Professor Ken Homa Georgetown University. PVP Framework. Price - Value - Profitability. Proprietary Material. K.E. Homa

Transcription

1 Professor Ken Homa Georgetown University PVP Framework Price - Value - Profitability Proprietary Material K.E. Homa

2 WARNING This material is intended strictly for current MSB students in PVP (Price, Value & Profitability) Any pass along of the material or its access information -- in any form verbal, printed or simply viewed -- now or ever -- to anyone not currently enrolled in PVP-- is a breach of academic integrity policies and is subject to disciplinary action. Do not copy, post or pass along in any way, shape or form

3 PVP Framework Price - Value - Profitability The Value Map is at the center of the PVP Framework!

4 Conceptually, a Value Map calibrates the Fair Market Value (FMV) of Perceived Benefits. More specifically

5 Conceptually, a Value Map calibrates the Fair Market Value (FMV) of Perceived Benefits. A Value Map is a visual representation of a market s competitive products (the letters) Horizontal axis: the combined magnitude of the benefits bundles a product delivers Vertical axis: the perceived price of each product i.e., what people think that they are likely to pay for comparable products. More

6 The Fair Market Value line is defined by the lowest priced products at the various steps along the benefits axis.

7 The Fair Market Value line is defined by the lowest priced products at the various steps along the benefits axis. Products above the fair market value line have value deficits, i.e. their prices are higher than their benefit bundles are expected to command in the market, at the point in time

8 Products deliver sought after benefits. When they are priced at (or below) the FMV, they create value Value Creation

9 Value Creation Pricing a bundle of benefits to deliver Relative Perceived Value to customers and extraordinary profits to companies

10 Value Creation Pricing a bundle of benefits to deliver R.P.V. to customers and profits to companies.

11 Value Creation Pricing a bundle of benefits to deliver R.P.V. to customers and profits to companies. The Value Map conforms to the fundamental economic laws of supply and demand

12 External Economics Matching supply and demand in aggregate, and for specific buyer and seller combinations. Details Value Creation Pricing a bundle of benefits to deliver R.P.V. to customers and profits to companies.

13 External Economics Matching supply and demand in aggregate, and for specific buyer and seller combinations. External Economics Supply curves generally slope upwards since higher prices entice more potential suppliers into a market and motivate existing suppliers to supply more. Industry demand curves generally slope downward more buyers are willing & able to buy more at lower prices Willing= f (Value), Able= f (Budget)

14 External Economics Matching supply and demand in aggregate, and for specific buyer and seller combinations. External Economics Supply curves generally slope upwards since higher prices entice more potential suppliers into a market and motivate existing suppliers to supply more. Industry demand curves generally slope downward more buyers are willing & able to buy more at lower prices Willing= f (Value), Able= f (Budget) Do all companies face downward sloping demand curves?

15 External Economics Matching supply and demand in aggregate, and for specific buyer and seller combinations. External Economics Supply curves generally slope upwards since higher prices entice more potential suppliers into a market and motivate existing suppliers to supply more. Industry demand curves generally slope downward more buyers are willing & able to buy more at lower prices Willing= f (Value), Able= f (Budget) Company-relevant demand curves may or may not slope downward, depending on the competitive structure of the industry effective strategy can tilt the curve downward

16 External Economics Matching supply and demand in aggregate, and for specific buyer and seller combinations. External Economics Supply curves generally slope upwards since higher prices entice more potential suppliers into a market and motivate existing suppliers to supply more. Industry demand curves generally slope downward more buyers are willing & able to buy more at lower prices Willing= f (Value), Able= f (Budget) Company-relevant demand curves may or may not slope downward, depending on the competitive structure of the industry strategy tries to tilt the curve downward At a macro level, in perfectly competitive markets, an equilibrium price balances supply and demand, Q = f (P) and all firms are price-takers. When there are market inefficiencies, i.e. imperfectly competitive markets, some firms may be price-makers.

17 From a firm s perspective, a downward sloping demand curve is strategically beneficial since it provides latitude for making prices and for optimally managing capacity.

