Why Customer Value Management Requires Value-Based Pricing
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
What is customer value management?
Customer value management is an emerging business practice that manages value to customer (V2C) across the full customer journey. Managing value means creating, communicating, delivering, documenting and capturing part of that value in price. The value cycle.
Value management is a counterbalance to the popular customer lifetime value metric (LTV). Value to customer (V2C) is the value being delivered to the customer. Customer lifetime value (LTV) is the value being received in return. Value to the customer comes first. This is sometimes referred to as the value imperative.
Customer value management extends across the customer journey
Ed Arnold has been at the forefront of value-based pricing for more than a decade, first at Monitor Group, then as a founder of LeveragePoint. From LeveragePoint he went to Forester where he got a deep grounding in Customer Experience (CX). He is now part of the Ibbaka team where he leads value modeling and pricing design work. He recently shared a post Value-based pricing 2.0 goes beyond ringing the sales bell.
Value-based pricing has been used mostly early in the customer journey, for pricing design, price setting and value-based sales. These are all solid uses of the value-based pricing methodology, but they are not enough. In a world where predictable revenue is king, the repeat purchases and subscription renewals are critical. This will only happen if as much attention is paid to value delivery and documentation is as paid to creation and communication.
This happens during the implementation, expansion and renewal phases of the customer journey. In what Tien Tzuo at Zuora calls the subscription economy, this is where customer value management is most important.
Implementation - customer value management makes sure that the value promises made during the sales process are communicated to the implementation team and the solution is set up to deliver the value promised.
Expansion - as use of the solution expands, customer value management makes sure that the value being delivered is documented, and that any shortcomings are being addressed. This is the job of the customer success team. They need skills in value creation and communication, but the critical skills are value delivery and documentation.
Renewal - when the time for renewal, or repurchase, comes around, value has to be communicated once again. But now, the customer has experience of the solution, so what is needed is not primarily value communication, but value documentation.
Why customer value management needs a value model
Customer value management is mostly hand waving when it is not supported by a formal value model. A value model organizes value drivers and defines how to quantify them. Value drivers are at the heart of the system. Quantified value drivers can be measured and tracked over time. This makes customer value management something concrete and actionable.
Value drivers motivate usage of the solutions, determine the value metrics (the units of consumption that track value) and inform the customer journey map, where they are used in the value and pricing swimlanes (swimlanes are the horizontal bands across customer journey maps that organize what the customer is experiencing at each touchpoint).
Ibbaka uses three different categories of value driver: emotional, economic and community. Conventional value based pricing focuses on economic value drivers. As Ibbaka uses value-based methods more broadly we needed to layer in emotional and community value drivers. We begin our work with a value-based market segmentation and build from their to the value model, the pricing model and how value delivery unfolds across the customer journey. In our approach, a good segment gets value in the same way, buys in the same way, and members of the segment reference each other. Doing this requires that emotional and community value drivers be considered.
Emotional Value Drivers for Customer Value Management
Ibbaka uses Maslow’s hierarchy of human needs to organize emotional value drivers. Our research has found that the higher the value driver in the hierarchy the greater the perceived value.
Basic Operations: Delivering value is basic to any B2B solution and is the basic operation of the customer success team. This can be defined and quantified for each solution through the economic value drivers.
Security: Everyone at a company will sleep better at night knowing that value is being delivered and documented.
Community: A good customer success team builds relationships with customers. They feel they are ‘in this together’ and that the customer’s wins are their wins and vice versa.
Self Esteem: All of us want to be respected for what we do and to receive the respect of others. In business the best way to do this is to deliver value and document the value you have delivered. Customer value management is also about keeping promises and building trust. These also feed into self-esteem.
Self Actualization: This is the highest emotional value. Brands like Apple or Lululemon are experts at selling the potential of the their products to help people be their highest self. Not many business solutions can achieve this. Customer value management has this potential though, as it organizes companies around creating value for customers, which is after all, what companies are meant to do.
Economic Value Drivers for Customer Value Management
Economic value drivers document the value that a solution provides to customers. Conventionally, there are six types of economic value driver: increase revenues, decrease operating costs, decrease operating capital requirements, decrease capital investment requirements, decrease risk, increase options.
Increase Revenue: This is the obvious value driver for customer value management. By connecting value creation to communication it leads to higher sales volumes at higher prices. Customer value management is even more important to customer success. By documenting value delivered cross sell, up sell and renewals are all made easier.
Decrease Operating Costs: The connection here is a bit weaker than with revenue value drivers. Customer value management can uncover insights into the value delivery process that can make it more efficient and help to avoid costly rework and ‘save the customer’ operations.
Community Value drivers for Customer Value Management
Community value drivers are growing in recognition and importance. Companies understand that the impact they have on the world beyond their shareholders and customers matters a great deal. Large companies now have CSR (Corporate Social Responsibility) officers and programs. Understanding what value is created for the larger world is a real management responsibility.
Customer value management can be extended to track this. Connecting the value created for customers with the impact on the world at large makes possible more balanced investments and better offering design. This is an approach that Ibbaka is committed to and continues to research.
Ibbaka Valio is the tool customer value management needs
Ibbaka now provides its customers with the Value Pricing Dashboard. This is how we deliver our pricing models and our value models. It is a data integration point for all of the variables used in the value and pricing models and is where value documentation takes place.
By connecting the value model, the pricing model and data in one place, the Value Pricing Dashboard becomes the indispensable tool for customer value management.
Develop the value model
Use the value model to communicate value in sales and marketing
Connect value to price
Document value delivered
Find patterns across customers and over time to improve the process
Implement Customer Value Management with the Ibbaka Value Pricing Dashboard
Why Customer Value Management Requires Value Based Pricing (this post)
