Module 3

• Value


  The overall satisfaction that a customer receives from using a product or service offering
• Use value


  The utility gained from the product
• Exchange value/Economic value


  Depends on the alternatives customers have available to satisfy the same need
• Differentiation value


  The net benefits that a product or service delivers to customers over and above those provided by the competitive reference product
• Monetary value


  The total cost savings or income enhancements that a customer accrues as a result of purchasing a product
• Psychological value


  The innate satisfaction a product creates for the customer
• Total economic value


  The price of the customer's best alternative (reference value) plus the worth of whatever differentiates the offering from the alternative (differentiation value)
• Next best competitive alternative (NBCA)

  The products that represent the set of alternative products under consideration for purchase
• Reference value


  The price charged for the next-best product choice
• Estimating economic value


  1. Identify competitive reference prices

  2. Quantify monetary value

  3. Quantify psychological value
• Challenges in identifying competitive reference prices

  • Products may not have a single competing product that customers would consider a suitable alternative
  • Gathering accurate price data and ensuring it is comparable to the pricing for your product

  
• Adjusting reference price data

  • Accounting for differences in volume and service levels

  
• Monetary value drivers


  Tied to the customer's financial outcomes via tangible cost savings or income enhancements
• Reference prices


  Prices of competitive products that can be used as a benchmark

  
• Estimating monetary value


  1. Determine competitive reference prices

  2. Gain detailed understanding of customer value drivers

  3. Translate understanding into quantified estimates to support pricing decisions

  
• Monetary value drivers


  Tied to the customer's financial outcomes via tangible cost reductions or revenue increases
• Psychological value drivers


  Intangible, not inherently quantifiable
• Quantifying monetary value drivers

  1. Understand how the product category affects the customer's costs and revenues

  2. Collect specific data to develop quantified estimates through in-depth customer interviews

  
• Value driver algorithms


  • Formulas and calculations that estimate the differentiated monetary worth of each unit of product performance

  
• Consider only the value of the difference between your product and the next best competitive alternative (NBCA) product
• Measure the differentiation value either as costs saved to achieve a particular level of benefit or as extra benefits achieved for an identical cost

  
• Do not assume that the percentage increase in value is simply proportional to the percentage increase in the effectiveness of your product
• Dyna-Test product


  • Synthesizes a complementary DNA strand from an existing DNA sample, significantly reducing DNA molecule degradation and enhancing the precision of a DNA analysis
• Reference value


  The price of what the customer considers the best alternative product
• Differentiated value


  The customer use value of the attributes that distinguish the product from the next best alternative

  
• The sum total of reference and differentiated values is the monetary value estimate
• Value drivers for Dyna-Test in commercial research segment

  • Yield opportunity costs
  • Yield labor savings
  • Quality control labor savings
  • Sample size opportunity costs
  • Sample size labor savings
• For pharmaceutical and commercial biotechnology firms, the estimated total economic value of Dyna-Test is the reference value of $30 plus the estimates of differentiated value, yielding a total estimated economic value of $2,528

  
• Value drivers for Dyna-Test in nonindustrial markets

  • Yield opportunity costs
  • Yield labor savings
  • Quality control savings
  • Sample size opportunity cost avoided
  • Sample size lab savings
• Academic institutions and government laboratories


  Estimate economic value in a similar fashion to industrial customers, but modified to reflect the business model in this market, which has a different research environment and economic reward structure
• Reference value


  The $30 price of the EnSyn test kit
• Price-sensitive academic and government buyers


  • Have lab assistants—essentially free student labor—make DNA test products from scratch
• Differentiating value drivers for academic and government buyers

  • Similar to those of industrial customers, but modified to reflect the business model in this market
• Yield opportunity costs


  The yield opportunity cost avoided by using Dyna-Test is $1,055, somewhat less than for commercial researchers because of the lower economic rewards from breakthroughs in primary research
• Yield labor savings


  $231, less than for industrial customers because of the reduced cost of labor within university systems
• Quality control savings


  $29, less than for industrial customers because of the reduced cost of labor within university systems
• Sample size opportunity cost avoided

  $317, less than for industrial customers because of the reduced cost of labor within university systems
• Sample size labor savings

  Less than for industrial customers because of the reduced cost of labor within university systems
• Estimated total economic value of Dyna-Test for academic laboratories

  $1,685 (reference value of $30 plus estimates for each value driver)
• The economic value derived from monetary value estimation is not necessarily the perceived value that a buyer might actually place on the product