Archive for the 'Competitive Metrics' Category

Cost of Purchase

Published on February 27, 2010 by Roger Best in Competitive Metrics. 0 Comments

Cost of Purchase vs. Price

While price is very important in any purchase, the total cost of purchase should also be considered in communicating value to customers. Southwest Airlines does both—they recognize and communicate their price and total cost of purchase.

The example below was created based on a sample of airline travelers. It is for educational purposes only and we have omitted the names of competing airlines and referred to them by letter. The ratings in the lower portion of the table were obtained using a rating scale that ranged from zero (no cost) to 10 (extremely high cost). These air traveler ratings were based on their perceptions, which may differ from the actual price and cost features shown. While these ratings are of value, creating a relative performance metric allows for greater strategic insight.

Relative Cost of Purchase Metric

We created the Relative Cost of Purchase above by dividing the rating for each area of cost of purchase by the average performance of competitors. For example, Southwest Airline’s relative ticket price is 72.4. This means it is roughly 28 percent below the average of competitors. Competitor A is 32.7 percent higher than the average competitor with respect to average ticket price.

The overall cost of purchase is computed using the cost of purchase for each cost component and its relative importance. Since Southwest Airlines has no cost associated with Seat and Luggage Fees and has a very competitive ticket price, its overall cost of purchase metric is 50.7. This means it is roughly 50 percent lower than the average index of 100.

To learn more, go to www.marketingmetricshandbook.com, view the  Intro Video, and download a 30-day demo.

Product Performance and Relative Advantage

Published on February 26, 2010 by Roger Best in Competitive Metrics. 0 Comments

Product Ratings

Consumer Reports (CR) is famous for its product performance ratings of various consumer products. They rate individual product attributes on a 5-category scale that ranges from poor to excellent. Overall product ratings are rated from zero to 100. The sixty inkjet printers displayed in the graphic above received overall ranking ranging from 43 to 73, with an average of 61. Prices ranged from $40 to $350 with an average price of $148.

Relative Product Performance Metric

While actual product performance ratings are of value, creating a Relative Product Performance metric allows for a more strategic interpretation of product performance. In the graphic above, the Relative Performance was computed for each of the sixty inkjet printers, by dividing the printer overall CR rating by the overall average. For example, the HP PhotoSmart Premium had a relative performance of 120, indicating a 20 percent higher performance than the average printer.

Relative Product Performance = Performance / Average Performance  x  100
=  73 / 61 x 100
=  120

Profit Impact

The PIMS Database (www.pimsonline.com) has created a large business unit database from which many performance metrics can be assessed with respect to their impact on pre-tax return on investment. Shown above is the relationship between Relative Product Performance and Pre-Tax ROI. One of the premiere findings in the PIMS research is that businesses with above-average levels of relative product performance are more profitable. It is important to note that the real profit impact goes to products with a meaningful advantage in relative product performance.

Measuring & Managing Relative Product Performance

While overall relative product performance is a key performance metric that helps a business understand its relative competitive advantage, we need to break it down into discrete aspects of product performance to manage this metric. In the lower portion of the table below are the HP ratings for four aspects of product performance as measured by Consumer Reports. We also added four HP competitors with prices comparable to the HP PhotoSmart Premium printer. In the upper portion of the table these ratings are shown as relative performance metrics. HP had a CR copy quality rating of 7 and had a relative performance rating of 155.6.

Because performance priorities across different customer segments will vary, we add the relative importance to each area of product performance. For example, the relative importance of Copy Quality is 30 percent, meaning that it accounts for 30 percent of overall performance. When relative importance is applied an overall relative performance of 126 is obtained. If HP were to improve its Copy Quality from a rating of 7 to a rating of 8, they could improve their overall relative performance from 126 (Yellow Dial) to 133 (Blue Dial). This would extend their competitive advantage relative to benchmark competitors and also have the potential to positively impact the company’s Pre-Tax ROI.

To learn more, go to www.marketingmetricshandbook.com, view the  Intro Video, and download a 30-day demo.