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Back on the concept of added value and the establishment of the sales price
Text by Ronald Bannon MBA, Adm.A., FCMC
December 27th 2014
1
Asselin Bannon
Strategic Management Consultants
Division of La Société de gestion et de formation GEXIMTM Inc.
I am always amazed to find out that a small number of entrepreneurs are able to quickly
determine not only the selling price of a good or a solution offered, but also the sum of benefits
generated that we called added value. Economic notion advanced by Michael Porter in 1979 in
his book entitled "Competitive Advantage", the concept of added value demonstrates how an
organization can reduce all of its operating costs to increase its competitiveness in an
environment where everything is constantly evolution. The model proposed by Michael Porter is
valid as well for organization seeking to redefine and reinvent itself.
In our commercialization interventions, we often use this concept to help organization which
starts with a single product or a single solution or for those who want to launch a new product
or a new solution. In the latter case, the knowhow used in establishing the sales price was
sometimes lost and are now conditioned by the behavior of the industry and market in relation
to the rising cost of raw materials and / or labor.
In many cases, the sales price is fixed according to an arbitrary value from the entrepreneur that
is often less than the real value of the product or the solution proposed in a given market. The
price of the competing products or solutions inevitably serve as a basis for an intrinsic value
without account of the profit margin sought, the demand, the business models in presence and
also the value that is transferred to the final user.
Therefore, to improve the contractor mindset on the fact that the sale price of the new product
/ solution is often set too low, we try to estimate the approximate value of that good or service
by using three different approaches:
• The manufacturing costs plus a profit margin
• The estimated selling price based on the distribution structures in presence
• The selling price based on the value transferred to the end user
Let's review each of these methods.
The first known method, so called as the accounting method, is used to calculate the selling
price from the costs of manufacturing, labor and manufacturing overhead. A profit margin to
cover fixed costs and net profit required is then added to the total of these three variables to
give a result that could be called the classic sales price. Generally, this method, which I would
call basic, does not reflect the fair value of a product or a solution as little innovative it may be.
Back on the concept of added value and the establishment of the sales price
Text by Ronald Bannon MBA, Adm.A., FCMC
December 27th 2014
2
Asselin Bannon
Strategic Management Consultants
Division of La Société de gestion et de formation GEXIMTM Inc.
The second method, oriented on the distribution networks, is initiated from the amount
determined with the first method plus the cost of accessing multiple channels in presence to the
organization in order to distribute its product or solution to reach targeted customers. With the
globalization of trade, it is unrealistic to think that only the volume of local or regional business
will be sufficient to ensure that the sales thus generated will be adequate to quickly reach the
breakeven point. The business is now in competition with organizations based anywhere in the
world that offer equal or similar products or solutions than those offered by our entrepreneur.
Access to the web for all or nearly to everyone opened the door widely to customers from any
geographical origin. We must therefore plan additional cost access to multiple distribution
channels in establishing the sales price.
Finally, the third and final method is based on the added value transferred to the end user. This
is a more difficult task to achieve when we ask an entrepreneur to measure the added value
generated by the product or solution proposed by the organization. The recommended
approach is to compare similar products and to take into account the competitive advantages
against each other. This is a good way to establish the added value on a qualitative basis before
moving on to the quantitative approach. To fix the price with the latter approach, we
recommend identifying one or at most few characteristics common to products or solutions in
competition and to measure the cost or use of each of them to consumers. Based on savings
transferred, it will be easier to determine a selling price.
The idea to test the result of this exercise with focus groups remains a useful approach that will
allow the entrepreneur to confirm its pricing strategy.
Asselin Bannon Strategic Management Consultant is a firm specialized in the international sales
and marketing of innovative applications from R & D. Our uniqueness lies in the ability to
facilitate the adaptation of products and solutions into foreign markets and to allow adoption
based on the knowledge gained from successful experiences. Asselin Bannon also offers
professional training in management and commercialization of innovations.

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Ronald Bannon - Added value concept revisited

  • 1. Back on the concept of added value and the establishment of the sales price Text by Ronald Bannon MBA, Adm.A., FCMC December 27th 2014 1 Asselin Bannon Strategic Management Consultants Division of La Société de gestion et de formation GEXIMTM Inc. I am always amazed to find out that a small number of entrepreneurs are able to quickly determine not only the selling price of a good or a solution offered, but also the sum of benefits generated that we called added value. Economic notion advanced by Michael Porter in 1979 in his book entitled "Competitive Advantage", the concept of added value demonstrates how an organization can reduce all of its operating costs to increase its competitiveness in an environment where everything is constantly evolution. The model proposed by Michael Porter is valid as well for organization seeking to redefine and reinvent itself. In our commercialization interventions, we often use this concept to help organization which starts with a single product or a single solution or for those who want to launch a new product or a new solution. In the latter case, the knowhow used in establishing the sales price was sometimes lost and are now conditioned by the behavior of the industry and market in relation to the rising cost of raw materials and / or labor. In many cases, the sales price is fixed according to an arbitrary value from the entrepreneur that is often less than the real value of the product or the solution proposed in a given market. The price of the competing products or solutions inevitably serve as a basis for an intrinsic value without account of the profit margin sought, the demand, the business models in presence and also the value that is transferred to the final user. Therefore, to improve the contractor mindset on the fact that the sale price of the new product / solution is often set too low, we try to estimate the approximate value of that good or service by using three different approaches: • The manufacturing costs plus a profit margin • The estimated selling price based on the distribution structures in presence • The selling price based on the value transferred to the end user Let's review each of these methods. The first known method, so called as the accounting method, is used to calculate the selling price from the costs of manufacturing, labor and manufacturing overhead. A profit margin to cover fixed costs and net profit required is then added to the total of these three variables to give a result that could be called the classic sales price. Generally, this method, which I would call basic, does not reflect the fair value of a product or a solution as little innovative it may be.
  • 2. Back on the concept of added value and the establishment of the sales price Text by Ronald Bannon MBA, Adm.A., FCMC December 27th 2014 2 Asselin Bannon Strategic Management Consultants Division of La Société de gestion et de formation GEXIMTM Inc. The second method, oriented on the distribution networks, is initiated from the amount determined with the first method plus the cost of accessing multiple channels in presence to the organization in order to distribute its product or solution to reach targeted customers. With the globalization of trade, it is unrealistic to think that only the volume of local or regional business will be sufficient to ensure that the sales thus generated will be adequate to quickly reach the breakeven point. The business is now in competition with organizations based anywhere in the world that offer equal or similar products or solutions than those offered by our entrepreneur. Access to the web for all or nearly to everyone opened the door widely to customers from any geographical origin. We must therefore plan additional cost access to multiple distribution channels in establishing the sales price. Finally, the third and final method is based on the added value transferred to the end user. This is a more difficult task to achieve when we ask an entrepreneur to measure the added value generated by the product or solution proposed by the organization. The recommended approach is to compare similar products and to take into account the competitive advantages against each other. This is a good way to establish the added value on a qualitative basis before moving on to the quantitative approach. To fix the price with the latter approach, we recommend identifying one or at most few characteristics common to products or solutions in competition and to measure the cost or use of each of them to consumers. Based on savings transferred, it will be easier to determine a selling price. The idea to test the result of this exercise with focus groups remains a useful approach that will allow the entrepreneur to confirm its pricing strategy. Asselin Bannon Strategic Management Consultant is a firm specialized in the international sales and marketing of innovative applications from R & D. Our uniqueness lies in the ability to facilitate the adaptation of products and solutions into foreign markets and to allow adoption based on the knowledge gained from successful experiences. Asselin Bannon also offers professional training in management and commercialization of innovations.