The Value Payoff - A New Framework to Measure Customer Value

In this issue, I cover:

• The Symptoms of a Weak or Largely Unknown Value Payoff

• What the Value Payoff is

• How to Measure the Value Payoff in Your Startup

In the last issue on designing customer workflows, we introduced Five Variables on workflows that I think through when evaluating startups for investment. The most critical variable to any workflow is what I call the Value Payoff.

In a workflow, the Value Payoff determines if the user want to adopt the startup’s new workflow and forsake the old, existing workflow.

And yet…

✅ Most startups do not have a clear understanding of the value their customer is deriving from the product.

When a Value Payoff is weak, or largely unknown, then I as an investor cannot triangulate the significance of the opportunity.

A strong, known Value Payoff is the only way a startup can hope to win in the market. ✅

Two Startups with Largely Unknown Value Payoffs

At one time, I met a startup team that was raising funds. They had a solution for a given industry that was unprecedented in it’s technology breakthrough. It was quite fascinating.

I understood the state of the art technology quite well. The breakthrough technology came in that the breakthrough allowed the customer to get the data it needed when the state of the art technology unable to be used in various real life scenarios, or got hacked.

So, I asked, “How often does this (state of the art technology) go down?”

The startup founders didn’t have a good answer.

I then asked,“How often does this (state of the art technology) get hacked?”

The founding team could point to an example or two from the news. Yet, did not have a clear answer on how often the problem actually occurred.

I then tried a different line of questioning.

“OK, let’s say this happens quite often, how much better data intel would this give me relative to the (state of the art technology)?”

The founding team said, “We provide a more exact measurement on this one KPI.” 

After talking to the founders, a “more exact measurement” mattered little to the user. It was metaphorically akin to sitting in your seat watching an NFL game and then having the opportunity to move into seats that were three rows up. It’s nice, but doesn’t change the overall experience all that much.

The Value Payoff was quite weak in this case. Additionally, the founders did not have much clarity when the Value Payoff would even apply!

But, it’s not just very early stage startups that struggle with the Value Payoff!

At one time, I spoke to the CEO of a Series A startup. The conversation was more casual and strategic in nature as I wasn’t evaluating the company for investment. I still recall the CEO saying something to the effect of,

On one hand, I couldn’t believe the Series A startup founder. On the other hand, I completely understood and knew why. Value is hard to measure. Additionally, when a startup is in full execution mode, often times the daily grind and need to generate revenue for the next funding round necessitates that you keep filling the punch bowl or making widgets, as it were.

But…

It is highly improbable for a startup to win with a weak Value Payoff.

It is highly unsustainable for a startup to continue to win with an unknown Value Payoff. 

An unknown Value Payoff is a symptom that the startup is not close enough to their customers. If a startup does not know what value the customer is deriving from your product, then sooner or later, that pattern will catch up to them.

In my experience, the majority of startups have a Value Payoff that is far too unknown. It’s not that it’s completely unknown. But it’s not known intimately enough that the startup can take the Value Payoff message to the masses.

So, how do we get clarity on the Value Payoff? I’m glad you asked… 😉

The Value Payoff Framework

Let me ask a question…

After a while, I put together a framework of how to measure “value” based on many observations over time.

Introducing The Value Payoff framework.

✅ For a given customer, a product’s Value Payoff can be measured in three major categories: Time, Money, and Assets and Liabilities. 👇

1. Time 

   1. Saves time

2. Money (P&L in Nature) 

   1. Increases revenues

   2. Decreases expenses

3. Assets and Liabilities

   1. Increases intangible assets

   2. Decreases intangible liabilities ✅

✅ In other words, the Value Payoff impacts:

1. Time

2. The Income Statement

3. The Balance Sheet ✅

It’s also important to note that The Value Payoff has what I term as “Market Actors.” Think of Market Actors as actors in the story of the startup. Sometimes Actor 1 is the actual customer that is paying the startup for the product but Actor 2 and Actor 3 are upstream or downstream beneficiaries of the experience. Often times, to find the market actors, one needs to look upstream and downstream in the story of your startup. Not all Market Actors will matter. The startup needs to identify the key main three or four market actors.

