Simple Value Model

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Of the capital equipment value models, the most common is the simplest. In the simple value model, the buying decision considers the time from the moment the workpiece enters your equipment to the moment it exits. The simple value model may apply if the process your equipment performs alone drives the economics of the purchasing decision, and your equipment operates in series with the customer’s primary profit-making process. See the figure below.

Diagram of the simple value model for capital equipment

With the simple value model, you only need to consider the value metric factors related to the operation of your equipment. This simple value model for capital equipment is a close cousin to the equipment’s cost of ownership and is easily expressed and communicated as a value metric. The Mr. Melty example used in the How to Define your Value Metric and How to Set Value-Based Price chapters of this guide illustrates this simple value model.

A simple value model is also easily expressed as a set of comparable financials for two common buying scenarios.

  1. The customer is purchasing a fixed number of systems
  2. The customer is buying to satisfy a specific capacity

Let’s return to the Mr. Melty example to show how the same value metric can be used to express value in both buying scenarios above. The value metric data for Mr. Melty and its benchmark competitor are shown in the table below

Value Metric ElementUnitsMr. MeltyCompetitor
Charge sizekg650700
Process timehrs<65<75
Yield>75%>65%
Price$US655,000600,000
Value metric data for the Mr. Melty example

In the case of a customer buying a fixed number of systems, the comparative financials are as shown below.

UnitsMr. Melty Competitor
Charge sizekg650700
Process timehrs6575
Max throughputkg/hr109
    
Mass ingot yield75%65%
Yielded throughputkg/hr7.56.1
Yielded throughputkg/yr          65,700           53,144
    
System price$US        655,000       600,000
Depreciation Expense (5yr)$/yr         131,000        120,000
Capital expense/kg$US               2.0               2.3
    
Difference -12% 
Simple value modelThe customer is purchasing a fixed number of systems

See the example below for example Mr. Melty comparative financials when the customer is buying for a fixed capacity.

UnitsMr. MeltyCompetitor
Charge sizekg650700
Process timehrs6575
Max throughputkg/hr109
    
Mass ingot yield 75%65%
Yielded throughputkg/hr7.56.1
Yielded throughputkg/yr          65,700           53,144
    
Target annual capacitykg/yr     1,500,000     1,500,000
Number of systems needed 2329
System price$US        765,000       700,000
Total capital expense$US    17,595,000  20,300,000
    
Difference -15% 

Note that the percentage difference in value in fixed-machine-number and fixed-capacity comparative financials may be different. This is due to the effect of rounding up to the number of whole machines needed in the fix-capacity financials. (e.g. If 28.2 systems are needed to fulfill the capacity requirement, the customer would need to buy 29 systems.)