A value-based strategy can be a uniquely effective way to gain, over time, a commanding lead over the competition.
Economic Value to the Customer (EVC) is defined as the relative value a given product offers to a specific customer in a particular application. That is, the maximum amount customer is willing to pay, assuming he is fully informed about product and competitors.
SC = Start-up costs (initial costs not incl. In purchase price – absorbed by customer or paid by different supplier)
PPC = Postpurchase costs (ongoing costs borne by customer)
LC = Lifecycle costs (sum of PPC, SC, and purchase price)
IV = Incremental Value (amount by which product’s potential dollar value to customer exceeds that available from reference product)
EVC = LC – SC – PPC + IV
The critical variable which account for differences in EVC can be grouped in four categories:
- Intensity of Product usage
- Geographical Scope of Usage
- Growth in the Customer’s Business
- Nature of Application
Ways to expand competitive advantage
- Reduce Lifecycle cost or alter the cost mix
- Expand incremental value by functional redesign
- Expand incremental value by capitalizing on associated intangibles (delivery arrangements, tech help, and financing terms)
Finally in apportioning the competitive advantage between company and customer, cannot simply aim to maximize profit. Must also give customer sufficient inducement to switch to product. This might take more than a marginal inducement to switch. Customer inertia can arise from uncertainty about product’s benefits, reluctance to change suppliers, concern over payback time and reluctance to assume risks of being pioneer user.