How To Quantify Value Part 1

by | Dec 13, 2012 | Pricing, Quantify Customer Value

Ask the Expert: Follow Up From December 2012 Webinar

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Q: How do you get valid information that enables one to determine the true value from a customer’s perspective?

A: This is a very common question. We feel that a lot of the insights and data that you need to begin this journey is already there in your organization, you just have to go look for it in the right places. You may have a customer services team that is in close contact with customers, who have a real sense of what’s going on. You also may have very strong salespeople who have very clear insights into how customers operate and how they work. Bringing in those separate pieces of information from within your organization to begin to structure your thinking of how you impact your customers’ business is a great place to start.

Understanding the logic is really the hard part. Once you’ve laid out what the formula is, it’s pretty straightforward to come up with good estimates.

Q: In addition to costs and revenue, what about risk? 

A: With risk it gets a little more subjective because you have to assign probabilities of risk happening, but in many cases those risks exist. It’s up to how you present this to the customer and how you’re able to walk the customer through that logic that enables you to make a stronger case for how to minimize risk.

What risk estimations do is they take potentially significant or expensive events, and they calibrate them. Even if the chance of a failure happening is one in a thousand, that thousandth time can really be significant, so you need to take that into account.

Q: How do you quantify the value of a service instead of a product?

A: It’s the same process. How does the service you are providing impact the customer’s business, how is that helping them run their operation more smoothly, how do you combine that service with a core offering? In many cases, the core offering itself may not provide a lot of differential value that can be quantified. But if you were to add services that go along with your core offering, that is what begins to differentiate yourself from other competitors. Maybe it is related to expertise, or you are able to provide technical support as a service, and you can begin to engage customers in those discussions.

With services, you are talking more about intangible value than with goods, especially with professional services. A lot of it comes down to reducing risk. Taking legal services for example, you’re really reducing the exposure of lawsuits and things like that.

Q: What about psychological factors? Beyond understanding economic value, customers may value things like peace of mind, comfort, and aesthetics.

A: Economic value is definitely one piece of your value story. There are other benefits that may not necessarily result in economic value, but are very important to your customers. Those are still part of your value proposition and still things you want to emphasize. But when it comes to talking to that economic buyer, the buyer that is trying to justify the purchasing decision, you’ll be better off the more you can articulate and show them how you impact their business from a cost and revenue perspective.

Pure psychological factors like “peace of mind” might be impossible to quantify, but they definitely enter into the pricing decision in terms of how much differentiated value you can capture from customers. For example, buyers who are highly risk averse will be resistant to paying a price premium, even if you do demonstrate superior value. Conversely, if your brand is truly the undisputed industry leader (like Apple), then many buyers will likely be willing to pay a little more because of the peace of mind your brand delivers.

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