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How Much Is Your Product Really Worth?
Optimize your pricing with Value Accounting
and the Value Scorecard
Bradley T. GaleCustomer Value, Inc.
© 2002 by Bradley T. Gale
What’s wrong with this picture?
And how do you fix it?
Price
Performance
You
2
Table of Contents
Page
Table of Contents 2
Executive Summary 3
I Frontiers of Worth 4
Worth Defined 5
II Keeping Score in the Value Game 5
Revealing Techniques 6Determining Fair Prices 7
Gathering Data in the Price-Performance Profile 7
Illustrating Price versus Performance on the Value Map 8Differential Worth and Fair-Value Prices 9
Frontiers and Relative Values 11
Working With the Value Scorecard 11
III Designing Value-Based Strategies 13
Worth-Based Pricing 13Three Strategies 13
Competitive Reaction 14
Segments and Value Positioning 14Fine-Tune Your Offerings and Prices 15
IV Value Accounting as a Management Tool 15Preparing for Value Selling 15
Aligning Your Management Team 16
The Digital War Room 17
V Are You Ready? 17
References 18
Glossary 18
About the Author 19
3
Executive Summary
Understanding a product’s 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 deci-
sions. They compare each product’s 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 dynam-
ics.
Managers must recognize how much competitive value they create, in dollar terms, with each of their product’s 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 organization’s clear under-
standing 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?
4
Frontiers of Worth
How much is your product worth? You can answer that ques-
tion in many different ways, depending on your perspective.
Every functional manager in your company will have a dif-
ferent answer. Salespeople think of their product’s “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. Fi-
nally, accountants have the last say as they calculate the
product’s net profit margins, and point out that “worth” de-
pends on production volumes, revenue, average costs, and
marginal costs.
But the real worth of your product—the metric that matters
the most to your company’s profit overall—is what the cus-
tomer thinks your product is worth, and how much the cus-
tomer 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 company’s internal assessments of a product’s 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. Func-
tion heads often focus on the product benefits that fall within
their purview and neglect others that are important to cus-
tomers 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 ignor-
ing 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.
Although determining what the customer is willing to pay
might at first seem a straightforward proposition, it’s 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 prod-
ucts for others or to end-users. A product’s worth continu-
ously shifts as customer needs change, new technologies
emerge, quality problems arise, and competitors launch new
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 proposi-
tion to keep customers informed about your offerings. Mar-
kets are forever dynamic. Companies that lose track of their
product’s worth and fail to adjust their product positioning
in line with changing customer needs seriously risk under-
pricing or overpricing the product. The experience of Baxter
Travenol (see adjacent article, “An Inattentive Pioneer”) il-
lustrates this problem.
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.
An Inattentive Pioneer
Typically, a pioneer wins on product attributeswhen its new technology displaces an old one.That happened when Baxter Travenol intro-duced PVC bags, which displaced glass bottlesfor delivering medical liquids to hospitals.
At first, the superiority of Baxter’s PVC bagsversus McGaw’s glass bottles allowed Baxterto price high, capturing most of the incremen-tal worth of those benefits. But, as typically hap-pens, another competitor entered the market.Abbott Laboratories introduced its own PVCbags that performed about the same asBaxter’s, leaving Baxter with no product ad-vantages versus Abbott. The price that Baxtercould charge now depended on the price thatAbbott charged.
For some time after Abbott’s entry, Baxter stuckto its marketing program, which was focusedon the advantages of PVC over glass. Prod-uct literature emphasizing PVC superiority wasready and on the shelf. Sales representativesschooled in explaining PVC product benefitshad earned their stripes disparaging glass con-tainers.
But hospitals began to place less emphasison product attributes and more weight on cus-tomer service when choosing brands. Custom-ers were deciding which vendor to select as asupplier of PVC bags, not whether to choosePVC bags or glass bottles. Baxter neglectedthose service attributes, however, and lostmarket share. By losing track of the true worthof its offering versus competing offers, and thecomponents of worth, Baxter’s business lostground in its market.
“There are two fools in every market.One charges too little;the other charges too much.”
— Russian proverb
How Much Is Your Product Really Worth?
5
Every product offers an economic value—an expected cost
reduction or revenue enhancement—to 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 customer’s downstream product can command
when it includes an ingredient brand (such as an Intel micro-
processor) in its configuration. Products, particularly con-
sumer goods, also provide emotional benefits that contrib-
ute to economic value, all be they difficult to quantify.
When assessing an offer’s economic value, customers con-
sider not only the physical product’s 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 product’s economic value
is likely to differ by customer because each customer has his
or her own needs and favorite product attributes.
In the customer’s mind, the “fair” price for a product de-
pends on its economic value relative to what the customer
perceives to be the economic value of the “average” prod-
uct. 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.
Worth Defined
What motivates purchase is an offer’s relative value: its ac-
tual purchase price compared to the customer’s perception
of the fair-value price of the offer’s 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 prod-
uct can actually attract the high-end buyer is another ques-
tion, 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) con-
tributes to share growth. The effectiveness of such pricing
depends on competitive countermoves, of course. When com-
petitors immediately react and all change prices and/or ben-
efits simultaneously—such as in a price war or in response
to a sudden increase in the price of raw materials—they col-
lectively change customer perceptions of fair value, and mar-
ket shares might remain the same.
