Branding 101: Value Equation
August 5, 2011 § 2 Comments
This should be one of the first things to come to mind whenever we’re facing some kind of performance issue with our products. A couple decades ago this was an important equation, but with little competition it wasn’t as important as it is today. Nowadays there is too much competition, shelves are full of good or even great products (mostly decoded by consumers as “The same value”) Hence, we’re looking at the importance that Private Label Brands are gaining in FMCG Industries (sometimes more than 50% of SOM)
What most Marketers miss to analyze is the value equation of a Product Proposition.
Seth Goding, Speaks of it as the “Value Fraction“, most Brand Managers know it a “Value Equation” and it is represented as:
On the consumer’s mind if two products have the same benefit, they’ll buy the inexpensive, but if two products cost the same they’ll choose the one that offers more benefits (including the value of a Brand – Its experiences). It’s not enough to value the purchase intention of a concept and the product performance on a specific environment. We have to challenge the value proposition against other products (substitution) and even prepare for early developers that might try to compete with a me-too product on the short-term.
If you can develop a patent to protect from short-term me-too, then you only need to understand what is it that your product is offering the consumer that increases the value equation. So when the time comes and the consumer does not follow the expected behavior (this is a clear indication that the value equation has change) then you’ll know what to change.
If you face a rising in cost (whether in Commodities, Packaging or Labor), don’t just follow the need to maintain your margin per pack (per gram, etc) by increasing the price or reducing the quality of the product to reduce costs. All these actions will change your value equation:
- Change of pack, ingredients, quality standards
- More premium –> perhaps more benefits
- Less costs –> price decrease (or maintain margin), but do you REMOVE BENEFITS?
If you know what differentiates your product from competition, don’t forget about it when facing a cost/price crisis and evaluate the long-term problems that the brand could face for a short-term tactic intended to reach the quarterly results.
I’m not being naive, neither I’m saying to loose money, but keep in mind that most times the easy way out (increasing prices to meet the required margin) is the long-term failure of a brand proposal. Kraft shows several strategies to beat a cost increase in this article
I recently moved this blog to http://tavovalencia.com if you want to read more interesting articles, don´t forget to visit my new and improved website.
- The most important part of a brand (tavovalencia.com)
- Two halves of the value fraction (sethgodin.typepad.com)
- Kraft braces for inflation’s hefty price tag (money.cnn.com)