How Much Is Your Product Really Worth?

Optimize your pricing with Value Accounting and the Value Scorecard Bradley T. Gale
Customer Value, Inc.

You

Price

Performance
Whats wrong with this picture? And how do you fix it?

2002 by Bradley T. Gale

Table of Contents

Page Table of Contents Executive Summary I Frontiers of Worth Worth Defined Keeping Score in the Value Game Revealing Techniques Determining Fair Prices Gathering Data in the Price-Performance Profile Illustrating Price versus Performance on the Value Map Differential Worth and Fair-Value Prices Frontiers and Relative Values Working With the Value Scorecard Designing Value-Based Strategies Worth-Based Pricing Three Strategies Competitive Reaction Segments and Value Positioning Fine-Tune Your Offerings and Prices Value Accounting as a Management Tool Preparing for Value Selling Aligning Your Management Team The Digital War Room Are You Ready? References Glossary About the Author 2 3 4 5 5 6 7 7 8 9 11 11 13 13 13 14 14 15 15 15 16 17 17 18 18 19

II

III

IV

Executive Summary
Understanding a products worth, its true value to customers, is a serious problem in marketing. The very notion of worth can be an elusive concept subject to wide interpretation and disagreement among managers. Yet it is essential strategic knowledge, required for effective pricing, new product, and marketing decisions. The value accounting approach provides product worth insights and monetary estimates in a disciplined way by comparing how customers perceive the benefits and prices of your offerings versus those of rivals. With value accounting, managers can better design more competitive products, price them to maximize long-term profit, and more accurately predict how customers and competitors will react. And value accounting provides a common format for all managers in a business to collaborate effectively. Analysis starts with the price-performance profile of all significant competitors in a product category, using customer feedback or expert evaluations of product capabilities. Analysts rate competitors on each of the key attributes that influence purchase decisions. They compare each products price and performance to the average price and performance of all competitors to determine which deliver the most attractive mix of economic value and low price in customers eyes. The brand offering the best relative value will be the one that gains market share. The value map provides a powerful visual tool for examining those market dynamics. Managers must recognize how much competitive value they create, in dollar terms, with each of their products key attributes. The value scorecard developed from price and attribute performance scores provides the level of financial detail required for pricing, product, and marketing decisions. Managers can apply the same value accounting processes to individual market segments and fine-tune segment pricing strategies to optimize profit. Furthermore, visualizing value accounting information in head-to-head value comparisons gives salespeople a powerful closing tool, particularly in competitive capital goods negotiations. Rather than panic in the face of competitive price concessions or customer demands for price cuts, salespeople will know how much value advantage they bring to the table, so they can act accordingly. Finally, Digital War RoomTM Software, implementing the value-accounting tools, facilitates cross-functional decision making among managers, eliminating the miscommunication and narrow perspectives that often obscure an organizations clear understanding of the marketplace. Value accounting, described at length in this paper, provides an effective tool for delivering worth to customers and wealth to company shareholders.

How Much Is Your Product Really Worth?

Frontiers of Worth
How much is your product worth? You can answer that question in many different ways, depending on your perspective. Every functional manager in your company will have a different answer. Salespeople think of their products worth as its ability to outsell the competition. Production people see worth as accumulated material, labor, and equipment inputs. Engineers herald the worth of product technical features and worry about competitors product specifications, whether or not customers care. Meanwhile marketers think in terms of the performance claims they can promote. Finally, accountants have the last say as they calculate the products net profit margins, and point out that worth depends on production volumes, revenue, average costs, and marginal costs. But the real worth of your productthe metric that matters the most to your companys profit overallis what the customer thinks your product is worth, and how much the customer is willing to pay for it. Financial accounting tracks the flow of money through an organization. But as we shall see in this paper, value accounting tracks the very essence of a business: its ability to deliver worth to customers and wealth to shareholders. A companys internal assessments of a products worth, its strengths, and its weaknesses are often incorrect or out of date. Managers frequently underestimate competitors and fail to understand why customers were lost to competitors. Function heads often focus on the product benefits that fall within their purview and neglect others that are important to customers but require cross-functional coordination to deliver. Managers panic when markets weaken, cutting prices and often triggering destructive price wars. Executives frequently wrestle with issues that are no longer relevant while ignoring emerging problems and opportunities. Perhaps that is why former top performers, like Xerox, Gateway, Compaq, Chrysler, Ford, and Polaroid have found themselves losing money and market share.

products, reprice products, and enter or leave the market. And changing degrees of customer knowledge can skew product perceptions. Customers often do not have complete and objective information about all their buying options, hence the importance of promoting the right value proposition to keep customers informed about your offerings. Markets are forever dynamic. Companies that lose track of their products worth and fail to adjust their product positioning in line with changing customer needs seriously risk underpricing or overpricing the product. The experience of Baxter Travenol (see adjacent article, An Inattentive Pioneer) illustrates this problem.

An Inattentive Pioneer
Typically, a pioneer wins on product attributes when its new technology displaces an old one. That happened when Baxter Travenol introduced PVC bags, which displaced glass bottles for delivering medical liquids to hospitals. At first, the superiority of Baxters PVC bags versus McGaws glass bottles allowed Baxter to price high, capturing most of the incremental worth of those benefits. But, as typically happens, another competitor entered the market. Abbott Laboratories introduced its own PVC bags that performed about the same as Baxters, leaving Baxter with no product advantages versus Abbott. The price that Baxter could charge now depended on the price that Abbott charged. For some time after Abbotts entry, Baxter stuck to its marketing program, which was focused on the advantages of PVC over glass. Product literature emphasizing PVC superiority was ready and on the shelf. Sales representatives schooled in explaining PVC product benefits had earned their stripes disparaging glass containers. But hospitals began to place less emphasis on product attributes and more weight on customer service when choosing brands. Customers were deciding which vendor to select as a supplier of PVC bags, not whether to choose PVC bags or glass bottles. Baxter neglected those service attributes, however, and lost market share. By losing track of the true worth of its offering versus competing offers, and the components of worth, Baxters business lost ground in its market.

There are two fools in every market. One charges too little; the other charges too much. Russian proverb

Although determining what the customer is willing to pay might at first seem a straightforward proposition, its a tricky question even in relatively stable markets. The answer can differ by market segment, market economic cycles, or whether you are selling to decision-makers who select products for others or to end-users. A products worth continuously shifts as customer needs change, new technologies emerge, quality problems arise, and competitors launch new 4

How much a product is worth to customers depends very much on what customers can get from competing products. You can set your price, but competitors have a say in your price relative to competitors.

How Much Is Your Product Really Worth? Every product offers an economic valuean expected cost reduction or revenue enhancementto a customer. It could be, for example, the cost savings achieved by adding a piece of equipment to a production line. Or the perceived time value of housework saved by a consumer appliance. Or the price premium a customers downstream product can command when it includes an ingredient brand (such as an Intel microprocessor) in its configuration. Products, particularly consumer goods, also provide emotional benefits that contribute to economic value, all be they difficult to quantify. When assessing an offers economic value, customers consider not only the physical products characteristics, but also the quality of supporting customer services, the importance of any established relationships, and brand affinity factors of image and reputation. A specific products economic value is likely to differ by customer because each customer has his or her own needs and favorite product attributes. In the customers mind, the fair price for a product depends on its economic value relative to what the customer perceives to be the economic value of the average product. Customers expect to pay higher fair-value prices for offers they believe have superior attributes and economic values. An inferior offering commands a smaller fair-value price, and customers expect a middling fair-value price for average attribute bundles with average economic values. thinks the product is worth. Products with the largest positive relative values are frontier offerings. If you are unlucky enough to be competing head-to-head against a strong competitor who is pricing well below fair value in your performance range, you must ask what your product is really worth relative to a frontier offering, the one that has the lowest price in your performance range. Your product is really worth only that price at which customers get a comparable or better relative value from you than they can get from your toughest competitor. That price is almost always below the fair-value price. Value has become one of the most popular words in marketing; used so often it has lost precise meaning in everyday business conversation. In a general sense, value means high quality for the money paid. And terms such as value pricing, a synonym for price cuts, and value added, used to gussy up the image of a product enhancement, sound impressive in a sales pitch.

