The uses of value models
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talio.
Ibbaka is built on value modeling. At the heart of our approach is the use of value models to understand and connect key business processes, from product and pricing, through presales and sales, to customer success. This is how we have structured the Ibbaka Platform.
Let’s look a bit deeper. We begin by answering ‘what is a value model?’
What is a value model?
A value model is a way to estimate the economic value that a solution provides to a customer. It is the impact that a solution has on a customer’s profit and loss statement and its balance sheet. Ibbaka uses Economic Value Estimation (EVE) as the base for our models. This approach comes from Tom Nagle and his collaborators and was introduced in his classic text The Strategy and Tactics of Pricing.
One creates a base value model and then instantiates a version for each customer (with possible intermediate steps in which there are versions of the value model for each use case and market segment).
Value models are built up out of value drivers. A value driver consists of a short written statement (normally one or two sentences) with an equation used to estimate the economic impact of that value driver on the target variable (revenues, costs, capex, operating capital, risk, options). If there is no equation you do not have a real value driver, just a value statement or value claim.
Some examples of value drivers
The following three value drivers are all from the same value model. The value model is for a generic contract management system.
Revenue Value Driver
Cost Value Driver
Risk Value Driver
Definition of a value model
Putting the pieces together …
“A value model is a system of equations, each equation representing one value driver, and the value drivers being organized into six types of value driver and two types of negative value driver.”
It is worth underlining that this is a system, with multiple inputs controlling the variables, and in many cases the inputs used in more than one value driver. The value driver is a system interacting with other systems, among them the pricing model and the cost model.
The Value Model Organizes the Flow of Value Across the Business
Ibbaka has built its platform on value models because they connect many key business functions.
There is a natural flow from product development, through product marketing, to sales, then implementation and delivery, and finally customer success. These define the customer journey. Many companies struggle to connect these different processes as they lack a shared language to talk to each other. Value provides that common language.
From the value model one can derive the pricing model (with the cost model establishing a floor price). The value model is also used to inform the value story (for more on the different flavors of value story see Value stories are the key to value based pricing success).
The value model connects the progression from Value Creation (product development) to Value Communication (product marketing), to Value Selling (Sales), to Value Delivery (Implementation, Delivery, and Professional Services) to Value Documentation (Customer Success). With this much data at play, one also needs to support Value Analysis, which answers questions like
How much value is being created?
Who is it being created for?
What are the trends in value delivery?
Which value drivers contribute the most value for which customers or segments?
Scott Page’s REDCAPE approach to model use
In his compelling book The Model Thinker: What You Need to Know to Make Data Work for You Scott Page introduced the REDCAPE approach to model use. Let’s see how REDCAPE applies to value models.
Reason
Application: Use EVE models to reason about the economic value a product provides compared to alternatives. By identifying value drivers such as increased revenue or reduced costs, businesses can logically deduce the overall value proposition.
Example: A software company uses an EVE model to reason that their product reduces operational costs by automating manual tasks, thus providing a clear economic benefit over competitors.
Explain
Application: EVE models can explain why a product is valuable by quantifying its benefits in economic terms. This helps in making the value proposition clear to stakeholders.
Example: A chemical company uses an EVE model to explain to a steel mini-mill how a new additive will reduce labor costs and scrap rates, thus justifying its higher price.
Design
Application: Use the insights from EVE models to design products and services that maximize value for customers. This involves focusing on the most impactful value drivers identified.
Example: A tech startup designs a new feature for their app based on an EVE analysis showing that this feature significantly increases customer retention and lifetime value.
Communicate
Application: EVE models provide a structured way to communicate the value of a product to customers and internal teams. This can be done through visual models and detailed value stories.
Example: A marketing team uses EVE models to create presentations that clearly show potential customers the economic benefits of their product, such as cost savings and increased revenue.
Act
Application: Use the actionable insights from EVE models to make informed business decisions, such as pricing strategies or market entry.
Example: A company decides to enter a new market after an EVE analysis shows that their product offers significant cost savings compared to local alternatives, making it highly competitive.
Predict
Application: EVE models can help predict the financial impact of a product on a customer's business, aiding in sales forecasting and financial planning.
Example: A sales team uses EVE models to predict the potential increase in revenue for a customer using their product, helping to set realistic sales targets and strategies.
Explore
Application: Use EVE models to explore different scenarios and their potential impacts on value. This can involve changing variables in the model to see how different conditions affect the value proposition.
Example: A business explores how changes in market conditions, such as inflation or interest rates, might impact the value drivers of their product. This helps in adjusting their strategy accordingly
Value models have the potential to reframe how we think about business. Buyers are more and more concerned with value, the value imperative. Think of the value model as your GPS for delivering value and capturing your fair share in price.