Using Economic Value Estimation (EVE) to Execute a Value-Based Strategy

by | May 14, 2009 | Quantify Customer Value

In an earlier post we identified a number of challenges that managers face when executing a value-based strategy.  Tom Nagle and I discussed these during our recent webinar for the Professional Pricing Society.  Tom, of course, is well known as one the industry’s leading experts on pricing and he commented that twenty years ago discussions about value were rare, whereas now they are mainstream – as evidenced by the good turnout we had at the webinar.

One of the key challenges to executing a value-based strategy is the wall that often exists between marketing and sales. This wall can be broken down using an eWorking solution that encourages rapid iteration and collaboration by marketing and sales around an easy-to-use visual value model.  Take for example, this model created by a chemical company for a steel mini-mill customer to demonstrate the economic value of a new steel additive using the Economic Value Estimation or EVE methodology.

EVE May 14We’ve seen marketers create models like this in as little as 15 minutes, based on the collective intelligence and expertise of the group.  Although the output is not as detailed or precise as what would be created in a full-blown consulting engagement, it provides the essential outline of a value conversation almost immediately.

Using this EVE model, the marketing team can quickly identify key elements of a value story (positive value drivers – green bars) and potential challenges (negative value drivers – red bars). Even an initial, “back of the envelope” analysis can be used to develop hypothesis that can be validated and refined with input from sales and in conversations with clients.

So for example, the sales team can test the viability of the following value story:

Steel mini-mill customer, we can show that you are better off economically per ton of steel by using our new steel additive versus your existing process in three specific ways.  First, the additive allows you to make and sell additional products, which will lead you to more revenue.  Second, it can reduce the amount of labor in your process. And third, it can reduce the amount of scrap.  Of course, this is partially offset by some additional process steps, but the net is that we estimate you will gain $18 worth of additional economic value for each ton steel produced.

For each specific value driver, the sales person can show the detailed assumptions that went into the quantification.  So for example, the incremental revenue of $15 per ton is based on the marketing team’s estimate of average revenue of $500 per ton, a 30% improvement rate, and 10% contribution margin.  Of course, chances are very good that the estimates for all three variables are off. But as long as the customer accepts the logic of the value driver, they are engaged in a true value discussion with the sales team.  At that point it doesn’t matter if the accepted number is $15 or $5, the real point is that the customer has “proof” that the additive provides differentiated value that will justify its price. Using EVE, marketing has helped the sale’s team move the conversation from cost to value, and if you are engaged in value-based selling, this is where you need to be.

Ed Arnold
VP of Products

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