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Few lines as an introduction to value creation

The products and services that attract customers and retain their loyalty are the ones that deliver better
overall perIormance and/or lower prices than their competitors. They win by delivering better customer-
perceived value.
All customers want good products and no customers want to overpay. Regardless oI the product category,
it is the customers` perception oI value that will determine which vendor gets their business. For this
reason, it is important Ior companies who make and price products to understand how much their
products are worth.
Success in pricing requires eIIective processes to collect data, to estimate consumer value, and to get that
inIormation into hands oI decision makers. It requires new skills and tools to help managers make better
pricing strategy choices in real time as they conIront ever-shiIting consumer needs and competitive
actions.
Economic value accounts Ior the Iact that the value one can capture Ior commodity attributes oI an oIIer
is limited to whatever competitors charge Ior them. Economic value depends on the alternatives
customers have available to satisIy the same need. Economic value is measured by the most someone
is willing to give up in other goods and services in order to obtain a product or service. Only the
part oI economic value associated with diIIerentiation, which called diIIerentiation value, can potentially
be captured in the price. DiIIerentiation value comes in two Iorms: monetary and psychological, both oI
which may be instrumental in shaping a consumer`s choice but require very diIIerent approaches to
estimate them. Monetary value represents the total cost savings or income enhancements that a customer
accrues as a result oI purchasing a product. Psychological value reIers to the many ways that a product
creates innate satisIaction Ior the customer.
A product`s total economic value is calculated as the price oI customer`s best alternative (reIerence value)
plus the worth oI whatever diIIerentiates the oIIering Irom the alternative (diIIerentiation value).
DiIIerentiation value may have both positive and negative elements. Total economic value is the
maximum price that a 'smart shopper¨, Iully inIormed about the market and seeking the best value, would
pay. Not every buyer is a smart shopper, however. OIten product and service users, and particularly
purchasing agents buying on the user`s behalI, may not recognize the actual economic value they receive
Irom an oIIering. That is, the oIIering`s perceived value to a buyer may Iall short oI the economic value iI
the buyer is uninIormed. ThereIore, it`s critical that a company`s sales presentations and marketing
communications ensure that Ieatures likely to be important to buyer-particularly competitively superior
Ieatures- come to buyer`s attention.

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