A client was excitedly telling me about his marvellous new product under development, and the tremendous benefit that customers would get from using it.
Since the new product targets the enterprise market, I asked if he had an economic justification or ROI calculation. Business customers tend to like to see how potential benefits can actually turn into time or money savings for them.
His next words were “No, I don’t.” This was, of course, a problem.
Quantifying your value proposition lets you understand the value you deliver to your customers in dollars and cents. This leads to a better understanding of what a customer might think is a reasonable price, and that in turn helps you set your price.
For example, if you are pursuing a value pricing strategy, you could set your price near, but a little less, than the value to be derived by the customer. If you are pursuing a low-cost pricing strategy, you’ll need to discount the value to give a larger portion back to the customer.
I think the best method of quantifying a value proposition is still the tried-and-true “before and after” comparisons. How does the customer’s business process change? What steps are eliminated or improved? What are the labour and overhead savings? What materials or supplies can be reduced or eliminated? How often will the customer achieve these savings? Is it on a regular basis or infrequently? Can they defer or avoid a capital expense? When you add it all up, what’s the total savings compared to the status quo and the alternatives? How much will it vary from customer to customer?
This is an even more important exercise if your product is to be resold in some manner. Your cost will impact your customer’s profitability — and maybe for the better! Perhaps the value is greater than you imagined before doing the math.
Unfortunately, sometimes it goes the other way. This is one situation when you will probably play up the emotional sell and don’t provide some sort of economic justification to prospective customers. You might simply tell them factors that could change for the better and let them figure it out themselves. But, if you haven’t gone through the exercise first yourself, you won’t be informed when making this decision.