Keeping Score in the Value Game

How do we put the value accounting framework to use? How do we maintain strong margins in targeted market segments, and set prices based on a rigorous understanding of the actual worth of our offering to customers? And how does value accounting help us manage cross-functional product and marketing strategies? This paper will discuss how you can estimate the fair-value price of your product by examining what customers have historically been willing to spend for various levels of features and benefits. We will introduce a valuable diagnostic tool, the value scorecard, which tracks information such as:

Worth Defined
What motivates purchase is an offers relative value: its actual purchase price compared to the customers perception of the fair-value price of the offers mix of benefits. The competitor offering the customer the best relative value the largest gap between fair-value price and actual price provides the greatest incentive to buy. Therefore, a product with modest attributes at a bargain price could offer more relative value than a higher performance product priced closer to the fair value of its attributes. Whether the bargain product can actually attract the high-end buyer is another question, one of market segmentation, which will be discussed later in this paper. Generally, if you set price above what customers perceive as fair value, providing negative relative value, they will drift away. Pricing below fair value (positive relative value) contributes to share growth. The effectiveness of such pricing depends on competitive countermoves, of course. When competitors immediately react and all change prices and/or benefits simultaneouslysuch as in a price war or in response to a sudden increase in the price of raw materialsthey collectively change customer perceptions of fair value, and market shares might remain the same. Your toughest competitors are those offering positive relative values. They charge the customer less than the customer

the attributes customers prefer in a product; the relative importance of these attributes; how you and your competitors compare in attribute performance; and how customers make the tradeoff between price and benefits.

Value accounting is not complex. Knowing what your product is worth relative to competing products is well worth the effort. Yet the benefits you receive are more than simply generating a number. Formal knowledge of customers and competitors permits more informed decisions in all areas of business strategy. For example,

Knowing fair value, you can accurately price your products to balance profit margin and market share growth. Quantifying customer needs, you can estimate the differential worthchanges in economic valuegenerated by 5

How Much Is Your Product Really Worth? product improvements, and simulate customer response to proposed changes in your offering. tive importance of attributes to customers. When surveying customers about actual products and brands, the value accounting approach implicitly accounts for the misinformation, misperception, and lack of knowledge people might have about some products and their attributes. Research by automobile makers, for instance, has found that motorists use a variety of cues to perceive a cars speed, including engine noise or even the pressure needed to depress the gas pedal. A customer survey asking about a specific car model would collect information that implicitly accounts for misperceptions and inadequate knowledge. Asking only about the concept of speed might not. Because advertising and other marketing mix elements can heavily influence attitudes about a brand and specific products, what a customer thinks is as critical in product planning as physical performance comparisons among brands. Value accounting need not rely on field research input, however. One of its strengths is the ability to profile customer perceptions based on expert evaluations. Comprehensive, objective product testing and rating is widespread in consumer markets, most notably by Consumers Union, publisher of Consumer Reports. Testing and product/service ratings are available in many business markets as well. The value accounting example in this paper will show how to harness such data for your own pricing and product decisions. Of course, you can use expert evaluations and field research in concert to refine your analysis.

Understanding how different customers weight the various attributes of your product, you can target the market segments that especially value the competitive strengths that you offer. Having data on competitive performance helps salespeople fine-tune their presentations for individual accounts. Assembling value scorecard data involves members of your management team discussing and agreeing on a common view of the market and appropriate strategies.

Revealing Techniques
Using the value scorecard will give you much greater insight for pricing to the market than you can achieve with traditional approaches such as cost-plus and target return pricing. Based on product costs, those methods do not account for demand and competitive activities, leaving you vulnerable to the twin sins of charging too much or too little for your product. Setting prices according to costs is convenient, but it creates marketing inflexibility. In contrast, the value scorecard builds a customer-oriented discipline into pricing strategies, avoiding sales force panic and marketing chaos when competitors act unexpectedly.

Value accounting synthesizes a number of management techniques that have traditionally been considered independently, However, customer perceptions and expert evaluations go such as customer satisfaction research, comparative perforonly so far in appraising benefits new to the world. New mance surveys, lisrel, and the family of choice modeling Exhibit 1 techniques known as conjoint Typical Sources of Data for a Price-Performance Profile and tradeoff analysis. Conjoint, which has won a wide Internal Published ket Published Proprietary Market following among market reData Research Data Data searchers, explicitly links product benefits to prices to develop a realistic picture of customer willingness to pay for performance. For example, customers might claim great interest in reducing car exhaust pollution, but Six sets of data Six sets of data a conjoint or tradeoff study about a category about a category would indicate whether 1 Vendors 1 Vendors theyd be willing to trade a 2 Benefit Attributes 2 Benefit Attributes higher price or slower speed 3 Performance Scores Performance Scores for environmental rectitude. 3 4 Attribute Weights (%) Attribute Weights (%) Conjoint and tradeoff studies 4 5 Selling Prices* Selling Prices* can be incorporated into 5 6 Market Share (+, 0, -) value accounting thereby re 6 Market Share (+, 0, -) vealing customer preferences * And/or Price Competitiveness Rating among attributes and the relaInternal Marketing Data Internal Marketing Data

Attribute Importance Attribute Importance Importance (Direct, Constant Sum, (Direct, Constant Sum, (Direct, Constant Conjoint, Regression) Regression) Conjoint, Regression)

Industry Analysts Industry Analysts

Internal Competitive Internal Competitive Assessments Assessments

Satisfaction/ Satisfaction/ Performance Performance Ratings

In-depth Interviews In-depth Interviews

Product Evaluators Product Evaluators

Won/Lost Analyses Won/Lost

Focus Groups Focus Groups

How Much Is Your Product Really Worth? products present difficult value analysis challenges. How, for example, could consumers or business people have known the benefits of personal computers before pioneers like Apple Computer introduced them? The best approach for assessing the unknown benefits of a new technology often starts by examining problems customers have with existing products. Next, we will examine recent desktop computer market data to illustrate the value accounting approach. We will see how a superior value delivery system contributes to Dell Computers extraordinary success over rivals Compaq, Hewlett Packard, and Gateway, which have not been able to match Dells low prices for high-value products. dividual monetary values per attribute. Scorecard data also reveals the competitive strengths at work on the value frontier. Finally, we will examine the segmentation, pricing, and positioning strategies that you and your management team can fine-tune with the knowledge disclosed in the value scorecard.

Gathering Data in the Price-Performance Profile

Businesses should tap a variety of sources (Exhibit 1) for price-performance profile data, for rarely does one source provide everything you need to know. Sources include published data, in-house proprietary information, and proprietary market research among customers. Each provides some, but not all, of the six kinds of information used in the price-performance profile. Because actual companies internal data for our computer example are proprietary, our real-world illustration relies on the expert evaluations and reader survey results published by Consumer Reports, the influential product testing and consumer information magazine. We selected data from 1999, when Dell Computer was still on its way to becoming the leader in desktop models. The magazines September 1999 issue reported an overall performance score for desktops, performance ratings for ten product attributes, and prices for each of twelve brands. Two months later, Consumer Reports also published data on customers perceptions of brand reliability and each computer makers technical support services. Pooling those reports and indexing comparative data on a 1 to 10 scale creates the price-performance profile in Exhibit 2.

