RA Quick Insights: Optimizing Product Gross Profits with Price-Value Maps - Part 1

Introduction

Early in my career in Revenue Growth Analytics, I made a critical mistake by relying solely on internal expertise to construct "Price-Value Maps" (aka. "PVM") for our products and those of our competitors. This error proved costly, decreasing gross profits and EBITDA as higher rebates and promotional expenses negated increases in our price list.

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Understanding the True Meaning of "Value" in Sales and Marketing

"Value" is frequently used in sales and marketing but is often misconceived as merely representing a "low price." In economic terms, "value" is the difference between the price a customer pays for a product and the quantifiable benefits they receive:

Value = Perceived Quality (Benefits) - Perceived Price

The logic suggests that the higher the perceived benefits of our product, or the lower its price relative to competitors, the greater the value to our customers and the more likely they are to choose our product.

Customer Decision Factors Beyond Price

Contrary to common belief, especially in B2B markets, customers do not base their purchasing decisions solely on price. When customers decide between your product and competitor alternatives, the price often ranks third or fourth in importance. This is even true in quasi-commoditized industries like distribution.

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The Role of Price-Value Maps in Strategic Decision Making

A well-constructed PVM is an excellent tool for evaluating our products' perceived quality and price versus those of competitors.

Here's how you can build a PVM:

1. Commission an expert 3rd party (e.g., a Market Research Firm) Hire a reputable third-party market research firm to survey as many customers as possible. The aim is to identify the attributes that drive purchase decisions and quantify the relative importance of each attribute. Once the customer survey results are in, we can also apply regression analysis or simple machine learning techniques to determine the weighting of these attributes.

2. Calculate the weighted Quality and Pricing Scores Using the data collected, calculate weighted quality and pricing scores for our products and those of competitors. These pricing scores can be derived from customer surveys or, ideally, from syndicated competitive intelligence and expressed as a Competitive Price Index.

3. Map our Products and Competitor alternatives along the horizontal axis of "Perceived Quality" (the weighted Customer Benefit scores) and the vertical axis of "Perceived Price" (Competitive Price Index).

Real-World Application of Price-Value Mapping

The earlier example demonstrates how, despite aligning our pricing strategy with "Competitor 1," they consistently outperformed us in "Perceived Quality." This insight explains our loss of market share and the detrimental effect on our gross profits each time we attempted to raise prices.

No wonder we have lost Market Share to Competitor 1, while Gross Profits suffered each time we tried to raise Prices. Competitor 1, while at price-parity with our product, is perceived to have much greater benefits for Customers vs. our product.

To compete effectively with this Competitor, we would either have to:

1. Lower our Prices (through additional Discounts, Promotions or Rebates) to get closer to the Value Equivalence Line (where the Perceived Benefits = the Perceived Price by Customers) or

2. Enhance the non-price attributes that Customers rate as highly important in their Purchase Decision, such as reconfiguring our packaging, product attributes, service levels, delivery frequencies, etc.
   

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Conclusion: Importance of Customer Feedback in Building PVMs

Of course, don't just rely on Price Elasticity Models or Competitive Price metrics when determining whether to raise prices and how much.

Pay close attention to where your Product falls on the PVM.

A significant lesson from my early career missteps is always to prioritize customer feedback when constructing PVMs. To avoid response bias, it's crucial to engage a qualified third party rather than rely on internal teams to conduct the surveys.