Core Concepts: Value Driver
Liam Hannaford is the Content Marketing Associate at Ibbaka. See his Skill Profile on Ibbaka Talent.
Definition of a Value Driver
A ‘value driver’ describes the impact of a product or service, or a set of functionality, on a customer’s business. There are three flavors of value driver: economic, emotional and community.
The variables in the value driver determine the value metric and are used to define pricing metrics and to fence different offers and packages.
Economic Value Drivers
A value driver is an equation formalizing the economic impact of a product or service, or a set of functionality, on a customer’s business.
It is the variables in the economic value driver that are often the best candidates for pricing metrics, and that need to be tracked in order to understand value to customer (V2C).
In most cases, economic value drivers are defined by the impact of the value driver on the customer’s profit and loss statement (in cases where the balance sheet determines enterprise value one can extend value driver analysis to the impact on the balance sheet, see Value drivers can impact your customer’s balance sheet.)
There are six types of economic value driver:
Revenue impact - Does the functionality help an organization increase its revenue, and if so how?
Operating cost reduction - Can costs be reduced? If so, by how much and under what circumstances?
Operating capital reduction - Can the company grow with a smaller amount of operating capital?
Capital investment reduction - Can the company grow while reducing or deferring capital investments?
Risk reduction - Can risk be reduced or better managed? Are hedging and mitigation strategies available?
Option generation - Can options for new business opportunities be generated and kept open? Options have an economic value.
Emotional Value Driver
Emotional value is important to B2B. It is very difficult to close a sale or sustain engagement without an emotional connection. Emotional value drivers can be organized using Maslow’s hierarchy of human needs. The higher up in the hierarchy a solution works the greater the pricing power.
A solution that helps leaders achieve their vision has a more compelling value proposition than one that simply covers off basic (and often commoditized) functions.
Community value drivers
Over the past few years community value drivers have become more and more important for many organizations. These are often collected under the ESG function (Environmental Social and Governance).
Governments and non profits are of course concerned with this. But so are many companies that are concerned about the larger impact of their activities.
In some cases, the community value drivers map back to economic value drivers (risk reduction) and emotional value drivers (community, self esteem, self actualization). Value drivers work together as a system.
Technically, community value drivers are ‘externalities.’ An externality is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either consumer or producer market transactions.
That is too technical for most of us though. One popular way to frame community value drivers is through the United Nation’s Sustainable Development Goals (SDGs). Many companies today have an explicit management goal of supporting these SDGs and they are used as a filter by some ‘ethical’ investors.
More reading for you
Core Concepts for Pricing and Customer Value Management
Value Driver (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)