18 External Economics Matching supply and demand in aggregate, and for specific buyer and seller combinations. Value Creation Pricing a bundle of benefits to deliver R.P.V. to customers and profits to companies. Mega TakeAway A demand curve can be tilted down for competitive advantage via strategies that identify or induce market inefficiencies.

19 External Economics Matching supply and demand in aggregate, and for specific buyer and seller combinations. Value Creation Pricing a bundle of benefits to deliver R.P.V. to customers and profits to companies. Value Map reflects leverage from external market economics and, also, from internal economics, i.e. profit models

20 External Economics Matching supply and demand in aggregate, and for specific buyer and seller combinations. Value Creation Pricing a bundle of benefits to deliver R.P.V. to customers and profits to companies. Internal Economics Profit Models Leveraging market economics & profit models to capitalize on the firm s value proposition. Details

21 Internal Economics Internal economics are a reflection of company specific Business Model Economics (BME) BME reduces to 3 basic factors: (1) Magnitude of required investment (2) Magnitude and composition of costs, I,e, high or low, mostly fixed or mostly variable, and (3) Magnitude and nature or the revenue stream, e.g. single or multiple streams More Internal Economics Profit Models Leveraging market economics & profit models to capitalize on the firm s value proposition.

22 Internal Economics Costs (C) are often a function of quantity produced due to scale economies, learning curve effects, and overhead absorption and, as reflected in demand curves, quantity (Q) is a function of price, i.e. Q = f (P)... so, costs (C) are a derived function of price, too i.e. C ~ f (P) which means that profit is ultimately a function of price since price influences demand (directly) and costs (indirectly), i.e. π = f (P) Internal Economics Profit Models Leveraging market economics & profit models to capitalize on the firm s value proposition.

23 Vertical axis of PVP Framework: The impact of internal & external economic factors on Value Maps...

24 External Economics Matching supply and demand in aggregate, and for specific buyer and seller combinations. Value Creation Pricing a bundle of benefits to deliver R.P.V. to customers and profits to companies. Internal Economics Profit Models Leveraging market economics & profit models to capitalize on the firm s value proposition.

25 Another Perspective Value Creation starts with Benefits Fulfillment

26 Strategic Positioning Benefits Waterfall Balancing customer reqs with technical feasibility and profit potential

27 Benefits Fulfillment Execution Gap Potential customers need (or want) products to deliver specific benefits. Key is understanding the benefits, their relative importance versus one another,, and the overlap or gaps in benefits delivery versus competing products Comm. Gap Typically done via market research: surveys, one-on-one interviews, direct observation of products in use Subject to bad market research and management mis-interpretation More Understand

28 Benefits Fulfillment Execution Gap Question: Is it typically desirable for a company to try to deliver all of the benefits sought by all potential customers? Answer Comm. Gap Understand

29 Benefits Fulfillment Execution Gap Question: Is it usually desirable for a company to try to deliver all of the benefits sought by all potential customers? Comm. Gap Answer: No It is typically not both technologically feasible ( can t do ) and / or economically justified ( don t want to do ) to satisfy all benefits sought by all customers More Understand

30 Benefits Fulfillment The process for translating customers desired benefits into product specifications is called QFD, Quality Function Deployment. Execution Gap (See HomaFiles.com for QFD details) Comm. Gap More Understand

31 Benefits Fulfillment QFD Design Gap Process for translating customers desired benefits into product specifications is called QFD, Quality Function Deployment. Execution Gap (See HomaFiles.com for QFD details) Comm. Gap The design gap between customers desired benefits and the benefits that get specified into a product may be unintentional (because customer requirements are misinterpreted) or intentional (because delivery of the benefits is not technically feasible or economical) Understand Design

32 Benefits Fulfillment QFD Design Gap Execution Gap Comm. Gap An execution gap can happen between the benefits specified into a product and the benefits delivered by the final product. That is, the product is not made to spec because (1) the specifications are not feasible to produce or (2) production is simply outside of design tolerances. Understand Design Produce

33 Benefits Fulfillment QFD Design Gap Execution Gap Perceived Benefits Real Benefits Comm. Gap The benefits that customers perceive that a product delivers may be different than the benefits that the product actually delivers. that s an avoidable perceptions gap, or communications gap, More Understand Design Produce Promote

