Core Concepts: Value Metric
Rashaqa Rahman is a Principal Consultant at Ibbaka. See her Skill Profile on Ibbaka Talent.
Definition: Value Metric
A value metric is the unit of consumption by which a customer customer derives value. An example of a value metric is kilometres travelled per litre when purchasing fuel.
Pricing should track the value metric
For pricing to be effective, it should track the value metric. The value metric is the unit by which the product or service offering is consumed that best reflects how the customer gets value. Understanding how a product or service creates differentiated value for the customer is the foundation to value-based pricing. Prices should align with the value the customer receives, thus ensuring the seller is maximizing returns from the customer segments that derive the most value from the offer.
A good example of this is Roll Royce’s Power by the Hour pricing. In this example, Rolls Royce changed their pricing model in 1962 to allow airlines to lease their jet engines and pay by only the number of hours the engine was in operation, rather than having to buy the engines outright. For an airlines, the engine is revenue generating only during the hours that it is in operation. So the value metric is hours of operation for the engines. By aligning their pricing to the number of hours the engine was in operation, Rolls Royce created a very successful pricing model that transformed the industry.
A few easy steps to get you started on connecting your pricing to value
Start by understanding how different groups of customers (customer segments) derive value from your product or service, relative to the alternative
Segment your market by finding groups of customers that get value in the same way
Identify the value metric that best tracks how customers get value (customers in the same segment typically will have the same value metric)
Find a pricing metric (unit by which the customer pays) that tracks the value metric
To go deeper see How to choose a pricing metric.
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