Pricing of Laptops - Bradley Gale

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

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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.


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


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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


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

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1 Vendors √ √ √ √ √ √ √2 Benefit Attributes √ √ √ √ √ √3 Performance Scores √ √ √ √4 Attribute Weights (%) √5 Selling Prices* √ √ √6 ∆ Market Share (+, 0, -) √ √

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* And/or Price Competitiveness Rating

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1 Vendors √ √ √ √ √ √ √2 Benefit Attributes √ √ √ √ √ √3 Performance Scores √ √ √ √4 Attribute Weights (%) √5 Selling Prices* √ √ √6 ∆ Market Share (+, 0, -) √ √

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Published Data

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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

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4.04.0

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6.06.0

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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

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Po

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Mac

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H-P

Son

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IBM

iMac

Mic

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Exhibit 2Price-Performance Profile for Desktop Computers

%


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


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


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.


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


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


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.


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


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($)


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


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


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.


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:

Pricing of Laptops - Bradley Gale

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