That consistency notwithstanding, the company is baffled by vacillations in its market share that accompany shifts from tight to loose supply in the industry. A consumer packaged goods company executes one of the most common business tactics – it matches a competitors price on a large contract to supply a leading food retailer. In the months that follow, a bitter price war breaks out, destroying almost all of the industry profitability in this product category. These disparate cases have at least one thing in common: apparently sound marketing strategies and tactics that produced unexpected and costly results.
But could they have been avoided? Here we will explore how these and other common and expensive marketing missteps might be averted by applying a discipline called “dynamic value management” to the pricing and product positioning that are at the core of what most marketers do. “Value” may be one of the most overused and misused terms in marketing ND pricing today. “Value pricing’ is too often misused as a synonym for low Real Leakiness and Mike Mark are principals in Muckiness’s Atlanta and Cleveland offices, respectively. Copyright 0 1997 McKinney & Company. All rights reserved.
The real essence of value revolves around the tradeoff between the benefits a customer receives from a product and the price he or she pays for it, The management of this tradeoff between benefits and price has long been recognized as a critical marketing mix component. Marketers implicitly address it when they talk about positioning their product visit-;-visit competitors’ offerings and setting the right price premium over, or discount under, them. Marketers frequently err along the two dimensions of value management, however.
First, they fail to invest adequately to determine what the “static” positioning for their products on a price/benefit basis against competitors should be. Second, even when this is well understood, they ignore the “dynamic” effect of their price/benefit positioning – the reactions triggered among competitors and customers, and the effect on total industry reparability and on the transfer of surplus between suppliers and customers. To illuminate the nature and magnitude of this missed value-management opportunity, value needs to be defined properly.
Customers do not buy solely on low price. They buy according to customer value, that is, the difference between the benefits a company gives customers and the price it charges. More precisely, customer value equals customer-perceived benefits minus customer-perceived price. So, the higher the Exhibit 1 perceived benefit and/or the lower the price Value map of a product, the higher the customer value Stable market shares ND the greater the likelihood that customers will choose that product. (We will return to this later. Perceived price Static value management Value ex. valence line (VELA) Many marketing and strategic assessments can be made by using a simple tool called a value map, and by considering how customers are distributed within the map for a given segment. The value map explores the way customer value and the price/benefit tradeoff work in real markets for a given segment (Exhibit 1). Customer value = perceived benefits minus perceived price The horizontal axis quantifies benefits as perceived by the customer; the vertical axis wows perceived price. Each dot represents a competitors product or service.
Higher-priced, higher-benefit competitors are toward the upper right; lowercased, lower-benefit competitors are at the lower left. Customer- perceived benefits 3 281 If market shares hold constant (and if you have the right measurement of perceived benefits and perceived prices), then competitors will align in a straight diagonal line called the value equivalence line (VELA). At any desired price or benefit level, there is a clear and logical choice for customers on the VELA. So competitors aligned on the VELA say in such a market that “you get hat you pay for. The clarity of that choice almost defines a market in which shares are stable. (Note that while market shares might be stable for competitors along the VELA their shares might not be equal. Again, more on Exhibit 2 Share loser c Share gainer ad V VA all gag D The opposite is true for competitor E, which finds itself in a value-disadvantaged position above the VELA. Competitor E will be a share loser if the value map has been constructed properly. Did ad Vale VA u NT If, however, market shares are changing, then share gainers will be positioned below the VELA in what is called a ‘value-advantaged” position.
Competitor A in Exhibit 2 is value-advantaged and should logically be gaining market share. If a customer is searching for a product in the benefit range of A and B, then he or she would be more likely to choose A, since A provides the same level of benefits as B but at a lower price. Likewise, if a customer were searching for a product in the price range of A and C, he or she would probably choose A over Value map C, since A provides greater benefits than C Changing market shares but at the same price.
So A, positioned below the VELA that B and C reside on, offers more customer value than B or C, and Hereford more customers prefer it. While the marketing concepts that underpin Customer-perceived benefits the value map are basic, advanced market research technique uses (conjoint analysis, discrete choice analysis, and multi-staged conjoint analysis, for example) allow an accurate quantification of the perceived benefit dimension and its tradeoff against price. These advances make the effective application of value maps easier than ever for marketers.
That said, examples abound of costly positioning errors that could have been avoided through the use of this tool. Illustrative case: Alpha Computer Company The Alpha Computer Company’s experience illustrates the value map’s power, even when applied in a simple, static fashion. Alpha Computer supplied minicomputers for use primarily as servers in network applications. Alpha prided itself on its engineering skills and ability to deliver high levels Of technological performance at reasonable cost.
In an attempt to diagnose unexpectedly poor 4 282 101 Exhibit 3 Minicomputer value map Alpha’s perception Ace market acceptance Of its new line Of minicomputers, Alpha created a value map that reflected its perception of the price/benefit positioning of competitors Ace Computer ND Comply, and itself (Exhibit 3). EVE Comply Alpha believed customers chose minicomputers on the basis of two technological attributes: processor speed in MIPS (millions of instructions per second), and secondary Alpha access speed, that is, how quickly the computer accessed data from an external storage device such as a hard disk drive.
Ace Computer was the premium competitor: it had the highest processor speed and secondary access speed, but also the highest ; Processor speed (MIPS) ; Secondary access speed price. Comply not only had slower processor speed and secondary access peed than Alpha but was also priced 10 to 15 percent higher. So, Alpha thought that Comply was value-disadvantaged and that Alpha itself was valetudinarian. If Alpha’s perception of the value map in Exhibit 3 were correct, then Alpha should have been gaining market share and Comply losing it.
The opposite was occurring, however, and Alpha’s managers were baa fled. They thought their product was superior to Composes at a lower price, and they could not understand why it was not a huge success. Alpha’s problem was a common one. It did not understand the psychotherapeutics attributes that really drove customer choice of minicomputers. Alpha’s marketing department commissioned research to try to confirm its hypothesis that processor speed and secondary access speed were indeed the most important features.
Sixty buyers were questioned about their criteria for selecting a network minicomputer supplier. Much to Alpha’s surprise, processor speed and secondary access speed ranked only fourth and sixth on their list. Software and hardware compatibility, perceived reliability, and quality Of vendor technical support ranked above raw processor speed. Even quality of user documents (the manual that accompanies the hardware) ranked above secondary access peed. As it turned out, processor speed was indeed important, but most customers had a minimum processor speed requirement that all competitors easily exceeded.
However, the nature of most network applications made secondary access not that important. In fact, Alpha was understood 102 5 283 by customers to be slightly better than Comply on processor speed and secondary access speed, but these features just did not matter that much to them. The research also showed that Comply was highly rated on compatibility, reliability, vendor support, and user documents. Alpha, on the other hand, fell hors on these. Its operating system software and hardware plug configuration created compatibility problems for many customers.
Some remembered reliability problems with an earlier generation Of Alpha’s minicomputer that tainted their perception of its new product. Alpha’s technical support Minicomputer value map was considered difficult to get hold of and its Actual customer perception user documents were seen as the weakest in the industry. Exhibit 4 shows how the value map was redrawn to reflect customers’ perceptions of benefits and performance rather than Alpha’s. It showed that Comply performed o well on the attributes most important to customers that, despite its higher price, it was value-advantaged and therefore justifiably gaining market share.
Conversely, Alpha performed so poorly on attributes most essential to customers that, despite its low price, it was still value-disadvantaged and predictably losing share. ; Compatibility ; Reliability ; Vendor support ; Documentation The insights from this properly constructed value map prescribed a clear course for Alpha. It mounted a crash program to correct the important attributes on which customers had rated it so poorly.