Value Management is usually used in downstream business activities. Value models help companies to communicate their differentiated value, negotiate prices with customers and to find and target the customers who can get the greatest value from an offering. But there is also a role for value modeling at the very beginning of the value creation cycle, when companies are developing new products and designing new offerings.
In a recent project, we used value modeling to help an enterprise software company analyze the key functional benefits it would need in order to provide differentiated value to its customers. By building formal models of the target customers’ businesses and then creating value models for a number of competitive alternatives we were able to pinpoint the critical benefits that the company’s products needed to provide. We were also able to identify some critical weaknesses in their business proposition that needed mitigation.
This was a simple three-step process:
- Research and build the business models for each type of customer
- Identify the key competitive alternatives (including their current products as one of the alternatives, after all , companies do compete with themselves
- Build the value model for the company’s proposed application (assuming that it ‘works as advertised’) for each type of customer relative to each of the competitive alternatives
This process led to a set of 12 value models, 3 competitive alternatives x 4 customers, that all needed to be considered together in order to make the most powerful product development choices. In addition to comparing each of the value models, we did some sensitivity analysis within each model to find out which value drivers were most sensitive to changes in the business model and thereby find the leverage points.
As is often the case, it was the revenue value drivers that were the most powerful. By pinpointing exactly how the new application would impact customer revenue, the product development team was able to focus in on the features and benefits that really mattered. But there were also insights from the negative value drivers (the places where the new application introduced new costs into the picture). Understanding the way in which these negative value drivers could reduce the differentiated value (and in one case eliminate it) helped the product development team to rethink the design and the cost of the whole solution. By catching this potential weakness early in the game, the product development team was able to revise its requirements and come up with a concept that is much more likely to succeed in the market.
(A careful observer will have noted that this company has a problem in its distribution channel: the new product has negative differentiated value for the distributor even though it has positive value for the manufacturer and end user. Distributors are likely to resist introduction of the new product. The company needs to figure out if this can be addressed by adding more value for the distributor, perhaps through services, or if there is a different pricing model they can adopt, or if they can bypass the distributor all together.)