As I explained in an earlier post, Economic Value Estimation (EVE)® has uses for the pricing, product development/management, sales, and marketing areas of a B2B enterprise. EVE models help professionals in those areas quantify the amount of monetary value that is created by an offering for a particular customer versus their next best alternative.
As seen in the image below, most EVE models have four components:
- Competitor Reference Value: The price that the customer actually pays for the next best competitive alternative (NBCA). In some situations this may be too difficult to estimate and left at 0, for example when comparing to an existing in-house solution.
- Positive Differentiation Value: The monetary value that an offering creates for the customer, either in cost savings or increased income that is over and above what the NBCA provides. Positive Differentiation Value is comprised of multiple value drivers. A value driver is a mathematical formula that quantifies a particular economic impact. The most basic format of a value driver is: [Customer financial metric] X [Percent impact of offering]. For example: Cost of Labor per Service Call * Reduction in Number of Service Calls.
- Negative Differentiation Value: Either any additional cost that the customer incurs with the offering (e.g., switching costs, training, etc.) or any positive differentiation value of the NBCA. This is NOT the price of the offering.
- Net Differentiation Value: The sum of Positive Differentiation Value minus Negative Differentiation Value. When this sum is positive, it represents the range of possibilities for setting a value-based price for the offering.
A consistent unit of measure must be used for all these components for a given EVE model. The unit of measure can either be a price metric of the NBCA or offering, or a customer key performance indicator (KPI), although multiple units of measure are often used.
Once you’ve built your EVE model, your product still needs a price tag. But now with the knowledge of customer value you will likely have more viable strategic options to consider.
Deciding on price depends on answering additional questions like:
- What are the relevant customer price sensitivity factors?
- What is our cost to sell/service a customer?
- How much value captured versus share do we want to trade-off?
A best practice utilized by leading B2B enterprises is to develop the EVE model collaboratively with cross-functional team input from pricing, product development/management, marketing, and sales using software solutions (such as LeveragePoint). This enables cross-functional teams to share best practices and data.
To learn more download our whitepaper: 8 Ways Spreadsheets Undermine Profits, Growth, and Customer Value.
Editor’s Note: Excerpted and adapted from the book,” The ROI of Pricing, Measuring the Impact and Making the Business Case” (publisher: Routledge).