Why pricing is part of customer value management

Steven Forth is CEO of Ibbaka. Connect on LinkedIn

Customer Value Management platforms (CVM-P) and agents (CVM-A) have been around for some time but they are now going through a transformation. Like all other B2B software categories, they have been caught up by the new approaches made possible by generative AI. Over the next few years we will see more and more people adopting these platforms to accelerate sales and drive Net Revenue Retention.

Some customer value management platforms focus on value communication and documentation. They go light on pricing, if they have pricing at all. At Ibabka we think this is a mistake. You cannot manage value without managing price. And you cannot effectively set prices without understanding value.

What is Value?

Value is sometimes used in a vague, handwaving way. Customer success can be like this when it tries to measure value through CSAT (Customer Satisfaction) or even worse NPS (Net Promoter Score). These do not measure customer value.

Usage does not measure value either. There are many forms of use that are actually counter indicators of value. When actions are repeated because the system failed or users bail before completing a value path usage is not tracking value.

Value has three aspects: economic, emotional and community.

Economic Value: There are many ways to measure economic value, ROI (Return on Investment) and TCO (Total Cost of Ownership) are often used, but the gold standard is a value model. At Ibbaka we use Economic Value Estimation (EVE) a framework introduced by Tom Nagle in his classic book The Strategy and Tactics of Pricing (now in its 7th Edition). This puts value into the context of the alternatives and incorporates both positive and negative value drivers. A value driver is an equation that estimates the value of a solution for a specific buyer or users.

In 2024 Ibbaka demonstrated that value models can be generated by AI.

Emotional Value: Engaging with software, making a buying decision, renewing a subscription, all depend on having an emotional commitment to a solution. CSAT and NPS scores are more likely to reflect the emotional value a solution delivers than anything else. Understanding, designing in and managing emotional value is part of value management.

Community Value: Not everything can be reduced to dollars. Value management can include things like sustainability, equity, health outcomes or other things that are important to the wider society we line in. Reducing negative and increasing positive externalities is part of value management. Economic externalities are indirect costs or benefits that arise from economic activities and affect unrelated third parties, without being reflected in the market price of goods or services.

What is Price?

Price is more than a number on a price tag. It includes what you put the price tag on and how the price of one thing interacts with others. Pricing is a system and is part of the larger revenue generation system.

Pricing and packaging (how functionality and data is combined so that it can be bought) go together. You cannot design packaging without considering value and pricing

Pricing begins with value and specifically an economic value model. The same value model that is used in value management (see above) is used to derive pricing that aligns with value. The best practice is to find variables used in the pricing model and use a subset as pricing metrics.

Value Metric: The unit of consumption by which a user gets value.

Pricing Metric: The unit of consumption for which a buyer pays.

So pricing includes the pricing metric, price levels, discounting and how all of these interact with other price. Value is the context that helps all of this make sense.

Value and Pricing are Connected

Businesses evaluate value in the context of price. One cannot manage customer value without managing price at the same time. The two critical metrics for value management are Value to the Customer (V2C) and the Value Capture Ratio (VCR) or sometimes simply the Value Ratio.

Value to Customer (V2C): This is the economic value being provided to the customer before price is deducted The term for after price is deducted is Net Value to Customer or Net V2C. One of the main functions of a Customer Value Management (CVM) platform is to calculate V@C, help manage this key metric and to identify customer segments and trends in V2C.

Value Capture Ration (VCR): This is the other key metric in Customer Value Management. How much of the V2C is being captured back in price? This is the capture part of the value cycle.

The appropriate number here will depend on many factors:

• Pricing strategy

• Pricing power

• Customer Willingness to Pay (WTP)

• Market trends

One cannot manage ones pricing or value strategy unless one measures both.

Managing Value in the Context of Price - Managing Price in the Context of Value

Managing price and value is what a customer value management platform does.

Ibbaka Dashboard Screen Shot

It is important to do this across your customer base, and understand the total value you are creating for your customers and the average value ratio.

Ibbaka Customer Dashboard Screen Shot

it is even more important to manage this for each customer, and to see how well balanced V2C and Value Capture Ratio are and how this is changing over time. In the above screen capture we can see that for this customer the Value Capture Ratio is too high.

When communicating this to the customer more detail is needed.

Ibbaka Customer Dashboard Screenshot

A Customer Value Management Platform gives you the tools you need to manage price and value around the value cycle.