Your toughest competitors are those offering positive rela-
tive values. They charge the customer less than the customer
thinks the product is worth. Products with the largest posi-
tive relative values are frontier offerings. If you are unlucky
enough to be competing head-to-head against a strong com-
petitor who is pricing well below fair value in your perfor-
mance 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 compa-
rable 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 mar-
keting; 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 pric-
ing,” a synonym for price cuts, and “value added,” used to
gussy up the image of a product enhancement, sound im-
pressive 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 ac-
tual 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 fea-
tures and benefits. We will introduce a valuable diagnostic
tool, the value scorecard, which tracks information such as:
• the attributes customers prefer in a product;
• the relative importance of these attributes;
• how you and your competitors compare in attributeperformance; and
• how customers make the tradeoff between price andbenefits.
Value accounting is not complex. Knowing what your prod-
uct is worth relative to competing products is well worth the
effort. Yet the benefits you receive are more than simply gen-
erating a number. Formal knowledge of customers and com-
petitors permits more informed decisions in all areas of busi-
ness strategy. For example,
• Knowing fair value, you can accurately price your prod-ucts to balance profit margin and market share growth.
• Quantifying customer needs, you can estimate the differ-ential worth—changes in economic value—generated by
How Much Is Your Product Really Worth?
6
product improvements, and simulate customer responseto proposed changes in your offering.
• Understanding how different customers weight the vari-ous attributes of your product, you can target the marketsegments that especially value the competitive strengthsthat you offer.
• Having data on competitive performance helps sales-people fine-tune their presentations for individual ac-counts.
• Assembling value scorecard data involves members ofyour management team discussing and agreeing on a com-mon view of the market and appropriate strategies.
Revealing Techniques
Using the value scorecard will give you much greater in-
sight for pricing to the market than you can achieve with
traditional approaches such as cost-plus and target return pric-
ing. Based on product costs, those methods do not account
for demand and competitive activities, leaving you vulner-
able 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 tech-
niques that have traditionally been considered independently,
such as customer satisfaction research, comparative perfor-
mance surveys, lisrel, and the
family of choice modeling
techniques known as conjoint
and tradeoff analysis. Con-
joint, which has won a wide
following among market re-
searchers, explicitly links
product benefits to prices to
develop a realistic picture of
customer willingness to pay
for performance. For ex-
ample, customers might
claim great interest in reduc-
ing car exhaust pollution, but
a conjoint or tradeoff study
would indicate whether
they’d be willing to trade a
higher price or slower speed
for environmental rectitude.
Conjoint and tradeoff studies
can be incorporated into
value accounting thereby re-
vealing customer preferences
among attributes and the rela-
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 knowl-
edge people might have about some products and their at-
tributes. Research by automobile makers, for instance, has
found that motorists use a variety of cues to perceive a car’s
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 implic-
itly 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 physi-
cal performance comparisons among brands.
Value accounting need not rely on field research input, how-
ever. One of its strengths is the ability to profile customer
perceptions based on expert evaluations. Comprehensive,
objective product testing and rating is widespread in con-
sumer markets, most notably by Consumers Union, pub-
lisher 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 deci-
sions. Of course, you can use expert evaluations and field
research in concert to refine your analysis.
However, customer perceptions and expert evaluations go
only so far in appraising benefits new to the world. New
Exhibit 1Typical Sources of Data for a Price-Performance Profile
Pro
du
ct E
valu
ato
rs
Ind
ust
ry A
na
lyst
s
Inte
rnal
Mark
etin
g D
ata
Inte
rnal
Com
pet
itiv
e
Ass
essm
ents
Wo
n/L
ost
An
aly
ses
Fo
cus
Gro
up
s
In-d
epth
In
terv
iew
s
Sa
tisf
act
ion
/
Per
form
an
ce R
ati
ngs
(Dir
ect,
Con
stan
t S
um
, C
on
join
t, R
egre
ssio
n)
1 Vendors √ √ √ √ √ √ √2 Benefit Attributes √ √ √ √ √ √3 Performance Scores √ √ √ √4 Attribute Weights (%) √5 Selling Prices* √ √ √6 ∆ Market Share (+, 0, -) √ √
Internal
Data
Proprietary Market
Research
Six sets of data about a category
* And/or Price Competitiveness Rating
Published
DataA
ttri
bu
te I
mp
ort
an
ce
√
Att
ribu
te I
mpo
rtan
ce(D
irec
t, C
onst
ant
Sum
,C
onjo
int,
Reg
ress
ion)
ket
Pro
duct
Eva
luat
ors
Indu
stry
Ana
lyst
s
Inte
rnal
Mar
keti
ng D
ata
Inte
rnal
Com
peti
tive
Ass
essm
ents
Won
/Los
t A
naly
ses
Foc
us G
rou
ps
In-d
epth
Int
ervi
ews
Sati
sfac
tion/
Per
form
ance
Rat
ings
(Dir
ect,
Con
stan
t Su
m,
Con
join
t, R
egre
ssio
n)
1 Vendors √ √ √ √ √ √ √2 Benefit Attributes √ √ √ √ √ √3 Performance Scores √ √ √ √4 Attribute Weights (%) √5 Selling Prices* √ √ √6 ∆ Market Share (+, 0, -) √ √
InternalData
Proprietary Market Research
Six sets of data about a category
Published Data
Att
ribu
te I
mpo
rtan
ce
√
How Much Is Your Product Really Worth?
7
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 assess-
ing the unknown benefits of a new technology often starts
by examining problems customers have with existing prod-
ucts.
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
Computer’s extraordinary success over rivals Compaq,
Hewlett Packard, and Gateway, which have not been able to
match Dell’s low prices for high-value products.
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 per-
formance ratings and price levels for each competing brand.
