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If priced appropriately, a better customer value proposition
should result in additional revenues – through higher prices,
greater market share, or perhaps both.
If the incremental revenues exceed the associated incremental
costs and capital requirements, then there will be a positive
incremental cash flow – the present value of which will be equal to
the increase in the intrinsic value of the segment.
While cost management is important, it is rare to find a
situation in which stand-alone cost reduction is the only course of
action available to enhance intrinsic value and create shareholder
wealth.
It is equally rare to find a situation in which a lower cost
structure leading to lower prices is the only way to enhance value
for customers. Often, this approach just leads to commoditisation,
where high quality components or ingredients are substituted or
removed in an effort to reduce price.
There is no doubt that many customers will welcome a lower
price. But in most segments there will also be groups of customers
who value non-price benefits and are prepared to pay for them.
When a management team believes that the only way to create
value for customers is to offer lower prices, cost reduction will
always be their main focus. But in the long term, this just leads
to commoditisation and lower industry profitability.
KBA has a long track record of successfully assisting clients
with new value proposition development, as well as sound
methodologies for measuring customer utility or value as an input
in competitive strategy development, value proposition refinement
and value pricing decisions.
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