Value Charts are an easy and effective way to communicate how much economic value your product offering provides to your customers. Reading a value chart lets you tell a rich story of why your offer is better than your competitor's. It also supports the claim of why your price is a better deal even though it is higher than the competition. Why? Because of higher value!
Value Charts can also illustrate a more complex narrative around the implications of differing pricing strategies. Let's compare different strategic scenarios based on the example of a medical device maker for a healthcare provider. We can use value charts to visualize each scenario (see Figures 1-4 below). Btw - An excellent explanation of these pricing strategies and when to use them is found in "Pricing with Confidence" by Reed Holden and Mark Burton. Note that none of these scenarios are inherently best or worst because the outcome depends on other factors.
click image to make bigger
Figure 1: Premium or Skim Strategy. Typically, a Value Chart is used to justify a higher price relative to the competition. This is the classic value communication scenario. The customer is willing to pay more because they perceive higher economic use value. This is represented in the Value Chart by a (i) relatively large green area in the left bar (e.g., the unique value that the medical device provides overall) and; (ii) relatively large blue bar on the right (e.g., the medical device costs $10.99 per patient procedure or $9.49 more than the competitive alternative). The implication of this strategy is that the marketer of the medical device maker is willing to forgo gaining market share to maintain a premium price.
A quick explanatory note about "competitor value" is in order. In value charts, the competitor price and value are assumed to be equal. So in our example, the competing medical device costs $1.50 per patient procedure and is therefore assumed to provide only $1.50 worth of value to the healthcare provider. In reality, the competitor probably provides more than $1.50 worth of economic use value, but Value Charts won’t give the competitor any credit for this. Reason: the competitor’s price is assumed to be the going market price for that bundle of economic value, in other words, a commodity. The customer would therefore never pay more for this base level of value because they can easily get it elsewhere. True differentiated value, however is a different story.
Figure 2: Penetration or Discount Strategy. Alternatively, a marketer may choose to aggressively grab market share with a low price. Here the left bar is exactly the same as in Figure 1 (e.g., $18.84 of differentiated value) but the right bar also shows a large green area indicating $18.34 worth of customer value -- nearly all the available differentiated value. This should be a very attractive proposition for the customer assuming that the underlying value story is credible. Obviously, the price-market share tradeoff can be taken much further – even to the point of under pricing the competitor (more on that in Figure 4 below).
click image to make bigger
Figure 3 - Neutral Strategy. For this scenario, we have significantly reduced the amount of differentiated value down to $0.61. This is clearly displayed in the Value Chart via the relatively small green area in the left bar. Note that the customer value in the right bar is also $0.61 (again the customer gets to keep all the differentiated value). The pricing is considered neutral because it matches the competitor's price. A marketer would chose to be neutral in order to deliberately avoid competing on price, instead aiming to be the preferred vendor because of better differentiation.
Figure 4 - Low Cost Leader. Using the same value story from the previous scenario (Figure 3), the marketer has chosen to price the medical device significantly below the competitor's price. This is essentially a more extreme form of Penetration Pricing (Figure 2 above). Here the left bar is exactly the same as in Figure 3 (i.e., relatively low differentiated value) but the right bar shows a much larger green bar. Not only does the customer gain all the differentiated value, but also receives the entire "commodity" value that the competitor provides at a lower price – in this case $1.01 lower! Obviously this strategy can only be sustained with a significant cost advantage by the medical device maker.
So in conclusion, value charts reveal four distinct visual patterns associated with the main pricing strategies. We suggest that they are a useful tool for marketers when evaluating possible strategic moves during their product planning.
Ed Arnold
Director of Products
