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What is Value Based Management?
Value based management (VBM) is a strategic approach that focuses on maximising the long-term value of a business or organisation by managing the customer base by value. The goal is to better optimise profitability and as a result, create value for shareholders.
Businesses need to ensure that projects, and products, and customers are profitable and will provide a long-term return on their investment. Decisions should not be purely based on short-term gain, and the longer-term effects need to be considered to make sure they are sustainable and profitable in the future.
VBM encourages employees to think like owners and make decisions that will benefit shareholders by bringing value to the business. Managers and executives should always be looking for opportunities that will generate value and benefit the business’s long-term future. An essential concept of VBM is that future cash flow and growth of the customer base are a core part of a business’s value. Key business decisions should not be based on things like quarterly revenue or earnings per share, that short-term investors may stress over. They need to truly consider the long-term future of a business.
Benefits of value based management
There are a range of benefits to using a value based management platform, which include:
Focus on value creation
VBM aligns strategies, operations, and decisions with the main overarching objective of creating value. This often begins with understanding customer value before using insights to power value creation and decisioning. This focus ensures that key business decisions being made will benefit the business long-term.
Improved decision-making and adaptability
VBM helps ensure decisions being made are focused around creating value, resulting in more informed and strategic decision-making. It can help prioritise product and service investments, projects, and strategies that will bring the biggest long-term value to the business. Businesses become more adaptable and react quicker to market changes. They’re always taking onboard feedback and looking at ways to improve so they can get an edge on their competition.
Effective resource allocation
With the focus on creating value in the customer base, VBM results in more efficient allocation of your resources. When you know which projects, products, and customer groups bring the most value, you can prioritise resources to these areas to help increase returns. If something isn’t performing well, it may need more resources to improve things or resources could be fully moved to a more profitable area.
Aligned objectives
VBM aligns the objectives of stakeholders, including shareholders, employees, customers, and suppliers, towards the same common goal of creating value. This helps get everyone on the same page and foster a value-based approach, inherently understanding that for your customer base, value, not volume, is the driving force to profitability.
Increased adaptability and innovation
Businesses that have a value-based approach are usually more adaptable and quick to react to market changes. They’re always taking onboard feedback and combine this with value-driven insights to improve products and/or services to get an edge on their competition.
Reduced risk
By understanding the most and least valuable customers in your base, decisions can be made by weighing up the risk against the potential value creation. If the value creation outweighs the risk, it could be worth pursuing. VBM results in more informed risk management decisions being made.
Value based management will transform your business
Adopting a value driven approach establishes a value culture across the organisations. It safeguards future planning and allows you to make decisions with certainty.
By understanding value, you can improve the overall value of your customers, handle value destroyers and consider long term growth plans.
Having a true picture of value enables you to conduct Next Best Action analysis before making changes as well as deliver insight for supplier (re)negotiation and customer service and support.
A value based approach enables you to refine and set pricing and discounts, create and modify bundle offerings and enhance product development - all built around value generation.
By discovering who your most and least valuable customers are, you are able to improve customer retention for those value makers as well as personalise upsell and cross-sell opportunities.
Value based management enables you to enhance the personalisation of your sales and marketing activities, improve customer journeys and segmentation, and uncover immediate PIRs on new strategies.
A value driven approach allows you to incorporate value into your business processes enabling improved system decisioning and enhanced data modelling capabilities.
Not only does value based management optimise the profitability of your customer base, but it allows for scenario planning and long term growth opportunities directly impacting the bottom line. Your business becomes proactive not reactive.
Challenges of value based management
A VBM focus can help a business increase its value, however it can be difficult to set up successfully without expert support, or a value based management platform. Here are some of the main challenges of VBM.
Established businesses that have found success using a particular business model for a long time need to make sure they don’t disrupt things. Value based management should not take away value from existing work your business already does so it should be considered carefully before being implemented and should be done by an expert who can help you identify areas where it will add value.