Although it might seem difficult to determine a single num-
ber 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
competitor’s 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 illus-
trating each competitor’s relative values. Next comes cre-
ation of the value scorecard itself, the heart of the analysis,
which decomposes each product’s economic value into in-
dividual monetary values per attribute. Scorecard data also
reveals the competitive strengths at work on the value fron-
tier. 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 pub-
lished data, in-house proprietary information, and propri-
etary 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 pub-
lished by Consumer Reports, the influential product test-
ing 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
magazine’s September 1999 issue reported an overall per-
formance 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 com-
puter maker’s technical support services. Pooling those re-
ports and indexing comparative data on a 1 to 10 scale cre-
ates the price-performance profile in Exhibit 2.
8992,3592,0201,5281,5181,1992,3482,5002,5482,4102,8581,921(++)
Selling Price($) Market Share
10.0100%
7.97.36.97.36.78.78.27.97.98.18.79.0Reliability10.06.77.05.67.07.26.76.56.76.45.96.77.6Technical Support1.68.010.08.06.06.06.08.08.08.010.08.08.0Display2.48.010.08.08.08.06.010.010.08.06.010.08.0Power4.06.08.04.06.06.08.06.06.06.06.08.08.0Manuals8.010.010.010.010.06.010.010.010.010.06.010.08.0System Restore8.06.06.08.06.06.04.08.06.08.08.08.010.0Expansion8.06.010.06.010.010.010.08.08.010.08.010.08.0Other Features8.06.010.08.08.010.08.010.010.010.08.08.08.0Multimedia Features8.0
16.016.0
6.0
6.06.0
8.0
4.04.0
8.0
6.08.0
8.0
6.06.0
8.0
8.06.0
6.0
8.08.0
8.0
8.06.0
8.0
8.08.0
8.010.08.010.0Multimedia Sound
8.010.08.010.0Multimedia Images8.010.010.08.0Speed
Benefit Attributes
∆
Estimates by Customer Value, Inc. based on data published by Consumer Reports, September 1999 and December 1999.
Del
l
Po
wer
Mac
Co
mp
aq
H-P
Son
y
IBM
iMac
Mic
ron
Gat
eway
Ess
enti
al
NE
C
Gat
eway
Pro
file
Wei
gh
ts%
eMac
hin
es
Exhibit 2Price-Performance Profile for Desktop Computers
%
How Much Is Your Product Really Worth?
8
In this example, Consumer Reports picked the attributes un-
der study. When designing your own price-performance pro-
file, however, take the time to choose study attributes care-
fully. Selecting the right list can be difficult. Within any or-
ganization, 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 con-
sistent 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 criti-
cal for using statistical analysis methods, and it is important
even for the most informal list as well. Otherwise, you can-
not 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 informationabout a category.
• Brands/Models: a list of the vendors in your category orthe subset of vendors in your customer’s considerationset.
• Benefits/Attributes: a list of the key buying criteria thatcustomers use when choosing a product or selecting avendor. These attributes cover all the non-price dimen-sions of an offering.
• Performance Scores: ratings for each vendor on each at-tribute on a scale of 1 to 10, with 10 excellent. Transformengineering or survey data so that it is comparable to thisanchored ten-point scale. Consumer Reports didn’t gatherits data with a price-performance profile in mind, so weimputed the performance scores. We converted themagazine’s five-point (excellent, very good, good, fair,poor) rating to a ten-point scale for the expert-evaluatedbenefits. We converted the ranges of survey ratings ofvendor reliability and technical support, expressed as per-centages, into comparable ten-point scales.
• Weights (%): an estimate of relative attribute importanceweights, adjusted to sum to 100%. When possible, alsoestimate relative importance weights for different seg-ments within the category. Guided by the Consumer Re-ports article, we first assigned relative importance weightsto the desktop product attributes and judgmentally addedimportance weights for technical service and reliability.
• Selling Prices: an estimate of the selling price of eachvendor’s offering in monetary terms. In markets whereseveral vendors bid on a project, estimate the typical priceof each vendor relative to the average vendor (e.g.105%,92%). Then use these relative prices and the average pricefor a representative project to estimate selling prices foreach vendor. Note that the exhibit shows only selling price:acquisition cost unadjusted by operating and switchingcosts, which probably do not figure heavily in most con-
sumer computer purchases anyway. But those costs canbe substantial factors in business transactions, even dwarf-ing acquisition cost in some categories. If your offeringhas a significant effect on the size of those costs, that factitself can be a researchable attribute.
• Change in Market Share: whether the brand/model is gain-ing, holding, or losing share.
Armed with this information, we calculate a weighted over-
all benefit score for each desktop brand (Exhibit 3). Com-
puter 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 Ex-
hibit 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.
Illustrating Price versus Performance on the Value Map
The value map in Exhibit 4 plots the selling prices and cus-
tomer-perceived performance ratings of competing products.
A value map contains four references lines for assessing price,
performance, and value.
• The horizontal reference line, at $2,009 for desktop com-puters, represents the statistically average price.
• The vertical reference line at 7.73 represents average per-formance. Models located to the right of this line offerbetter performance; models to the left offer worse perfor-mance.
• The frontier line connects products that offer the lowest
7.732,009 Average Model
6.65899eMachines
6.952,359Gateway Profile7.172,020NEC7.241,528Gateway Essential7.361,518Micron7.701,199iMac7.842,348IBM7.982,500Sony8.232,548H-P8.342,410Compaq8.632,858PowerMac
8.701,921Dell
Performance(1-10)
Price ($)Model/Brand
Estimates by Customer Value, Inc. based on data published byConsumer Reports, September 1999 and December 1999.
Exhibit 3Prices and Overall Performance Scores
How Much Is Your Product Really Worth?
9
price in each performance range. The eMachines brandhad the lowest price among models offering lower per-formance, iMac had the lowest price of models offeringaverage performance, and Dell had the lowest price ofmodels offering superior performance. The end points,the model with the lowest price and the model with thebest performance, anchor the frontier line. Models on thefrontier line offer better than average value.
