The delta value formula

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As time goes by and the picture gets clearer, I take one important learning from the Kellogg course with me. The good thing is: This learning can be summarized in one equation. Well, good thing for me since I have to admit liking mathematical rigor (No, please don’t take me as a boring/picky!).

Well, this is the equation:humour-908907-l

Δ price ≤ Δ value

So, why do I like this equation? Let me explore it further.. in other words that equation equals:

Price(your price) – Price(your competitor’s price) ≤ Value(your offering) – Value(your competitor’s offering)

So, what does the left hand side of that inequality represent? That’s your price premium. What about the right hand side? That’s the additional monetary value your offering provides, the extra value that only your offering can provide (and that competition can’t match).

Thus, what if there is no Δ value? Or what if you “don’t know”/”can’t prove” the differential value your offering has in comparison to competition?

Well, this is what our equation gives us:

Δ price ≤ 0, that is to say:

Price(your price) – Price(your competitor’s price) ≤ 0, which finally means:

Price(your price) ≤ Price(your competitor’s price)

Yes, you got it all right. In case you cannot prove the value side of that equation in monetary terms, your offering/product might be, and as a matter of fact should be, perceived as a commodity. And how do you think procurement managers buy commodities? They buy the cheapest!

Then you might think: Great, that’s a matter of having my marketing peoplecreating some smart business cases. Well, I wouldn’t simplify things to that extreme. Please have a look at the value creation arrow below:value creation arrow

Marketing should rightfully be held accountable for “Communicating the value, educating the market”. However, the value creation process should start much earlier. In fact, it should start as early as when you decide what to take to market.

Very well then. So, what is the monetary value proposition for the product/service you plan to offer? And how is it better than competition or the second best alternative (that solves the customer’s problem)? In case you can’t answer that, you better get prepared for a price war!