VALUE EQUIVALENCE LINE
A business model to determine a price strategy for your products/services
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.
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).
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.