• The fair-value line completes the value map by indicat-ing how much customers are willing to pay, on average,for different levels of performance. The fair-value linerepresents the economic value of an offer. The fair-valueline passes through the intersection of the average priceand 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 value—the
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
be delivering superior value—more 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 value—fair value—across 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 sur-
veys 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 pro-
vide our input data. In cases such as this, you can consider
several factors to determine the position and slope of the
fair-value line.
• You can look at the brand price-performance points plot-ted and fit a line to them using regression analysis, rangemapping, or some other technique.
• If additional information is available on changes in mar-ket share, the line can be adjusted so that it divides theshare gainers from the share losers. In the desktop ex-ample, the fact that Dell was gaining market share rap-
Exhibit 4Value Map showing Positions of Desktop Models
Dell
Sony
IBM
iMac
Gateway Profile
500
1000
1500
2000
2500
3000
6.5 7.0 7.5 8.0 8.5 9.0
Performance Score
Price($)
High
Low
BetterWorseSlope of FV Line = $800 per benefit point
Superior value
Inferior value
PowerMac
Fair-value line
NEC
Compaq
eMachines
Gateway Essential
Micron
Frontier line
H-P
How Much Is Your Product Really Worth?
10
idly gives us confidence that the fair-value line really does fall well above theDell’s position on the value map.
• Finally, if additional factors suggest thatthe performance ratings, as presented, donot tell the full story, the line (or points)can be adjusted to reflect the additionalinformation. For example, many productsreviewed by Consumer Reports havesome specialized feature tailored for aspecific subset of consumers, the valueof which is often not reflected in the gen-eral ratings.
In our example, the fair-value line for desk-
top computers has a positive slope of roughly
$800 per point of overall benefit. This price-
for-benefit tradeoff estimates how much cus-
tomers have paid on average for any level
of better performance in the desktop mar-
ket.
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 fair-
value 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. Prod-
ucts positioned along the upper diagonal line deliver $400
less value. Setting the width of the fair-value zone is purely
judgmental. You could use it to define a range within which
customers have extraordinary price sensitivity, for example.
Positioning competing products on a value map clearly sug-
gests which will gain or lose market share. Those to the lower
right of the fair-value zone tend to gain market share and are
in a “grow and prosper” position. Products positioned to
the upper left of the fair-value line tend to lose market share;
they are in the “wither and die” position of the value map.
Exhibit 5 shows the fair-value price and the differential
worth of each product.
• To determine the fair-value price for a product, locateits performance score on the horizontal axis of a valuemap, move up vertically to the fair-value line, and movehorizontally to the price on the vertical axis.
• The differential worth is a product’s fair-value price lessthe fair-value price of the statistically average productin the category. (Situated at the intersection of the aver-age price and average performance lines, the averageproduct’s fair-value price and selling price are identi-
0
-863-624-452-394-298-2886
199400487714772
DifferentialWorth ($)
2,009
2,0092,0092,0092,0092,0092,0092,0092,0092,0092,0092,0092,009
AveragePrice ($)
2,009
1,1461,3851,5571,6151,7111,9812,0952,2082,4092,4962,7232,781
Fair-ValuePrice ($)
Average Model
eMachinesGateway ProfileNECGateway EssentialMicroniMacIBMSonyH-PCompaqPowermacDell
Model/Brand
Ordered by Differential Worth, compared to the average model.
Exhibit 5Differential Worth and Fair-Value Prices
Delivering Worth at Dell
Dell Computer has employed a combination of customer performance and service benefits to deliver a competitive advantagebuilt on differential worth at an unbeatable price. By selling direct to the customer and building computers to order, Dell avoidsclogging its inventories with rapidly obsolescing products. Although it is the low-cost producer in the category, its computersappear to customers to be more state-of-the-art, a perception that shows up in Dell’s superior performance on product attributessuch as multimedia images, multimedia sound, and expansion.
Dell’s direct-selling business model has built a history of information sharing with individual customers. Unlike rivals sellingthrough dealers, Dell knows who buys its computers, where, and how well their components perform. Dell therefore can predictwhere it will need to stock spare parts at the local level, further minimizing inventory while improving customer service responsetime. 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 havecomplete measures of brand affinity for computer makers. However, Consumer Reports surveys find Dell scoring best on lowfrequency of repairs, which the magazine interprets as a sign of brand reliability. Superior performance, reliability, and respon-sive technical service are corporate level advantages that carry over as Dell moves into servers, switches, and storage devices.
How Much Is Your Product Really Worth?
11
cal.) Another way of calculating differential worth is com-paring a model’s performance score to that of the cat-egory average and multiplying the difference by the slopeof the fair-value line.
In this illustration, the Dell model’s benefits correspond to a
fair value price of $2,781, which is $722 more than the aver-
age product’s 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. Dell’s score is 0.965 greater than average. Since a
benefit point is worth $800, Dell’s differential worth is 0.965
x $800, or $772. Power Mac also rates well, yielding a dif-
ferential worth of $714. In contrast, the eMachines model,
with the lowest performance score in the category, is worth
$863 less than the average model.
Frontiers and Relative Values
The difference between a model’s fair-value price and its
selling price represents the relative value offered to custom-
ers, the amount of value the buyer receives in addition to a
product’s economic value.
In our computer example, Dell’s relative value is its fair-
value price of $2,781 minus its selling price
of $1,921, which yields an $860 customer
value advantage (Exhibit 6). By compari-
son, the relative value delivered by Compaq
was $86, thanks to higher pricing for a leaner
benefit package. Dell, as we’ve noted, is the
frontier offering in its performance range,
offering the largest relative value among
high-end machines and for all machines as
well. Dollar for dollar, it offers the best per-
formance.
