Core Concepts: Value Model
Liam Hannaford is the Marketing Associate at Ibbaka. See his Skill Profile on Ibbaka Talent.
Definition of a Value Model
A value model formalizes how a product or solution creates value for a customer or group of customers (a segment) relative to an alternative.
Generally, value models focus on the economic value of the solution, though in some cases emotional and community value drivers are included. You can learn more about value drivers here.
An economic value model is built from value drivers. An economic value driver is an equation that defines one dimension of the value of a solution. It has constants, variables and operators. The constants tend to be specific to segments and the variables are company specific.
The model is a system of equations built from value drivers that estimates how much value a solution will provide to a customer or set of customers (market segment).
Here is an example of a value model on the Ibbaka Valio platform. In this case, there are value drivers for Revenue, Operating Costs (expanded so you can see the equations) and Risk.
How value models are used
Value models are used by all of the business functions concerned with the customer and how value is provided to the customer. At the center of the Value Cycle is Value Understanding. The Value Model formalizes Value Understanding.
The value model connects features and functions to benefits and, from there, to the value delivered by goods and services. The model provides product and service designers with the means to organize design research and prioritize development.
Here are some of the ways value models are used.
Pricing
One cannot do value-based pricing without a value model to underpin it. The value model helps to identify pricing metrics and make sure that price tracks value. In a good pricing design the pricing metric integrates one or more value metric.
Value Metric: The unit of consumption from which a user gets value.
Pricing Metric: The unit of consumption for which a buyer pays.
Marketing
Marketing communications incorporates value drivers into its value messaging, strategic marketing uses value models in its strategic positioning. Value models get transformed into value stories.
Sales
Through the sales process, value claims are used to convince potential customers of the effect the solution will have on their company. As value claims are often asserted by sales, they should be written down and given to those responsible for customer success and implementation.
Customer Success
In modern business models, customer success plays an important and critical role. Many businesses, especially SaaS businesses, put a high priority on customer success nowadays. One wants to make sure that the value promised is actually delivered and then documented. A crucial KPI (Key Performance Indicator) for customer success teams is renewals and net dollar retention. The renewal discussion can be much simpler if one can prove that you are delivering the value promised.
Finance
For financial and revenue teams, delivering value to their customers is another issue that is dealt with. The Value to Customer (V2C) is far greater than the Lifetime Customer Value (L2V) for a healthy business.
How to develop a value model?
You must begin with a framework to develop a value model. At Ibbaka, value models are built on Tom Nagle’s approach to Economic Value Estimation. The value drivers serve as a guide for the surveys, conjoint analysis and interviews used to find and then confirm the value drivers.
When it comes to emotional value drivers, the same approach is taken. It is critical to tie emotional value drivers to Buyer and User Personas and to understand how these vary throughout the customer journey and experience.
Community value drivers (increasing positive externalities and reducing negative externalities) are of growing importance in many markets and should not be ignored.
See also
Value Models in Ibbaka Valio
Ibbaka Valio provides a software platform for the development, management and use of value models. It also implements your packaging, pricing, bundling and discounting so that price and value are connected in quotes and proposals. Value models are transformed into value stories for use by marketing, sales and customer success.
Use of Ibbaka Valio can deliver:
Higher Conversion Rates
Greater Sales Velocity
Engaged Customers
Higher Renewals
More reading for you
Core Concepts for Pricing and Customer Value Management
Value Model (this post)
Coming soon …
Community Value Driver
Connecting Value and Pricing Models
Cross Price Elasticity
Customer Value Journey
Customer Value Management
Economic Value Driver
Interactions of Cross Price Elasticity and Price Elasticity of Demand
Package Design
Pocket Price Waterfall
Price Elasticity of Demand
Pricing Design
Pricing Model
Value Based Market Segmentation
Value Ratio
Value to Customer (V2C)
