How to Quantify the Value that your Product Creates for Industrial Customers
A guide for industrial tech startup founders to estimate the business value their product creates
Industrial/B2B buyers hardly make a buying decision if you cannot clearly showcase the value that your product can offer to them. In other words, you will have to quantify your value proposition.
Why is that important? say for example there are two products, Product A & Product B, both offer a predictive maintenance solution for boilers, here is the value proposition for both of them:
- Product A: Reduces boiler breakdowns, improves equipment life, hence saves cost.
- Product B: Reduces boiler breakdowns by 80%, helps extend boiler life by 2 years, hence saving $250K/year.
Without a doubt, customers will choose to buy Product B, as it quantifies the value and clearly communicates what customers can expect. While Product A’s offerings are the same but is vague & unclear. More specifically, Product B showcases Business Value—the monetary benefits the product can offer to customers (Note: customer = buyers + users)
Buying decisions will not be made unless startups showcase a clear Business Value that their product can help their customers realise.
In addition to helping craft a better value proposition, quantifying value or business value also helps in estimating the Market Opportunity, i.e. TAM, for your product and in Estimating the RoI for a particular deployment or project.
In his blog Everything you need to know about Value Proposition, Vish Sahasranamam, co-founder & CEO of Forge, explains the importance of value proposition and its role in assessing customers' willingness to buy/pay. This also gives an insight to startup founders on how to price their product.
Business Value Estimation
Business Value, i.e. the monetary benefits, for any product is realised in two ways—cost saving & revenue generation. So your product should either save cost or generate additional revenue or do both for your customers.
Business Value = Cost Saving + Revenue Generation
A. Cost Saving
If your product helps prevent some undesirable event or does something efficiently with fewer resources—it falls into the cost saving category. The likely use cases include reducing plant downtime, preventing accidents, automation of any kind, reducing equipment failure, etc.
There are two ways to calculate Business Value for the cost saving category:
1. Cost of Consequence
This is the cost that your customer will incur if there is no solution in place. In other words, what will be the consequence of not using your product? Take predictive maintenance solutions for example, if there is no such solution in place, what will be the cost that customers will incur due to sudden breakdown of equipments? Another example is factory floor safety monitoring—what will be the cost of accidents occurring on the factory floor if a monitoring solution is not present?
Example: ExactSpace, one of the startups supported by Forge, has developed an AI/ML based predictive maintenance solution that predicts likely failures of 50+ thermal assets in power plants. The startup has estimated that $1.5M to $3M is lost evey year due to unplanned asset downtime in power plants—which the startup can potentially save through its solution. Hence the Business Value is $1.5M to $3M.
There will be cases where it’s difficult or not possible to estimate the cost of the consequence, for which the following method can be adopted.
2. Cost of Alternate Solution
Alveofit, a digital health tech startup, has developed an assistive device that helps in monitoring the lung health of patients with lung conditions, industrial workers in harsh environments, etc. The cost of consequence, for industrial workers, is not having a lung health monitoring system due to which workers develop serious lung complications & even encounter loss of life. Hence Alveofit’s solution is without a doubt valuable. However, estimating a Business Value is difficult in this case—putting a monetary value on a health condition or loss of life is not possible or is too complex to estimate.
The only way to estimate business value in cases like these is to find the cost of using an alternative solution/substitute to do the same job or to achieve the same outcome. The use cases & solutions that fall into this category include carbon emission reduction, preventive health solutions, etc.
Example: Traditional lung monitoring test would require about $12/person, while a test using Alveofit’s product costs only about $0.5. Hence the Business Value is $12.
B. Revenue Generation
Products that help customers generate additional revenue or unlock a new revenue stream falls into the revenue generation category. The use cases include improvement in productivity & process efficiencies, quality enhancements in customers’ products, generating wealth out of waste, etc.
There are two ways through which products can generate revenue:
1. Additional Revenue Generation
These are products that can generate additional revenue in already existing revenue streams. The possible use cases include improvements in workforce productivity, operational efficiencies, product quality, etc. All these help increase or improve output in factories/industries, hence generating additional revenue.
Example: Consider Maximl, a startup that digitises the workflows for factory floor workers. Due to which, workers’ productivity improves, reduces lead time and hence increases the factory output with the same inputs—helping factories generate additional revenue. The outcome include 50% faster training for new operators, 75% increase in procedural adherence, 35% improvement in First Time Right, reduced training costs, and others. All these results in generating atleast a few thousand dollars in revenue as business value for industrial customers.
2. New Revenue Stream
This scenario occurs when your product or solution generates a new, previously non-existent, revenue stream for customers. For instance, take red mud—an industrial waste generated during the processing of bauxite into alumina. It currently has no significant economic value, so it is usually discarded & dumped. However, there are few emerging solutions that can extract iron from red mud—opening up a new revenue stream. This is an example of how ‘wealth out of waste’ can open a new revenue stream to a company.
Example: Goenvi, another startup supported by Forge, has developed a solution for converting plastic waste into alternate fuel that can be used for industrial heating applications, through a process called pyrolysis. Say, a city’s municipal corporation decides to adopt this solution for processing 1 tonne of plastic waste/day. The output here will be about 500 litres of alternate fuel/day. The economic value for this fuel is around Rs. 50 per litre, hence the Business Value will be ~$27 million per year.
Summing it up
- Buying decisions for a product among industrial or B2B customers will only be made if a clear/quantified business value is showcased.
- Business Value = Cost Savings + Revenue Generation
- Cost Savings can be estimated using Cost of Consequence—the cost of the consequences if the product is not used; or Cost of Alternate Solution—the cost of using an alternate solution/substitute to do the same job.
- Revenue Generation happens in two ways—firstly, Additional Revenue Generation—is the increment in revenue that a product/solution brings to an existing revenue stream. Secondly, New Revenue Stream—the creation of a new, previously non-existent, revenue stream.
At Forge, we support industrial tech startups with the right tools, frameworks, and processes for them to build products, commercialise them, establish partnerships, raise investments, and successfully scale their venture. Know more about Forge here—www.forgeforward.in
