Introduction to the value chain
The objective of this post is for you to get acquainted with what a value chain is, how we can price each of the steps of the value chain, and how this is a tool you should have in your toolbox for negotiations.
What is a Value Chain?
We will begin by introducing the definition of the value chain, the value chain. It’s the series of sequential actions that are necessary for the actors in the distribution model to bring the products from the warehouse of the manufacturing plant to the aisle on a shelf so that consumers can buy them.
The first step is for us to describe a simple value chain. Because we are primarily interested in export business, we will consider a value chain made from producer, importer, distributor, or retailer.
And, of course, at the end of it, it’s the consumer. Each one of the players does something with the product. It gets it closer to the consumer. And by doing so, they charge a price on the activities and the products they are purchasing for a fee, the build-up of Pricing and Value in their ability to generate and take for their part of this value. It’s best analyzed, but when we call upon a price structure, the price structure instead, it’s a framework that allows us to understand which actors of the value chain are generating value and how much of the value they are retaining for themselves. This is a vital and strategic tool in negotiations with customers that allow us to benchmark competitors and understand how far we can go in pricing our customers by looking at the ramifications of our decisions upstream into the shelf price.
The price structure
There are five main benefits to a price structure. First, it allows the producer’s point of view to understand the final consumer price and, therefore, the positioning of the consumer. Vice versa, it will enable us to target a price if we know that there are products in the market we should be tagged on and therefore backtrack and define an EXW or FOB price from the manufacturer’s point of view. The second benefit is the ability to understand the cost of distribution. In other terms, how much does it cost, and how much value do other players in the value chain accrue because we’re not vertically integrated, and we have to rely on third-party companies to bring the product to the consumers?
The third that’s benefit relates to the ability to analyze the price structure, our billing as a consequence, and our product or our brand to these third parties so that we understand whether we should pay them a margin big enough or if they are marginality sufficient depending on the type of effort that will require this player in this specific market.
The fourth benefit of the value chain is the ability to manage profit and loss by knowing our consumer price and, therefore, our expert price. We can understand whether our business is profitable at a certain price level (and how marginally it is for our P&L).
It’s a what-if scenario model that allows distribution negotiation with wholesalers, importers, or retailers to go where we lend in terms of consumer prices and what kind of margins are acceptable or not to each one of the players. Well, we will be doing now it’s to use a simplified example of the price structure so that we can see how it works and how you can use it.
Our Price Stricture model
As anticipated, our Excel file consists of two separate in-panel approaches. The first one we are looking at is the price structure from the producer to the market. So from our own, the EXW or FOB price towards the values players will distribute, buy and sell the products in the market and deliver them to the consumers. You can download the file here.
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Value chain analysis is a helpful tool for working out how you can create the most significant possible value.
Value chain analysis is a helpful tool for working out how you can create the most significant possible value for your customers, the customers of their customers, and your company. It helps you to benchmark that with your competitors.
It’s also a good way of understanding what drives these different parts of your business and allows you to adjust or change them if necessary.
In business, we often talk about “value-added” – in other words, the added value that your company brings to its products or services to differentiate itself from its competitors. One way to think about this is through a value chain analysis, which allows you to identify the parts of your business that add the most value for customers.
We can do this individually if you want to know if a particular channel is valuable for your business and whether it adds value to your route to market.
Value chain analysis is a powerful tool that can help any business to improve its operations and analyze its domestic and international commercial efforts. It allows you to measure which actors in the chain create and grab the most value, assessing the overall “distribution costs.” Furthermore, when viewed through the lens of a price structure – it’s a helpful framework for negotiating with agents, distributors, and partners.