Value Above Cost: Driving Superior Financial Performance with CVA, the Most Important Metric You've Never Used

347 Pages·2009·2.51 MB·English

by  Donald E. Sexton

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From the Library of Garrick Lee
Value Above Cost
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From the Library of Garrick Lee
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From the Library of Garrick Lee
Value Above Cost
Driving Superior Financial
Performance with CVA®, the Most
Important Metric You’ve Never Used
ptg
Donald E. Sexton, Ph.D.
From the Library of Garrick Lee
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Printed in the United States of America
First Printing April 2009
ISBN-10: 0-13-604332-1
ISBN-13: 978-0-13-604332-4
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Library of Congress Cataloging-in-Publication Data
Sexton, Donald E., 1943-
Value above cost : driving superior financial performance with CVAÆ, the most important
metric you’ve never used / Donald E. Sexton.
p. cm.
Includes index.
ISBN 0-13-604332-1 (hbk. : alk. paper) 1. Marketing—Management. 2. Economic value
added. I. Title.
HF5415.13.S458 2009
658.8—dc22
2008040502
From the Library of Garrick Lee
To all the members of my wonderful family:
Laura, Mitra, Daniel, Jonathan, Ian, Matt, and Nan,
who are always in my thoughts.
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From the Library of Garrick Lee
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From the Library of Garrick Lee
Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . xiii
Acknowledgments . . . . . . . . . . . . . . . . . . . xvi
About the Author . . . . . . . . . . . . . . . . . . . xvii
Chapter 1: Marketing and Financial Performance . . . . 1
Determining Marketing Accountability. . . . . . . . . 5
The Value of a Business . . . . . . . . . . . . . . . . . . . . . 7
Customer Value and Costs . . . . . . . . . . . . . . . . . . . 9
Perceived Value . . . . . . . . . . . . . . . . . . . . . . . . . . 10
A New Definition of Marketing. . . . . . . . . . . . . . 11
CVA®. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ptg
Cost Orientation . . . . . . . . . . . . . . . . . . . . . . . . . 13
Value Orientation . . . . . . . . . . . . . . . . . . . . . . . . . 17
CVA®Orientation . . . . . . . . . . . . . . . . . . . . . . . . . 19
Strategic Themes. . . . . . . . . . . . . . . . . . . . . . . . . . 21
Design and Communication. . . . . . . . . . . . . . . . . 25
CVA®and Economic Development. . . . . . . . . . . 29
Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Chapter 2: How CVA® Affects Financial
Performance . . . . . . . . . . . . . . . . . . . . . . . 33
CVA®and Financial Performance:
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . 33
Perceived Value and Price . . . . . . . . . . . . . . . . . . 35
Demand Curves . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Perceived Value and Revenue . . . . . . . . . . . . . . . 41
Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Revenue and Contribution: An Example . . . . . . 44
Shifting the Demand Curve . . . . . . . . . . . . . . . . . 45
From the Library of Garrick Lee
viii VALUEABOVECOST
Sexton’s Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Sexton’s Revenue Law . . . . . . . . . . . . . . . . . . . . .48
Sexton’s Contribution Law . . . . . . . . . . . . . . . . .50
Employing Sexton’s Contribution Law . . . . . . . . 52
Contribution and Profit, Cash Flow,
Shareholder Value, and Share Price . . . . . . . . . . 56
CVA®and Life Time Customer Value . . . . . . . . . 58
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Appendix: Derivations. . . . . . . . . . . . . . . . . . . . . . 63
Chapter 3: CVA® over Time . . . . . . . . . . . . . . . . . . . . . 65
Levels of Sales Life Cycles . . . . . . . . . . . . . . . . . . 66
The Competitive Life Cycle. . . . . . . . . . . . . . . . . 67
Sales Life Cycle. . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Margin Life Cycle. . . . . . . . . . . . . . . . . . . . . . . . . 69
Unit Cost Life Cycle. . . . . . . . . . . . . . . . . . . . . . . 69
Perceived Value Life Cycle. . . . . . . . . . . . . . . . . . 70
CVA®Life Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . 73 ptg
Financial Performance over Time . . . . . . . . . . . . 76
Brand Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Valuing Brand Equity . . . . . . . . . . . . . . . . . . . . . . 81
Estimating Brand Equity . . . . . . . . . . . . . . . . . . . 83
Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Chapter 4: Perceived Value . . . . . . . . . . . . . . . . . . . . . 89
Expected, Actual, and Perceived
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Marketing Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . 91
Determinants of Perceived Value. . . . . . . . . . . . . 92
Branding and Perceived Value . . . . . . . . . . . . . . . 95
Development of Perceived Value. . . . . . . . . . . . . 98
Stages of Buyer Behavior . . . . . . . . . . . . . . . . . . . 99
Managing Perceived Value . . . . . . . . . . . . . . . . . 104
Measuring Perceived Value . . . . . . . . . . . . . . . . 112
Estimating Demand Curves. . . . . . . . . . . . . . . . 121
Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
From the Library of Garrick Lee
CONTENTS ix
Chapter 5: Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
The Income Statement in Custodial
Format . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Types of Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . 129
The Income Statement in Contribution
Format. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Identifying Costs for CVA® . . . . . . . . . . . . . . . . 134
Employing the Variable Margin Rate. . . . . . . . . 136
Graphing Contribution. . . . . . . . . . . . . . . . . . . . 138
Fixed Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Breakeven Sales Level . . . . . . . . . . . . . . . . . . . . 139
Direct and Indirect Fixed Costs. . . . . . . . . . . . . 144
Shutdown Sales Level. . . . . . . . . . . . . . . . . . . . . 146
Evaluating Contribution. . . . . . . . . . . . . . . . . . . 147
Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Chapter 6: Managing CVA® . . . . . . . . . . . . . . . . . . . . 151
Marketing Strategy Versus Marketing ptg
Tactics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Components of a Marketing Strategy. . . . . . . . . 154
Identifying Possible Target Markets. . . . . . . . . . 156
Evaluating Possible Positions for the
Product or Service. . . . . . . . . . . . . . . . . . . . . . . . 159
Determining Design . . . . . . . . . . . . . . . . . . . . . 167
Selecting Target Segments . . . . . . . . . . . . . . . . . 170
Developing Communications. . . . . . . . . . . . . . . 173
Managing the Brand . . . . . . . . . . . . . . . . . . . . . . 176
Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
Chapter 7: Managing CVA® over Time . . . . . . . . . . . 181
Managing CVA®Through the Market
Life Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
Financial Objectives Throughout the
Competitive Life Cycle. . . . . . . . . . . . . . . . . . . . 185
Managing CVA®Throughout the
Competitive Life Cycle. . . . . . . . . . . . . . . . . . . . 187
Introduction Stage. . . . . . . . . . . . . . . . . . . . . . . . 192
From the Library of Garrick Lee