I tend to get at the Value Payoff with a question of, “What does the customer win differently that they didn’t have before?” 

✅ Understanding the Value Payoff is how I believe with additional certainty that this startup’s new and proposed workflow either has enough escape velocity to be adopted by the market, or not. ✅

Let me give an example from the Tundra Angels portfolio.

Towards the end of 2023, I got introduced to Pilot Project Brewing and Co-Founder and CEO, Dan Abel, via a Tundra Angels investor referral.

When I first had a Zoom call with Dan, my 30 minute meeting stretched to almost an hour. I became highly intrigued by what Pilot Project had accomplished at a systems-level in an antiquated industry of alcoholic beverages.

In short, Pilot Project is the first of its kind company in the alcoholic beverage market. In Dan’s words, Pilot Project is like a recording studio for alcoholic beverage brands. Pilot Project has manufacturing, distribution, and retail capabilities so that a beverage entrepreneur needs to bring the opportunity, the brand vision, and a great flavor. Pilot Project takes in hundreds of applications a year and selects roughly five a year to work with. Pilot Project works with the selected brands to bring it to market - starting with very small batches and instant feedback via consumer tests at retail, to scaling it up to hundreds of barrels if the brand becomes successful. This system creates a data ecosystem and feedback loop for beverage innovation that has never existed in alcoholic beverage (or beverages in general). At the end, Pilot Project, completely eliminates the barriers to getting an alcoholic beverage to market.

I spoke to Dan on a Tuesday while in a Madison hotel room at a conference. I was so intrigued that I set up another meeting with him on Thursday in-person at Pilot Project Brewing downtown Milwaukee to see the space and get the experience. Dan gave me a tour and we were able to talk for about an hour and a half. 

About a month later after that Zoom conversation above with Dan, Tundra Angels invested in Pilot Project.

As part of our due diligence process, we went through the Value Payoff exercise to quality and qualify the Value Payoff to each actor in the Pilot Project story. Below is a redacted version of Pilot Project’s Value Payoff.

Dan identified Pilot Project’s three major Market Actors as 👇

1) An Up and Coming Beverage Brand (one of their potential portfolio brands),

2) The Retailer/Consumer, and

3) A large alcoholic beverage company

Dan noted how Pilot Project saves time for two of the market actors… 👇

Dan detailed how Pilot Project increases revenue for the large alcoholic beverage company, as well as decreases expenses for all three market actors…👇

Dan finally noted how Pilot Project increases intangible assets and decreases intangible liabilities for all three market actors…👇

A clear Value Payoff helps me as an investor understand, “How much does or will the market care about this startup’s solution?” 

At the end of the Value Payoff exercise, I am left with much more clarity around the Value Payoff for a startup, quantified and qualified.

I would encourage any startup founders to do this exercise for their own startup…

Also…

The optimal Value Payoff is one that is highly specific in terms of time, money, and intangible assets, if at all possible.

Some value pieces, such as in the case of Pilot Project’s saving time comments of “bringing a brand to market quickly,” it is near impossible to peg down into a specifics. But one can get the sense that we’re on the order of months if not years of time savings.

The more specific, the better, as specificity of payoff determines if a solution is worth it, or not, to the market actor.

The outflow of the Value Payoff is immense and has vast implications on everything the startup does.

We identified in the previous issue that game changing workflows have the following characteristics:

1. A clear Trigger Moment

2. Many “A ha” Moments

3. Stay far away from the Line of Ambivalence

4. Almost never fall into the Drop Off Point

5. Unleash a spectacular Value Payoff

I’ll reiterate again - most workflows fail because the Value Payoff is not spectacular.

Specifically, the majority of startups have a Value Payoff that is either 1) too weak, or 2) largely unknown to the customer.

It is in those moments when the Line of Ambivalence creeps up for the customer - “I don’t know if this is worth it…..” 

When designing workflows specifically…

A startup needs to get clarity on their Value Payoff.

If it’s not spectacular, find a way to make it spectacular. Otherwise, your customer or user will drift toward the Line of Ambivalence of the Drop Off Point.

In the next issue, we will see how placing well-designed “a ha” moments in the product workflow act as tailwinds to move the user through the end of the process, into the victorious feeling of the Value Payoff.