Determining Fair Prices

What is a fair price for each product in your category? To understand how performance differences drive economic value as perceived by the customer, we need attribute performance ratings and price levels for each competing brand. Although it might seem difficult to determine a single number that represents what a customer thinks a product is worth, focusing on the statistically average customer allows us to estimate comparative attribute strengths and each competitors relative performance standing. We start with a snapshot of the prices and performances of competing offerings, creating a price-performance profile. This data leads to the value map, a revealing tool for illustrating each competitors relative values. Next comes creation of the value scorecard itself, the heart of the analysis, which decomposes each products economic value into in-

Exhibit 2 Price-Performance Profile for Desktop Computers

PowerMac eMachines
6.0 6.0 6.0 6.0 6.0 6.0 10.0 6.0 8.0 8.0 6.7 7.9 899

Gateway Essential

Gateway Profile

Compaq

Benefit Attributes Speed Multimedia Images Multimedia Sound Multimedia Features Other Features Expansion System Restore Manuals Power Display Technical Support Reliability Selling Price($) Market Share 8.0 10.0 10.0 8.0 8.0 10.0 8.0 8.0 8.0 8.0 7.6 9.0 1,921 (++) 10.0 8.0 8.0 8.0 10.0 8.0 10.0 8.0 10.0 8.0 6.7 8.7 2,858 10.0 10.0 10.0 8.0 8.0 8.0 6.0 6.0 6.0 10.0 5.9 8.1 2,410 8.0 8.0 8.0 10.0 10.0 8.0 10.0 6.0 8.0 8.0 6.4 7.9 2,548 8.0 8.0 8.0 10.0 8.0 6.0 10.0 6.0 10.0 8.0 6.7 7.9 2,500 6.0 8.0 8.0 10.0 8.0 8.0 10.0 6.0 10.0 8.0 6.5 8.2 2,348 8.0 8.0 6.0 8.0 10.0 4.0 10.0 8.0 6.0 6.0 6.7 8.7 1,199 6.0 8.0 8.0 10.0 10.0 6.0 6.0 6.0 8.0 6.0 7.2 6.7 1,518 6.0 6.0 8.0 8.0 10.0 6.0 10.0 6.0 8.0 6.0 7.0 7.3 1,528 8.0 6.0 8.0 8.0 6.0 8.0 10.0 4.0 8.0 8.0 5.6 6.9 2,020 4.0 4.0 8.0 10.0 10.0 6.0 10.0 8.0 10.0 10.0 7.0 7.3 2,359 16.0 16.0 8.0 8.0 8.0 8.0 8.0 4.0 2.4 1.6 10.0 10.0 100%

Estimates by Customer Value, Inc. based on data published by Consumer Reports, September 1999 and December 1999.

Weights %

Micron

Sony

iMac

Dell

IBM

H-P

NEC

How Much Is Your Product Really Worth? In this example, Consumer Reports picked the attributes under study. When designing your own price-performance profile, however, take the time to choose study attributes carefully. Selecting the right list can be difficult. Within any organization, managers will have different opinions about key buying factors, their relative importance, and how well the company performs on each factor. But you must have a consistent set of importance weights and performance ratings on which everyone agrees. Additionally, the attributes selected should not overlap. They should be distinct and independent of each other. This is critical for using statistical analysis methods, and it is important even for the most informal list as well. Otherwise, you cannot assign specific percentage weights to each attribute, an essential step, as shown in the far right column of Exhibit 2. A price-performance profile contains six sets of information about a category. sumer computer purchases anyway. But those costs can be substantial factors in business transactions, even dwarfing acquisition cost in some categories. If your offering has a significant effect on the size of those costs, that fact itself can be a researchable attribute.

Change in Market Share: whether the brand/model is gaining, holding, or losing share.

Brands/Models: a list of the vendors in your category or the subset of vendors in your customers consideration set. Benefits/Attributes: a list of the key buying criteria that customers use when choosing a product or selecting a vendor. These attributes cover all the non-price dimensions of an offering. Performance Scores: ratings for each vendor on each attribute on a scale of 1 to 10, with 10 excellent. Transform engineering or survey data so that it is comparable to this anchored ten-point scale. Consumer Reports didnt gather its data with a price-performance profile in mind, so we imputed the performance scores. We converted the magazines five-point (excellent, very good, good, fair, poor) rating to a ten-point scale for the expert-evaluated benefits. We converted the ranges of survey ratings of vendor reliability and technical support, expressed as percentages, into comparable ten-point scales. Weights (%): an estimate of relative attribute importance weights, adjusted to sum to 100%. When possible, also estimate relative importance weights for different segments within the category. Guided by the Consumer Reports article, we first assigned relative importance weights to the desktop product attributes and judgmentally added importance weights for technical service and reliability. Selling Prices: an estimate of the selling price of each vendors offering in monetary terms. In markets where several vendors bid on a project, estimate the typical price of each vendor relative to the average vendor (e.g.105%, 92%). Then use these relative prices and the average price for a representative project to estimate selling prices for each vendor. Note that the exhibit shows only selling price: acquisition cost unadjusted by operating and switching costs, which probably do not figure heavily in most con-

Armed with this information, we calculate a weighted overall benefit score for each desktop brand (Exhibit 3). Computer brand overall performance scores ranged from 6.65 for eMachines to 8.70 for Dell. A performance score of 10 is the best a model can receive. Prices of the desktop models ranged from $899 for the eMachines model to $2,858 for a PowerMac. When shown a table of price and performance data like Exhibit 3, most people find it difficult to identify quickly which models offer the best and worst value to the customer. A graphic display makes the value relationships much more apparent.

Exhibit 3 Prices and Overall Performance Scores

Model/Brand Dell PowerMac Compaq H-P Sony IBM iMac Micron Gateway Essential NEC Gateway Profile eMachines Average Model Price ($) 1,921 2,858 2,410 2,548 2,500 2,348 1,199 1,518 1,528 2,020 2,359 899 2,009 Performance (1-10) 8.70 8.63 8.34 8.23 7.98 7.84 7.70 7.36 7.24 7.17 6.95 6.65 7.73

Estimates by Customer Value, Inc. based on data published by Consumer Reports September 1999 and December 1999. ,

Illustrating Price versus Performance on the Value Map

The value map in Exhibit 4 plots the selling prices and customer-perceived performance ratings of competing products. A value map contains four references lines for assessing price, performance, and value.

The horizontal reference line, at $2,009 for desktop computers, represents the statistically average price. The vertical reference line at 7.73 represents average performance. Models located to the right of this line offer better performance; models to the left offer worse performance. The frontier line connects products that offer the lowest

How Much Is Your Product Really Worth?

Exhibit 4 Value Map showing Positions of Desktop Models

3000

High

PowerMac Inferior value

2500

Sony Gateway Profile IBM

H-P Compaq

2000

NEC Dell

Price ($)
1500

Fair-value line
Micron Gateway Essential iMac
1000

Superior value

eMachines

Frontier line

Low
500 6.5 7.0 7.5 8.0 8.5 9.0

Worse
Slope of FV Line = $800 per benefit point

Performance Score

Better

price in each performance range. The eMachines brand had the lowest price among models offering lower performance, iMac had the lowest price of models offering average performance, and Dell had the lowest price of models offering superior performance. The end points, the model with the lowest price and the model with the best performance, anchor the frontier line. Models on the frontier line offer better than average value.

be delivering superior valuemore performance for the same price. To measure the relative value delivered by all models in a category, the value map needs a diagonal reference line with a positive slope that represents what customers believe is average economic valuefair valueacross the full range of performance scores. Researchers often employ some form of conjoint or tradeoff analysis to determine how customer price perceptions change as benefit levels change. Such surveys produce price-benefit elasticity estimates that indicate the appropriate slope for the fair-value line. In our example, however, performance ratings and prices published by expert evaluators rather than field research provide our input data. In cases such as this, you can consider several factors to determine the position and slope of the fair-value line.

