Value equivalence line

The value equivalence line (VEL) maps an offer’s perceived benefits against its perceived price. Premium offers can justify higher prices when customers recognise proportionately greater benefit; economy offers can remain attractive with fewer benefits when their prices are correspondingly lower. Positions close to the line represent perceived equilibrium.

When to use it

• Diagnose whether a brand’s price and perceived benefits support its market position.
• Decide whether to change the offer, communication, target segment or price.

Origins

Bradley Gale expressed the principle as “quality relative to price” in Managing Customer Value (1994). His fair-value map plotted perceived quality against price with a 45-degree line representing balance. Ralf Leszinski and Michael Marn described the value equivalence line in their 1997 McKinsey Quarterly article “Setting Value, Not Price,” and Michael Marn, Eric Roegner and Craig Zawada developed the approach further in The Price Advantage (2004).

What it is

Real markets contain offers on both sides of the line. An offer to the left is perceived as expensive for the benefits it provides and may lose share. Brand 4 illustrates that position. An offer to the right provides unusually strong perceived benefits for its price and may gain share; brand 5 illustrates this position.

The map suggests strategic choices rather than automatic prescriptions. A brand to the right can preserve its value position to build share, raise price to capture more of the surplus or invest in benefits to defend the advantage. Brand 4 could lower price, improve the offer or make existing value more visible.

Perception is central. Customers may undervalue an offer because its benefits have not been communicated or experienced, or overestimate its price because they ignore durability and total ownership cost. Before changing the economics, determine whether the problem lies in performance, positioning, segment fit or evidence. A communication campaign can move brand 4 only when the underlying promise is credible.

Estimate relative positions by asking comparable customers two questions:

• Compared with alternative suppliers, are the benefits from Company A significantly better, somewhat better, neither better nor worse, somewhat worse or significantly worse?

• Compared with alternative suppliers, are Company A’s prices significantly better, somewhat better, neither better nor worse, somewhat worse or significantly worse?

Ask the same questions for relevant competitors, code the responses consistently and plot segment-level results. Brand 4 may occupy a different position for professional users than for occasional buyers, so an overall average can conceal important structure.

Developments of the model

The VEL simplifies how markets adjust. A large benefit improvement at an unchanged price should move an offer to the right, potentially encouraging competitors to reduce price or improve benefits. In practice, loyalty, switching cost, imperfect information and emotional meaning can slow or prevent the predicted movement. Use the map to frame hypotheses, not to assume customers behave as perfectly rational agents.

An alternative summary is the net value score. Ask customers to rate one company’s total value against comparable suppliers, then subtract the percentage giving a “worse” response from the percentage giving a “better” response. Give double weight to “significantly better” and “significantly worse” responses so the strongest views matter more.

The result can be converted to a score out of 100. As with the map, report the sample, segment and confidence around the estimate rather than treating one score as a permanent market fact.

How to use it

A hand-tool manufacturer serving professional trades used customer research to investigate lost share. Buyers did not see enough benefit to justify its relatively high price. Technical tests showed that the tools performed as well as, or better than, competitors, so the gap was not simply product quality.

Further research found that distribution through do-it-yourself stores had weakened the brand’s professional identity. Tradespeople associated its wider availability with general-public use and questioned whether it remained robust enough for their work.

The manufacturer wanted to retain consumer growth, so it differentiated the professional range through new handle colours, point-of-sale packaging and a “Professionals Pick Brand X” message. Communications demonstrated performance in professional use. The move restored relevant perceptions without abandoning the consumer channel and helped the brand regain professional share.

Some things to think about

• If your brand sits to the right of the line, should it build share, raise price or invest to sustain the advantage? If it sits to the left, is the cause excess price, insufficient benefit, weak proof or the wrong audience?

• Which experiences, word of mouth and communications shape price and benefit perceptions? Where do those perceptions differ by customer segment or buying occasion?

Top practical tip

Plot segments and competitors from recent customer evidence, then investigate why the position exists before changing price. Separate a real offer deficit from a communication or targeting problem.

Top pitfall

Do not assume that every point left of the line requires a discount. Lowering price may damage margin and signal weakness when the real issue is poor benefit delivery, weak evidence or a segment that does not value the offer.

Further reading

• Gale, B.T. (nineteen ninety-four). Managing Customer Value. Free Press.
• Leszinski, R. and Marn, M.V. (nineteen ninety-seven). “Setting Value, Not Price.” McKinsey Quarterly.