Calculating the Value of Benefits

Benefits with both measurable and perceived value can produce either cost avoidance or dollar savings. You calculate the dollar value using indirect and direct savings. The former is more long-term and subjective, while the latter is more short-term and objective.

Indirect Savings

Indirect savings, such as that afforded by maintenance or insurance programs, has perceived value. Customers assign value to their benefits according to the negative events they avoid. The following two factors influence the value of indirect savings:

1. The probability these negative events will occur

2. The financial ramifications if they do occur

Note

As the probability and dollar ramifications increase, it is more likely that customers will place value on indirect savings.

Example

Doing an oil change every 3,000 miles supposedly makes your car engine last longer. Its value is hard to prove in dollars. If you never had engine problems, you might believe that a $20 oil change saves you a $2,000 engine rebuild. Additionally, as you put on more mileage (greater probability), the more valuable the oil change becomes.

Direct Savings

Direct savings have measurable value. You assign value to benefits without depending on cost-avoidance calculations. Customers measure the value of direct savings immediately.

Example

You buy a new car that uses regular gas instead of premium. Regular gas costs ten cents less a gallon. You calculate your cost savings instantly by taking the number of gallons and multiplying them by ten cents.

Note

Unless you are always the low-price supplier, you do not want the only direct savings to be Column 1's price difference between you and competitors.