Over time, customers tend to migrate toward
products on the frontier of a value map, es-
pecially the product offering the greatest
value to customers. If you want to compete
successfully against products offering the
best value to customers in your performance
range, you need to charge a price that deliv-
ers a relative value comparable to those of
frontier models. To determine the frontier
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 horizon-
tally to the price on the vertical axis. In the desktop illustra-
tion, Compaq would need to lower its price from $2,496 to
the $1,600-$1,700 range to offer a relative value comparable
to the iMac and Dell models.
In active markets, as customers migrate away from products
above the fair-value zone and surviving incumbents cut prices
to place them closer to the frontier line, new entrants will
price below the frontier line and/or offer more performance
than incumbent frontier offerings in order to build share. The
frontier line shifts down and to the right on the value map,
moving quickly in dynamic markets such as technology prod-
ucts.
Working With the Value Scorecard
What makes your product different and worth more? There
are many ways to differentiate your offering from the
competition’s product features and performance, customer
services, vendor/customer relationships, and brand affinity.
The challenge is differentiating yourself in a way that cus-
tomers perceive as valuable, and that you can execute prof-
itably. Dell Computer has met that challenge, putting itself
at the head of our price-performance profile of the PC mar-
ket. (See the adjacent article, “Delivering Worth at Dell.”)
Measuring variances from the average model in a category,
you can calculate the worth of individual attributes of each
brand using a value scorecard. A value scorecard enhances
your understanding of your competitors, their strengths and
weaknesses in the eyes of customers, and their likely reac-
tions to price and benefit moves by your company.
Unlike the price-performance profile, the value scorecard
shows dollar-denominated differential worth for each at-
tribute and each brand (Exhibit 7). The value scorecard high-
lights the selling points of leading performers and quantifies
the relative value position of each product. The columns in a
value scorecard quantify the relative value position of each
model compared to the statistically average product, by at-
tribute and overall.
0
247
-974
-463
87
193
782
-253
-292
-139
86
-135
860
RelativeValue ($)
2,0092,009 Average Model
8991,146Emachines
2,3591,385Gateway Profile
2,0201,557NEC
1,5281,615Gateway Essential
1,5181,711Micron
1,1991,981iMac
2,3482,095IBM
2,5002,208Sony
2,5482,409H-P
2,4102,496Compaq
2,8582,723PowerMac
1,9212,781Dell
SellingPrice ($)
Fair-ValuePrice ($)
Model/Brand
Exhibit 6Relative Value Delivered to Customers
How Much Is Your Product Really Worth?
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. How-
ever 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, commu-
nicate, and deliver its value proposition clearly to its in-
tended 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 cus-
tomer-perceived strengths and weaknesses of category play-
ers, management can tell whether it has been communicat-
ing its intended value proposition and whether it’s deliver-
ing on that promise.
Reporting attribute data in monetary terms helps a busi-
ness team review marketing and new product development
issues. Managers can estimate how much performance im-
provements are actually worth to customers, assess the com-
petitive reality of different prices, and predict how profit-
able contemplated product changes are likely to be. Exam-
ining how customers evaluate competing products also of-
fers insights for marketing communications and sales strat-
Calculating the cell values in Exhibit 7 is straightforward.
According to the price-performance profile in Exhibit 2,
Dell’s 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 eco-
nomic value, but speed is just 16 percent of the average
customer’s 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. That’s the monetary worth of
Dell’s above average speed rating.
To focus on which model(s) performs best on an attribute
and how much that’s worth, we highlighted the cells of the
top performers on each attribute. We begin to see a picture
of each brand’s strengths, and we begin to identify and quan-
tify the relative strengths of each model. For example, Dell
performed best on three attributes: expansion, technical sup-
port, and reliability. In addition, Dell tied Compaq for lead-
ing performance on multimedia images and multimedia
sound. Dell also tied several other models for leading per-
formance on manuals. Because we measure all amounts rela-
tive 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 larg-
est relative value, $860. The iMac model came in second in
relative value. Although it had a differential worth of -$28,
Exhibit 7Value Scorecard for Desktop Computers
0-247-974-46387193782-253-253-13986-135860Total Value Advantage
2,0098992,3592,020
1,5281,5181,1992,3482,5002,5482,4102,8581,921Selling Price ($)
0247-974-46387193782-253-292-13986-135860Total Value Advantage
01,110-350-11481491810-339-491-539-401-84988Price Advantage
2,0091,1461,3851,557
1,6151,7111,9812,0952,2082,4092,4962,7232,781Fair-Value Price
0-863-624-452-394-298-2886199400487714772Differential Worth
00-44-80-44-92642804166488Reliability
0027-8527433-130-21-61375Technical Support
02282-23-23-232222822Display
0-632-6-6-6-453232-6-4532-6Power
0-1648-80-16-1648-16-16-16-164848Manuals
053535353-20353535353-20353-75System Restore
0-64-6464-64-64-19264-64646464192Expansion
0-17185-171858585-43-4385-4385-43Other Features
0-17185-43-4385-43858585-43-43-43Multimedia Features
0
0
0
-128
-192
-171
0
-448
-427
0
-192
85
0
-192
-171
0
64
-171
-128
64
85
0
64
-171
0
64
85
01280128Multimedia Sound
6432064320Multimedia Images
8534134185Speed
Benefit Attributes
Differential Worth ofeach model versus theaverage model ($)
Del
l
Po
wer
Mac
Co
mp
aq
Son
y
H-P
IBM
Mic
ron
iMac
Gat
eway
Ess
enti
al
NE
C
Ave
rag
e
Gat
eway
Pro
file
eMac
hin
es
How Much Is Your Product Really Worth?
