Perhaps the most challenging question every technology sales person faces is “Why should I buy your product instead of alternative A, B, or C?” Value equations are used to answer these types of questions. Value is defined as the value of the benefits offered by a solution minus the costs of deploying a solution. Understanding the value equations associated with a product is critical for product strategy, product development, marketing, and sales. Product managers should strive to define the best value equations for their products.
Value Equation Origins
The contemporary use of value equations in technology marketing and sales can be traced back to a book published in 1999 by James C. Anderson, James A. Narus , and Das Narayandas entitled Business Market Management: Understanding, Creating, and Delivering Value. In the book they describe value as the customer’s incentive to purchase one solution over another. They offered the following formula:
Values and Prices are the value and price of the supplier’s market offering, and Valuea and Pricea are the value and price of the next best alternative. The difference between value and price equals the customer’s incentive to purchase. Simply put, the equation conveys that the customer’s incentive to purchase a supplier’s offering must exceed its incentive to pursue the next best alternative.
The process starts by identifying and defining value elements. Value elements are the benefits and price associated with a solution. Benefits can include tangible items that can be quantified like improvements in revenue, reduction in costs, reduction in time required, improvement in quality, etc. (aka Faster, Better, Cheaper). Many organizations use metrics like Net Present Value (NPV) or Internal Rate of Return (IRR) to express the net value of quantifiable benefits.
Benefits can also include intangible items that cannot be readily quantified. For example customer organizations that can be described as early adopters in the technology adoption life cycle are visionaries that will embrace new technology for the opportunity to create a competitive advantage for their organization almost regardless of its costs.
Price is defined as all of the costs that are associated with the acquisition and deployment of a solution. There can be quantifiable costs like license fees, subscription fees, infrastructure (servers, software, bandwidth, etc.) and implementation costs. There can be intangible costs as well, such as the opportunity cost of not pursuing other initiatives.
A critical aspect of effective value equations is domain knowledge. To be able to understand the potential costs and benefits of any solution, product managers must have a deep understanding of the market problems and user personas that their product addresses. The reality is that most enterprise software solutions impact dozens of complex business processes and deliverables. Developing effective and credible value equations requires a nuanced understanding of these processes, deliverables, and outcomes.
There is no single value equation that covers everything a product can offer a prospective customer. Instead there are often dozens of tangible and intangible value equations that describe what a total solution can bring to the table.
Customer/Prospect Validation is Critical
As noted technology sales management authority Adam Shapiro, President of Sales Reform School, states in a great post entitled #$%E! it is critical to get a prospect’s agreement that the value elements in your value equations are relevant and accepted by them. Value is in the eye of the beholder, not the seller.
Adam also notes that it is critical to see if your prospect is emotionally connected to our value equations. A value equation may be intellectually interesting, but if it does not tap an emotional note it might fall flat. As Adam states:
“How does it make you (your team, the affected group) feel?”
“How badly do you and your team members want to fix …?”
This gives you and
your prospect an idea about the emotions of the situation. At times, all the
hard dollar gain in the world may not help you close the opportunity if your
prospect isn’t connected on an emotional level to your offering or solution.
Simplifying the Complexity
At the end of the day, effective value equations simplify decision making for customers and prospects. Clear, compelling value equations that are aligned with a prospect’s world view will make it easier for them to pick your solution over an alternative. Effective value equations also raise the competitive bar – alternative solutions have to demonstrate how they are superior to your solution. Comprehensive and credible tangible and intangible value equations set a target that they cannot hit.