Value Stick Model: The Economics of Competitive Advantage
Helps businesses balance willingness to pay and willingness to sell
Value Stick Model
What is the Value Stick Model
Have you ever wondered why people are willing to pay more for one product over another, even when both seem similar?
Many companies struggle to set the right price, understand customer value, or figure out how much profit they should make.
The Value Stick model helps answer these questions. Developed by Professor Felix Oberholzer-Gee from Harvard Business School, this model focuses on what customers are willing to pay and what suppliers or employees are willing to accept.
Visualize the Value Stick Model
The Value Stick can be visualized in a top-to-bottom view: a customer is willing to pay at the top, the cost to the company at the bottom, and the resulting profit margin as the space between the two.
Willingness to Pay (WTP)
The highest or maximum price a customer is willing to pay for your product or service. If your product is valuable or unique, WTP goes up since it's delighting the customer.
Price
What the customer actually pays. This also defines the firm margin.
Cost
What it costs the company to produce the product or service.
Willingness to Sell (WTS)
The minimum price at which the company is willing to accept.
If working conditions or supplier relationships improve, WTS can go down, it means the company would like to accept a lower price since the overall cost goes down.
How to Use the Value Stick Model
These four parts create three important value zones:
Customer Delight = WTP – Price
- This is the extra value the customer feels they are getting. The bigger this gap, the more satisfied the customer is.
- To enhance WTP, please identify what increases customer willingness to pay, such as improving features, customer services, etc.
Firm Margin = Price – Cost
- This is the company’s profit. A bigger margin means more money for the business.
Supplier or Employee Surplus = Cost – WTS
- This is the value given to the people or suppliers who help make the product. If treated fairly, their surplus grows.
- To lower WTS, analyze your cost structure to find ways to reduce costs.
The goal is to stretch the Value Stick – raise WTP, lower WTS, and grow the total value created. Companies can then decide how to share this value among customers, themselves, and suppliers.
When to Use
- Pricing Strategy: When you are afraid to raise prices. Check your WTP. If customer satisfaction is huge, you likely have room to move price up without losing them.
- Employee Retention: When you cannot afford higher salaries. Look at lowering WTS by improving culture, flexibility, or purpose.
- Supplier Negotiations: To understand if you are squeezing your partners too hard (pushing price below their WTS), which puts them out of business.
Example
Product Design:
Apple raises WTP by offering sleek design and advanced features, which customers value highly. Even though their price is high, many still buy because they feel they get more value.
Employee Experience:
A company can reduce WTS by offering flexible hours, training, or purpose-driven work. This means employees accept lower pay because they gain non-monetary benefits.
Cost Management:
By improving operations or partnering with more efficient suppliers, companies can lower costs. This increases the firm margin without raising prices.
Value Communication:
A marketing team might focus on clearly showing the benefits of a product to increase WTP, making customers more willing to pay a higher price.
Key Takeaway
Price is a zero-sum game between you and the customer.
Real strategy is about "Stretching the Stick." You win by raising the customer's love for the product (WTP) or by making work better for your employees (lowering WTS). If you stretch the ends, price becomes much easier to manage.
FAQ
What should a good Value Stick Model output look like?
A good result is a clear view of where value is created and where it is captured across customers, suppliers, employees, and the company. It should show where leverage exists, not just restate the components.
When is Value Stick Model not the right tool?
It helps show where value is created and captured, but it does not tell you how easy it will be to change those economics in practice. You still need evidence about bargaining power, execution, and market behavior.
Can Value Stick Model help with employee retention?
Value Stick Model can help with employee retention by showing which side of the value equation you are really trying to move: willingness to pay, price, cost, or willingness to sell. That makes the lever clearer before action is taken.