13
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 cat-
egory will be priced 15 percent or more above their fair-
value 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. Har-
vest strategies work best when customers are not price sen-
sitive and when variable costs represent a large fraction of
your product’s overall cost. You can also price above the
estimated fair value if the overall performance score of your
offering doesn’t fully capture your brand affinity or the ad-
vantages of special features.
You could price your offering at or near its fair-value price.
About 36 percent of models in the Price-Performance Data-
base are priced within 15 percent of their fair-value price.
Renowned marketing professor Philip Kotler calls the strat-
egy “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.
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 ser-
vice expertise and repair speed.
Designing Value-Based Strategies
Worth-Based Pricing
Knowing your product’s real worth and relative value to cus-
tomers gives you insights to a perennial pricing strategy ques-
tion: 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 vol-
ume, the variable cost of your product, and your short- and
long-term investment requirements. Value accounting indi-
cates 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 philo-
sophically similar to the oft discussed “skimming,” “neu-
tral,” and “penetration” strategies for setting prices relative
to economic value. Most businesses do consider prices rela-
tive to competing models, but do not make explicit adjust-
ments for the worth of superior benefits that some products
provide. Let’s examine the options and their expected re-
Dell’s Lean-Asset Strategy Stymies CompetitorsHow could Dell have charged such low prices without triggering a major competitive response and still attractinvestors? Dell charged a price less than but close to the price of the average personal computer even thoughits performance far exceeded the average model. It preempted a strong competitive price response by employ-ing a low-asset strategy that competitors cannot quickly match.
Dell has not enjoyed the industry’s highest profit margins. But, despite its value pricing it has enjoyed thehighest return on investment. With its build-to-order strategy, Dell’s value delivery system produces quick pay-ments and less receivables, plus inventory efficiencies that reduce costs and reduce assets as a percentage ofrevenues. Keeping assets lean gives Dell the largest return on assets among PC makers even though it chargeslower than average prices.
This strategy has created a price dilemma for competitors. From the customer’s viewpoint, Compaq andHewlett Packard must cut prices to deliver value comparable to Dell’s. But investors want Compaq and H-P toraise prices, or reduce asset intensity, to earn an ROI comparable to Dell’s.
Investors have noticed. As of fall 2001, Dell enjoyed the highest market value to revenue and by far the highestmarket value to assets among leading computer marketers. Dell’s market value to assets multiple was wellover four while the multiples for competitors Apple, Compaq, Gateway, H-P, and IBM were less than two. “It’s aterrible time to be selling computers—unless you’re 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.
How Much Is Your Product Really Worth?
14
You can price your offering below its fair-value price, fore-
going some margin for greater volume and market share.
About 31 percent of models in the Price-Performance Data-
base are priced more than 15 percent below their fair-value
price. It is a strategy that works best in price sensitive mar-
kets, 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 prod-
uct 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 cus-
tomers 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 everyone’s relative price as market shares remain
steady. Then again, your share-grabbing price cut might suc-
ceed if a strategic barrier prevents competitors from retaliat-
ing. In our personal computer example, Dell’s competitors
cannot match its cost efficiencies. (See adjacent article,
“Dell’s Lean-Asset Strategy Stymies Competitors.”)
Positioning new or repriced prod-
ucts benefits from a value account-
ing analysis. McKinsey & Com-
pany 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 percep-
tions 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 competitor’s 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, how-
ever, that, “Market research must first establish that the ex-
panded 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, it’s
usually wise to segment your market and apply value ac-
counting 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, pre-
fers 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 8Weights Assigned to each Attribute by Market Segment
100.0100.0100.0100.0 Total Weight
16.06.06.010.0Reliability
16.06.06.010.0Technical Support
1.21.01.61.6Display
1.71.52.42.4Power
2.92.54.04.0Manuals
5.85.016.08.0System Restore
16.05.04.08.0Expansion
5.85.018.08.0Other Features
5.85.016.08.0Multimedia Features
5.85.04.08.0Multimedia Sound
11.510.06.016.0Multimedia Images
11.548.016.016.0Speed
Segment-3Do-It-
Yourselfer
Segment-2
Heavy User
Segment-1
Engineer
BaseCase
MarketCategory
Attribute
How Much Is Your Product Really Worth?
15
ample, having the best performance on the most prized at-
tributes in the engineering segment makes H-P more com-
petitive with the highest fair-value price. Compaq is more
competitive in the heavy user segment.
The strategic implications are clear. H-P’s relative superior-
ity 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 mar-
keting communications, and it can introduce new products
with improved performance on attributes “engineers” value
highly.
But Dell’s superior relative value continues to bedevil H-P
and Compaq, even in the engineer and heavy user segments.
Dell’s much lower selling price and best in category perfor-
mance on many benefit attributes have made it difficult for
H-P and Compaq to offer comparable value. To be more com-
petitive from the relative value perspective, Compaq and H-
P 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.
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
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 ex-
ample, a PC maker could produce a fully featured
model for a subsegment of high-end customers will-
ing 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 $1,799—beginning
with the highest priced model for its most eager cus-
tomers.
Identifying particularly receptive subsegments is par-
ticularly important during slow economic times when
the pressure to reduce price to gain volume is espe-
cially strong. Some subsegments of your targeted mar-
ket segment might perceive your incremental worth
versus competitors as large, others as small. Without
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 ex-
amine the size of target subsegments. Customers rarely dis-
tribute 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 per-
formance levels, and “price-capped customers” will not pay
more than a certain price no matter what the benefits deliv-
ered. “Only customers who fall into neither category, ben-
efit-bracketed or price-capped, are actually willing to con-
sider 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 competi-
tors. 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 proposi-
tions.
