What is value ?

A simple equation

lots of levers

Value is an equation made up of needs, desires, quantitative and qualitative measures. Value is, “what am I getting for my money?”… but because everything is relative, the more the brand equity or the greater the positional good, the less costly it appears to become. So what are high value, low value and niche products?

Delivering value is an end-game: never ever stop until the customer has paid and the desire is visible in their eyes!

What are High Value Products?

They are a composite of their positive features. It does not matter if they are inexpensive or very expensive–it’s important that our customers value them highly enough to purchase.

What are Low Value Products?

They, conversely, have features that make us stop and reflect upon what is bad about the product.

‘features’ are how we describe the various building blocks, the terms, of our value equation.

And niche products?

Counter-intuitively, high value ‘niche’ products appear to ‘ignore’ some basic quantitative (measurable) qualities, e.g.:

1. cars: rear-seat headroom in a four door coupe vs a standard four door car
2. watches: time-keeping accuracy of a luxury mechanical to a basic quartz watch

…when we say, “we’re prepared to live with it, because of their other ‘qualities’”, we mean that our focus is on key needs or desirables: their design, their brand or positional value, a must have feature or their price-point.

Examples of individual attributes

Where can we see these different types of quality?

The following are real-life examples that show how attention to different aspects of quality fundamentally affects the financial success of a company

Automobile Industry: continued increase in cross-over between more differentiated niche markets.

Differentiation has increased, sometimes to become more subtle…do customers recognise the differentiation and do they value it?

To illustrate this point, let’s take a birds-eye view of the situation and unfortunately forgo the very fun in-depth discussion.

Porsche entered the luxury car market in 2009 with its sports-luxury Panamera, which over the years, had been the domain of the Mercedes S-Class along with the Audi A8 and BMW 7 Series.

Niche: Luxury 4-door

1. Porsche’s Panamera must retain its sporty nature to support its brand

2. Mercedes, BMW and Audi all offer speed and performance

Niche: Luxury 4-door sports

1. Porsche Panamera GTS/Turbo (S)

2. Mercedes AMG, BMW n/a (no M-Series), Audi S8

Niches: Luxury 2-door coupe and 4-door coupe

1. Porsche: none

2. Mercedes S-Class coupe; Mercedes CLS 4 door coupe; BMW 6 Series Gran Coupe, Audi A/S 7

Mercedes sold over 100.000 S-Class in 2014, against Porsche who sold over 20.000 Panamera, thus a higher investment cost for Porsche per Unit Volume.

The Panamera is in the intersect with multiple niche cars and didn’t itself offer variants to address its competition: e.g. the Mercedes CLS four-door coupe and the S-Class two-door coupe. The Panamera also risked being pulled towards new competition, should new sporty yet luxury oriented 4-door coupes be introduced, which would have marginalising it further in the 4-door luxury market. So, Porsche introduced the Panamera Sport Turismo, a station wagon/estate car/shooting-brake…another story.

Interestingly, Porsche previously occupied the S-Class two-door coupe space with their 928, which also looked the part. This opens the design question, ‘if the Panamera looked more the part, embodying it’s sporty genes, could it then define the niche?’ I’d argue, yes.

So, there are good value arguments for leveraging the sports luxury Panamera, with its credentials, in new body formats. There is so much overlap from the luxury sector into the performance arena, that the current sport-luxury niche is fully included within the extended portfolio of luxury cars. There has been a greater verticalisation of the luxury segment (A8+A7; 7series +6series; S+CLS) more than an outright expansion of luxury products (exception S-Class Coupe).

In value terms, it’s been good for the auto industry, interesting for the premium customer, but less interesting for the luxury customer: Porsche, Audi and BMW would appear to have, as yet, unused opportunities to compete.

The creation of high value niche products in the mature auto industry marketplace requires companies to address multiple value criteria, e.g. overachievement in specific features

FMCG Industry: cheaper retail own-brand products better than multinational brand-name

Compare private/own-label to brand-name drugstore articles for body care products and cosmetics, from toothpaste to body lotion, across 20 product groups.

