value-stick

---
name: value-stick
description: Oberholzer-Gee's Value Stick — 4-layer model (Customer Delight, Firm Margin, Employee Satisfaction, Supplier Surplus), 3 diagnostic patterns (stick too short, delight giveaway, cost squeeze), "too expensive" reframe (WTP vs perception), WTS as strategic lever, complement profit pool analysis (WTP engine vs profit pool per tier). Use when pricing decisions arise, customers say "too expensive," or margin analysis is needed.
type: skill
---

# Value Stick Analysis

## When to Apply
- Pricing decisions or reviews
- Customer says "too expensive"
- Margin analysis or improvement needed
- Multi-tier or freemium pricing strategy
- Strategy Kernel diagnosis involving revenue or pricing

## Core Framework

### 4-Layer Model

```
WTP (Willingness To Pay) ----------- top of stick
  |
  |  Customer Delight = WTP - Price
  |  (surplus given to customers)
  |
Price ---------------------------------
  |
  |  Firm Margin = Price - Cost
  |  (what the company keeps)
  |
Cost ----------------------------------
  |
  |  Employee/Supplier Satisfaction = Cost - WTS
  |  (surplus given to workers/suppliers)
  |
WTS (Willingness To Sell) ----------- bottom of stick
```

All strategy reduces to this single bar. Everything — pricing, compensation, supplier negotiation — is how the bar is sliced.

### Value Stick Diagnostic

When revenue, pricing, or margin issues surface, diagnose:

```
WTP (estimated from conversations + alternatives):  $200/mo
Price (actual):                                      $49/mo
Cost (COGS + SGA per customer):                     $30/mo
WTS (min suppliers/employees accept):               $20/mo

Customer Delight: $200 - $49 = $151  (giving away 76% of value)
Firm Margin:      $49 - $30  = $19   (capturing only 11%)
Supplier Surplus:  $30 - $20 = $10
```

### 3 Diagnostic Patterns

| Pattern | Diagnosis | Response |
|---|---|---|
| **WTP too low** (stick too short) | Customers don't value product enough | "Not a pricing problem. Improve the product to raise WTP." |
| **WTP high, price too low** (delight giveaway) | Value capture failure | "Raise price or add premium tier. You've earned the right to charge more." |
| **Cost too high** (margin squeezed) | Operational problem | "Lower WTS through non-cash value (culture, equity, mission) or reduce COGS." |

### "Too Expensive" Reframe

When customers say "too expensive," do NOT default to "lower the price."

First ask: **Is WTP genuinely below the price (product problem), or is the customer anchored to a lower reference point (perception problem)?**

| Root Cause | Intervention |
|---|---|
| WTP < Price (product problem) | Improve product to raise WTP. Price is correct; value delivery is insufficient. |
| WTP > Price but anchored low (perception) | Reframe value communication. Show TCO, ROI, or outcome-based comparison. |
| WTP ~ Price (tight margin) | Segment: some customers have higher WTP. Tier pricing to capture it. |

### WTS as Strategic Lever

Lowering WTS is NOT cost-cutting. It is making the relationship more valuable so partners accept less cash.

```
Apple pays malls ~2% of revenue vs industry ~15%
WHY: Apple stores drive ~10% more foot traffic.
The non-cash value (foot traffic) lowers the mall's WTS.
```

Agent advises: "What non-cash value do you create for suppliers/employees that lowers their minimum acceptable price?"

Examples: reputation, learning, network access, mission alignment, equity.

### Complement Profit Pool Analysis

For multi-product, multi-tier, or freemium models, map which product is the WTP engine and which is the profit pool:

```
Free tier:
  Role: WTP ENGINE (not profit source)
  Purpose: Drive adoption, create lock-in, generate data
  Key metric: "How many free users reach the moment they NEED Pro?"

Pro plan:
  Role: PROFIT POOL (margin capture)
  Purpose: Capture value from users who've experienced free tier
  Key metric: Conversion rate x ARPU
```

**Rule:** "Don't optimize free tier for revenue. Optimize it for maximizing WTP for Pro. Free is not a cost center — it's your best sales tool."

Applied to 3-option choice proposals: consider which tier should absorb cost (WTP driver) and which captures margin (profit pool).

## Decision Rules

1. **Diagnose before prescribing** — determine which of 3 patterns before recommending action
2. **"Too expensive" is ambiguous** — always distinguish WTP problem from perception problem
3. **Non-cash value lowers WTS** — cost-cutting is not the only lever
4. **Free tier serves Pro** — WTP engine metrics, not revenue metrics
5. **Stick length matters most** — a short stick can't be sliced profitably no matter what
6. **Segment by WTP** — different customers have different WTP; tier pricing captures this

## Anti-Patterns to Detect

| Anti-Pattern | Signal | Response |
|---|---|---|
| Reflexive discounting | "Customer said too expensive, let's lower price" | "First: is WTP below price, or is perception anchored low?" |
| Free tier revenue pressure | Trying to monetize free tier | "Free tier is the WTP engine, not the profit pool." |
| Short stick, wrong diagnosis | Pricing pressure with low WTP | "This isn't a pricing problem. Product needs to deliver more value." |
| Cost-cutting without WTS | Cutting salaries/quality to improve margin | "Lower WTS through non-cash value instead of cash reduction." |
| Uniform pricing | Same price for all customer segments | "Different segments have different WTP. Tier pricing captures value." |
| Ignoring complements | Pricing product in isolation | "Map the profit pool. Which product drives adoption? Which captures margin?" |