Projects are all about producing Value, and products are all about providing Value. The question is, how do you measure Value?
This post examines a recent strategic framework, the Value Stick, which is great to digging in to the dynamics of value creation of products and projects.
What Is a Value Stick?
The Value Stick is an interesting tool that provides insight into where the value is in a product or service. It relates directly to the Michael Porter’s Five Forces, reflecting how strong those forces are.
Here is what the four components mean:
- Willingness To Pay (WTP) – What is the maximum amount the customer is willing to pay? That’s the WTP level on the Value Stick. The difference between WTP and actual Price is shown in the Value Stick as Customer Delight, which is the extra value the customer receives over and above what they were willing to accept.
- Price – This is the Price that the company charges for the product or service. It can be set anywhere between the Cost and WTP lines – anywhere along the red or green areas in the Value Stick. The higher the Price, the higher the Firm Margin for the company – but the lower the Customer Delight.
- Cost – This is the monetary Cost of all inputs that go into the product or service. It includes both fixed and variable Costs – no differentiation here on the Value Stick. Lower Cost provides more money to be allocated to the Firm Margin and Customer Delight.
- Willingness To Sell (WTS) – The WTS represents the minimum amount that the suppliers of raw materials and inputs are willing to accept for their products.
Let’s go a little deeper and take a look at where the Value Stick Framework can be useful.
What Is Value Based Pricing – and Value Based Strategy?
Value Based Pricing is about pricing products and services based on the Value they provide, rather than how much they cost to provide. In fact, there is a tension between both Value and Cost to come up with the optimal pricing strategy.
I recommend these strategy resources (paid link):
A Value Based Strategy is one that is driven by the Value – not so much cost – provided to customers. And it can be extended more broadly – to employees, suppliers, and even the greater community…
Value based pricing and Value based strategy both depend upon increasing the customer’s Willingness To Pay (WTP) by creating greater Value. They also depend on lowering the Willingness To Sell (WTS) line on the supplier end of the Value Stick.
Increase Willingness To Pay (WTP) – reconfigure to increase Value more than cost
- Add desired product features
- Add choices of product features
- Add new desired activities to the Value chain
Lower Willingness To Sell (WTS) cost – enhance supplier relationships to create greater Value
- Collaborate with suppliers on ways to configure the product to create efficiencies
- Negotiate more consistent purchase commitments with suppliers
- Increase or decrease number of suppliers, as appropriate
The key is to focus on Value, and not Price or even Cost. That means stretching the Value Stick in both directions – upward in Value created for the customer, and downward in the suppliers willingness to sell.
Value Stick Framework Dynamics
The image above shows the initial baseline for the Value Stick, followed by four change scenarios which illustrate the dynamics of what happens with price, cost, value creation, and relationships with customers and suppliers.
- Increase Price – The chart shows that an increase in Price can increase Firm Margin, but decreases Customer Delight. Increasing Price does not increase the size of the pie and simply transfers money from one pocket to another.
- Increase Value – An increase in Value – as indicated by an increase in the customer’s Willingness To Pay (WTP) – increases the Customer Delight without effecting Firm Margin. Note that there is also room to increase Price, increase Firm Margin, and still maintain an increase in Customer Delight.
- Decrease Costs – If a company decreases Costs by decreasing the amount it pays its suppliers for inputs, Firm Margin increases, but Supplier Surplus shrinks. This illustrates the tension between buyer and supplier in this scenario where, like increasing prices, the size of the pie remains the same.
- Increase Input Efficiency – There is a focus here – let’s say a collaboration between buyer and supplier. They work together to increase supplier efficiency, decrease supplier cost, and therefore decrease the supplier’s WTS. With a downward stretching of the Value Stick, more Value is created, increasing Supplier Surplus. There is even room to share some of that increased Value, increasing both Firm Margin and Supplier Surplus.
Value is increase for both the ‘Increase Value’ and ‘Increase Input Efficiency’ scenarios. Increased Value extends the Value Stick upward, while ‘Increase Input Efficiency’ extends the Value Stick downward.
This set of scenarios illustrates that expanding the Value Stick upward and downward increase total Value – or increase the size of the pie to be split among customer, the company, and suppliers.
Products, Projects, and the Value Stick Framework
Increasing the size of the pie – stretching the Value Stick upward and downward – is what happens when Value is created in projects.
Since they are closely related, let’s think about the impact of applying the Value Stick in product management, project management, and in the special case where projects are actually the product being sold.
- Product Management – The focus is on constantly monitoring and enhancing product and service offerings to increase Value. In many cases, projects will be needed to implement the bigger changes. Thinking strategically, the focus is on enhancements to customer Value, decreases in supplier Cost (Willingness To Sell (WTS)), and improving the profit margins (Firm Margin in the Value Stick)
- Project Management – What is the Value that the project produces? Does it fit the Value Stick Framework? Note that the Value Stick applies more broadly than to selling products and services to customers; the Value Stick applies to creating Value for employees, suppliers, and the greater community. Project planning requires identifying where the Value is being created. Project execution needs to include monitoring for metrics that show progress toward the intended Value added.
- Project as Product – There are many situations – I have seen figures in the 50% plus or minus range – where the project is the product. For example, a customer might buy a new roof or door, or implement a new CRM software. In both of those cases, there is a product and a project component. With the Internet of Things (IoT), products increasingly contain an information component, and that tends to inject a great ‘project component’ into the products The Value Stick provides a great framework for considering the Value produced, and for provide guidance in using Value Based Pricing.
I recommend these PM templates (paid link):
Since the objective of projects is to produce Value, the Value Stick Framework is a nice tool to have in the arsenal.
The Value Stick Framework does have its limitations. Here are some things to consider.
The supply and demand curve at right shows the intersection of supply and demand. That indicates a point at which a certain price will attract a certain quantity of purchases from buyers.
There are numerous theoretical models like the supply and demand curve that explain various aspects of how markets work. The Value Stick is focused on identifying the Value of an offering, how that Value is split among market participants, and how everyone can benefit when Value is expanded.
While the Value Stick extends that notion, all of these representations, including the Value Stick, have their limitations.
Here are a few limitations on the customer side (WTP) of the Value Stick:
- Each customer will derive unique Value from the product or service
- There are likely to be multiple WTP price points across the customer population
- There may be a need to create Value Sticks for each customer grouping
And here are a few limitations on the supplier side (WTS) of the Value Stick:
- Suppliers will not have identical cost structures
- Suppliers will not have identical inputs
- There are unique challenges both to using multiple suppliers as well as using a single suppliers
In addition, on both the customer and supplier side, economies of scale are not considered.
The model also does not account to varying offers – providing different levels of offers to satisfy different customer groups, and to take advantage of different levels of WTP. For example, many companies offer three levels of a product (such as Starbucks’ Tall, Grande, and Venti), each at optimal price points. In some cases, the higher priced product can fetch significantly more than the lower, without a drastic increase in cost.
The Value Stick can provide insights to help with those kinds of decisions.
Please share any experiences you have had with the Value Stick below!
Good video that illustrates many of the concepts in this post: “Strategic Management: WTP and Value Capture”, by Melissa Schilling:
Good article in Harvard Business Review on the value stick and value based approach: “A Beginner’s Guide to Value-based Strategy“, by Tim Stobierski, 03 Nov 2020
Book by author who developed the Value Stick: “Better, Simpler Strategy: A Value-Based Guide to Exceptional Performance” by Felix Oberholzer-Gee, April 2021.
Article by same author above: “Eliminate Strategic Overload: How to select fewer initiatives with greater impact” by Felix Oberholzer-Gee, Harvard Business Review Magazine, May–June 2021.