The Importance of a Quantified Value Proposition
Why is a Quantified Value Proposition Important?
The Quantified Value proposition (QVP) is a statement of the value of a product or service by means of a quantified assessment of the cash value brought to the customer. In the following, we treat “value” as the financial impact on the customer’s business that would not otherwise occur without using the product or service.
QVP is also the name we give to the model implementing the analysis.
Most customers don’t buy solutions based on the cool features delivered. The key customer decision-makers, who approve payments for a solution, want to know the impact of the solution on their company’s finances: “What’s in it for me?”
Far too much effort is spent during the sales process in discussing features and comparing them with other competitive offerings available in the market. Time is better spent understanding the financial situation at the customer. Then target the solution value to financial benefits by developing a QVP.
How to Create the QVP Model?
As a result of studying the customer, we can identify areas where the solution brings the greatest value in the areas of greatest need. If the customer is focused on cost efficiencies, then the solution value ought to target cost reduction in various categories. If the need is improving the top line or retention of their customers, then targeting revenue and quality of the services offered to the customer’s customer is essential. The focus here is using the QVP to measure the impact of your solution on the customer’s business.
The areas of financial benefit track key categories and sub-categories used in financial management at the customer, such as revenue growth and optimizing cost components such as Operational expenditures (OpEx) and Capital expenditures (CapEx). The model can also quantify satisfaction of the customer’s customer as a leading indicator of future revenue impact.
But, in practice, customer satisfaction is hard to measure. Even if there are well-respected metrics, such as Net Promoter Score (NPS), there are no good models to say convincingly that certain operational improvements correlate well with higher customer satisfaction, leading to higher retention rates and increased future revenues.
The first step in developing a QVP is to have a conversation with the customer in order to understand their needs, digest them, and then target your solution to meet these business needs. For customers, who are public companies, publicly-available financial reports can be a useful supplemental source of data. But these reports are usually very complex and have a lot of data to sort through.
There are a number of things to pay attention to during discovery of customer business needs and a couple of key questions to ask to identify them. In general, you need to ask the customer what key financial metrics they use routinely to measure the performance of their business. You need to tune the sample questionnaire below to address the key categories.
- Are costs too high? If so, in what categories? OpEx? CapEx? Be careful that the rules about what expenditure falls into which category changes by customer. What are the specific cost targets to be met?
- Labor costs are a significant component of operational expenditures. If you are providing automation to improve operational efficiencies, then you need to understand current labor loading and costs in order to connect your solution more or less directly to specific reductions in labor.
- If you are improving the “systems” cost by making them more efficient (doing more useful work in the same configuration), you need to understand the cost to upgrade such systems as a basis for quantifying reduction or deferral of capital expenditures over some period of time.
- If you are improving “systems” so that they are capable of generating more revenue, then you need to identify closely the areas of improvements and quantify the improvements in monetary terms. By using your solution, how much more stuff (products, services) can be sold to the customer’s customer at what price?
- If you are targeting “customer retention” or potential for future revenue changes at the customer, then you need to identify the factors, which impact the retention of the customer’s customer and how, specifically, your solution influences these factors.
It is important to understand the audience of the QVP analysis.
If your solution works in a “technical” area, e.g., IT systems optimization, it is tempting to consider the audience for the QVP to be a technical/systems IT team at the customer. It is not. You are trying to convince a business stakeholder, who usually is outside of the technical organization.
This person is directly responsible for using financial metrics and analysis to manage their business and to decide whether to buy your solution. You have to speak in this stakeholder’s language. Thus, the most effective QVP uses commonly used financial metrics to describe benefits of your solution.
Financial Benefits Categories
The following explains important financial benefits categories in which the QVP should be expressed. One common theme is the need to provide a cash flow analysis. To do this you need to have a clear pricing model of your solution as it applies to the particular configuration of the customer with specific sizings defined (e.g., number of units to be sold and basis for this; pricing per customer system, per transaction, etc.).
A cash flow analysis calculates certain properties of combined cash in-flows and out-flows over time. For example, you can say that your solution will cost the customer a certain amount over time (cash out-flow) and, you will bring new revenue as a consequence of running your solution (cash in-flow). There are certain financial benefits, however, where your solution is targeted to reducing cost. Here, it is reasonable to use the estimated reduction in cost as a virtual “cash in-flow” over a period of time for purposes of the QVP cash-flow analysis.