The fair-value line completes the value map by indicating how much customers are willing to pay, on average, for different levels of performance. The fair-value line represents the economic value of an offer. The fair-value line passes through the intersection of the average price and average benefit lines. Prices on the fair value line have a relative value of zero.

Differential Worth and Fair-Value Prices

Customers perceive the value they capture in a transaction as the level of performance they get for the money paid. In monetary terms, we call such value the relative valuethe economic value of the offer minus its actual selling price. If we were to say that a high performance product, which is worth more to customers, had the same value to customers as an average product, we know that it must have a higher selling price than the average product. Otherwise it would

You can look at the brand price-performance points plotted and fit a line to them using regression analysis, range mapping, or some other technique. If additional information is available on changes in market share, the line can be adjusted so that it divides the share gainers from the share losers. In the desktop example, the fact that Dell was gaining market share rap9

How Much Is Your Product Really Worth? idly gives us confidence that the fairvalue line really does fall well above the Dells position on the value map.

Exhibit 5 Differential Worth and Fair-Value Prices

Model/Brand
Dell Powermac Compaq H-P Sony IBM iMac Micron Gateway Essential NEC Gateway Profile eMachines Average Model

Finally, if additional factors suggest that the performance ratings, as presented, do not tell the full story, the line (or points) can be adjusted to reflect the additional information. For example, many products reviewed by Consumer Reports have some specialized feature tailored for a specific subset of consumers, the value of which is often not reflected in the general ratings.

Fair-Value Price ($) 2,781 2,723 2,496 2,409 2,208 2,095 1,981 1,711 1,615 1,557 1,385 1,146 2,009

Average Price ($) 2,009 2,009 2,009 2,009 2,009 2,009 2,009 2,009 2,009 2,009 2,009 2,009 2,009

Differential Worth ($) 772 714 487 400 199 86 -28 -298 -394 -452 -624 -863 0

In our example, the fair-value line for desktop computers has a positive slope of roughly $800 per point of overall benefit. This pricefor-benefit tradeoff estimates how much customers have paid on average for any level of better performance in the desktop market.

Ordered by Differential Worth, compared to the average model.

We define a fair-value zone by drawing value map lines parallel to the fair-value line. The width of the zone can be set as a monetary amount or as a percentage of the average price in the category. In this example, we set monetary contour lines $400 above and $400 below the fairvalue line. Any products positioned along the lower parallel line deliver $400 of additional value to customers compared to the average product because the customer pays $400 less than the fair-value price for a given performance score. Products positioned along the upper diagonal line deliver $400 less value. Setting the width of the fair-value zone is purely judgmental. You could use it to define a range within which customers have extraordinary price sensitivity, for example. Positioning competing products on a value map clearly suggests which will gain or lose market share. Those to the lower right of the fair-value zone tend to gain market share and are

in a grow and prosper position. Products positioned to the upper left of the fair-value line tend to lose market share; they are in the wither and die position of the value map. Exhibit 5 shows the fair-value price and the differential worth of each product.

To determine the fair-value price for a product, locate its performance score on the horizontal axis of a value map, move up vertically to the fair-value line, and move horizontally to the price on the vertical axis. The differential worth is a products fair-value price less the fair-value price of the statistically average product in the category. (Situated at the intersection of the average price and average performance lines, the average products fair-value price and selling price are identi-

Delivering Worth at Dell

Dell Computer has employed a combination of customer performance and service benefits to deliver a competitive advantage built on differential worth at an unbeatable price. By selling direct to the customer and building computers to order, Dell avoids clogging its inventories with rapidly obsolescing products. Although it is the low-cost producer in the category, its computers appear to customers to be more state-of-the-art, a perception that shows up in Dells superior performance on product attributes such as multimedia images, multimedia sound, and expansion. Dells direct-selling business model has built a history of information sharing with individual customers. Unlike rivals selling through dealers, Dell knows who buys its computers, where, and how well their components perform. Dell therefore can predict where it will need to stock spare parts at the local level, further minimizing inventory while improving customer service response time. Surveys by Consumer Reports show that customers rate Dell tops in technical support services. Putting these advantages together creates an image of market leadership and brand affinity with customers. We do not have complete measures of brand affinity for computer makers. However, Consumer Reports surveys find Dell scoring best on low frequency of repairs, which the magazine interprets as a sign of brand reliability. Superior performance, reliability, and responsive technical service are corporate level advantages that carry over as Dell moves into servers, switches, and storage devices.

10

How Much Is Your Product Really Worth? cal.) Another way of calculating differential worth is comparing a models performance score to that of the category average and multiplying the difference by the slope of the fair-value line. In this illustration, the Dell models benefits correspond to a fair value price of $2,781, which is $722 more than the average products price. To examine the relationship in another way, Dell performs best with a performance score of 8.698, compared to the average performance score of 7.733 for the category. Dells score is 0.965 greater than average. Since a benefit point is worth $800, Dells differential worth is 0.965 x $800, or $772. Power Mac also rates well, yielding a differential worth of $714. In contrast, the eMachines model, with the lowest performance score in the category, is worth $863 less than the average model. to place them closer to the frontier line, new entrants will price below the frontier line and/or offer more performance than incumbent frontier offerings in order to build share. The frontier line shifts down and to the right on the value map, moving quickly in dynamic markets such as technology products.

Working With the Value Scorecard

What makes your product different and worth more? There are many ways to differentiate your offering from the competitions product features and performance, customer services, vendor/customer relationships, and brand affinity. The challenge is differentiating yourself in a way that customers perceive as valuable, and that you can execute profitably. Dell Computer has met that challenge, putting itself at the head of our price-performance profile of the PC market. (See the adjacent article, Delivering Worth at Dell.) Measuring variances from the average model in a category, you can calculate the worth of individual attributes of each brand using a value scorecard. A value scorecard enhances your understanding of your competitors, their strengths and weaknesses in the eyes of customers, and their likely reactions to price and benefit moves by your company.

Frontiers and Relative Values

The difference between a models fair-value price and its selling price represents the relative value offered to customers, the amount of value the buyer receives in addition to a products economic value.

In our computer example, Dells relative value is its fairvalue price of $2,781 minus its selling price of $1,921, which yields an $860 customer Exhibit 6 value advantage (Exhibit 6). By compariRelative Value Delivered to Customers son, the relative value delivered by Compaq was $86, thanks to higher pricing for a leaner Fair-Value Selling Model/Brand benefit package. Dell, as weve noted, is the Price ($) Price ($) frontier offering in its performance range, Dell 2,781 1,921 offering the largest relative value among PowerMac 2,723 2,858 high-end machines and for all machines as Compaq 2,496 2,410 well. Dollar for dollar, it offers the best perH-P 2,409 2,548 formance.
Sony 2,208 2,500

Relative Value ($) 860 -135 86 -139 -292

Over time, customers tend to migrate toward IBM 2,095 2,348 -253 products on the frontier of a value map, esiMac 1,981 1,199 782 pecially the product offering the greatest Micron 1,711 1,518 193 value to customers. If you want to compete Gateway Essential 1,615 1,528 87 successfully against products offering the NEC 1,557 2,020 -463 best value to customers in your performance Gateway Profile 1,385 2,359 -974 range, you need to charge a price that delivEmachines 1,146 899 247 ers a relative value comparable to those of frontier models. To determine the frontier Average Model 2,009 2,009 0 price for a product, locate its performance score on the horizontal axis of a value map, move up vertically to the frontier line, and move horizonUnlike the price-performance profile, the value scorecard tally to the price on the vertical axis. In the desktop illustrashows dollar-denominated differential worth for each attion, Compaq would need to lower its price from $2,496 to tribute and each brand (Exhibit 7). The value scorecard highthe $1,600-$1,700 range to offer a relative value comparable lights the selling points of leading performers and quantifies to the iMac and Dell models. the relative value position of each product. The columns in a In active markets, as customers migrate away from products above the fair-value zone and surviving incumbents cut prices value scorecard quantify the relative value position of each model compared to the statistically average product, by attribute and overall. 11

How Much Is Your Product Really Worth?

