Maybe you’re one of the lucky ones. Your target market overwhelmingly chooses you over the competition because of your clear technical advantage.
Maybe you’re not so lucky. Your target market overwhelmingly chooses the competition, despite your clear technical advantage.
If your superior technology consistently puts you in the winner’s circle, it can be easy to convince yourself that “Our customers don’t buy on value, they buy based on technology.” If you keep losing despite your superior technology, it’s equally easy to rationalize, “Our customers just don’t recognize the value of your technology.”
Make no mistake. In both situations, your customers are making buying decisions based on economic value. They are buying the solution that will make them the most money. If you want to know what’s truly driving buying behavior and how to establish value-based pricing, you must understand how your superior technology translates into financial value for your customer.
Process Specifications Defined
Your superior technology likely leads to legitimate marketing claims that you can do something that the competition cannot. That claim usually comes in the form of a process specification. Examples of process specifications include:
- Distance that a commercial airliner can fly
- Weight that a crane can lift
- Film uniformity for thin-film deposition equipment
- Resolution of a microscope
- Accuracy of pick-and-place manufacturing equipment
- Cleanliness of the workpiece process environment
Process specifications define the work piece that your capital equipment is capable of processing.
Your customers need to know your process specifications so that they can determine if your equipment is capable of operating on their workpiece. For example, suppose that you are a commercial jet manufacturer selling to airlines that feature long-haul, non-stop flights. Your customers would need to know your maximum non-stop flying distance to be sure that you were capable of flying their passengers. In this case, long-haul passengers are the workpiece.
Superior Process Specifications Can be a Source of Value
All capital equipment buyers derive value from their purchases in a similar way. At the highest level, value drivers for capital equipment buyers are the same, whether they’re buying manufacturing equipment, bulldozers, or jet airplanes. These value drivers can be arranged in an expression that describes the revenue that your customer can earn with your equipment, divided by the cost of producing that revenue. This is called the comprehensive value expression. It captures all the economic gains and costs associated with a capital equipment purchase. See below.
Comprehensive value expression for capital equipment
Process specifications are not value drivers as we’ve defined them above, but they can be a source of value. They can be a “value-driver driver.” Say, for example, your customers routinely cite your or your competitor’s superior process specification as the reason they buy or don’t buy from you. What’s actually happening is that the process specification is affecting one of the value drivers in the comprehensive value expression. This in turn is driving the buying decision. As a value-based strategy practitioner, your job is to understand how.
For example, suppose you are the only manufacturer selling commercial jets with a 10,000-mile-non-stop-flying, process specification. Airlines with long-haul routes that buy this jet from you can offer direct flights to almost any destination. If tickets for direct flights sell for higher prices than flights with connections, your 10,000-mile-non-stop-flying specification improves the revenue-per-unit factor in the comprehensive value expression. Your value modeling would need to compare the economics of your direct-flight solution with your competitor’s connecting-flight solution.
Superior Process Specifications can be Irrelevant
Better process specifications, however, do not automatically translate into higher value. Let’s take the same 10,000-mile-non-stop jet. But this time your customer is a regional airline that only flies 1,500-mile and shorter routes. Several jet suppliers exist that can fly 1,500 miles non-stop. For this customer serving this market segment, your 10,000-mile-non-stop-flying specification is irrelevant. It doesn’t create any value when compared to competitors’ jets with 1,500-mile-non-stop-flying specifications.
So whenever you’re struggling to understand the impact a superior process specification has on customer value, ask and answer these two questions:
- Does that process specification affect one or more of the value drivers in the comprehensive value expression?
- Is that value driver(s) in your value metric?
If you can answer yes to both, then your superior process specification is driving customer value and the economics of the purchasing decision. Moreover, using the value metric, you can quantify the economic benefit and determine value-based pricing.