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Value-Add, Value Pricing, Value Proposition
ASTD-TCC Coaching SIGOctober 4, 2010
Bill Handschin, Ph.D., L.P.
Talent Management Consulting, Inc.
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Agenda
IntroductionStrategyValueValue-AddValue ChainValue PropositionValue PricingSummaryReferences
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Introduction
Pricing is part of how we go to market, and hence part of strategy. These are terms that your clients are familiar with. We will talk about both strategy and marketing during this hour. This is just a very cursory introduction to the key concepts and language of our clients.
I welcome the input of anyone who has strategic or marketing background during this discussion.
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Strategy
Three Basic StrategiesBroad (Industry-wide)
DifferentiationProduct uniqueness - Apple
Low CostLow cost position - Wal-Mart
Narrow (Market Segment)Focus
Either low cost or differentiation
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Value
The extent to which a good or service is perceived by its customer to meet his or her needs or wants, measured by the customer’s willingness to pay for it.
It depends more on the customer’s perception of the worth of the product than on its intrinsic value.
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Value
How do we create the perception of value when we talk to our customers?
Remember this!
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Value-Add
Difference between the total sales revenue of an industry and the total cost of components, materials, and services purchased from other firms within a reporting period (usually one year). Gross revenue.
Creation of a competitive advantage by bundling, combining, or packaging features and benefits that result in greater customer acceptance.
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Value-AddCorn $4.07/bushel = $0.07/lb.
Corn Flakes $2.22/lb.
Wheat $7.25/bushel = $0.12/lb.
Shredded Wheat $3.94/lb.
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Value Chain
Interlinked value-adding activities that convert inputs into outputs which, in turn, add to the bottom line and help create competitive advantage. A value chain typically consists of
inbound distribution or logistics,
manufacturing operations,
outbound distribution or logistics,
marketing and selling, and
after-sales service.
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Value Chain
The value chain categorizes the generic value-adding activities of an organization. The "primary activities" include: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, technology (R&D), and procurement. The costs and value drivers are identified for each value activity.
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Value Chain
After Dinesh Pratap Singh's visualization for Porter's Value Chain, retrieved from http://en.wikipedia.org/wiki/File:Porter_Value_Chain.png
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Value-Chain
After Value Chain Partnerships for a Sustainable Agriculture, retrieved from http://www.inclusive.com/value-chain/
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Value Chain Analysis
Examination of the value chain of an enterprise to ascertain how much and at which stage value is added to its goods and/or services, and how it can be increased to enhance the product differentiation (competitive advantage).
This has yielded new Business Process Models.
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Value Chain Exercise
Form groups of three people. Construct a sketch of the value-chain of one of your client organizations.
Help each other out!
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Value Proposition
The mix of goods and services, and price and payment terms offered by a firm to its customers.
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Value Proposition
Internal Value Proposition
Market – who are your customers?
Customer experience - what does the market value most?
Offering – what product or service are you offering?
Benefits – what benefits can be derived from your offering?
Alternatives & differentiation – do nothing or do in house?
Proof – evidence that you can do what you promise?
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Value Proposition Exercise
Answer these six questions for your coaching services. Work in your groups.
Help each other!
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Customer Value Proposition
A good customer value proposition will provide convincing reasons why a customer should buy a product, and also differentiate your product from competitors.
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Customer Value Proposition
See Handout
The All Benefits column requires you to know your business.
The Favorable Points of Difference column requires you to know your competition.
The Resonating Focus requires you to know your customer.
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Customer Value Proposition Exercise
Create a customer value proposition for your business: an explanation in three jargon-free sentences of why your customers need your product or service.
Work in your groups.
Help each other out!
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Value Pricing
Types of Pricing
Channel-based pricing
Competition-based pricing
Cost-based pricing
Demand-based pricing
Demand-backward pricing
Differential pricing
Value-based pricing
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Value Pricing
Pricing method based on the perceived worth of the good or service to its intended customer.
To price your services on a value basis, you have to be able to talk about the value that your service has to the customer in terms of your customer’s values.
You have to know the ROI of your service as part of convincing your customer of the real worth of your service. What is the magnitude of the benefit realized or threat averted?
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Value Pricing
Challenges to Value Pricing
Lack of entry barriers to industry
Fragmented industry
Commodity pricing
Perception of a commodity service
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Summary
To determine your pricing strategy, you need to know:
Your strategy and value-chain
Your competition’s strategy and value-chain
Your client’s strategy and value-chain
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References
Porter, M. E. (1996). What is strategy? Harvard Business Review, November-December, 61-78 (reprint No. 96608). Download from http://www.ipocongress.ru/download/guide/article/
Porter, M.E. (1998). Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: The Free Press.
what_is_strategy.pdf
http://www.businesdictionary.com
http://en.wikipedia.org
http://www.netmba.com/strategy/value-chain/
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References
Anderson, J. C., Narus, J. A., & Rossum, W. v. (2006). Customer Value Propositions in Business Markets. Harvard Business Review.
Parasuraman, A. (1997). Reflections on gaining competitive advantage through customer value. Journal of the Academy of Marketing Science , 154-161.