Exhibit 7 Value Scorecard for Desktop Computers

Gateway Essential Gateway Profile Average
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,009 2,009 0 2 0 0 -863 1,110 247 1,146 899 -247

Compaq

Micron

Sony

Benefit Attributes Speed Multimedia Images Multimedia Sound Multimedia Features Other Features Expansion System Restore Manuals Power Display Technical Support Reliability Differential Worth Price Advantage Total Value Advantage Fair-Value Price Selling Price ($) Total Value Advantage 85 320 128 -43 -43 192 -75 48 -6 2 75 88 772 88 860 2,781 1,921 860

341 64 0 -43 85 64 53 48 32 2 3 64 714 -849 -135 2,723 2,858 -135

341 320 128 -43 -43 64 -203 -16 -45 28 -61 16 487 -401 86 2,496 2,410 86

85 64 0 85 85 64 53 -16 -6 2 -21 4 400 -539 -139 2,409 2,548 -139

85 64 0 85 -43 -64 53 -16 32 2 0 0 199 -491 -292 2,208 2,500 -253

-171 64 0 85 -43 64 53 -16 32 2 -13 28 86 -339 -253 2,095 2,348 -253

iMac

Dell

85 64 -128 -43 85 -192 53 48 -45 -23 3 64 -28 810 782 1,981 1,199 782

-171 64 0 85 85 -64 -203 -16 -6 -23 43 -92 -298 491 193 1,711 1,518 193

-171 -192 0 -43 85 -64 53 -16 -6 -23 27 -44 -394 481 87 1,615 1,528 87

85 -192 0 -43 -171 64 53 -80 -6 2 -85 -80 -452 -11 -463 1,55 7 2,02 0 -463

NEC

IBM

H-P

Differential Worth of each model versus the average model ($)

PowerMac

-427 -448 0 85 85 -64 53 48 32 28 27 -44 -624 -350 -974 1,385 2,359 -974

-171 -192 -128 -171 -171 -64 53 -16 -6

Calculating the cell values in Exhibit 7 is straightforward. According to the price-performance profile in Exhibit 2, Dells speed performance rating was 8, which is 0.67 points higher than the average speed rating for all brands of 7.33. Each performance point is worth $800 in additional economic value, but speed is just 16 percent of the average customers overall perception of product performance. The product of those factors, $800 x 0.667 x 0.16, is $85, the amount shown in Exhibit 7. Thats the monetary worth of Dells above average speed rating. To focus on which model(s) performs best on an attribute and how much thats worth, we highlighted the cells of the top performers on each attribute. We begin to see a picture of each brands strengths, and we begin to identify and quantify the relative strengths of each model. For example, Dell performed best on three attributes: expansion, technical support, and reliability. In addition, Dell tied Compaq for leading performance on multimedia images and multimedia sound. Dell also tied several other models for leading performance on manuals. Because we measure all amounts relative to the average model, the net relative value on each attribute across all vendors is zero. Summing the advantages and disadvantages of each brand on all twelve attributes produces the overall differential worth amounts we calculated in Exhibit 5. For instance, Dell had the greatest differential worth, $722, and the largest relative value, $860. The iMac model came in second in relative value. Although it had a differential worth of -$28, 12

its price advantage was $810, which nets to a relative value of $782. The eMachines model, with the lowest price in the category, came in third in relative value. eMachines price was only $889, far below the average price of $2,009, which produced the biggest price advantage, $1,110. However its differential worth was -$863. Together, the large positive price advantage and the not quite so large negative differential worth yielded a relative value advantage of $247. The value scorecard shows the dollar contribution of each attribute propelling those brands to the frontier of the value map. Sound marketing requires that a company choose, communicate, and deliver its value proposition clearly to its intended customers, explaining the differential worth of your intended offer to customers in terms of the benefits they will experience. With a value scorecard reporting the customer-perceived strengths and weaknesses of category players, management can tell whether it has been communicating its intended value proposition and whether its delivering on that promise. Reporting attribute data in monetary terms helps a business team review marketing and new product development issues. Managers can estimate how much performance improvements are actually worth to customers, assess the competitive reality of different prices, and predict how profitable contemplated product changes are likely to be. Examining how customers evaluate competing products also offers insights for marketing communications and sales strat-

eMachines

How Much Is Your Product Really Worth?

Dells Lean-Asset Strategy Stymies Competitors

How could Dell have charged such low prices without triggering a major competitive response and still attract investors? Dell charged a price less than but close to the price of the average personal computer even though its performance far exceeded the average model. It preempted a strong competitive price response by employing a low-asset strategy that competitors cannot quickly match. Dell has not enjoyed the industrys highest profit margins. But, despite its value pricing it has enjoyed the highest return on investment. With its build-to-order strategy, Dells value delivery system produces quick payments and less receivables, plus inventory efficiencies that reduce costs and reduce assets as a percentage of revenues. Keeping assets lean gives Dell the largest return on assets among PC makers even though it charges lower than average prices. This strategy has created a price dilemma for competitors. From the customers viewpoint, Compaq and Hewlett Packard must cut prices to deliver value comparable to Dells. But investors want Compaq and H-P to raise prices, or reduce asset intensity, to earn an ROI comparable to Dells. Investors have noticed. As of fall 2001, Dell enjoyed the highest market value to revenue and by far the highest market value to assets among leading computer marketers. Dells market value to assets multiple was well over four while the multiples for competitors Apple, Compaq, Gateway, H-P, and IBM were less than two. Its a terrible time to be selling computersunless youre Michael Dell, who is slashing prices and stealing share from less efficient rivals, Fortune concluded early in 2002.1
1

Is it game over in PCs? Fortune, 21 January 2002. p. 71.

egies. For example, a marketing campaign might be improved by shifting emphasis from physical product attributes to the services associated with an offering, such as technical service expertise and repair speed.

sults, the risks, and the conditions under which they work best. According to analysis of the 551 products in 51 categories in the Price-Performance Database compiled by Customer Value, Inc., about 33 percent of products in the typical category will be priced 15 percent or more above their fairvalue price. Such a harvest strategy provides a larger gross margin on a sale, which might produce greater short-run profit and fund more R&D for the future. But harvesting margin can erode market share in the long run as customers migrate to better competitive offers. Harvest strategies work best when customers are not price sensitive and when variable costs represent a large fraction of your products overall cost. You can also price above the estimated fair value if the overall performance score of your offering doesnt fully capture your brand affinity or the advantages of special features. You could price your offering at or near its fair-value price. About 36 percent of models in the Price-Performance Database are priced within 15 percent of their fair-value price. Renowned marketing professor Philip Kotler calls the strategy perceived-value pricing.1 Pricing near fair value means that the vendor tends to capture the differential worth of its superior performance as a price premium over the average product. Customers perceive they are getting only what they paid for, but no more. Differential worth is not passed on to customers as a way to gain market share. The risk is that your fair-value price might be well above your frontier price and customers might migrate to the frontier offerings. 13

Designing Value-Based Strategies

Worth-Based Pricing
Knowing your products real worth and relative value to customers gives you insights to a perennial pricing strategy question: Should you price high to boost margins or low to gain market share? Financial accounting realities are of course important, such as your capacity to handle additional volume, the variable cost of your product, and your short- and long-term investment requirements. Value accounting indicates realities of the marketplace, such as customer price sensitivity, how customers perceive your offering, and how competitors will react and attempt to change their relative positions on the value map.

