Have you ever been in a bar fight with an academic?
They kick. They bite. They knee you where it hurts. Debating an expert with strong attachments to his or her methodology can get ugly.
I ought to know. I used to be an academic. Worse than that, I used to be an economist.
Then the malpractice insurance got too expensive and, fortunately for academia, I changed careers. But I still wake up in a cold sweat when memories of those academic debates creep into my subconscious.
In those days, when I took up an intellectual challenge in a specific way and wrote stuff down, I developed passionate attachments. I would spin my wheels, trying to solve the problem. I would hit the wall and walk away from it. Then the sleepless nights redefining objectives, trying out solutions. Finally the light bulb would flash on. And the answer was so clear that there could be no other solution. Not even another way to ask the question. Workshop presentations often got hostile, but the collateral damage of losing friends was acceptable. Because my approach was right.
Now I hang out with B2B professionals who are passionate about quantifying and communicating the value their products create for their customers. Sometimes it’s déjà vu all over again. It’s not just competing spreadsheets.
It’s competing language and methodologies. Which can have a horrible way of turning into turf.
“Return on Investment is the only thing my customers care about.”
“Ditch the equations and show me the Value Map. Otherwise bugger off.”
“In pricing differentiated products, I use Economic Value Estimation. Exclusively.”
“Total Cost of Ownership is the only way my customers will ever understand why my product is better.”
Sometimes the ego of the speaker is in plain sight. Often the language of these debates is the language of acronyms: ROI, EVE, TCO. Not plain, simple English. The methodological arguments get more and more arcane. Any good sales executive who happens to be in the room will roll their eyes and check their mobile devices.
Publishing a peer reviewed article about value methodology never improved a product seller’s profitability. Speaking incomprehensibly in acronyms never closed a deal. But quantifying and communicating differentiated customer value can profoundly improve profitability. The numbers prove it.
Let’s start with three fundamentals:
- Customers do the math. At least they do in the 21st century. In deciding whether to buy a B2B product, most professionally run companies have someone in management who asks the math question: how does buying this product improve profitability? The focus of the math answer might be narrow or broad, but relying on deficient customer mathematical literacy or aptitude is a mistake. B2B sales quotas that assume customer irrationality are sales quotas that will never be met.
- Understanding your customer’s math gives you an edge. Especially if your B2B products are better. You don’t have to be a human calculator, but you do need to be able to communicate why your product is better. If you communicate your product’s superiority as a quantified increase in profit, you speak the one language that customer decision-makers definitely understand. If you don’t speak the customer’s language, good luck closing a deal at a decent price.
- Value Propositions, ROI, Value maps, EVE and TCO are all means to a common end: understanding and communicating your customer’s math. When they are clearly and thoroughly applied, these methodologies get the same answer. If your product makes your customer more profitable, it is a persuasive and rational choice. A quantifiably rational choice.
So, other than academic turf, why all the noise about competing frameworks and methods? I wish I knew, but I believe the substance behind any debate on methodologies boils down to two points. Two points that may differ by industry and product but relevant points nonetheless:
- Quality. One method may be more prone to error than another. None of these methods is wrong. At least if deployed appropriately. But there are differences in how each method phrases its questions, generates quantified customer value and makes a persuasive case. This translates into differences in emphasis and training for broad usage. These differences in approach result in different likelihoods of muddled thinking and low quality analysis.
- Communicating clearly. One approach may be simpler or more compelling than another. Of course, communication is audience-specific. The language of annual or multiyear profitability plays well in the C-suite. The language of production time, process yield, input efficiency and time savings plays well with an operating manager. Whatever approach is used to generate customer math, the output needs to be translatable into understandable terms for various stakeholders.
In forthcoming blogs, I hope to provide specifics, examples and in-depth comparisons between approaches, but for a start, it is worth highlighting some situations where each approach to customer value has its strengths:
- Return on Investment (ROI) is a natural approach to the choice between investing in a new solution versus doing things the old way. As a finance concept, ROI naturally focuses on making a substantial outlay now to get a substantial increase of profitability, usually later. That makes ROI well suited to discussing whether to do something or do nothing, often the question posed by a customer’s cost-conscious finance team. As a metric, ROI is subject to misapplication when your customer is comparing your product against more than one alternative, especially a direct competitor. The thoughtful application of ROI involves careful attention to the distinctions between overall investment in something new and incremental investment in your alternative compared to the investment in a potential competitor. For most purchasers, designing appropriate ROI hurdle rates for positive decisions is an art form subject to variable practices. Sometimes a customer’s voodoo arts generating ROI hurdle rates make communicating value with confidence a challenge for product sellers. And hurdle rates are economically meaningless barriers when the choice of your alternative delivers fast results.
