Economic Value Calculation
When customers are satisfied about your value, but you get the question : We love your value, but why are you so expensive ? - and your sales teams are not equiped to defend your value, you missed a great opportunity to prove your value. If you want to price and sell on value - you will need to be able to prove your value in economic terms.
In b2b relationships, it's better to be able to prove your value (unless you sell on 'price'..). Selling on 'trust me' - or 'product features' can be ok for some time, but if you are confronted with a next best alternative that claims 'to do exactly the same, but at a lower price' you are in trouble. And if you have been in the great position that you had no competition (you had a patented, or breakthrough innovation), but you are suddenly confronted with an alternative technology, you better be prepared to defend your value. Also when launching new products, EVC can be great to align your sales, marketing, product management and pricing around value discussions ! The result of the EVC execercise and discussions is that sales will be confident about the value AND the price we charge.
During one of our recent projects in the tyre (b2b segment) market we found out that the new product could be priced 12% higher than the existing product alternative. When we asked a first price ballpark range at sales for the new product, they came with the idea to surcharge the existing product prices with 5%. After the EVC, sales was confident to increase the prices with 9%. The extra 4% resulted of course in important net margin increase for the business segment.
The principle of EVC
EVC compares your 'new' value to the value created by the next best alternative (within the segment). Customers always compare prices to a next best alternative (NBA). Something is expensive or cheap - compared to what .. ?
EVC does calculate economic value only. Of course, your trusted value (emotional value) is important too - think about the emotional value of your account management relationship, or your brand trust. EVC does not include emotional value - so the first thing you need to know is how important your brand value is ... It's simple : ask your sales people how much higher your prices can be compared to the NBA for a similar product or service. That's your brand value. Pure and simple.
How does it work ? EVC practical.
We recommend you to engage your product management and sales into the excercise.
Step 1 : segment your market - and define the next best alternatives
Step 2 : define the benefit ladder (features - advantages - benefits)
Step 3: select your resonating value drivers - both compelling and simple value arguments, points of difference between your solution and your competitor's, that deliver the greatest value to the target customers.
Step 4 : build your data sheet (variables to calculate the value)
Step 5 : build your economic value calculator
Step 6 : build your value sentences and value communication toolbox
We have supported many EVC projects and the value is both in the conversations with sales/marketing, the confidence in selling the right price - and the insights that are created for new innovative developments to increase value for customers.
What makes it sometimes more complex ?
If your organisation has a weak relationship with customers, lacking business insights in the customers' real value creation, EVC becomes difficult. But you face probably other important challenges too...
Make sure your early innovators commit to share business insights !
When launching new products, sometimes the data insights are not yet available during the (technical) testing phase or pre-launch. Hence the importance of selecting the right customers as beta-testers or if you give limited exclusivity (applications/regional/time) ; make sure you have contracted commitment that these early innovators accept to share business practice insights. The data is extremely important to build your value calculation and pricing model !
Want more info ?
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