Three Strategies
Using fair value as a reference point for pricing, you can set selling price above, near, or below the fair-value price for the attribute mix you offer. This view of pricing is philosophically similar to the oft discussed skimming, neutral, and penetration strategies for setting prices relative to economic value. Most businesses do consider prices relative to competing models, but do not make explicit adjustments for the worth of superior benefits that some products provide. Lets examine the options and their expected re-

How Much Is Your Product Really Worth? You can price your offering below its fair-value price, foregoing some margin for greater volume and market share. About 31 percent of models in the Price-Performance Database are priced more than 15 percent below their fair-value price. It is a strategy that works best in price sensitive markets, where a price differential motivates customers to try a product or switch suppliers. This strategy tends to work well if the incremental cost of a sale is a small part of total product cost. Each additional unit provides a large contribution to profit. But pricing below fair value does not work well when the benefits of competing offers are difficult for customers to evaluate and they cannot recognize the bargain you are offering. Competitive Reaction You can set your price, but competitors have a say in your price relative to theirs. Therefore, pricing below fair value is especially risky when competitors are alert and have excess production capacity. All other things being equal, the lower you set your price relative to your fair-value price, the more likely you are to trigger a competitive response. Typically competitive reactions will not only neutralize your attempt to gain market share, but also will drive down profit rates throughout the category. A competitive stampede to cut prices could shift the customer-perceived fair-value line downward, trimming everyones relative price as market shares remain steady. Then again, your share-grabbing price cut might succeed if a strategic barrier prevents competitors from retaliating. In our personal computer example, Dells competitors cannot match its cost efficiencies. (See adjacent article, Dells Lean-Asset Strategy Stymies Competitors.) Positioning new or repriced products benefits from a value accounting analysis. McKinsey & Company consultants Ralf Leszinski and Michael V. Marn, for example, have urged business practitioners to use value maps to avoid common and expensive marketing missteps that stem from uninformed pricing and product positioning decisions. They emphasize that customer perceptions of your moves and those of competitors are what matters. If a competitor changes its offering, will it actually hurt you, or simply be some other competitors problem? They note that when launching a product, a new offering positioned along the fair-value line (which they call the value equivalence line) but beyond either the economy or premium product could expand a market and not trigger competitive reaction. They warn, however, that, Market research must first establish that the expanded horizon does indeed include new concentrations of customers, not just empty space. 2

Segments and Value Positioning

Because different groups of customers might perceive the same product attributes in substantially different ways, its usually wise to segment your market and apply value accounting to important segments individually. You should offer each segment a distinct value proposition tailored to the needs customers within the segment share, then deliver excellent performance serving those needs at a price that segment members are willing to spend. For example, imagine three archetypal desktop computer users. The engineer values special features, multimedia features, and system restore. The heavy user places much greater emphasis on speed. The do-it-yourself expert user wants a computer built to his or her own specifications, prefers strong technical support direct from the computer maker, and is especially fond of easy expansion and reliability. Each archetype represents a segment of computer purchasers. We have developed a set of benefit weights for each of these segments, judgmentally, for illustrative purposes, in Exhibit 8. Highlighted areas indicate attributes where weights are higher in a segment than they are in the overall market. In Exhibit 9, we have assumed that the segments correlate to the respective strengths of H-P, Compaq, and Dell. For ex-

Exhibit 8 Weights Assigned to each Attribute by Market Segment

Attribute Base Case Market Category 16.0 16.0 8.0 8.0 8.0 8.0 8.0 4.0 2.4 1.6 10.0 10.0 100.0 Segment-1 Engineer 16.0 6.0 4.0 16.0 18.0 4.0 16.0 4.0 2.4 1.6 6.0 6.0 100.0 Segment-2 Heavy User 48.0 10.0 5.0 5.0 5.0 5.0 5.0 2.5 1.5 1.0 6.0 6.0 100.0 Segment-3 Do-ItYourselfer 11.5 11.5 5.8 5.8 5.8 16.0 5.8 2.9 1.7 1.2 16.0 16.0 100.0

Speed Multimedia Images Multimedia Sound Multimedia Features Other Features Expansion System Restore Manuals Power Display Technical Support Reliability Total Weight

14

How Much Is Your Product Really Worth?

Exhibit 9 Product Values Differ by Market Segment

H-P ($) Base Case: Market Category Fair-Value Price Selling Price Relative Value Engineer Fair-Value Price Selling Price Relative Value Segment 2: Heavy User Fair-Value Price Selling Price Relative Value Segment 3: Do-It-Yourselfer Fair Value Price Selling Price Relative Value 2,409 2,548 -139 2,451 2,410 41 2,292 2,548 -256 2,707 2,410 297 2,435 1,921 514 2,517 2,548 -31 1,931 2,410 -479 2,163 1,921 242 2,409 2,548 -139 Compaq ($) 2,496 2,410 86 Dell ($) 2,781 1,921 860

Segment 1:

buy your product at different price levels along your demand curve. You can sell some units at a very high price to the subsegment that perceives great worth from your strongest attributes and value proposition. If you reduce your price to other subsegments, however, you might attract more customers, and so forth. For example, a PC maker could produce a fully featured model for a subsegment of high-end customers willing to pay a large premium. A heavily but not fully featured model could be offered at a lower price to attract customers in the subsegment that is somewhat more sensitive to price. Apple did just that in January 2002, rolling out the second-generation iMac at three price points$1,299, $1,499, and $1,799beginning with the highest priced model for its most eager customers.

ample, having the best performance on the most prized attributes in the engineering segment makes H-P more competitive with the highest fair-value price. Compaq is more competitive in the heavy user segment. The strategic implications are clear. H-Ps relative superiority in the eyes of engineers, for example, suggests H-P should focus on that segment and promote its current advantages in multimedia features, other features, and restore. It can make sure its current products are appropriately positioned in marketing communications, and it can introduce new products with improved performance on attributes engineers value highly. But Dells superior relative value continues to bedevil H-P and Compaq, even in the engineer and heavy user segments. Dells much lower selling price and best in category performance on many benefit attributes have made it difficult for H-P and Compaq to offer comparable value. To be more competitive from the relative value perspective, Compaq and HP need to reduce prices or further enhance their benefits to targeted segments. Or, they could fine-tune their product lines and offer different models with customized prices to select subsegments.

Identifying particularly receptive subsegments is particularly important during slow economic times when the pressure to reduce price to gain volume is especially strong. Some subsegments of your targeted mar3,072 ket segment might perceive your incremental worth 1,921 versus competitors as large, others as small. Without 1,151 knowing which are which, the tendency is to reduce prices across the board, which erodes profit margins across the entire product line. When customizing price and benefit packages, carefully examine the size of target subsegments. Customers rarely distribute themselves evenly along the fair-value line. Leszinski and Marn cite imperfect market information as one cause. Another reason is that customers do not necessarily view benefits and prices in a linear way. Some customers will perceive great worth in even small benefit increases. They explain that benefit-bracketed customers want maximum or minimum performance and will not consider other performance levels, and price-capped customers will not pay more than a certain price no matter what the benefits delivered. Only customers who fall into neither category, benefit-bracketed or price-capped, are actually willing to consider the full range of tradeoffs along the fair-value line.3

Value Accounting as a Management Tool

Preparing for Value Selling
In the final stages of trying to land an account, win a bid, or sell a product, salespeople need to know how customers assess the worth and value of their offers versus competitors. A key account review focused on the value scorecard can inspire the sales team to create value for the customer during the sales process. A straightforward summary of value scorecard data lets them fine-tune closing selling propositions. 15

Fine-Tune Your Offerings and Prices

Once you have chosen value propositions for your targeted market segments, you can use value accounting for price customization, to identify subsegments of customers who will

How Much Is Your Product Really Worth? To see how this head-to-head comparison is delivered using our computer example, suppose that in 1999 Dell found itself vying with Compaq for a key account order. What are the major selling points that the Dell sales team should have emphasized? The head-to-head value comparison shows the attribute performance scores of Dell and Compaq, followed by their relative value versus the average product, by performance attribute and selling price, and finally the relative value offered by Dell versus Compaq (Exhibit 10). superiorities obviousif, of course, you have them.

