Value models trump ROI calculators

Steven Forth is CEO of Ibbaka. Connect on LinkedIn

Customer Value Management is based on value models. Why use value models rather than ROI (Return on Investment) calculators or perhaps TCO (Total Cost of Ownership)?

TL:DR

• Value models analyze economic impact at the level of value drivers rather than just giving a top line number

• Value models are easy to customize for different buyers by turning value drivers on or off and adjusting the value of different variables

• Value models take into account competitive alternatives

What is a value model?

A system of equations estimating the impact of a solution on a buyer’s profit and loss statement and balance sheet.

Each equation quantifies a value driver.

There are six main types of value drivers:

1. Increase Revenue

2. Decrease Costs

3. Decrease Operating Capital Requirements

4. Decrease or Defer Capital Investments

5. Decrease Risk

6. Increase Options

Value models are used to Understand value and are applied to value communication, value documentation and inform value capture (pricing)

The Value Cycle

A screen shot of the output of a customer model for Ibbaka’s Customer Value Management and Value Based Pricing platform is shown below.

Ibbaka’s Customer Value Management (CVM) platform.

Value Models are more powerful than TCO Models or ROI Models

Value Models vs. Total Cost of Ownership Models

Total Cost of Ownership or TCO models are of limited use in the modern world. They go back to the days of on-premise, client-server architectures and are primarily used to win on build vs. buy decisions. The focus is on total costs over time. The problem with this is that the most powerful value drivers are generally not cost-related but revenue, risk, or option-related. And when you focus on costs you highlight that your solution is a cost, and one way to reduce the total cost of ownership is to reduce the price of any solution. This is not generally a goal of pricing or sales negotiations.

Value Models vs. Return on Investment Models

Return on investment or ROI reduces all of the costs and benefits to a single number. It is a bit simplistic in that it does not take time into account, but that is easily remedied by using the Net Present Value (NPV) and applying a discount rate to get the present value of future cash flows. ROI and NPV are popular with finance people as they reduce many different things (benefits, costs, time) into one number. This lets finance compare very different things and allocate investments.

That is not what is happening in most sales or customer success scenarios, where the challenge for the buyer is to compare similar alternatives (two different CRM or CVM solutions or a CVM to a CPQ solution). Here having a single number blurs differences and confuses the buying process.

Economic Value Models are a more powerful approach.

• By decomposing value into value drivers it helps one focus on the types of value most relevant in any specific situation or use case. Different value drivers can be relevant to different buyers and decomposing value into its components leads to much more effective conversations.

• By analyzing value as a set of equations it makes it possible to consider the interactions of different value drivers and take a more holistic and systems-based approach to understanding value over time.

• Value models can be made adaptive in a way the ROI calculators cannot. As solution capabilities, customer requirements, and competitive alternatives change and interact value also changes. Value models provide a powerful way to understand these changes.

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