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).
$$ VIU_{A\,versus\,B}=(Value_A - Value_B ) - (Price_A - Price _B)$$
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.
$$ VIU_{A\,versus\,B}=(Value_A - Value_B ) - (Price_A - Price _B)$$
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.
$$ VIU_{A\,versus\,B}=0=(Value_A - Value_B ) - (Price_A - Price _B),$$
$$ VIU\,Price_A= Price_B+(Value_A - Value_B)$$
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.