In the German Öko-Test (engl. eco-test magazine) the consensus was that the on average 50% cheaper own-brand products not only saved money but were better than the brand-name products.

This speaks to the competence of the retail industry and roasts brand-name products of multinationals such as Beierdorf AG (Nivea), Colgate-Palmolive (Colgate), L’Oréal („Because we’re worth it“), Unilever (Dove) and Procter&Gamble (Gillette).

Clearly, the tested brand-name products are not/no longer designed to satisfy current quantitative (measurable) test criteria and L’Oréal’s brand claim, „Because we’re worth it“, cannot be validated.

In 2019, private label products have grown to over 40% market share in Germany, Spain, Belgium and over 50% in the UK.

Qualitative (emotional) quality QL is independent of price, although associated with being expensive. It’s more than basic needs fulfilment: a chair that supports your weight and doesn’t topple over; more than desirable features, such as back and height adjustment of an office chair; it’s the Eams Executive Chair or a Walter Knoll Elton chair… a blend of several characteristics, which resonate with the customer and evoke an emotionally positive response.

However, the phrase, “doesn’t live up to expectations” is where QL is present, but where basic quality (QT_base) is not. We must be careful not to confuse QL quality with design excellence.

Through analysis, supported by design of experiments and customer validation, we can build an understanding of key physical characteristics and their effective ranges, which evoke this positive emotional response.

The more complex a product, the greater the number of associated emotional responses: the “wow!” and “delight.”

In the past, we had “surprise & delight” features, which are infact QT₊ values. “Surprise” actually indicates a lower expectation of the customer towards the brand and its products: a deficit in brand equity.

We hear about form and function and there are three possible combinations for high value products:

1. It’s beautiful and it does exactly what I want

2. It’s beautiful and I can live with it’s imperfections

3. It’s nearly perfect for me and I can live with its looks

Obviously 1. should be the target for our products. However, it is simply amazing how many products fail to score reasonably high marks for design. On one hand, design encourages acceptance and raises our desire to purchase and on the other, well thought out, elegant, design, significantly increases both usability and product acceptance.

A failure to invest in design, which leads to a product with a less acceptable design, debases the investment made to create that product and leads to decreases sales volumes and EBIT.

A failure of large companies to address design has lead to new competition, e.g. IT: Business IT Systems vs beautiful websites… poor user experience and usability

A new industry segment has grown to satisfy the robust but previously user-unfriendly business IT systems environment. And, furthermore, IT departments are being superseded by IT services.

Poor sales training leads to simple failures, stops sales and destroys brand

You’ve decided to purchase a product or in this example, a service.

Imagine you are travelling to a German city and, as an exercise, decide to book a hotel room for the night, yourself, over the phone. You are offered a room rate, at higher price than online and in condescending manner, from a 5* Hotel Chain.

Your negative emotional reaction (anger) would generate four consequences:

1. stop sale: cancel the idea to spend money at this hotel now

2. raise barrier to future purchases: become reluctant in the future to do business with this chain of hotels

3. promote alternatives: become happier with e.g. Marriott for their price guarantee

4. actively demote brand: talk about bad experience with other people

In B2C, Point-of-Sales (POS) is critical, requiring, as always, the satisfaction of minimal quantitative quality standards and ‘showing-off’ the high value features, in which the company has invested.

Failure to leverage product and service values leads to discounting

In B2B key account interactions, account managers must understand the features of their products that make them high value products and transport this understanding to their business customers.

Although sales efficacy can be measured in product transaction prices (discounts) and volumes, the quality of the transaction itself is less visible for measurement than in a B2C environment.

In many businesses with changing environments, Key Account Managers fail to champion product values preferring to relying upon their relationship management skills to sell products. As a consequence, price and discount become key drivers instead of the investments made on their customers’ behalf, leading to declining ROI and EBIT.