34 Benefits Fulfillment QFD Design Gap Execution Gap Perceived Benefits Real Benefits Comm. Gap The communications gap can be a positive a perceived benefits surplus -- if a customer credits a product with more benefits than it actually delivers. Eventually perceptions converge on realities provided that a product survives in the market long enough. Understand Design Produce Promote

35 Strategic Positioning Value Creation Balancing customer reqs with technical feasibility and profit potential Pricing a bundle of benefits to deliver R.P.V. to customers and profits to companies Perceived Benefits are direct linked to the Value Map Here s how

36 Linking Benefits Fulfillment & Value Creation Benefits Fulfillment Again, the Fair Market Value line is defined by the lowest priced products at the various steps along the benefits axis. Understand Design Produce Promote The relationship between the benefits fulfillment waterfall and the value map can be visualized most easily by inverting the value map, i.e. swapping the axes. More

37 Linking Benefits Fulfillment & Value Creation Benefits Fulfillment Understand Design Produce Promote Perceived Benefits are one of the Value Map axes More

38 Linking Benefits Fulfillment & Value Creation Benefits Fulfillment Understand Design Produce Promote Ricocheting off the fair market value line calibrates the expected market price of the benefits bundle The process from benefits fulfillment through fair market pricing is the essence of Value Creation

39 Strategic Positioning Value Creation Balancing customer reqs with technical feasibility and profit potential Pricing a bundle of benefits to deliver R.P.V. to customers and profits to companies

40 Value Creation ends with Profits Realization

41 Linking Benefits Fulfillment & Value Creation Value Creation Value Capture Capturing some of the created value as profits starts with FMV from the Value Map

42 Price Profits Realization Companies may set a target price at FMV or below FMV... The latter is called ceding value gives buyers a good deal. Above FMV, few or no sales should be expected since product is a bad deal for customers More Calibrate Decide

43 Price Profits Realization Companies may set a target price at FMV or below FMV... The latter is called ceding value Above FMV, few or no sales should be expected since product is a bad deal for customers Question: why would a company ever price below FMV rather than pricing to the market? Answer Calibrate Decide

44 Price Profits Realization Companies may set a target price at FMV or below FMV... The latter is called ceding value Above FMV, few or no sales should be expected since product is a bad deal for customers Question: why would a company ever price below FMV rather than pricing to the market? Answer: To build short-term market share, perhaps to establish a broad installed base that can be strategically leveraged into follow-on or ancillary sales, e.g. next generation upgrades, razors & blades Calibrate Decide Note: long-run, competitors are likely to react, may recalibrate the FMV relationship, and neutralize gains

45 Price Profits Realization Realized price is that portion of the target price that is actually pocketed so, it is sometimes called the pocket price. The ratio of realized price to target price is called the transaction yield, or price yield. More Calibrate Decide Execute

46 Price Profits Realization The difference between the target price and the realized price is called leakage, or sometimes referred to as holes in the pricing bucket. The leakage occurs mostly due to unplanned discounting (to close sales) and non-price concessions (e.g. extended dating terms) Calibrate Decide Execute

47 Price Profits Realization The ultimate objective is profits! Different customers have varying costs-to serve (CTS) -- some customers may require extra services, special logistics, etc. Final step: subtracting full cost including the appropriate allocation of fixed costs from realized price to determine net profit Variable Fixed C-T-S Calibrate Decide Execute Realize

48 Vertical axis of PVP Framework: Value Creation > Value Map > Value Capture

49 Strategic Positioning Value Creation Transactional Effectiveness Balancing customer reqs with technical feasibility and profit potential Pricing a bundle of benefits to deliver R.P.V. to customers and profits to companies Maximizing profitability by capturing some part of the value created.

50 Putting It All Together

51 PVP Framework 2 K.E.Homa

52 Adding some detail

53 PVP Framework Competitive Strategy Demand Management Q. F. D. Target Costing Customization Price-Yield Management Cost Price Leverage Price Share Leverage K.E.Homa

54 That s the PVP Framework!

55 Professor Ken Homa Georgetown University PVP Framework Price - Value - Profitability Proprietary Material K.E. Homa