I first learned the VPC Framework (VPC: Value-Price-Cost) back in 2006 and the simplicity of the framework made an impression on me. I still revisit a few times a year to think about where our company is in the position within the framework and how we are investing our resources.
The concept is quite simple. Let’s start with the definition:
- Value: This is the value your offering is creating and delivering to customers.
- Price: This is the price you charge and customers pay for to acquire or use your offering.
- Cost: This is the cost of creating and delivering your offering to the customer.
The differences between these elements create the benefits:
- The difference between Value and Price is the Customer Benefit
- The difference between Price and Cost is the Company Benefit
The wider the gap between V and P, the greater the benefit for the customer is and vice-versa. Same goes with the company benefit.
There are 3 actions your company can take to increase or decrease the benefit, and finding the right balance is really the key:
- Increasing Value: By developing richer features, launching new products, providing best practices and white papers, customer success and various service programs are all items that increase the value of your offering.
- Increasing/decreasing Price: Based on the position of your product, pricing model changes, increasing/decreasing switching costs, better documentation and guides all impact your pricing.
- Lowering Cost: Optimizing servers, reaching economy of scale, better brand/product awareness leading to lower cost of acquisition, better employer brand leading to easier talent attraction and better retention, all impact your overall costs.
As you can see, various activities can impact different part of your business and benefits change for your customer and/or your company.
You probably know your Costs of the items and their ratios already, so lowering costs may seem like an easier thing to do in the short term. But if the Price remains the same, you are only increasing the benefit of the company, and not the customer.
So to continue to gain competitive advantage over your competitors, you need to invest and innovate to further increase the Value, which gives you more flexibility on where you can place your Price between the Value and Cost.
If you are in an undifferentiated and a mature/commoditized market, it will make sense to gain as much market share as possible to have the bargaining power to lower the Costs, but if you are in a relatively new market with a high-degree of differentiation, you might as well invest as much as possible into increasing Value to further strengthen your position as the market leader, giving you the power to increase the Price if needed. Then not only are you able to increase the customer benefit, but also be able to increase the company benefit at the same time.
This is what happens quite often in high-tech companies, who might have an exponential growth trajectory with a clear market leadership, allowing some healthy gross margin (company benefit) while being able to raise a lot of capital to invest rapidly into drastic increase in Value, leading to greater customer benefit.
So when you are setting up your company goals and OKRs, think about where you are putting your focus and investing your resources into. Are we increasing Value? Changing the Price? Or lowering the Cost?