Why does Apple sell more high priced smartphones than Samsung? Because the higher price is modified/normalised by what the brand represents for the customer and, in some markets, because of the positional good value of an iPhone vs other smartphones.

Samsung also has brand equity, but in the volume market, in which Samsung represents reliable and stable, but not wow!

Brand Equity is a product of both reliability (needs) QT_oand desire (wants) QL.

One industry example

Sustainable Value to Satisfy multiple customers

Healthcare industry: The big-pharma product triple jump of three market customers

The value creation process for drugs in the health care marketplace is very challenging, because of the number and variety of value touch-points for a (new) drug, on its journey to the patient.

Essentially, our approach is to divide the value journey into three parts:

1. Front-end Fast Moving Consumer Goods FMGC Pharmacy-Patient market

2. Middle Key Account Management KAM Government/Insurance/Hospital/Medical Practice

3. Back-end Investment Goods Discovery and Development (R&D/Production)

It should not surprise people that Daniel Vasella chose the ex Heinz (Ketchup) executive Joseph Jimenez Jr. to be his successor, as Novartis CEO, who went on to divest non-core businesses and put in a new operation model to refocus on customers, before handing over to Vas Narasimham, in 2017. Novartis continuously transacts multi-billion dollar deals and has successfully rejuvenated its innovation pipeline.

Three short deep-dives:

New Value Creation opportunities: does personal medicine offer wide-ranging niche products through to pharmacy compounding?

Value creation through new personalised medicine pathways: In the costly development of new drugs, even at late clinical trial stages, promising products fall by the wayside. But some of these products could, in the light of personalised medicines and pharmacogenomics, become valuable and safe treatments.

The question to the industry is, can big pharma gain governmental legal support to develop and protect (patent) these focused treatments by demonstrating the value of patient RNA/DNA testing in combination with more specialised treatments?

The answer lies with the original requirement to demonstrate that a product is ‘safe.’ Safe to use for the appropriate audience and safely and cost efficiently compounded if required. Just as cars require infrastructure of roads and fuel to be viable transport systems, so do personalised medicines require new low-cost, exceptionally accurate test-kits to fuel their uptake, as sales enablers.

Sustainable Brand Value: susceptibility of narrow product verticalisation

Concentration on establishing and maintaining leadership in a narrow vertical within a specialist medical field has lead to increased EBIT, when all three value areas are well managed. This has also increased the importance of M&A portfolio management, including supplier management of contract research organisations, CROs.

What has made this narrow focus so successful?
Mid-market pressure and successful relationship development with authorities, management of drug trial approvals, more streamlined procedures, and the B2B Brand recognition allowing follow-up or future new products easier entry into a receptive market and drug approvals scenario.

What are the dangers?
This narrow focus approach poses risks and is susceptible to change on two fronts:

Front-end change in consumer respect for a narrow brand vs a universally trusted company, if competition can drive their influence through the front-end
A step changes in procedures such as a political demand for a level playing field, where inappropriately tight relationships are seen to have developed

Future Sustainable Value Creation, All-Inhouse or Suppliers-driven?

The future value of big pharma could radically change.

The retail power of countries, focused through bodies such as the Federal Joint Committee (Germany), which represents the insurers together with the care providers for 70 million people, is immense: >€300billion or more than the combined turnover of the top 10 big pharma worldwide.

Currently, big pharma creates a positive relationship in price challenged markets (from India to the USA!) by generously giving away €/$/CHFbillions of products.

Big pharma must constantly demonstrate that they provide the best value path for the treatment of illness. There is a growing sensitivity, seen in a court decision in India, to envisioned price vs life scenarios. So, we can expect more of a price/profit squeeze, if demanded by the public.

Pharma must demonstrate that their products offer the best value, because they manage research, manufacturing and distribution better than future alternative propositions from country governments and their committees.

However, as the contract research organisations CRO and contract manufacturing organisations CMO markets mature, big pharma will be challenged to demonstrate where and how they add value.