By Aaron Williams, Software Developer, LeveragePoint
Editor’s note: At LeveragePoint, the concept of value-based pricing is important to every member of the company. In this blog post, one of LeveragePoint’s software developers, Aaron Williams, provides insights on value-based pricing for start-ups based on his experience as a CEO of start-up.
In previous posts in this series, we have examined why startups should create value propositions. We also looked at the offer selection, along with target customer and competitor identification pieces of the value proposition creation process. Then we discussed building a differentiated feature list for the offering, and building a differentiated benefits list from the customer’s point of view.
In this post we will continue building a value proposition in under an hour by calculating the amount of value our offering provides the customer versus the next best competitor. To help illustrate the points, we will continue to look at this process from the perspective of a new file sharing tool versus traditional email attachments.
Calculating Differentiated Value to the Customer (20 minutes)
The differentiated benefits list we created earlier is important because it shows the differences between our offering and the competition from the customer’s point of view. The next step in creating our value proposition is to determine how valuable our product is to the customer. This step of the process is the most important, but also the most difficult. Twenty minutes should be allocated for the quantification process. More time may be needed on this step depending on the complexity of your offering. It may be best to complete this step as a quick and rough estimation. In the future, more time can be spent refining the most important calculations.
To calculate the differentiated value to the customer:
1. Create two list headings, one for your offering and one for the customer.
2. For each item in the differentiated benefits list write down how the benefit impacts the customer financially. We will call these value drivers. A good technique is to think of how the benefit affects costs and revenues for the customer. Include the name of the benefit in parentheses at the end of the value driver for reference. Make sure to leave at least two lines of space between each value driver.
3. Under each value driver, write a formula that calculates the value to the customer using placeholder variables.
4. Under each formula rewrite the formula with numeric values replacing the variables.
5. Calculate the formula result for each value driver.
6. Be sure to repeat the process for the competitor’s benefits list.
7. Finally, use the following formula to calculate the total differentiated value
Total Differentiated Value = Sum(Your Value Drivers) – Sum(Competitor’s Value Drivers)
Here is what the value driver list for our file sharing example looks like this. The benefits that create the value driver are in parentheses. All value drivers are on a per user basis:
File Sharing Tool:
Reduced time authoring a document (Easier to collaboratively write a document with a group)
Number of authoring hours saved per document * Average hourly rate of employee * Average number of documents authored per person
.25 * $25 * 50 = $312.50
Reduces time spent retrieving old versions of documents (Can roll back changes, Protection from accidentally deleting document)
Number of rollback hours saved per document * Average hourly rate of employee * Average number of documents authored per person
.1 * $25 * 50 = $125.00
Reduces time spent reviewing documents (Can see differences added by people)
Number of review hours saved per document * Average hourly rate of employee * Average number of documents authored per person
.01 * $25 * 50 = $12.50
Reduces time searching for current versions of files (Can keep groups of related files together, Better organization of files)
Number of email search hours saved per document * Average hourly rate of employee * Average number of documents authored per person
.2 * $25 * 50 = $250.00
Reduces data breach costs (Prevents reading of the document on unauthorized computers, Prevent unauthorized access to sensitive documents)
Average cost of a data breach * Data breach rate * Average number of documents authored per person
$188 * 6.2% * 50 = $582.80
Reduces training time on new tools (Integrates easily with existing email workflow)
Number of training hours per person * Average hourly rate of employee + Number of trainer hours * Average hourly rate of trainer / Number of employees
.5 * $25 + (20 * $15 / 50) = $18.50
Reduces employee time setting up new tool (No need to sign up for new account)
Number of hours to configure account * Average hourly rate of employee
.083 * $25 = $2.08
Reduces IT time configuring new tools (No need to administer new accounts)
Number of IT hours to configure tool * Average hourly rate of IT employee / Number of employees
4 * $35 / 50 = $2.80
Total Differentiated Value
= Sum(Your Value Drivers) – Sum(Competitor’s Value Drivers)
= $312.50 + $125.00 + $12.50 + $250.00 + $582.80 – $18.50 – $2.08 – $2.80
= $1,259.42 per employee
In this blog post we calculated the total differentiated value our offering versus the competitor by creating a list of value drivers. You should now have a list of differentiated value drivers and the total economic value. This gives us a good understanding of how much economic value we provide the customer compared to the next best competitive alternative. In the next post we will use our differentiated value to choose a price for our offering.
About the Author:
Aaron Williams is a software developer for LeveragePoint. Previously he was the CEO and co-founder of a ride-sharing startup, Rootless, Inc and a software engineer for Cisco Systems. He is passionate about new technology, startups, and traveling. Mr. Williams holds a BS in Electrical and Computer Engineering from The Ohio State University.