Value Equivalence Line

The concept of the value equivalence line was described in 1997 an article in the The McKinsey Quarterly by Ralf Leszinski and Michael Marn entitled Setting Value, Not Price.

The theory of the value equivalence line is based on the assumption that people are rational in their actions. For example, it could assumed that if a major brand makes a significant improvement, offering greater benefits, and its price remains the same, the brand will be repositioned to the right hand side of the value equivalence line and will gain market share. If the competitors are unable to match the increased benefits of the major brand, we can theorise that they would have to lower their prices to maintain the equilibrium in the market and the value equivalence line would move to the right.

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These are changes that are difficult to predict and recognise. The additional benefits offered by a competitor may be insufficient to move the dynamics of the market. Loyalty to companies and the inertia in buying decisions, may mean that they do not have to move their prices downwards. It cannot be assumed that people will always act in an economically predictable way.

Within any class of product there is likely to be a premium offer and an economy offer. The premium offer by its very nature will have more features and benefits than the economy offer and can be expected to have a higher price. Products or brands can be plotted on a graph in which the Y axis reflects the perceived price and the X axis the perceived benefits. The line that bisects the X and Y axis is the value equivalence line (VEL). This is illustrated in the figure below which shows a premium product (Brand A) a medium product (Brand B) and an economy product (Brand C).

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It is helpful for a company to know where it sits relative to competitive brands on and around the value equivalence line. For example, a brand that sits to the right of the line could decide to maintain the "good value strategy" and build market share. Equally, a decision could be made to raise prices, capture more value and profit, and see the brand move upwards and closer to the VEL. A brand that sits to the left-hand side of the line may want to think about how it can communicate more benefits to customers or, it may recognise it is overpriced and needs to lower its prices.

It should be emphasised that the value equivalence model is based on perceptions of price and benefits and these could be wrong. For example, a brand that sits to the left of the line may be thought to offer relatively few benefits for the perceived price. It is just possible that the promotions supporting that brand haven’t communicated the true benefits of the company and it is being unfairly maligned. If this is the case then a promotional campaign, correcting the perceptions, may be the way forward. So too, a brand could be perceived to have a high price when in fact it offers good value for money because it lasts longer than other products on the market. Again, this could be something that requires addressing through a communications campaign.

Two simple questions can be asked to determine a company’s position on the VEL. These are:

How would you rate Company A on the benefits you get from buying its products and services compared to the benefits you get from other suppliers?

• Significantly better

• Somewhat better

• Neither better nor worse

• Somewhat worse

• Significantly worse

How would you rate Company A on the prices of its products and services compared to the prices of other suppliers?

• Significantly better

• Somewhat better

• Neither better nor worse

• Somewhat worse

• Significantly worse

The same questions can be asked of other suppliers to the market. The results can be plotted on an XY graph to show the position of the brands and from these, a brand owner can formulate a pricing and product strategy.

Some things to think about:

• Understanding where your brand sits on the value equivalence line is important in determining future strategy. If it is to the right-hand side of the line you can carry on winning market share or raise prices. However, if it is to the left-hand side of the line it is necessary to find out why it has adverse perceptions in order to win back share. A product at the left-hand side of the line could be over priced, it could lack sufficient features and benefits or it could be failing to communicate them.

  
  

• The position of a brand in the market is based on perceptions. Perceptions are created by customer experiences, word-of-mouth, and promotions. What perceptions do your customers have and how are you influencing them in the right way?