Strategic Plan and Powerpoint

The value equation is a simple way of pictorializing what a firm offers the customer. Ultimately, value is what the consumer basis his/her purchase decision on. For example, a meal purchased at McDonalds has a very different set of benefits and costs than a meal purchased at Ruth’s Chris Steak House. Yet both serve the same utility; a meal. Likewise, BMW and Hyundai both make automobiles that serve the same utility; they get you from point A to point B. But the features, benefits, and costs are very different between the two. Yet value is created, in different ways, for each of their respective purchasers (market segments).

The equation looks like this:

The equation can help a firm conceptualize strategic decisions. The greater the value the firm can offer the customer relative to its competitors, the more likely the firm is to create greater sales and thereby profits. From the diagram you can see two generic growth strategies; increase benefits and/or reduce costs. Also, the cost side of the equation includes the customer’s total costs to acquire, some elements of which the firm may have little or no control over. An example might be a trip to the store to make the purchase.

The problem most firms run into is that they don’t understand the customer’s perceptions. They think they do but they really don’t. Customer perception is what drives their view of Value, and ultimately their purchase decision. It is vitally important that firms understand what their customer’s actually value. Also, markets are dynamic and what the customer values can change over time.