Some time ago I paid around $50,000 for a used German car. My search got down to a BMW 3 series sedan and a Volkswagen station wagon.
After driving both and some deliberation on the merits of the two vehicles I went with the VW. A couple of male friends asked me why I went with the VW and my unedited response was that the particular BMW didn’t deliver much value for money. They burst out laughing that I mentioned “value for money” and a German car purchase in the same sentence.
Which got me thinking.
We often confuse “value” and “value for money” with “valuable”. And before we can consider the third we need to consider the first two.
For simplicity’s sake I suggest the following:
Value is shorthand for “what is the market willing to pay”.
Value-for-money is shorthand for “what the market receives in exchange for what it pays”.
Valuable is shorthand for “the market’s willingness to pay a premium”.
In my car quandary, both cars were the same value ie around $50k. The BMW was a valuable car because at $50k you didn’t get very much. Other than a standard vehicle, well made, and with a BMW badge. There was a lot of intrinsic value locked up in the brand, brand reputation, history etc. The VW was value for money because I got a lot more car for the same money as the BMW — it was bigger, had more options, leather seats, was newer and had lower mileage.
So what then is value? How do we value the concept of value. More importantly how does the consumer value a good or service and what are the implications for brands.
Marketers frequently get tripped up by these concepts and misunderstand how to price and how to use pricing to add to the value of a brand. Or how to index your brands against other brands or the consumers’ value index. Furthermore how to use premium pricing to increase the “valuable-ness” of a brand.
Putting it simply; everything has a price. The market price of a pair of branded sneakers might be $100. If a particular brand is losing favor with trend-setters then the value (or perceived value) of those sneakers will be around $100, maybe less. If a brand is extremely sought after then the value (or perceived value) is higher than $100.
If the brand manager via the retailer doesn’t price the brand accordingly then they are going to at some point experience either a glut or shortage of those sneakers.
How can we then measure value, and then price accordingly? One economic definition of what value is, I find, quite helpful.
Value = (Tangible Performance + Intangible Performance) / Price. Using this formula you can use your consumer measures to calibrate the objective, tangible factor and the subjective, intangible factors to calculate scores in your category and then apply prices accordingly.
In the case of a luxury good, the intangible factors are extremely important and mostly outweigh the tangible. A $3000 handbag does the same job as a $30 handbag. But it does it with a lot more style. And delivers considerably more status and emotional payoff to the owner than the $30 handbag would.
The purchaser of a Huawei phone is less driven by the intangible factors than an iPhone purchaser and is willing to sacrifice intangible benefits in order to achieve tangible benefits at a much lower price.
The V=(TP +IP) / $ approach is particularly helpful when comparing similar brands.
Viagra and Cialis do (or so I’m told) a similar job. But they have quite different brand personas and perform in different ways functionally. Let’s assume for the moment that a supply of either costs $100. And let’s assume that the tangible benefits are similar at 4 out of 5. Let’s also assume that Viagra delivers 5 out of 5 on intangible benefits (branding, emotion, social etc) and Cialis 4 out of 5.
Using the simple calculation Viagra would deliver total performance of 9 and Cialis 8. At a score of 9 Viagra is more valuable. At $100 it’s also better value for money. But if Cialis were to drop their price to $80 they would now represent better value for money, albeit at a lower value.
In the light of recent occurrences the VW brand has been substantially devalued and BMW and other European automotive brands have benefited from this. Some because their products are more valuable and some because they deliver better value for money either through tangible of intangible performance factors.
When it comes to value what is your brand delivering?
Contributed to Branding Strategy Insider by: Rob Bree
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