Exhibit 9Product Values Differ by Market Segment
Relative Value
Selling Price
Fair Value Price
Do-It-Yourselfer
Relative Value
Selling Price
Fair-Value Price
Heavy User
Relative Value
Selling Price
Fair-Value Price
Engineer
Relative ValueSelling PriceFair-Value Price
Market Category
1,15141-139
1,9212,4102,548
3,0722,4512,409
Segment 3:
514297-256
1,9212,4102,548
2,4352,7072,292
Segment 2:
242-479-31
1,9212,4102,548
2,1631,9312,517
Segment 1:
86086-1391,9212,4102,5482,7812,4962,409
Base Case:
Dell($)
Compaq($)
H-P($)
How Much Is Your Product Really Worth?
16
To see how this head-to-head comparison is delivered using
our computer example, suppose that in 1999 Dell found it-
self 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 perfor-
mance attribute and selling price, and finally the relative value
offered by Dell versus Compaq (Exhibit 10).
Illustrating the data with a head-to-head value comparison
graph (Exhibit 11) clarifies the presentation. Dell’s selling
proposition is clear: Except for speed and
display, Dell matches or beats Compaq at-
tribute for attribute at a far better price.
The head-to-head value comparison helps
sales representatives and key account ex-
ecutives understand and communicate the
value of their offer versus the individual
customer’s 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 com-
parisons 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 dif-
fer among individual members of the buy-
ing committee. Tailored presentations
based on value accounting will make your
superiorities obvious—if, of course, you have them.
Aligning Your Management Team
Most business leaders don’t understand how customers evalu-
ate 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
thinking varies widely. They do not agree on
what’s most important to customers, they tend
to focus largely on attributes within their pur-
view, and no one focuses on attributes that
require cross-functional coordination. Opti-
mistic function heads think customers favor
their products over competitors; pessimists
fret about the opposite. As a result, it’s diffi-
cult getting members of the management
team to truly function as a team.
Value accounting with its price-performance
profiles and value scorecards puts everyone’s
knowledge on the same footing, with expert
evaluator and customer-perceived perfor-
mance data that are reality checks on man-
agement thinking. Properly aligned, your
people and processes can deliver offerings
worth more to customers. Updating value ac-
counting data and the strategies derived from
them keeps the management team informed and in touch with
customers and each other.
Exhibit 11Head-to-Head Value Comparison
-400 -200 0 200 400 600
Multimedia Images
Multimedia Sound
Multimedia Features
Other Features
Expansion
System Restore
Manuals
Power
Display
Technical Support
Reliability
Selling Price
Relative value impacts - Dell vs. CompaqWeaknesses Strengths
Speed
Relative Value(versus average model)
RelativeValue
Scores
77486860 Total Customer Value Advantage
489-40188Price (or cost) Advantage
2,4101,921Selling Price ($)
285487772Sum of Benefit Advantages
7216888.19.0Reliability
136-61755.97.6Technical Support
-2628210.08.0Display
38-45-66.08.0Power
64-16486.08.0Manuals
128-203-756.08.0System Restore
128641928.010.0Expansion
0-43-438.08.0Other Features
0-43-438.08.0Multimedia Features
012812810.010.0Multimedia Sound
032032010.010.0Multimedia Images
-2563418510.08.0Speed
Dell vs.Compaq
CompaqDellCompaqDellAttributes
Exhibit 10Benefit and Price Advantages of Dell versus Compaq
How Much Is Your Product Really Worth?
17
The Digital War Room
A primary use of value accounting is helping managers craft
their company’s value proposition. That is usually a group
process requiring documentation and critical analysis to as-
sess the situation, identify strategies and tactics, and imple-
ment 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
everyone’s review and comment. Customer Value, Inc. has
developed special value accounting software to enable the
Digital War Room.TM It includes the Value-Strategy Simula-
tor 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 account-
ing tools simultaneously in its war room or business confer-
ence room (Exhibit 12).
The software reports changes in strategy on the price-per-
formance profile and automatically updates the other exhib-
its. Once the team devises and quantifies a basic strategy, it
can quickly test alternatives, update, and fine-tune the analy-
sis in real time during a meeting.
Digital War Room and Value-Strategy Simulator
are trademarks of Customer Value, Inc.
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 cat-
egories.
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 com-
petitive market. Are you ready to assemble the data, build
knowledge, sharpen your customer focus, and drive strate-
gies that will deliver worth to your customers and wealth to
your shareholders?
1 Philip Kotler, Marketing Management, tenth edition,
(Prentice Hall, 2000), Chapter 15, “Designing Pricing Strat-
egies and Programs.”
2 Ralf Leszinski and Michael V. Marn, “Setting value, not
price,” The McKinsey Quarterly 1997 Number 1.
