Value stick

Definition

The value stick is a diagram that shows how the value a company creates is shared among customers, the company, employees and suppliers. It was made widely known by Felix Oberholzer-Gee, author of Better, Simpler Strategy and professor of business strategy at Harvard Business School. It rests on two well-known ideas: willingness to pay (WTP) and willingness to sell (WTS).

WTP and WTS

Willingness to pay (WTP) is the most a customer is prepared to pay for a product or service. Willingness to sell (WTS) is the lowest price at which a supplier, or an employee, is prepared to offer their goods or their work. The two ideas explain how prices form and how value is shared among the people involved.

The value stick draws these quantities on a single vertical line. The distance between WTP and WTS is the total value created. Price and cost divide it into three parts: WTP minus price is the customer’s gain, price minus cost is the company’s margin, and cost minus WTS is the gain of suppliers and employees.

The value stick and business strategy

In business strategy, the value stick helps you see where a company can improve its competitive position, and how value is created and shared across an industry. A company can raise what customers are willing to pay, or lower what suppliers and employees need in order to work with it. Reading the stick for each group helps the people who run a company decide where to act.