- Value maps can be constructed directly from other approaches to estimating dollarized quantified economics (eg by EVE or TCO) and can be interpreted in a two dimensional context to provide identical results. Often, however, value maps are deployed when quantifying your product’s impact on profitability is either premature or problematic (eg B2C products). Value maps based on nondollar scoring or ranking of product attributes are a natural B2B approach in a situation where you have identified truly “intangible” benefits or where you do not yet understand how your product directly affects your customer’s profitability. Surveying and scoring then provides a way to gain insight without doing the in-depth work of quantifying the profitability impact of your product. Scoring or ranking may or may not give the same answer as a thorough understanding of your customer’s business. And value maps are more frequently used as a planning tool than they are as a communication tool.
- Total Cost of Ownership (TCO) was designed to take a step beyond good old fashioned direct price comparisons and incorporate other indirect costs of competing products. TCO is a readily applicable and simple framework for comparing multiple alternatives in a single visual where differentiation has impacts primarily on cost. The language of TCO is cost-centric. In practice, that can mean that product differentiation resulting in improved customer revenues, reduced risk or other forms of enhanced profitability are less naturally captured by TCO. But these differentiators can be captured and applied. A full blown TCO analysis often involves collecting data that are not directly relevant to a customer’s decision between two alternatives. This information overkill sometimes increases the risk that a customer conversation is derailed by irrelevant detail. That said, a TCO analysis is readily translatable into EVE and ROI.
- Economic Value Estimation (EVE®) is a method that encourages the identification of multiple value drivers that highlight the ways in which a product improves a customer’s profitability. It was designed to articulate and communicate these key value drivers individually and collectively to customers. EVE, as a discipline, encourages clarity regarding offering, customer segment and competitor. It is economical with information; it only requires the information relevant to customers making a choice. It is an efficient way to separate out price discussions from other sources of differentiated value. But EVE requires careful thought when comparing two alternative choices where the goods being compared are purchased in different packages, different units or in different amounts. In this circumstance, focusing on customer profitability per annum or some other neutral metric can help clarify. Sometimes building a model without a price for the competing alternative can help avoid double-counting. Alternatively, communicating value can sometimes be displayed more simply in a TCO style graph rather than in an EVE graph. EVE results are thoroughly translatable into TCO, value maps or ROI.
There are some very practical considerations in deploying an approach to understanding customer economics. Somehow they seem a long way from religious fanaticism or academic turf.
All of which may seem like a good reason to send the product management, pricing, business analysis and field support teams to their respective corners. To use whatever method they like. To build their competing spreadsheets. That quantify customer math.
Each spreadsheet conceived in the brilliance of its author. Each new formula a uniquely expressed thing of beauty.
Except that almost nobody else gets it. Almost nobody else can replicate it. Spreadsheets don’t provide a common framework. They don’t build fluency in a common language understandable by the customer.
To make customer math work for your organization, you need a scalable easy to follow and use platform that…
- Makes it easy to avoid mistakes
- Utilizes consistent graphics and messages that others can understand and use
- Is customized but QA’ed materials to leave behind
- Gathers data from each customer
- Creates effective, tailored customer conversations
Bar fights over competing methodologies are a waste of time. And a waste of good glassware. Successful B2B companies focus on the customer’s math and profitability using a common platform for collaboration.
About Peyton Marshall
Peyton Marshall is CEO of LeveragePoint. Previously, he served as CFO and Acting CEO at PanacosPharmaceuticals, Inc., CFO of EPIX Pharmaceuticals, Inc. and as CFO of The Medicines Company through their initial public offering and the commercial launch of Angiomax®. Previously, he was an investment banker in London at Union Bank of Switzerland, and at Goldman Sachs where he was head of European product development. He has served on the faculty in the Economics Department at Vanderbilt University. Dr. Marshall holds an AB in Economics from Davidson College and a PhD in Economics from the Massachusetts Institute of Technology.