The Value Triangle:
An Integrated Approach to Creating and Capturing Value

Hamilton Consultants White Paper

Anthony Nygren, Will Rodgers

What do IBM, WalMart, Merrill Lynch, and Southwest Airlines have in common? They are all companies that have been able to sustain growth and increase profits over time by consistently creating and capturing value in the market. The difference between these companies and all the others is that these companies understand that creating and capturing value are not just words that sound good in an annual report. These companies understand that there can and should be a rigorous process for pursuing this goal.

The key to the pursuit of value is the Value Triangle. The Value Triangle is a framework for maximizing the value of a company's products or services by optimizing and coordinating the marketing levers that most strongly affect value perceptions: Brand Promise of Value, Pricing Strategy, and Sales Strategy. Alone, each of these activities works to create or capture value. The senior management team, and especially the senior sales and marketing executives, should be paying attention to all three. However, it is only through the perspective of the Value Triangle-the perspective that focuses on coordinating the three activities-that full value can be realized.

Truly adopting the Value Triangle perspective on value creation and capture means thinking about brand positioning, pricing strategy, and sales strategy as a positive cycle of reinforcement. The cycle (Figure 1) begins with the brand's "promise of value"-the functional and emotional benefits that the brand fulfills for customers, and that are then translated into the brand positioning in advertising and sales messaging (see Scott Ward, Larry Light, and Jonathan Goldstine, "What High-Tech Managers Need to Know About Brands," Harvard Business Review, 1999). Once this concept of value is created in the customers' minds, pricing strategy should be aligned with this brand promise to ensure that all customers believe that the value they will receive is equivalent to what they will pay (this could be a high price or a low price, cost structure permitting). Sales strategy provides a structure and process for selling and servicing that is commensurate with the price level sought. Also, by emphasizing and repeating the message of value all the way through the purchase decision, the sales strategy reinforces the brand positioning in the marketplace and helps to train the customer to buy based on value rather than price.

Creating Value at the High- and Low-End of Markets

The Value Triangle framework can be used to understand the success of two companies as different as IBM and WalMart. Both have been able to integrate the three components of the Value Triangle and, as a result, have been able to grow and prosper while competitors withered in the face of a slowing economy. However, the two companies have obviously directed the elements of the Value Triangle to very different ends: IBM has been able to maintain price premiums while growing its business; WalMart has come to dominate its market through a low-price approach.

IBM's renaissance in the 1990s from dinosaur to market leader was driven by Lou Gerstner's strategy of focusing on high-end business-to-business services. This strategy was-and continues to be-successful because the three elements of the Value Triangle, and their coordination, have been at the core of the implementation. The company's Brand Promise of Value shifted from "technological reliability, stability, consistency" to "premier provider of all IT needs," thereby encompassing the service component. Pricing strategy quantified this value through premium-level bundles of services, hardware, and software. Finally, the sales force captured the value by emphasizing the impact IBM could have on a business (in terms of ROI, reduced cost of ownership, reduced costs through outsourcing, etc.), rather than trying to match prices on hardware, software, or services alone.

WalMart, on the other hand, represents how the Value Triangle can deliver growth and profits at the low end of a market. For WalMart, the Brand Promise of Value has remained consistent: national brands at everyday low prices with friendly service. Through the support of superior logistics, the company has been able to hold a lowest price strategy while maintaining margins. At the same time, the legendary helpfulness of WalMart's associates has generated significant customer loyalty. In addition, WalMart's sales strategy is extremely efficient as associates obviously do much more than stand around waiting to help customers-they adjust displays, stock, inventory, and work the cash registers. For WalMart, the Value Triangle elements were never about creating premiums that drive growing margins. Rather, they were about establishing a position in which they undercut department stores and local retailers on price while surpassing competitive "big boxes" like K-Mart on service, thereby achieving market share dominance through superior low-end value.

Why Is the Value Triangle Important?

Generally speaking, about half of all buyers in a given market are likely to be value buyers, meaning they make purchasing decisions on a "value" equation that takes into account both price and the perceived value of the product or service to be bought. In many situations, particularly business-to-business situations that focus on one-to-one sales, there is a tendency for price buying-making decisions on price alone-to become the default mode. This is typically due to a combination of competition fostering downward price pressure and misdirected sales activity that focuses on what is tangible-price, rather than value.

This tendency represents a significant danger for companies as it pushes the entire industry into a "commodity trap." As sales people focus more and more on price, they train customers to weigh price more and more heavily in their buying decisions. As a result, the pressure to lower prices increases and the ensuing "price war" destroys profits.

Even when this "doomsday" scenario does not play out, however, ignoring the Value Triangle can cost a company profit and volume (Figure 2, Scenarios A, B, and C).

