Sign in Subscribe
Strategy

Strategy Byte - Week 77 Differential Value

Anand N Panicker

• 4 min read
Share
Strategy Byte - Week 77 Differential Value
Photo by Haberdoedas / Unsplash

Table of Contents

  1. Recap
  2. Willingness to Pay (WTP)
  3. Laptop Wars

Recap

During Week 76, we started exploring the concept of "Value" by asking - What is value or what comes to our mind when we think of the word "Value" - Is it the price paid or utility to customer or difference between selling price & cost?

As a framework, we decided to explore value from the perspective of

  1. The Customer &
  2. The Company

Customer Perspective

Roger L Martin said on value - "The customer determines value, not you (the company)" or in other words "Value is measured by the price the customer is willing to pay. It doesn't matter what you think the value is"

So value depends on how much a product or service satisfies a customer utility. To explore this further, we discussed two concepts from classic economics -

  1. Utility Theory &
  2. Marginal Utility

Utility Theory

Utility Theory is a framework in economics that assumes humans make choices rationally to maximize their total satisfaction or happiness.

Marginal Utility

Total utility is the total or cumulative satisfaction a customer gets from consuming a certain amount of goods. Marginal Utility is the ADDITIONAL satisfaction gained from consuming one more unit of that good.

The more critical concept from theory of marginal utility from a strategy perspective is the Law of Diminishing Marginal Utility which states that as a customer consumes more of a good, the additional satisfaction from each successive unit decreases.

Then we linked perception to value where a customer assesses the value of a product or service based on the perception of what the product or service provides. What does this value mean? We then used classical economists' distinction between :

  1. Use Value &
  2. Exchange Value

Use Value refers to the specific qualities of the product perceived by the customer in relation to their needs. E.g., TV screen size - 55 or 65 inch, OLED screen etc. Judgements about use value are subjective depending on individual customer needs or Use value is perceived by the customer.

Exchange Value refers to Price. It is the monetary amount realized at a single point in time when the exchange of goods take place.

The Exchange Value is based on customers' assessment of the product value & how much they are WILLING TO PAY.

Willingness To Pay (WTP)

Willingness to Pay is a foundational concept in Strategy. Revisiting our quote from Roger L Martin - Value is measured by the price the customer is willing to pay for your offer. And the value that matters most is the value to the customer to whom you sell your offer.

What does value mean to the customer? Value can be aesthetics, it can be utility or it can be entertainment. Anything that helps the customer achieve their goals or whatever they are looking for at a point in time. This makes the customer reach out to his or her wallet to make them willing to pay for that product or service.

The WTP value is the most a customer would pay for a product or service. A company which finds ways to improve their product or service increases it's WTP value.

To make the concept clear with a real world case - Let us take the example of Apple Macbook laptops vs other laptops.

Laptop Wars

A MacBook costs more than other brands & people gladly pay for it. A capable Windows laptop sells in the $500–$1,200 band. A MacBook runs $999 to $2,500+, with the MacBook Pro (M4 Pro) starting where most Windows laptops price point ends. A budget Chromebook, doing almost the same everyday tasks, can be 50–70% cheaper than either.

Same category but radically different prices. We normally hear someone say that the MacBook is "overpriced" - but that price is the customer's vote of their preference.

Value is defined from the customer's seat, not the producer's spreadsheet. A price premium that customers willingly pay is how we know customers perceive more value.

Value that translates to customers higher willingness to pay

  • Apple captures ~42% of total laptop-market revenue on far fewer units than its rivals. In one quarter Apple shipped 2.4 million Macs against roughly 4.85 million each for Dell and HP — yet matched or beat them on revenue. Fewer machines, more money, because each one commands a premium.
  • Apple's average selling price sits around $1,093 — roughly double the mid-point of the Windows range.

That premium is only payable because customers believe the extra dollars buy extra value: the build quality, the macOS ecosystem, the Apple-silicon performance-per-watt, the extra long battery life, the way it plugs into an iPhone and iPad they already own etc,

On the resale market, MacBooks retain 55–75% of their retail price after one year and 40–60% after two to three years — depreciating slower than any other laptop brand.

That's differentiation showing up as value from the customer perspective.

Differential pricing across a category is proof of differential value as customers perceive it. The Chromebook buyer, the Windows buyer, and the MacBook buyer are each paying for their perceived value.

The MacBook premium survives for one reason only: enough customers look at the offer and conclude it's worth it to them. That worth is what translates to the premium pricing.

Now that we understood value from the customer side, next week we go to the other side - Value from the perception of the company.

Sources: