Their newly designed deposition system was ready to start shipping just as the market was taking off. Customers couldn’t get enough of them. In just eighteen months, they sold eighty units at over $4M a pop. Nearly three times more than anyone had forecasted. They felt like geniuses.
Then as the market mania calmed down a bit, those eighty customers started to plug in their new machines and qualify them for production. That’s when it started to get ugly. Once in the customer’s environment, these machines were simply incapable of meeting their yield specifications. Not just by a little, but by a lot. Virtually none of EquipCo’s customer’s were able to put their machines into production..
Customers were screaming. Some were so upset that they would not even let EquipCo’s service engineers on site. Others got fired for selecting EquipCo’s deposition system and failing to get their productions lines up and running. For EquipCo, orders dried up like a Savannah watering hole in the summer. The once frenzied business came to screeching halt. EquipCo was burning cash fast. If they didn’t solve this problem quickly, their days were numbered.
Back at headquarters, EquipCo’s engineer’s figured out what went wrong. There was a fundamental flaw in the system’s source material distribution module. This flaw was missed during in-house testing because they didn’t use the exact source materials used by their customers. The good news was that they had a fix. The bad news was that the fix required replacing the entire module to the tune of $100,000 per machine. It was going to take $8M to make their customers whole. $8M they didn’t have.
So the management team called an emergency meeting to figure out how to dig out of this hole. The meeting started with Bill, Vice President of Engineering, explaining in detail what went wrong, and his team’s solution to fix it. When he got to the solution part, Bill let it slip that the fix will also boost the system’s throughput by 25%.
“Wait! Do you mean the new source material distribution module will not only fix the installed base problem, but it will also improve the system throughput to be 25% better than the original specification?” Max, EquipCo’s Vice President of Marketing, asked.
“That’s right,” Bill confirmed.
“I have an idea,” Max said as he walked up to the whiteboard. “If I understand our situation correctly, we promised our customers a certain level of value. Then we under-delivered by a wide margin. Now we have a fix for the problem that will result in 25% greater value than our original promise.”
“That’s right,” was the chorus from the around the table.
“What if we could get the fix in our customers’ hands and get paid for the portion of the value that’s beyond what we promised?” Max asked.
“How would we do that?” again the chorus.
‘”Our customers paid around $4M for each machine. The fix that Bill’s proposing increased throughput by 25%. If we had these new modules in the original machine, it would have been worth $5M instead of $4M. What if we proposed to our customers that we will not only fix their machine, we’ll make it run 25% faster than we originally promised and charge a mere fraction of what this added value is worth?”
Ken, the head of sales, stands up, “I think they might. They are in a tough spot too. They have factories full of equipment that doesn’t work. They don’t have the capital or time to scrap it all and start over. They can dig their heels in, but eventually, the rational ones will act in their best interest.”
“Exactly what I was thinking.” Max chimed in, “Our customers need us to do this. I propose that we each price upgrade at $175,000. Our customers will be getting $1M in value above their original purchase at an incredible discount. While they won’t be thrilled about cutting another purchase order, they will be getting a very good deal. They can get on with running their factories, and we can start rebuilding credibility with our customers. Our message to our customers would go something like this,
‘You will be getting a completely new source distribution module that will both fix the yield issues you’ve been experiencing and make your equipment run 25% faster than it’s original specification. These original machines at the original specifications sold for $4M. The 25% productivity improvement makes them worth $5M each.
We understand the disruption we have caused your business, but we cannot afford to upgrade your machines for free. It will bankrupt us. If that happens, we won’t be able to help you recover your investment. The price for this upgrade is $175,000. That represents less than 20% of the $1M in value that you will derive from it.’
I’ll create some materials the sales team can use including a cleaned up version of the sketch I drew on the whiteboard.”
Over the next six months, EquipCo upgraded almost 90% of the crippled installed base. The upgrade saved EquipCo’s and their customers’ businesses. Saved by a value-based strategy.
The characters, companies, and figures used to illustrate value-based strategy concepts in this post are fictional.