Value-in-Use Analysis

Customer value is the worth in monetary terms of the economic, technical, service and social benefits a customer firm receives in exchange for the price it pays for a market offering (Anderson et al., 1993).

It follows that if Value > Price there is incentive to purchase. An offering, however, is rarely considered in isolation. Considerations of value take place within the context of one or more competing products. If the incentive to purchase a product A (ValueA − PriceA) is greater than the incentive to purchase competitor product B (ValueB − PriceB), in that case the buyer is likely to prefer A over B. The difference in the incentive to purchase A over its competitor B is termed as Value in Use (VIU).

VIU analysis determines the monetary benefits of a company’s offering, compared to its direct competitors.  It allows companies to articulate the true, differentiated value of their offering to their customers.

VIU analysis starts with an in-depth understanding of customers, and the products and services offered by the company and its competitors. A value assessment of costs and benefits in monetary terms is required. Depending on the objective, this exercise may be quite detailed and complex. The relatively simple example that follows serves as an illustration of the approach.

Example — VIU analysis

The ash level of coal at a mine has declined from 10% to 9.5%. Assuming other specifications including price remain the same, customers stand to benefit from savings in ash disposal fees, which are estimated to be US$120 per ton.

 

 

Since the price has not changed, VIUA versus B becomes the incremental saving in value, and is equal to 60 cents per ton. On an annual basis a customer consuming a million tons of coal will save US$ 600,000 in ash disposal costs. This improvement in quality, which translates to an increase in value from savings in the ash disposal costs, provides a valid basis for price adjustment. Considering that the savings are fairly significant, the mining company would be interested to know how much increase in price may be justified, on account of the reduced ash content.

VIU Price

VIU Price is the monetary amount at which a customer has no preference between one offering and an alternative offering (VIU = 0). Assuming that the supplier wants to split the benefit of lower ash costs with customers, VIU price will serve as the upper bound for the price adjustment.

 

 

 

If the export price of coal is US$100 per ton, the VIU Price for the improved coal is $100 + 60 cents = $100.60 per ton. Based on the improved performance, the mining company can increase the price by as much as 60 cents per ton.

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