Value drivers can impact your customer's balance sheet
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
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Pricing in a time of uncertainty
A deep understanding of value drivers is at the heart of any value-based pricing strategy. Value drivers are the way in which you impact your customer’s business. More so, value drivers are the foundation on which you can impact your customer’s business in ways that are meaningfully different from what your competitors do.
At Ibbaka, we look at economic, emotional and community value drivers. All are important to market segmentation. Without a good value-based market segmentation, you cannot build a grounded pricing model. Value-based market segmentation clusters buyer, users and other stakeholders according to how they perceive value (what value drivers are important to them) and to how they buy.
Once one gets from market segmentation, through customer targeting, to designing the pricing model, the focus shifts more to economic value drivers, which come in four flavors.
Profit and Loss Statement - Value drivers that impact the P&L, revenues and costs. This is where most people focus.
Risk & Optionality - Value drivers based on reducing risk or opening new options. These can be harder to quantify, so we usually only use these in industries that already quantify the monetary value of risk or that have formal ways to measure investments in innovation. Otherwise, it is often easier to treat these as emotional value drivers.
Unit Economics - Customer Acquisition Costs (CAC), Lifetime Value of a Customer (LTV), Churn (or its inverse Renewals) are all important metrics for subscription businesses, and framing economic value drivers in terms of their impact on these measures of unit economics can be compelling for companies with subscription models (or when migrating a perpetual license model to a subscription model).
Balance Sheet - Value drivers that change the value of assets or liabilities. These are often overlooked, but in industries such as mining where the value of an asset (or reserves) are an important part of the share price they can be compelling.
Economic value drivers that impact the balance sheet are often overlooked, so let’s dig into them a bit here.
The importance of these value drivers was reinforced for us in a recent conversation with Matt Chilcott, CEO of the mining software company Deswik. Deswik offers a suite of software for modeling ore bodies, scheduling production, planning operations and managing mining data. One value driver that Deswik offers their customers is the ability to recover more of an ore body and to mine an ore body more efficiently.
There are four major approaches to valuing a mining stock (see How do you value a mining asset?).
Price to Net Asset Value (P/NAV)
Price to Cash Flow (P/CF)
Total Acquisition Cost (TAC)
EV/Resource ($/ounce)
Price to Net Asset Value is the most important of these, so the Net Asset Value is a critical business metric. Anything that increases the Net Asset Value will have an impact on share price.
Net present value (NPV) or discounted cash flow (DCF) value of all the future cash flow of the mining asset less any debt plus any cash. The model can be forecast to the end of the mine life and discounted back today because the technical reports have a very detailed Life of Mine plan (LOM). So the place to look for balance sheet value drivers, for companies that serve the mining sector, is to look at the impact on the Life of Mine Plan.
What other industries rely on the value of assets for their valuation? Two obvious candidates are real estate and the financial sector. When pricing packages for these two industries it is important to look at value drivers that impact the balance sheet. In certain cases, one can even construct pricing metrics based on the impact on assets.
Given the current economic situation, we would be prudent to prepare our companies for a recession. In a recession, investors become more cautious and skeptical. This means that assets become relatively more important than in an expansionary phase. Now is a good time to review your current economic value driver library and make sure that you are capturing value drivers that impact the balance sheet. Value drivers that better enable organisations to manage risk are also becoming more important.
Here is a simple checklist you can use to see if you have balance sheet economic value drivers.
Go through your current customers and identify the companies whose share price is impacted by their assets.
Understand how assets are valued (in mining, the life of mine plan is critical)
Work out how your offer impacts the valuation model
Create new packages that are designed to increase asset value
Price the new packages using pricing metrics that are tied to asset value
