Pricing Economic Value to the Customer

PRICING ECONOMIC VALUE TO THE CUSTOMER

Contents

Definition

EVC example

Practical Implementation of EVC analysis in a firm

How far should a firm discount from EVC?

1

2

2

3

Using EVC as a Pricing Formula

Using EVC as a Pricing Guideline for new products

5

5

Using EVC as a Pricing Diagnostic for existing products

6

Definition

Economic Value to the Customer (EVC) is based on the insight that a customer

will buy a product only if its value to them outweighs the value of the closest

alternative, or when U tilitya ≥ U tilityb . The utility of a product depends on its

value to the customer minus its price.

V aluea − P ricea ≥ V alueb − P riceb

Rearranging gives:

P ricea ≤ [V aluea − V alueb ] + P riceb P ricea ≤ Dif f erentiationV alueab + P riceb

Rewriting [V aluea − V alueb ] as the differentiation value between product a and

b allows us to summarize product a’s price ceiling as

P ricea ≤ Dif f erentiationV alueab + P riceb

Therefore, to sell a product, a firm needs to price at or below its competitor’s

price plus the value advantage its product has to the customer over the rival prod­

uct.

1

2

PRICING ECONOMIC VALUE TO THE CUSTOMER

EVC example

Atlantic Computer has developed software that allows their servers to host twice

as much webspace as its rivals. How should they price this new software-server

combination?

• Relative to buying two servers from Atlantic’s competitor, by buying one

doubly efficient server from Atlantic, a firm would save $4,000 in labor costs,

$500 in electricity and $1,500 in software licenses. This suggests that the

differentiation value relative to the closest competitive offering is $6,000.

• The price of two servers from the competitor is $6,800.

• This suggests that the EVC of a server with the software is $6,000 + $6,800

= $12,800.

Practical Implementation of EVC analysis in a firm

• Identify what benefit your product provides

– Make sure you define a benefit, not a feature....