Value stick

What is the value stick?

The value stick is a model of value running from customers' willingness to pay down to suppliers' willingness to sell, where strategy widens the gap and decides who captures it. Price and cost sit in between. The firm keeps price minus cost. Customers keep the difference between their willingness to pay and the price, and suppliers and employees keep the difference between what they are paid and the least they would accept. It is commonly traced to Brandenburger and Stuart's 1996 paper on value-based strategy.

Why it matters to a revenue leader

The stick gives a revenue leader a clearer way to think about discounting. A discount moves value from the firm to the customer without making the stick any longer. Raising willingness to pay, through faster response or proof of compliance, lengthens the stick, so price can rise while the customer still gains. Felix Oberholzer-Gee of Harvard Business School applies this logic in a 2021 Harvard Business Review article, judging strategic moves by whether they raise what customers will pay or lower what employees and suppliers need to receive.

Customers of a fire alarm monitoring company would pay up to $120 a month, it charges $90, and its cost to serve is $60. A discount to $80 would hand $10 of the firm's margin to the customer. Instead, a compliance reporting portal that costs $2 a month to run lifts willingness to pay to $140, and the company prices at $100. Customer surplus rises from $30 to $40, and the firm's margin rises from $30 to $38.