How to calculate your "economic contribution" and using it to price your product or value an idea

I'd like to share a method I learned from studying publicly listed companies (I make a living as an investment analyst) to measure your business' economic contribution, a measure I believe to be fundamental to any enduring success.

It also happens to be:

1. a neat way of figuring out how to price your product in a way that generates huge long-term competitive advantages
2. a starting point to figuring out what ideas are worth pursuing.

I'll call this metric economic contribution and is calculated as follows...

Formula

Economic Contribution = Monetary value generated for your customers from using your product / how much your customers pay you

Take one of the greatest businesses, Costco, as an example. For every dollar Costco earns, their members save $5 on average. Their economic contribution amounts to $5 ($5/$1) per customer.

Of course, if you offer a free product like Indie Hackers, then your economic contribution is infinite.

The higher the economic contribution...

1. The lower the probability of churn
2. The higher the probability of long-term business sustainability (competitors have to top this economic contribution in order to compete. In the case of IH, having an infinite economic contribution almost guarantees there will be no viable alternative to IH that would lead users to churn)
3. Higher probability of word-of-mouth marketing spread (infinite ROI)
4. The larger your contribution to society, and by extension, the happier you will be in your grave.

So, how does this relate to pricing and validating ideas?

First, start by asking what is the quantifiable value your business adds to customers. This can be hard but try your best to approximate the value as close to reality as possible. It could be time saved, opportunity costs, higher revenues etc. Use existing data if you must.

Then, figure out what value your competitors add to society. Your goal is to top that. Either add more value on the numerator, or reduce the denominator and undercut your competitors.

How to pick a meaningful economic contribution value? It has to be significantly greater than your competitors'. Double it, triple it if possible. Once you settle on a value, work backwards to determine your price point.

For the last step, figure out if that price point adequately covers your costs and offers you a profit potential you are happy with.

Closing: What's your Economic Contribution?

The above might seem obvious, but not many people value businesses that way. I find that businesses that generate the highest relative economic contribution in their field to be the most enduring, and by extension, happens to be amongst the best investment candidates. I think the same principles can be applied to all businesses, no matter the size.

I hope this helps. Do share your startup's / side project's economic contribution below, it'll be an interesting exercise that we can all learn from.

p.s. Do follow me on Twitter if you'd like more of these ideas. I'll be posting random things I learn from studying businesses throughout my journey as an investment analyst. I've also spent the last year and a half learning how to code on the side and am in the midst making a couple of side projects that I will be building semi-publicly on Twitter.