Aligning Your Management Team

Most business leaders dont understand how customers evaluate differential worth and relative value. Each function head has his or her own implicit mental model of how customers choose a product or select a vendor. Often, when they put assumptions into the common format of a price-performance profile, we find that their Exhibit 10 thinking varies widely. They do not agree on Benefit and Price Advantages of Dell versus Compaq whats most important to customers, they tend Relative Value Relative to focus largely on attributes within their purScores (versus average model) Value view, and no one focuses on attributes that Attributes Dell Compaq Dell Compaq Dell vs. require cross-functional coordination. OptiCompaq mistic function heads think customers favor Speed 8.0 10.0 85 341 -256 Multimedia Images 10.0 10.0 320 320 0 their products over competitors; pessimists Multimedia Sound 10.0 10.0 128 128 0 fret about the opposite. As a result, its diffiMultimedia Features 8.0 8.0 -43 -43 0 cult getting members of the management Other Features 8.0 8.0 -43 -43 0 team to truly function as a team. Expansion 10.0 8.0 192 64 128
System Restore Manuals Power Display Technical Support Reliability Sum of Benefit Advantages Selling Price ($) Price (or cost) Advantage Total Customer Value Advantage 1,921 2,410 88 860 8.0 8.0 8.0 8.0 7.6 9.0 6.0 6.0 6.0 10.0 5.9 8.1 -75 48 -6 2 75 88 772 -203 -16 -45 128 64 38

Illustrating the data with a head-to-head value comparison graph (Exhibit 11) clarifies the presentation. Dells selling proposition is clear: Except for speed and display, Dell matches or beats Compaq attribute for attribute at a far better price. The head-to-head value comparison helps sales representatives and key account executives understand and communicate the value of their offer versus the individual customers best alternative. Salespeople can negotiate price better, knowing how much value advantage they have and when to cave in or stand firm. Our example uses the attribute importance weights of the overall computer market. You can apply the same head-to-head comparisons to market segment data, or even tailor it to the needs of the specific account, if known. In some business-to-business cases, the sales representative might also know how needs and attribute worths differ among individual members of the buying committee. Tailored presentations based on value accounting will make your 16

Value accounting with its price-performance profiles and value scorecards puts everyones 28 -26 knowledge on the same footing, with expert -61 136 evaluator and customer-perceived perfor16 72 mance data that are reality checks on man487 285 agement thinking. Properly aligned, your -401 489 people and processes can deliver offerings 86 774 worth more to customers. Updating value accounting data and the strategies derived from them keeps the management team informed and in touch with customers and each other.

Exhibit 11 Head-to-Head Value Comparison

Speed Multimedia Images Multimedia Sound Multimedia Features Other Features Expansion System Restore Manuals Power Display Technical Support Reliability Selling Price

-400
Weaknesses

-200

200

400

600
Strengths

Relative value impacts - Dell vs. Compaq

How Much Is Your Product Really Worth?

Exhibit 12 Value-Strategy Simulator

Price-Performance Profile
Desktops -- Consideration Set
Performance Scores

Value Map for consideration set

Weights for:

Gateway Essential

Gateway Profile

Compaq

Average

High3000

Dell

H-P

2500

DimensionAttribute Benefits Speed Multimedia Other Features Expansion System Restore Technical Support Reliability Weighted benefit scores Costs Selling Price Weighted cost scores Slope of fair value line 8.0 9.5 8.0 10.0 8.0 7.6 9.0 8.8 10.0 9.5 8.0 8.0 6.0 5.9 8.1 8.4 8.0 8.5 10.0 8.0 10.0 6.4 7.9 8.3 6.0 7.0 10.0 6.0 10.0 7.0 7.3 7.3 4.0 6.5 10.0 6.0 10.0 7.0 7.3 6.8 7.2 8.2 9.2 7.6 8.8 6.8 7.9 7.9

Attrib. 17.0 34.0 9.0 9.0 9.0 11.0 11.0

Value
2000

Gateway Profile

H-P Compaq Dell Gateway Essential

Price ($)
1500

1000

100.2 100.0 -0.2 600 Low

500 6.5 7.0 7.5 8.0 8.5 9.0

1921 2410 2548 1528 2359 2153 1921 2410 2548 1528 2359 2153

Worse
Slope of FV Line = $600 per benefit point

Performance score

Better

Value Scorecard
Desktops -- Consideration Set
Gateway Essential
Incremental worth of performance advantages and disadvantages

Head-to-Head Value Comparison

Gateway Profile Average

Compaq

Speed Multimedia Other Features

Dell

Dimension Benefits

Attribute Speed 82 265 -65 130 -43 54 69 492 232 232 724 1921 2645 724 286 265 -65 22 -151 -58 10 308 -257 -257 51 2410 2461 51 82 61 43 22 65 -25 0 247 -395 -395 -147 2548 2401 -147 -122 -245 43 -86 65 15 -40 -371 625 625 255 1528 1783 255 -326 -347 43 -86 65 15 -40 -677 -206 -206 -882 2359 1477 -882 0 0 0 0 0 0 0 0 0 0 0 2153 2153 0

H-P

Multimedia Other Features Expansion System Restore Technical Support Reliability (a) Total incremental worth of benefits Costs (b) Total cost advantage Selling Price

Expansion System Restore Technical Support Reliability Selling Price

(c) Total value advantage = (a)+(b) (d) Actual price (or cost) (e) Fair Value Price = (a) + (average price, 2153 ) (f) Total value advantage = (e)-(d)

-400

-200 0 200 400 600 Relative value impacts - Dell vs. Compaq

The Digital War Room

A primary use of value accounting is helping managers craft their companys value proposition. That is usually a group process requiring documentation and critical analysis to assess the situation, identify strategies and tactics, and implement changes. We advocate a war room environment for these activities, in which all input data, key assumptions, shared models of the market, and action steps are always immediately accessible to meetings of the team. Modern spreadsheet technology provides a powerful tool for evaluating alternatives, simulating proposed actions for everyones review and comment. Customer Value, Inc. has developed special value accounting software to enable the Digital War Room.TM It includes the Value-Strategy Simulator TM as one of its components. We have already discussed key elements of the simulator such as the price-performance profile, the value map, the value scorecard, and head-to-head value comparisons. Using a single computer, Digital War Room Software and a digital image projector, the business team can display these four key interrelated value accounting tools simultaneously in its war room or business conference room (Exhibit 12). The software reports changes in strategy on the price-performance profile and automatically updates the other exhibits. Once the team devises and quantifies a basic strategy, it can quickly test alternatives, update, and fine-tune the analysis in real time during a meeting.

Are You Ready?

We have examined the question of how much your product is really worth, and have described how to find the answer from several perspectives: worth on the fair-value line, worth in terms of the frontier line, and worth to specific market segments and subsegments. Value accounting and its tools address how to compete and win in your chosen market categories. The method of analysis illustrated in this paper can have a powerful impact on the effectiveness of the managers and function heads that drive your business units in any competitive market. Are you ready to assemble the data, build knowledge, sharpen your customer focus, and drive strategies that will deliver worth to your customers and wealth to your shareholders?

