Class Notes (834,387)
ECON 208 (210)
Lecture 6

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School
Department
Economics (Arts)
Course
ECON 208
Professor
Paul Dickinson
Semester
Winter

Description
Eco Lecture 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 Utilitya ≥ Utilityb. The utility of a product depends on its value to the customer minus its price. Valuea − Pricea ≥ Valueb−Priceb Rearranging gives: Pricea ≤ *V aluea −V alueb++Priceb Pricea ≤ Differentiation Valueab +Priceb Rewriting *V aluea −V alueb+ as the diﬀerentiation value between product a and b allows us to summarize product a’s price ceiling as Pricea ≤ DifferentiationV alueab +Priceb 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 product. 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. Skill here reaps large rewards. • Identify closest competitive oﬀering and calculate its price – Be honest about who your closest competitor is – Be honest with yourself about the price that competitors sell their product for. – Get the units and time-horizon right. This is far easier to do when you have deﬁned the product’s beneﬁt properly. • Identify potential sources of diﬀerentiation value – Be speciﬁc, not vague. It is important that your ﬁrm’s value proposition does not sound like it was churned out by generic software. • Measure how much value these create – Have an independent lab do measurable testing. – Often current customers are willing to take partin benchmarking stud­ ies, as they view it as free consulting. •
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