VBM needs to be carefully implemented and should not be your only criteria for decision making as it could result in projects or ideas that have unknown potential being shelved or scrapped altogether. They could be profitable and beneficial to the long-term future of the business but currently have an unknown outcome. An example would be a piece of technology in the early stages. It could be an extremely valuable asset to a business that’s not suitable to measure using VBM at this stage.
Businesses need to make sure a value based management approach doesn’t take away from their social or environmental projects or goals. They have a responsibility to consider social and environmental issues and making decisions that only benefit the bottom line can backfire and end up hurting the business if they gain a negative perception. An expert can implement VBM while ensuring it does not detract from any environmental and social efforts.
Implementing value based management
Introducing VBM to your business isn’t a one size fits all approach, and there is no set way to carry out the process. Value based management will look different for every business, however there are some essential components that will form a part of every VBM strategy:
Firstly, understand the key factors that drive value within your business and customer base. Defining value drivers and the most valuable customers will help define goals and set VBM strategy in motion. To do this, review every way you currently invest resources and assess the value of each one. This could include factors like customer satisfaction, operational efficiency, innovation, or market share.
Secondly, establish clear and measurable long-term goals and objectives that are aligned with generating value and let your team know how they can help achieve them. This ensures goals bring value to the business. In order for VBM to work, it needs employees to buy-in to the value mindset. Letting your employees know that the work they do contributes to the overall creation of VBM helps it to be successful.
When establishing goals, you could include financial goals such as increasing shareholder value, but also non-financial objectives like improving customer satisfaction or looking at innovation. Let your employees know what they can do to help achieve goals so everyone is working towards growing the business.
Develop and implement metrics that align with value creation and monitor them closely. Measuring performance allows you to adjust things if you’re not on track to achieve set goals and targets. If a project, product, or customer group that was expected to generate long-term value is clearly failing, a business should act quickly using insights to determine how it can be improved or adjusted. Continuous monitoring of how everything is performing is crucial for VBM.
Regularly monitor performance against value-based metrics and adapt strategies where needed to ensure value is being generated. Tracking metrics like Economic Value Added (EVA), Return on Investment (ROI), and other relevant financial and non-financial indicators can help you see how your business is performing.
Assess all risks against the potential value they create. This can help you calculate how much value each project or decision could generate. If the risks outweigh the return, it’s likely not a good avenue to pursue. Ensure there are robust risk management practices in place so that everything is checked thoroughly before any decisions are made. Precautions should be in place to minimise any risks.
Decisions should be based on the potential long-term value they can create rather than short-term gains. This ensures that decisions being made are going to benefit the long term future of the business and not put it in a position of risk for short term gains. Prioritise investments and initiatives that will generate the biggest value in the long run. Try to calculate the potential a project or product could have by looking at market research and other tools at your disposal.
VBM is an approach that works best when everyone buys-in. Engaging with all employees and empowering them to contribute ideas is a great way to get them onboard and show they are valued by the business they are trying to generate value for. You can create a culture of innovation by listening to employee feedback on how the business can improve and by encouraging employees to openly suggest ideas and contribute during meetings.
Leadership within a business needs to be fully committed to VBM in order for the rest of your employees to support it. If people in high positions within a business don’t show they are behind VBM, other employees are likely not going to bother with it resulting in the approach failing. Managers should lead by example demonstrating their focus on value creation and helping implement the mindset.
How Sagacity can help with value based management
Our Value Based Management Platform can help your business implement a VBM mindset. You’ll have complete confidence that any business decisions you make are aligned with your goals and will generate long-term value. Our platform gives every employee the tools required to embrace a value based mindset.
We take a data-driven approach when looking at your business and help you identify the areas of your customer base that bring the most value. Our insights provide you with clear data to help you make informed decisions while understanding the long-term impact they will have on your business.
One of our clients is a ‘Big Six’ energy supplier who saved £12m opex using our VBM modelling.
