Value Math is an interesting concept from the product development world.
It's way of measuring how much expected value a product produces and compares that to the cost of the product.
(The Finance-world with a capital-F have a few similar concepts but they require a BII financial calculator)
Value Math can be used to persuade and justify a product's benefits and works really well on analytical types of customers. Especially complex or complicated products sold to a B2B or professional market. It can help with high-end consumer purchases too.
Basically what you do is describe how the product helps, how much it helps, and then show at the end the total benefit is much higher than the costs.
Let's use one from the customer loyalty space.
Assume your customers spend $50 on their first order on average (AOV).
Assume 20% of customers order a second time and of those, 20% will order a third time. At that point they stop ordering.
(All of these assumptions are lower than industry averages, some MUCH lower. But the numbers make the math easier to follow).
Say there's a paid service you buy that will in increase the number of customers who reorder by 10% (from 20% to 30%, right around the industry average is).
Without that benefit, for every 100 first orders your store makes $6,200 from the first and follow-up orders.
- 1st orders: $5,000
- 2nd orders: $1,000
- 3rd orders: $ 200
With the benefit of the service, you're now making $6,950. An improvement of $750 or $7.50 per first order.
- 1st orders: $5,000
- 2nd orders: $1,500
- 3rd orders: $ 450
Let's say this service costs $100 per month. Paying $100 per month to make $750 more each month seems like a easy win right? You could even say "you'd earn back the cost in 14 orders" ($100 divided by $7.50).
This benefit is per 100 orders too, so if you sell more than that you'd benefit even more while the cost is kept the same.
That's a strong persuasive message to potential customers. Much stronger than the original "10% improvement to your reorder rate" or even a generic "boost your sales"
That's Value Math.
Some companies go as far as develop calculators for customers to plug in their own numbers and see how much they'd benefit.
It's great for B2B or professional markets where people buy based on value.
Eric Davis
Is your customer acquisition spending too much?
If you're spending more to acquire a customer than they are worth, you're at risk of going out of business. Check how much you can expect your Average Customer.