A value model will change your business
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Most companies sell on value. Unless you are selling a commodity, it is hard to to. Customers buy because of the value you provide.
We sell on value, but many of us struggle to define just what that value is. And there are often gaps between the value position established by marketing, what sales sells and what is actually delivered.
This is inevitable as most companies have only a vague idea of what value they deliver and who they deliver value for. Even worse, value claims are made by sales, but are not communicated to the implementation and customer success teams. As a result it is difficult to execute on the value cycle of create, communicate, deliver, document and then capture value in price.
Companies that struggle with value also struggle to
Sell
Upsell
Win renewals
Innovate
It is hard to execute around the value cycle without a value model. The value model organizes everything from value communication to value documentation.
Connecting the value model to the pricing model price is how one actually executes on value based pricing.
What is a value model?
A value model is a formal representation of the value provided to a customer (or customer segment or persona) relative an alternative.
It has three dimensions: the economic value, the emotional value and the community value. It is not enough to simply list up value drivers and categorize them. A good value model is able to quantify value and connect it to the customer’s ground truth. This means two things:
The value model includes equations and measurement
You cannot build a value model without discussing it and validating it with customers
Value models should be both human readable and machine readable.
Human readable so that they can be used to communicate value and support conversations with everyone involved in value conversations. This ranges from value and pricing experts to product and service owners to sales and marketing to customer success. That is inside the company. Value models are also shared with customers, so that they can validate them and use them to hold vendors to account. Value promises are embodied in value models. Companies are accountable for keeping their value promises.
Machine readable so that it can be integrated with other software applications and used in machine learning and other artificial intelligence applications. The difficult thing with machine learning is not the actual machine learning. There are good solutions for that generally available, we are exploring Keras and Tensorflow, and all of the large cloud infrastructure companies are caught in a Red Queen race on machine learning services. The tough thing is developing the data model that machine learning can work on. This will be a critical area for value and pricing over the next decade.
How is a value model used?
Value models connect business processes across the customer journey. (See The customer journey is your guide to value communication.)
In product and service design, the value model connects features and functions to benefits and from this to value. Having a value model gives product and service designers a way to prioritize development and a way to frame design research.
Strategic marketing uses value models in strategic positioning, while marketing communications builds value drivers into its value messages.
In the sales process, value claims are used to persuade prospects of the impact the solution will have on their business. Value claims are often made by sales. it is important to document these and to pass them on to the people responsible for implementation and customer success.
Customer success plays a critical role in modern business models. It is responsible for making sure that the value promised is delivered and then documented. The critical KPI (Key Performance Indicator) is generally renewals. If you can document that you are providing the value promised the renewal conversation is a lot easier.
Finance is also concerned with the value being delivered to customers. A simple rule of thumb is that for healthy companies Value to Customer is greater than the Lifetime Customer Value.
V2C > LTV
With customer lifetime value displacing revenue multiples as a way to value companies finance is going to want to pay more and more attention to V2C. It is hard to estimate V2C without a value model.
How to develop a value model?
To develop a value model, one needs to begin with a framework. At Ibbaka we use Tom Nagle’s Economic Value Estimation as the foundation for our economic models. This guides the surveys and interviews that are used to uncover and then validate the value drivers.
The same approach is taken with emotional value drivers. Ibbaka uses a modified version of Maslow’s hierarchy of human needs as a framework. With emotional value drivers it is critical to map to buyer and user personas and to understand how these change across the customer journey.
Value models in the Value Pricing Dashboard
Value modeling is complex. Like any complex work, it is made simple with the right tools. Ibbaka is building these tools into a Value Pricing Dashboard that can be used to connect value and pricing across the customer journey.
The dashboard connects your value model to your pricing model.
Provides the tools needed for value communication.
And provides a place to document value at each key customer touchpoint, in the sales process, during implementation, and as part of customer success.
The result
Higher conversion rates
Greater sales velocity
Engaged customers
Higher renewals
