals in McKinsey's Atlanta and Cleveland offices. The pay off for getting dy namic v alue management right has probably nev er been higher. Views expressed by third-party authors are theirs alone. competitor capabilities.