The critical step of defining a unit of measure can be easily overlooked when determining your product’s value versus alternatives. A best practice is to choose an important customer key performance metric (KPI) that is relevant when comparing your product’s advantages versus a competitive alternative.
So for example, if you are selling building materials to a contractor in the construction trade, a standard unit of measure in that industry is cost per square foot. A standard unit of measure makes it very easy to manage costs. The contractor buys concrete by the bag, wood by linear foot, laborers by the hour, etc. but these and hundreds of other items can all be expressed in either total cost per project or cost per square foot. Quantifying value in terms of a customer KPI: “Our offer can save you $10 per square foot in material” or “Our offer can increase the market value of your building by $10 per square foot” effectively communicates value in a way that is immediately understood.
Aside from customer KPIs, another type of unit of measure to use is a price metric. So for example, if you are value modeling a new roofing product for theconstruction industry, you might use “price per roll” because that is how the contractor is currently buying roofing material. This works well if you and your competitor use the same price metric (in the case of direct competitors) but there is an issue when they do not. For example, say your new roofing solution comes in boxes instead of rolls. In this case, using the standard “cost per square foot” makes for a cleaner comparison. Ideally a value model should have multiple units of measure, customer KPIs and price metrics on both the “per unit” and aggregate level.
Once the unit of measure(s) is defined, then the first piece of quantified data, “reference value” is entered into the value model. A reference value is defined as the cost of purchasing the next best competitive alternative. If using the competitor’s price metric as the unit of measure, then this is simply the competitor’s price. But if another unit of measure (such as a customer KPI) is used, then you just convert it.
Sometimes the best course of action is to set the reference to zero. For example, if the next best competitive alternative is the “status quo;” such as in the case of an existing piece of equipment that has already been fully paid for (therefore no additional outlay to keep it). Certainly the status quo may have additional operating costs, but these are quantified later as value drivers. Similarly when comparing a new technology to an existing manual process, the reference value is often zero (practically speaking) because although there is certainly an opportunity cost, the true cost is not readily transparent as a reference value; again these are shown more clearly as value drivers.
To access the white paper How to Put a Value Tag on Your Product by Ed Arnold, click here.
About The Author
Ed Arnold is VP, Products at LeveragePoint. Previously, he held senior positions at Communispace, Diamond Management & Technology Consultants, and OmniTech Consulting Group. He directs product design and development and drives the go-to-market strategy for LeveragePoint. Mr. Arnold holds an MBA in Marketing from New York University and MA and BA degrees in Political Science from Boston University.