The Value Stick : Strategy Frameworks Top CEOs Use

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1. Core Concept
Imagine a vertical "stick" with two key reference points:

• Willingness to Pay (WTP): The maximum amount a customer is willing to pay.
• Willingness to Supply (WTS): The minimum amount a supplier (or the firm itself, in terms of cost) is willing to accept.

   |<------ Customer Surplus ----->|
   |<-------------- Firm Margin ----------->|
   |<-------------- Supplier Surplus -------------->|
WTP                                        ^
Price                                      ^
Cost                                       ^
WTS                                        v

Each segment on the stick represents "who" gets which share of total value:
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• Customer Surplus: (WTP – Price)
• Firm Margin: (Price – Cost)
• Supplier Surplus: (Cost – WTS)

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2. Breaking Down the Value Surpluses

Total Value Created	WTP – WTS
Customer Surplus	WTP – Price
Firm Margin	Price – Cost
Supplier Surplus	Cost – WTS

Key Insight: All these surpluses add up to the total "pie" of economic value from a transaction.

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3. Moving the Value Stick
A. Increase Willingness to Pay (WTP)
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• Improve product/service quality, brand, or experience.
• Differentiate through design, technology, or marketing.

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QuoteEffect: Raises the top of the stick, potentially expanding both Customer Surplus and Firm Margin.

B. Lower Willingness to Supply (WTS)
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• Negotiate better supplier terms, achieve volume discounts.
• Streamline supply chain or vertically integrate.

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QuoteEffect: Pushes the bottom of the stick down, increasing total value and possibly boosting the firm's margin.

C. Adjust Price
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• Raise Price to capture more margin per sale (risk: losing volume).
• Lower Price to increase demand or customer surplus (risk: slimmer margin).

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D. Manage Cost
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• Improve operational efficiency (lean production, automation).
• Capitalize on economies of scale or process innovation.

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4. Strategic Implications
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• Balancing Surpluses: Some firms maximize customer surplus (discount retailers); others capture high firm margin (luxury brands).
• Competitive Advantage: Shifting WTP up or WTS down more effectively than rivals can create a unique edge.
• Trade-offs: Setting Price close to WTP maximizes profit per unit but can reduce overall volume.
• Industry Dynamics: In commodity markets, WTP is often low; in premium/niche segments, WTP can be very high.

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5. Real-World Example
Consider a coffee shop sourcing specialty beans:

• WTP: A customer might pay up to $5 for a premium latte.
• WTS (Supplier): A coffee farm might need at least $2/lb to break even.
• Firm's Cost: Suppose the shop pays $3/lb for beans; total cost per cup is $2.50.
• Price: The shop charges $5.

QuoteCustomer Surplus = $5 – $5 = $0 
Firm Margin       = $5 – $2.50 = $2.50 
Supplier Surplus  = $3 – $2 = $1 (farm's gain per pound)

By:
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• Increasing WTP (marketing the premium experience),
• Lowering WTS (better supplier terms),
• Optimizing Cost (efficient labor, supplies),
• Adjusting Price (finding the sweet spot),

the coffee shop can expand and recapture more of the overall value.

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6. Synergy with Other Frameworks

• Porter's Five Forces: Manage buyer/supplier power by adjusting surpluses.
• VRIO Framework: Unique resources boost WTP or reduce WTS if they're Valuable/Rare/Inimitable.
• SWOT Analysis: Identify strengths (raising WTP) or weaknesses (excess costs) that affect the Value Stick.
• Blue Ocean Strategy: Create new value curves that drastically shift WTP or slash WTS in untapped market spaces.

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7. Common Pitfalls
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• Overestimating WTP: Setting Price above actual willingness to pay can crash sales.
• Supplier Strain: Forcing down WTS too much can damage supplier relationships or quality.
• Neglecting Perception: Value is partly emotional; brand and reputation heavily affect WTP.
• Market Changes: WTP and WTS can shift due to competition, regulation, or new technology.

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Conclusion
The Value Stick framework offers a clear model for identifying and expanding total economic value in a transaction. By strategically raising WTP, lowering WTS, managing internal Cost, and adjusting Price, firms can capture a larger share of value—or deliberately share that value with customers or suppliers to foster loyalty and partnerships. Combined with other strategic tools, the Value Stick approach ensures long-term competitiveness and profitability.