Economic value to the customer (EVC)

Economic value to the customer is simply the purchase price that customers should be willing to pay for your product, given the price they are currently paying for the reference product and the added functionality and diminished costs provided by your product. Start with the purchase price of the reference product and then add improvements in functionality and cost savings to the customer. You are left with the amount you should be able to charge customers for your product and still take their business away from the maker of the reference product.

Example below

chart_deva00_02.gif

The reference product—the one that the customer already uses—costs $300. By switching to your product, the customer gains an extra $350 worth of functionality (yellow arrow). This $350 often shows up in increased profit because your product works faster, works better, appeals more to consumers, and so forth.

By switching from the reference product to yours, the customer will therefore gain $350 worth of functionality improvements (which may or may not mean $350 in profit improvements), plus $100 in lower start-up costs, plus $200 in lower postpurchase costs. (These last two obviously do mean straightforward profit improvements for the customer.) The customer, then, will enjoy a total of $350 + $100 + $200, or $650, in added benefits. A customer who is willing to pay $300 for the reference product should be willing to pay $300 + $650, or $950, for your product. That is the “economic value to the customer” for which the model is named. The EVC is exactly $950, as shown in Exhibit 2—and, in rough terms, that is what you could charge the customer if you wished. In reality, in the example shown in the figure, charging the full $950 for your product would leave the customer perfectly indifferent between the reference product and yours. Therefore, you might want to charge somewhat less than $950—say, $825 or $850. In other words, you want to cede only enough value to customers to make them switch to your product, but not much more. EVC can help you do just that.

This article is directly lifted from http://www.mckinsey.com/insights/strategy/delivering_value_to_customers.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s