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Anyone Can Build a Value Model: Let Me Show You How

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At the PPS Spring Conference in San Francisco Ed Arnold, VP of Products at LeveragePoint, delivered his presentation "Anyone Can Build a Value Model: Let Me Show You How". Designed to help the …

At the PPS Spring Conference in San Francisco Ed Arnold, VP of Products at LeveragePoint, delivered his presentation "Anyone Can Build a Value Model: Let Me Show You How". Designed to help the audience make better strategic decisions for their organization, he discussed:

- Key concepts for building a value model

- How to use value models to make strategic decisions and craft marketing messages

- How to use value models to create customer-facing value propositions to support sales in capturing value

The talk received a very positive response from the attendees. Enjoy the presentation!

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  • 1. WORLD-CLASS TRAINING • NETWORKING • PRICING RESOURCESEd ArnoldVPLeveragePointEd Arnold is a founder of LeveragePoint, the only cloud-based solution for value-basedpricing, and currently leads product development and marketing. Previously, Ed held keymanagement roles in software and management consulting firms such as Communispace,the Monitor Group, and Diamond Technology.He has a solid track record of delivering technology solutions and services to many satisfied clients over the pasttwenty-plus years. He holds a MBA from the Stern School of Business at New York University, as well as BA and MAdegrees from Boston University.
  • 2. Copyright © 2013 by LeveragePoint Innovations Inc.No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means —electronic, mechanical, photocopying, recording, or otherwise — without the permission of LeveragePoint Innovations Inc.This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion.COMPANY CONFIDENTIALAnyone Can Build a Value Model– Let Me Show You HowProfessional Pricing Society Spring ConferenceMay 3, 2013
  • 3. 2Topics• Key concepts and steps for building an economicvalue model• How to use value models to make strategic decisionsand craft marketing messages• How to use value models to create customer-facingvalue propositions to support sales in capturingvalue• Your questions about value modeling
  • 4. 3Comparing Prices is Easy, butWhat About Value?Value: $ ???? $ ???? $ ????
  • 5. 4So What do we Mean by “Value”?Psychological Economic“Psychological value*refers to the many waysthat a product createsinnate satisfaction forthe customer”“Economic value*represents the total costsavings or incomeenhancements thataccrues to the customer”Source: “The Strategy and Tactics of Pricing” 5th Edition
  • 6. 5Why is Value so Important?To create value, you need to model it!PriceLevelPricing PolicyValue CommunicationPrice StructureValue Creation
  • 7. 6Components of a Successful Value StrategySource: Tom Nagle, Price versus Value Management – Know the Difference, Whitepaper, 2012
  • 8. 7What a Value Model Provides• Visual model for thinkingthrough various strategicdecisions:– product development– customer segmentation– competitive positioning– strategic pricing• Provides a way tocommunicate yourdifferential value to channelsand customers
  • 9. 8 8Identifying Differential Economic ValueDevelop anunderstanding of thecustomers businessrequirementsIdentify your areas offunctionality from thecustomer’s perspectiveUnderstand the competitorscapabilitiesCompetitorsCapabilitiesandOfferCustomerBusinessRequirementsYourCapabilitiesandOfferCompetitionDifferential ValueCommodityDifferential ValueEconomic Value is relative and contextual (and dynamic too!)
  • 10. 9Common QuestionsDoes this mean weneed a separate valuemodel for EVERYcustomer, offering, andcompetitor? Don’t you need tobe a PRICINGEXPERT to buildvalue models?ANYBODY can builda value model!!
  • 11. 10Value Model Case StudyYou are a Product Managerfor the AirVentis Corporationa leading heating, ventilation,and air conditioning (HVAC)providerYou manage the System BTR –a very innovative HVAC systemBTR is designed to serves twocustomer segments:1) High-End Office Buildings2) Specialty Manufacturing
  • 12. 11AirVentis BTR OfferingFeature DescriptionAdvanced Multi-ZoneCapabilityAllows for maximum flexibility in defining zones: either byfloor, section or even individual offices.High-EfficiencyFan MotorsThe fans are the most energy efficient fans available and useup to 40% less electricity than conventional fans.Green-BuilderCertificationAirventis Corporation is one of the first HVAC companies to becertified as a “green” supplier of building systems.Built-inHEPA Air FiltrationCaptures 98.55% of airborne dust particles that complies withfederal and state clean-room manufacturing regulationsSmall FootprintThe patented engineering design allows the system to use 33%less space than comparable HVAC systems.24-hourCall CenterA 24x7/365 telephone support hotline to answer technicalquestions about maintenance and repair.
  • 13. 12Customer/Competitive BackgroundNew sales opportunity:A defense contractor is replacingan HVAC system in one of itsfacilities. It was originally installedby competitor NTG Company andnearing the end of its useful life.NTG has offered to do an overhauland upgrade for $195,000.This customer has requested a bidfrom AirVentis for System BTR.Reducing operating costs is a keybusiness objectiveKey background information:• Large, sprawling, single-storybuildings with open floor plan.Secure facility with restrictedaccess.• Requires “clean area” requiringextremely low dust particlecounts.• Nearly continuous operation: 6days a week, 16 hours/day• Has in-house maintenancedepartment capable of servicingall major building systems.
  • 14. 13AirVentis BTR OfferingIdentify Top 3 FeaturesFeature Defense ContractorOpportunityTypical High-End OfficeBuilding OwnerAdvanced Multi-Zone CapabilityHigh-EfficiencyFan MotorsGreen-BuilderCertificationBuilt-inHEPA Air FiltrationSmall Footprint24-hourCall Center
  • 15. 14AirVentis BTR OfferingIdentify Top 3 Features (suggested solution)Feature Defense ContractorOpportunityTypical High-End OfficeBuilding OwnerAdvanced Multi-Zone CapabilityHigh-EfficiencyFan MotorsGreen-BuilderCertificationBuilt-inHEPA Air FiltrationSmall Footprint24-hourCall Center
  • 16. 15 15Feature-Benefit-Value Driver MappingProduct Focus“What do we offer?”Customer Focus“Why should thecustomer care?”Economic Focus“How much is that worth?”Features$ ValueBenefitCost RevenueThe process for hypothesizing economic value
  • 17. 16Feature-Benefit-Value Driver Mapping ExampleFEATURE 35 Miles per Gallon of GasBENEFITS Spend lessmoney on gasTake less trips tothe gas stationLower my carbonfootprintPOSSIBLE VALUEDRIVERSSavings in gasexpenditures(per year)Increase inamount of timeto spent earningincomeAdditionalbusiness growthbecause of valueof “being green”More Tangible Less Tangible
  • 18. 17AirVentis BTR Offering for Defense Contractor OpportunityFeatures – Benefit – Economic Value MappingFeature Defense ContractorBenefitPossible EconomicImpactsHigh-EfficiencyFan MotorsBuilt-inHEPA Air Filtration24-hourCall Center
  • 19. 18AirVentis BTR Offering for Defense Contractor OpportunityFeatures – Benefit – Economic Value MappingFeature Defense ContractorBenefitsPossible EconomicImpactsHigh-EfficiencyFan Motors• Uses less electricity• Less noise in workplaceBuilt-inHEPA Air Filtration• Reduces or eliminates need forother filtering equipment tomeet “clean room” requirements• Reduces maintenance and repairtime for filtering equipment24-hourCall Center• Reduces in-house maintenancedepartment costs (time spenttroubleshooting/fixing HVACproblems• Reduces risk of productiondowntime (caused by HVACsystem failure)
  • 20. 19AirVentis BTR Offering for Defense Contractor OpportunityFeatures – Benefit – Economic Value MappingFeature Defense ContractorBenefitsPossible EconomicImpactsHigh-EfficiencyFan Motors• Uses less electricity• Less noise in workplace• Reduce HVC-related electricityexpenseBuilt-inHEPA Air Filtration• Reduces or eliminates need forother filtering equipment tomeet “clean room” requirements• Reduces maintenance and repairtime for filtering equipment• Reduce maintenance expense offiltering equipment• Reduce compliance costs (finesfor not meeting air qualitystandards)24-hourCall Center• Reduces in-house maintenancedepartment costs (time spenttroubleshooting/fixing HVACproblems• Reduces risk of productiondowntime (caused by HVACsystem failure)• Reduces HVAC maintenance cost• Reduces emergency repair costs• Reduces production downtimecosts
  • 21. 20What is a Value Driver …Name/ DescriptionFormula/LogicData/SourceReduce Warehouse Operating CostA) Warehouse Workers Rates*B)Warehousing Hours *C) PercentImprovement= the reduction inwarehouse labor costs($50 per hour)*(24 hours aday)*(10% daily improvement)=$120 per day reduction inwarehouse costsOur superior solution will allowyou to reduce the amount of timeworkers spend in the warehouseMessageQuantifyEconomically HowWe Are Better Thanthe Competition...elements ...example ...goal
  • 22. 21Building a Value DriverEconomic Impact Variables/Formula/Logic QuantificationReduce HVAC-related ElectricityExpensea. Estimated number of kilowatts usedper year with NTG overhaul (peryear)b. Percent reduction in electricity useby BTRc. Cost per kilowattd. Number of years (evaluation period)a. 225,000b. 35%c. $0.115d. 5A value driver formula essentially has two parts:1) the customer economic metric your solution impacts (cost, revenue)2) the degree of impact your solution provides.A value driver formula may in fact have several variables, but they are eitherbreak-outs of parts 1 and 2, or a conversion into another metric.a * b * c* d = Economic Value225,000 * .35 * 0.115 * 5 = $45, 281 per HVAC System
  • 23. 22Building a Value Driver (again)Economic Impact Variables/Formula/Logic QuantificationReduce ProductionDowntime Costsa. Lost Productivity Costi. Unplanned downtime hoursii. Downtime cost per hourb. Number of yearsc. Reduction of downtime costsa. $166,250i. 17.5ii. $9,500b. 5c. 50%Less tangible value drivers often have more significant impact than simplecost-reduction value drivers.Exposing the logic is more important than accuracy of numbers. Ultimately itis the customer who decides whether it is accurate or not.a or (i* ii) * b * c = Economic Value(17.5 * 9,500) * 5* 0.5 = $415,625 per HVAC System
  • 24. 23Unit of MeasureCustomer-CentricCustomer KPIProduct-CentricPrice MetricPer unit $ / SQ FT $ / RollAggregate $ Total Project $ Total ContractUse aCommonUnit ofMeasure toQuantifyValue
  • 25. 24The Finished ProductThe value model below shows that AirVentis BTR offer provides significanteconomic value versus NTG overhaul for this defense manufacturing customer
  • 26. 25Using Value Models for Strategic DecisionsUse Case Question Next StepsPricing StrategyDecision• How much of the differentiationvalue can we capture in price?• How much should we trade-offprice for volume?• How should we “tier” offers?• Customer Sensitivity Analysis• Price/Volume Break-EvenAnalysis• Price FencingProductDevelopmentDecision• Can we reasonably expect ROIon our innovation?• Are we targeting the rightcustomer segments?• Margin Analysis• Price/Volume Break-EvenAnalysis• Customer ResearchMarketingCommunicationStrategy• What key value messagesshould we emphasize to our keysegments?• Who are the key functionalstakeholders?• Value Messaging Development• Stakeholder AnalysisValue-BasedSelling Execution• What 2-3 things do we dobetter than the competitionand what’s that worth to thecustomer?• Customer Validation Interviews• Provide Value Propositions• Deploy to sales channels
  • 27. 26Examples of Customer Communication
  • 28. 27Getting Started on Your Value Model• Identify all the components of your product offer.• Decide which customer segment you wish to model value. (themore specific the customer profile, the easier it is to valuemodel)• Determine who is your customers next best competitivealternative to your offer.• Identify which features of your offer provide a differentiatedcompetitive advantage for your customer.• Hypothesize tangible customer benefits of thesedifferentiators and possible economic impacts (i.e., reducedcosts, increase revenue)
  • 29. 28Tips for Value Modeling• More specific the use case, the easier• Value Drivers:– Ask questions until you can visualize it– Logic is more important than the quantification: “don’t know” versus “Iknow you’re wrong”– Don’t worry about data precision: Better to be generally correct thanprecisely wrong– Remember, just about anything can be quantified, the issue is whetherit is either significant or practical to measure• Unit of measure – use customer KPI first, then convert intopricing metric• Iterate in small doses with frequent “test” with other teammembers. Expertise comes after your 5th value model
  • 30. 29Thank You! For more information…Leveragepoint.com35 Medford Street, Suite 301Somerville, MA 02143Ed Arnoldearnold@leveragepoint.com617.945.9674