Overview: Gross profits in Practice
This article from Revology Analytics explains gross profits in the context of modern pricing analytics and revenue growth management. It draws on real engagements with mid-market and enterprise clients to turn gross profits from a buzzword into a measurable commercial capability. Read on for the full perspective, and see our related reading for additional depth.
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.
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.
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:
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.
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.
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:
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
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.
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.
Frequently asked questions about price-value maps
What is a price-value map?
A price-value map, or PVM, is a tool for evaluating how customers perceive your products’ quality and price against competitor alternatives. It plots products on a horizontal axis of perceived quality, based on weighted customer benefit scores, and a vertical axis of perceived price, based on a competitive price index.
What does value mean in pricing?
Value is often misread as simply a low price. In economic terms, value is the difference between the quantifiable benefits a customer receives and the price they pay: perceived quality minus perceived price. The higher a product’s perceived benefits, or the lower its price relative to competitors, the more likely customers are to choose it.
Do B2B customers buy mainly on price?
No. Contrary to common belief, customers rarely base purchasing decisions on price alone, especially in B2B markets. When they choose between your product and competitor alternatives, price often ranks third or fourth in importance, even in quasi-commoditized industries like distribution.
How do you build a price-value map?
Commission a reputable third-party market research firm to survey as many customers as possible, identify the attributes that drive purchase decisions, and weight them, for example with regression or simple machine learning. Then calculate weighted quality and price scores for your products and competitors, ideally using syndicated competitive intelligence for a competitive price index, and plot them on the map.
What if a competitor offers more value at price parity?
You have two options. Lower your prices through additional discounts, promotions, or rebates to move closer to the value equivalence line, where perceived benefits equal perceived price. Or enhance the non-price attributes that customers rate as highly important in their purchase decision, such as packaging, product attributes, service levels, or delivery frequencies.
What is the most common mistake in building price-value maps?
Relying only on internal expertise. Building price-value maps that way proved costly in one of our own early experiences: gross profits and EBITDA fell as higher rebates and promotional expenses offset list price increases. Always prioritize customer feedback, and have a qualified third party run the surveys to avoid response bias.
Why check a price-value map before raising prices?
Price elasticity models and competitive price metrics should not be the only inputs when deciding whether and how much to raise prices. In one example, a product priced at parity with a competitor that customers saw as offering much greater benefits kept losing market share, and gross profits suffered every time prices went up.
For broader industry perspective on pricing analytics and revenue growth management, see McKinsey’s Growth, Marketing & Sales insights.
Revenue Growth Analytics Maturity Report