- NPV (Net Present Value). Calculates the value of future cash flows in present value terms using the customer-local weighted cost of capital (discount rate). It is important to note that the discount rate may not capture the true risks of investing in your solution.
- IRR (Internal rate of Return). Measures the profitability of the investment in your solution. IRR is the discount rate that makes the NPV equal to zero, i.e., IRR solves the NPV equation for the discount rate. This is used to assess the projected growth rate that your solution will generate in order to compare alternative solutions.
- ROI (Return on Investment) Measures the benefits of using your solution relative to the cost of your solution. It is expressed as the ratio of net gains (gains minus cost) of using your solution to the cost of your solution. ROI is expressed as a percentage.
- TCO (Total cost of Ownership) is the total cost of your solution including fees and other costs assessed by you (e.g., Support & Maintenance) as well as estimated costs to the customer of adopting and maintaining your solution.
- Payback Period shows how long it will take for the customer to payback their initial investment in your solution given the net benefits offered (cost reductions, revenue increases, etc.) Be careful about this; in simple formulations, this metric usually fails to capture the time value of money and other investments made by the customer during the lifetime of your solution.
How to Get the Data to Populate the QVP?
The QVP should show the impact on the financial condition of the customer based on the results of running the solution in the customer’s environment, measuring the improvements, and calculating the financial benefits.
If you do not have the experience making a trial of your solution in the customer environment, then two additional useful, but less powerful, approaches are:
- Option A: Run the QVP using some specific, well-documented assumptions about independent parameters for the model
- Option B: Use experience in another environment at another customer, which is “similar to” the customer at hand.
If you can make a case that the customer is quite “similar” to the customer where you already ran the solution, then the empirical results and the QVP based on them will apply. Option (B) can be made into a much more compelling story than Option (A). Often, you are able to provide both Options (A) and (B) by offering the customer a “similar-to” analysis as a means to provoke the customer to help set the model parameters of Option (A), which may be better tuned to a targeted customer’s needs.
Even if you arrange a trial of your product or service in the customer environment, you need to be careful that the trial is representative of typical conditions; you may have to extrapolate from a small dataset to scale benefits across the entire enterprise. This requires that you understand to some level how your sample is or is not representative of a larger sample and, on the basis of this, scale your benefits accordingly. This can work well, as long as you clearly document your scaling assumptions. It is often a good practice to use these assumptions as talking points for a better understanding of the customer’s business.
QVP is a Core Competency
The creation of a QVP analysis should become one of the core competencies of your company.
Even though a QVP statement needs to be customized for a particular customer and configuration of your product, you should make an attempt to systematize QVP creation in your sales and marketing workflow. The practice of systematically and in detail understanding your customer’s financial condition and how your solution impacts this should become part of your customer engagement processes.
Data from your customer trials, used as a basis for the QVP, need to be maintained and stored in a customer knowledge base.
Your corporate website should be dedicated to making the case of the financial benefits you bring to a customer, rather than just a soft qualitative benefits summary or an unending stream of product features. Every customer presentation should include a summary of financial benefits, best presented in a compact and branded form of the QVP and targeted, as best you can, to the particular needs of the customer.
By doing this, you are providing a customer-internal advocate of your solution with the ammunition needed to convince higher-level decision makers of the merits of your solution. A common format and model should be adopted to allow easy comparison across your customer engagements.
The QVP is the basis for the all-important case study, which shows your solution in action delivering beneficial results in various configurations under various customer requirements.
If you cannot identify a significant source of financial benefits brought to your customer by your product or service, then you ought to consider changing what you sell.
QVP is a Valuable Tool to Measure Real Impact
Key overall STEP properties of the QVP:
- Simple: Easy to grasp your value at a single glance. Confine your benefits summary to one page
- Targeted: the QVP shows financial benefits directly related to the use of your solution
- Empirical: the QVP is grounded on empirical results of your solution in trials at the customer or in an environment that can be shown to be “similar to” the customer’s.
- Plausible: The language and metrics should allow people versed in financial analysis to quickly understand your benefits and conclude that they are correct to some level.