For example, the roller coaster ride of the dot.com boom and bust witnessed many examples of Scenario A above-companies that left significant profits on the table in an effort to attract customers. On the business-to-business side, for example, Giga Information Group, a subscription-based provider of market research on information technology trends, had a promise of value that should have had strong appeal, both in boom and bust times, and reinforced the value created through substantial annual subscription charges. However, in order to attract customers and renew accounts, Giga offered discounts, free trials, and grace periods after subscriptions had run out. As a result, while revenue and customer tallies grew, profits were hard to come by.

Amazon.com, while clearly one of the "success stories" of the e-business world, nevertheless continues to struggle to attain profitability, in part because it is mired in the trap of Scenario B. Specifically, the book division-obviously the flagship of the Amazon business-is likely missing substantial profit opportunity by continuing to drive prices down. Amazon initially made a name for itself as a discount price provider. Over time, more features have been added to the site (ease of searching, profiling, delivery options, out-of-print offerings), and the site has become a dominant player in the book retail business. Despite this position, prices continue to be held low (which has caused other retailers to follow suit), thereby limiting profits. Given Amazon's market position and the complexity of the offering now available on the site, Amazon could probably raise prices selectively to reflect its greater value of information and not suffer a significant loss of volume. The main obstacle to this remedial action would be the fact that prolonged exposure to Amazon's lowest-price approach has trained customers to think in terms of price, rather than value.

Cellular service provider AT&T Wireless, on the other hand, continues to lag behind market leaders Verizon Wireless and Cingular, in part because it is guilty of Scenario C-failing to create and communicate a compelling brand promise of value. AT&T Wireless offers competitive calling plans and has a sales strategy that is not substantially different from its competitors, but it has failed to take hold as a brand in the market. While AT&T has a strong brand name, its history and equity have not proven transferable to the cellular market. Moreover, AT&T Wireless has spent the last two years focusing on its "m life" campaign, which has clearly not resonated with the public. Rather than creating a truly meaningful promise of value, it seems to be merely a collection of features that-at best-were of interest to customers but were not differentiators (e.g., text messaging), and, at worst, were of little interest at all (e.g., a GPS-based person locator).

The Value Triangle In Action

A newly created large oilfield services company ("Oilfield Co.") found itself defining all three corners of the value triangle within an 18-month period. A successful "roll-up" of many small "mom and pop" companies, it was able, for the first time, to raise prices significantly. As a 40+ percent market share company it now represented a very significant supplier to major oil companies such as Exxon Mobil and Chevron. Previously the mom and pops were always intimidated by large customers and had been afraid to raise prices, even though market price levels were causing a gradual liquidation of capital among all suppliers, including Oilfield Co.'s predecessor companies.

Price rises of 20-30% by Oilfield Co. held, despite customer complaints. But not wanting to use market power alone as the justification for premium prices, Oilfield Co. next turned to analyzing both its sales process, and the value elements it was providing to customers. What became clear is that the company provided superior service as well as proven, measurable cost savings to its customers, but did not have a way of communicating that, given that most sales were made everyday by field "tool pushers" who supervised several crews, and for whom sales was only a very part-time job. So Oilfield Co. undertook extensive "value selling" training, plus developed real case material, to generate a superior selling effort at the grass roots level.

Successful with higher prices, and having bolstered the sales force, the company did not stop there but went on to refine its (new) brand promise of value with the aid of a boutique New York ad agency. Building off some of the value selling experience with customers, plus their own research of all aspects of the company, the agency developed with management a new ad campaign and sales support materials reinforcing the company's new brand promise of quality and consistency, and positioning it as superior to all competitors.

Adopting the Value Triangle Approach

As the examples above illustrate, the impetus for developing a Value Triangle approach can differ from company to company. However, there are common characteristics of businesses that have used the Value Triangle to have a significant impact. Typically, these companies:

• Operate in a highly competitive environment
• Face downward pressure on prices
• Hold less than 50% of the market, and are constantly fighting a trench war to gain share points

The examples also demonstrate that, while the paths towards adopting the Value Triangle approach may differ, the process always begins with the same first step: understanding customers. Because the Value Triangle spans three marketing activities that represent different modes of customer interaction, success requires more than demographic information, profitability profiles, and past purchasing history (although all of these have some value). In order to develop a meaningful Value Triangle approach to the market, it is necessary to understand how customers make purchase decisions-the decision making process from the moment of need recognition to the moment of purchase and beyond.

When a company is armed with knowledge about how customers buy, it can begin to assess how to manage the Value Triangle to maximize the value captured from the market. This assessment should involve reviewing the company's current activities and strategies within the Value Triangle framework and then comparing these activities and strategies to the customer decision-making process. What should emerge from this effort is the identification of where within the Triangle the company is not optimized for value. From there, remediation initiatives can begin.

Hamilton Consultants © 2003