3 Ibid.
Value Map for consideration set
Gateway Profile
Gateway Essential
Dell
CompaqH-P
500
1000
1500
2000
2500
3000
6.5 7.0 7.5 8.0 8.5 9.0
Performance score
Price($)
High
Low
BetterWorseSlope of FV Line = $600 per benefit point
Head-to-Head Value Comparison
-400 -200 0 200 400 600
Speed
Multimedia
Other Features
Expansion
System Restore
Technical Support
Reliability
Selling Price
Relative value impacts - Dell vs. Compaq
Price-Performance ProfileDesktops -- Consideration Set
Performance Scores Weights for:
DimensionAttribute
De
ll
Co
mp
aq
H-P
Gat
eway
Ess
entia
l
Gat
eway
Pro
file
Ave
rage
Attrib. Value
Benefits Speed 8.0 10.0 8.0 6.0 4.0 7.2 17.0Multimedia 9.5 9.5 8.5 7.0 6.5 8.2 34.0Other Features 8.0 8.0 10.0 10.0 10.0 9.2 9.0Expansion 10.0 8.0 8.0 6.0 6.0 7.6 9.0System Restore 8.0 6.0 10.0 10.0 10.0 8.8 9.0Technical Support 7.6 5.9 6.4 7.0 7.0 6.8 11.0Reliability 9.0 8.1 7.9 7.3 7.3 7.9 11.0
Weighted benefit scores 8.8 8.4 8.3 7.3 6.8 7.9 100.2
Costs Selling Price 1921 2410 2548 1528 2359 2153 100.0Weighted cost scores 1921 2410 2548 1528 2359 2153 -0.2
Slope of fair value line 600
Value ScorecardDesktops -- Consideration Set
Incremental worth of performance advantages and disadvantages
Dimension Attribute
De
ll
Co
mp
aq
H-P
Gat
eway
Ess
entia
l
Gat
eway
Pro
file
Ave
rage
Benefits Speed 82 286 82 -122 -326 0
Multimedia 265 265 61 -245 -347 0Other Features -65 -65 43 43 43 0Expansion 130 22 22 -86 -86 0System Restore -43 -151 65 65 65 0Technical Support 54 -58 -25 15 15 0Reliability 69 10 0 -40 -40 0
(a) Total incremental worth of benefits 492 308 247 -371 -677 0
Costs Selling Price 232 -257 -395 625 -206 0(b) Total cost advantage 232 -257 -395 625 -206 0
(c) Total value advantage = (a)+(b) 724 51 -147 255 -882 0
(d) Actual price (or cost) 1921 2410 2548 1528 2359 2153(e) Fair Value Price = (a) + (average price, 2153 ) 2645 2461 2401 1783 1477 2153(f) Total value advantage = (e)-(d) 724 51 -147 255 -882 0
Exhibit 12Value-Strategy Simulator
How Much Is Your Product Really Worth?
18
Glossary
Differential Worth or Worth Differential — The differ-
ence 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 aver-
age product (in the category or consideration set) or a spe-
cific competing product.
Digital War RoomTM Software — Computer software used
to analyze a product’s price, performance, and value posi-
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 Con-
joint Analysis to View Competitive Interaction Through the
Customer’s 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 Per-
spective,” ISBM presentation summary, 1997.
Philip Kotler, Marketing Management, tenth edition,
(Prentice Hall, 2000), Chapter 15, “Designing Pricing Strat-
egies 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, “Pric-
ing Strategy.”
Josh Quittner, “Apple’s 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 Janu-
ary 2002, p 70-75.
tion relative to competitors and to simulate actions to im-
prove competitiveness. It takes a performance profile as in-
put 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 perfor-
mance. It is equivalent to the economic value of the offer. To
determine the fair-value price for a product, locate its per-
formance 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 be-
low 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 mon-
etary 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 low-
est price in their performance range. To determine the fron-
tier 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 horizon-
tally 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 of-
fering 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 differ-
ent market subsegments, pricing higher in subsegments that
perceive the most differential worth in your product, and re-
ducing price to appeal to other subsegments according less
worth to your product.
How Much Is Your Product Really Worth?
19
maps, value scorecards, and head-to-head value compari-
sons from changes in a price-performance table. The soft-
ware allows all members of a business team to see those
four exhibits on a screen, real time, in a meeting environ-
ment.
Worth — The economic value of the benefits associated with
an offering, as perceived by the average customer in the cat-
egory.
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 ac-
counting 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 cat-
egory. Estimates of market-share changes are desirable.
Price Premium — The selling price of the vendor’s product
minus the selling price of a reference product. It is the oppo-
site 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 cus-
tomers, calculated as the fair-value price of an offering mi-
nus 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 fair-
value price per point of overall performance.
Value Accounting — The discipline of analyzing a product’s
worth to customers on an attribute-by-attribute basis, and
determining how much customers will pay for it versus com-
petitive 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 fron-
tier 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 product’s performance and price
promise promoted to potential buyers.
Value Scorecard — A report of each offering’s differential
worth by attribute, compared to the average model. It high-
lights the best performers on each attribute to emphasize the
key selling points of performance leaders.
Value-Strategy SimulatorTM — The Digital War Room Soft-
ware feature that automatically updates associated value
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. Gale’s book, Managing Customer Value, published by
The Free Press, was hailed by Publishers Weekly as, “Ar-
guably the most useful marketing study since the forma-
tive works of Peter Drucker, Philip Kotler, and Michael Por-
ter . . . may shape business thinking for years to come.”
Customer Value, Inc.
Customer Value, Inc. (CVI), founded in 1990 by Dr. Brad-
ley Gale, is an executive education and market-strategy con-
sulting firm specializing in Customer Value Management.
CVI and its consulting arm, Gale Consulting, help compa-
nies align their people and processes to the needs of cus-
tomers, clarify their customer value proposition, and de-
liver 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-manage-
ment programs. At meetings, members learn and share strat-
egies for building customer focus, perceived value, cus-
tomer satisfaction, relationships, and loyalty. These strate-
gies help companies attract and retain targeted customers.
They lead to improved growth, profitablility, and share-
holder value.
Customer Value, Inc.
217 Lewis Wharf
Boston, MA 02110
USA
Phone (617) 227-8191 * Fax (617) 227-8287 * Web site: www.cval.com * email: [email protected]
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: