Quantifying value: Working Through the Math

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A common complaint against value-based strategy is that it's too hard for the average business person to quantify value. That it's a task best left to an expert with a complex spreadsheet. We could …

A common complaint against value-based strategy is that it's too hard for the average business person to quantify value. That it's a task best left to an expert with a complex spreadsheet. We could not disagree more. LeveragePoint has worked with hundreds of cross-functional managers to successfully apply the steps of economic value modeling.

In this presentation, we are happy to share our expertise for tackling common value estimation challenges such as estimating intangible or "soft" value (such as risk and brand recognition), justifying the value of a bundled offer, plus much more.

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  • 1. Monthly Webinar Series – December 12, 2012 Quantifying Value: Working Through the Math Copyright © 2012 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 CONFIDENTIAL
  • 2. Sponsored by LeveragePoint the Software Solution for Value-based Pricing2
  • 3. Today’s PresentersQuantifying Value: Working Through the Math Ed Arnold is Vice President of Product Management at LeveragePoint. Previously, he held senior positions at Communispace, Diamond Management & Technology Consultants, and OmniTech Consulting Group. He directs product design and development and drives the go-to-market strategy for LeveragePoint. Mr. Arnold holds an MBA in Marketing from New York University and MA and BA degrees in Political Science from Boston University. Roberto Rivera is Director of Professional Services at LeveragePoint. Previously, he was a pricing consultant at the Strategic Pricing Group and Zilliant. At LeveragePoint, he helps our customers understand and capture the value of their products and services. Mr. Rivera has an MBA and Economics degrees from Clark University, where he guest lectures future marketing professionals on the practical application of pricing strategies and tactics.3
  • 4. Agenda • Why Quantify Value? • Scenario: Intangible Value • Scenario: Bundled Offers • Q&A4
  • 5. Why Quantify Value? Shifting the Focus from Product to Customer Economic Impacts Product Focus Features “What do we offer?” Application Focus Benefit “Why should the customer care?” $ Value Customer Focus “What is that worth?” Cost Revenue5
  • 6. Polling question • Which of these challenges have you experienced when quantifying value? [Select all that apply] – How to quantify “intangible” value – How to quantify the value of a bundled solution – How to compare value versus an in-house (free) alternative – How to estimate the value of a new product or innovation – How to defend value of a mature, commoditized product – OTHER (please specify in chat window)6
  • 7. Quantifying Intangible Value7
  • 8. Insights for Quantifying Intangible Value • It’s important: because the “intangibles” may comprise a significant amount of your value of your offer. • It’s not binary, i.e., “Hard” versus “Soft” value: Actually it’s a continuum ranging from easy-to-measure to very-expensive to measure. • It’s not impossible: often broad customer benefit statements can be broken down into very tangible customer benefits8
  • 9. Breaking Down a Broad Customer Benefit What does your We have a brand mean to a strong brand! typical customer? (why do they buy from you?)9
  • 10. Breaking Down a Broad Customer Benefit It means we have the most reliable product Why is that in the industry. important to the customer?10
  • 11. Breaking Down a Broad Customer Benefit Because unplanned downtime is a How does does How do that How oftenyou it big issue for impact with your the cost happen the measure them. customer’s cost of unplanned competitor? of operation? downtime?11
  • 12. Defining the Economic Logic Our solution Reduces cost of Hourly rate X Hours of downtime per year X reduces your non-productive Number of workers X % unplanned labor Reduction downtime Average cost per service Reduces cost of call X Number of calls emergency per year X % Reduction repairs Reduces amount Quantity of production lost X Average per unit of potential lost margin X % Reduction sales12
  • 13. Customer Examples13
  • 14. Customer Examples14
  • 15. Another Example We provide How does this superior industry benefit a typical expertise! customer? (why should the customer care?)15
  • 16. Another Example of Defining the Economic Logic Our expertise Increases Incremental volume X Average margin per unit improves production your output efficiency and Average cost per service Reduces customer customer service call X Number of calls per year X % Reduction service issues Reduces Average churn rate X Value of customer per incidence of period X % Reduction customer churn16
  • 17. Customer Example17
  • 18. Quantifying Bundled Offers18
  • 19. Insights for Bundling • It’s natural for customers to want a discount for bundled offers. This effect is known as “Total Expenditure price sensitivity”, i.e., the more I buy, the bigger the volume discount I deserve. • It’s important to understand the distinction between cost efficiencies of volume versus the value of an integrated solution, i.e., 1+1=3. • It’s about providing customers with viable and fair trade-offs of products and services, e.g., not volume discount, but free delivery with certain level order. • It’s useful to look at bundling best practices in other industries, including consumer. Examples of good bundlers are for software, cable TV, new car packages.19
  • 20. Tiered Offers Software Cable TV Automotive Pro Version Xfinity Triple Play $649.99 $99/mo With spoiler, bumper protector, body side moldings $18,167Personal Xfinity TVVersion $74.99 $39/mo Standard Corolla $17,025Copyright © 2012 Value Management Advisors, Inc. Confidential 20
  • 21. Customer Example – A Tale of 2 Value Models21
  • 22. How to Bundle for large OEM customer? Specialty Catalyst – 1 Year Volume Commodity Catalyst – 1 Year Volume 1 + 122
  • 23. How to Bundle for large OEM customer? Bundled 3 Year Contract23 1+1= 3
  • 24. How to Bundle for large OEM customer? Multi-Year View24
  • 25. Conclusion25
  • 26. Our Next Webinar – January 2013 • Stephan Liozu • Value Modeling in the Innovation Process • January 23, 2013 – Noon EDT26
  • 27. Thanks for Watching! sales@leveragepoint.com www.leveragepoint.com (617) 252-287627