Digital War Room and Value-Strategy Simulator are trademarks of Customer Value, Inc.

1 Philip Kotler, Marketing Management, tenth edition, (Prentice Hall, 2000), Chapter 15, Designing Pricing Strategies and Programs.

2 Ralf Leszinski and Michael V. Marn, Setting value, not price, The McKinsey Quarterly 1997 Number 1.

Ibid. 17

How Much Is Your Product Really Worth?

References
James C. Anderson and James A. Narus, Business Market Management, (Prentice Hall, 1999). Robert J. Dolan and Hermann Simon, Power Pricing, (The Free Press, 1996). Bradley T. Gale, Managing Customer Value, (The Free Press, 1994). Paul E. Green and Abba M. Krieger, Chapter 15 Using Conjoint Analysis to View Competitive Interaction Through the Customers Eyes, in Wharton on Dynamic Competitive Strategy edited by George S. Day and David J. Reibstein, (Wiley, 1997). Irwin Gross, Evolution in Customer Value: The Gross Perspective, ISBM presentation summary, 1997. Philip Kotler, Marketing Management, tenth edition, (Prentice Hall, 2000), Chapter 15, Designing Pricing Strategies and Programs. Michael J. Lanning, Delivering Profitable Value, (Perseus Books, 1998). Ralf Leszinski and Michael V. Marn, Setting value, not price, The McKinsey Quarterly 1997 Number 1. Thomas T. Nagle and Reed K. Holden, The Strategy and Tactics of Pricing, (Prentice Hall, 2002), Chapter 6, Pricing Strategy. Josh Quittner, Apples New Core, Time, 14 January 2002, p. 46-52. Neil Rackham and John DeVincentis, Rethinking the Sales Force: Redefining Selling to Create and Capture Customer Value, (McGraw Hill, 1999). Andy Serwer, Dell Does Domination, Fortune, 21 January 2002, p 70-75.

tion relative to competitors and to simulate actions to improve competitiveness. It takes a performance profile as input and creates the associated value map, value scorecard, and head-to-head value comparisons. The software contains a variety of analytical tools for managing customer value. Economic Value The worth or value of the benefits of an offering expressed in monetary terms. Fair-Value Line A reference line on a value map that reflects how much customers are willing to pay, on average, for different levels of performance. The relative value along the fair-value line is zero. The fair-value line passes through the intersection of the average price and average benefit lines. See slope of fair-value line. Fair-Value Price The price for a product that customers are willing to pay, on average, for a specific level of performance. It is equivalent to the economic value of the offer. To determine the fair-value price for a product, locate its performance score on the horizontal axis of a value map, move up vertically to the fair-value line, and move horizontally to the price on the vertical axis. Fair-Value Zone A zone on a value map representing customer value close to and spaced equally above and below the fair-value line. The width of the zone can be set as a percentage of the average price in the category or as a monetary amount. Frontier Line A value map line connecting products that offer the lowest price in each performance range. Frontier Price The price for a product that would offer value to customers comparable to products selling at the lowest price in their performance range. To determine the frontier price for a product not on the frontier line, locate its performance score on the horizontal axis of a value map, move up vertically to the frontier line, and move horizontally to the price on the vertical axis. Frontier Offerings Products and bundled services that sell at the lowest price in their performance range. If an offering provides both the lowest price and best performance, it dominates every other offering in the category. Head-to-Head Value Comparison A report or graph comparing the attribute performances and relative values for a target model versus a reference model. Price Customization Setting different prices for different market subsegments, pricing higher in subsegments that perceive the most differential worth in your product, and reducing price to appeal to other subsegments according less worth to your product.

Glossary
Differential Worth or Worth Differential The difference in the worth (economic value) of benefits delivered by one product versus a reference product. It is equivalent to the monetary difference between the two products positions on the fair-value line. The reference product can be the average product (in the category or consideration set) or a specific competing product. Digital War RoomTM Software Computer software used to analyze a products price, performance, and value posi18

How Much Is Your Product Really Worth? Price Differential The difference between the price of an offering and the price of a reference offering. Products that perform better than average are often priced higher than the average price. Products that perform worse than average are often priced lower than average. Price-Performance Database A database developed by Bradley Gale at Customer Value, Inc. containing value accounting metrics for more than 550 products in more than 50 categories. It can be used to determine category value benchmarks and make cross-category comparisons. Price-Performance Profile A report of the benefits and attributes, customer-perceived performance scores, attribute relative importance, and prices of major offerings in a category. Estimates of market-share changes are desirable. Price Premium The selling price of the vendors product minus the selling price of a reference product. It is the opposite of the price advantage a vendor enjoys when selling at a price below the price of the reference product. Relative Value The amount of value captured by customers, calculated as the fair-value price of an offering minus its selling price. Products on the frontier of a value map offer the greatest value to customers in their performance range. Slope of Fair-Value Line The amount of change in fairvalue price per point of overall performance. Value Accounting The discipline of analyzing a products worth to customers on an attribute-by-attribute basis, and determining how much customers will pay for it versus competitive offerings. Value Map A plot of the prices and overall performance scores of competing offerings. The map contains reference lines for assessing customer-perceived fair value and the frontier prices that represent the best relative values available to buyers in the category. Value Position How a product compares to competitors, as reported on a value scorecard, price-performance profile, and value map. Value Proposition The products performance and price promise promoted to potential buyers. Value Scorecard A report of each offerings differential worth by attribute, compared to the average model. It highlights the best performers on each attribute to emphasize the key selling points of performance leaders. Value-Strategy SimulatorTM The Digital War Room Software feature that automatically updates associated value maps, value scorecards, and head-to-head value comparisons from changes in a price-performance table. The software allows all members of a business team to see those four exhibits on a screen, real time, in a meeting environment. Worth The economic value of the benefits associated with an offering, as perceived by the average customer in the category.

About the Author

Dr. Bradley T. Gale is an enthusiastic and persuasive advocate of customer value management measuring, analyzing, and managing how much benefit and value your product delivers to customers, relative to what customers can get from competitors. Dr. Gale operates the Customer Value Network, a forum where leading companies learn and share strategies for building customer focus and value, loyalty, market share, and profitability. Dr. Gales book, Managing Customer Value, published by The Free Press, was hailed by Publishers Weekly as, Arguably the most useful marketing study since the formative works of Peter Drucker, Philip Kotler, and Michael Porter . . . may shape business thinking for years to come.

Customer Value, Inc.

Customer Value, Inc. (CVI), founded in 1990 by Dr. Bradley Gale, is an executive education and market-strategy consulting firm specializing in Customer Value Management. CVI and its consulting arm, Gale Consulting, help companies align their people and processes to the needs of customers, clarify their customer value proposition, and deliver superior performance on the factors customers use to choose among competing suppliers.

Customer Value Network

The Customer Value Network is a membership group for companies that are implementing customer-value-management programs. At meetings, members learn and share strategies for building customer focus, perceived value, customer satisfaction, relationships, and loyalty. These strategies help companies attract and retain targeted customers. They lead to improved growth, profitablility, and shareholder value. 19

How Much Is Your Product Really Worth: Optimize your pricing with Value Accounting and the Value Scorecard, is copyrighted by Bradley T. Gale. For reprints or information about keynote presentations, in-company seminars and workshops, the Value-Strategy Simulator, Digital War Room software training and leases, and action learning consulting services contact:

Customer Value, Inc. 217 Lewis Wharf Boston, MA 02110 USA

Phone (617) 227-8191 * Fax (617) 227-8287 * Web site: www.cval.com * email: bgale@cval.com