What is product value equation?
Every product has an implied value equation, which takes into account the relationship between its quality, convenience, and price. This relationship will vary for different consumer segments. The team’s first job is to analyze their products’ value equations and benchmark them against the competition.
The team should investigate:
- Product positioning, which includes brand value, relative share position, and private-label development.
- Competitive landscape, which includes the pricing supply curve, relative cost structure, and market discipline (leaders and followers).
- Consumer motivation, which includes segmentation of needs and benefits, long-term price elasticity, the impulse-buying dynamic, and life-cycle profitability in each segment.
The objective is to ensure that the pricing structure supports the value equation as well as captures the full value of any advantages in cost, quality, or service. We call this “pricing to your sweet spot.”
If, for instance, the product is the only one of its kind to feature a warranty that consumers particularly value, it should be priced accordingly. Such a strategy goes beyond traditional pricing tactics to recognize the value of a product that can be realized in the marketplace.
