You expect a value-based strategy to deliver more customers at higher prices. That, after all, is the headline promise of a value-based strategy. But what’s beneath the headline? Where exactly do those customers and prices come from?
It turns out that adopting a value-based strategy activates five different powerful profit sources. Some happen very quickly. Others provide the engine for your longer term growth and competitiveness. Those five profit sources are:
- The underpriced product
- Better value articulation and substantiation
- Leaner products
- New more valuable products
- Uncontested space
The Underpriced Product
Without a value-based strategy, there’s a better than even chance that you have undervalued a product in your portfolio. A value-based strategy produces a clear financial expression of customer value. That expression relates your product’s value-drivers, their impact on your customer’s profitability, and your product’s price.
Once you have developed this expression, you can use it audit your current product portfolio to determine if you have priced the products in it correctly. If this audit surfaces an underpriced product, you can immediately correct the price then update sales materials and train the sales to defend it. It is not unheard of for an equipment company to go from kicking-off a value-based strategy implementation effort to capturing underpriced-product returns in less than 30 days.
Better Value Articulation and Substantiation
Once an organization develops the capability to understand and implement a value-based strategy they quickly come to a critical realization – It can do a much better job articulating and substantiating the current product portfolio’s value proposition. A value-based strategy makes it very clear what the customer’s value drivers are, how they produce profit for the customer, and how your competitive advantages support your target pricing.
These lead to amazing clarity on exactly what you must do to articulate and substantiate your value and defend your pricing. Selling materials get revamped, demo scripts get revised, proof data is developed, and sales training sharpens. Shortly afterward pricing and win rates start to move up.
A value-based strategy requires that you clearly define value in the eyes of the customer, then identify the specific value drivers in your product that are critical to the buying decision. With this clarity, non-value added features can be removed from the product along with their added costs and complexity. No more loading up the product with features hoping that the customer equates more features with more value.
The result is a lean product that hits the customers’ value drivers without a lot of extras thrown in. Of course, new products that are conceived from a value-based strategy framework will be lean, but you can also lean-out existing products. The results will come as quickly as you can zero in on the true customer-value drivers and drive existing product configuration changes.
New, More Valuable Products
With clarity on the customer’s value drivers comes clarity on your product strategy. You will set those value drivers that drive your customers buying decision to be better than the competition and everything else to be just good enough. You’ll have a lean product that from the moment of conception was destined to capture more customers at higher prices. The profit from these new more valuable products hit your income statement as fast as your new product definition and development cycle allow.
The traditional product strategy mindset is to keep developing higher performing products to solve a static customer problem. Product innovation is seen as the source of competitive advantage. In contrast, a value-based strategy is always seeking new customer problems to solve. Unique insight into customer problems and how solving them produces profit for the customer is seen as the primary driver of competitive advantage. Every time you identify and solve a new valuable customer problem uncontested space is created. Selling in uncontested space produces extraordinary returns.
Timing for the 5 Profit Sources
The five sources of value-based strategy profit above have been presented in the order of when you can expect them to hit your income statement – from almost instant to longer term. While no two value-based strategy implementations are alike, the chart below represents a reasonable timeframe for an equipment company.