Excerpt from Get Your Price!: Value-Based Strategy for Capital Equipment Companies
If your company can’t define, create, market, and sell value, you’ll know it. Failure to implement a value-based strategy will show up on the bookends of your income statement. You’ll have lower revenue on your top line because of lost orders or lower prices. Lower revenue means lower profit on your bottom line.
But anemic revenue and profit as symptoms of a failed value-based strategy are too abstract. Consider this: A doctor can’t diagnose your health issue with nothing more to go on than “I don’t feel well.” She needs to examine several details of your condition before she can make a diagnosis.
The same is true for establishing what ails your value-based strategy implementation. You need more precise indicators. Here are seven signs of value-based strategy trouble to help you pinpoint what’s gone wrong in your implementation.
Value Propositions Don’t Express Value
No, the subheading above isn’t a typo. It’s actually one of the most common signs of a company that has failed to embrace a value-based strategy. To find out if you have this problem, try this with your marketing manager.
Ask him, “What is our product’s value proposition?”
If you get an answer like, “Our unique deposition technology provides 30% better uniformity than the competition does,” then you have this problem.
This supposed value proposition doesn’t express value. It expresses a feature. It expresses a benefit. But no value is expressed. Compare that to the following:
“Our unique deposition technology provides 30% better uniformity than the competition, resulting in ten more salable units per day. At $1,000 profit per unit and 330 production days per year, our machine produces $3.3M more profit each year for our customers.”
In the first answer, no financial value was expressed. In the second, it’s clear that your product is worth $3.3M more a year than the competitor’s product is worth.
Price Is Top Lost-Order Cause
When the competition wins an order at a price lower than what you were willing to offer, you didn’t lose on price (except on rare occasions). You lost on value.
When price shows up as the most frequent lost-order cause, you have a fundamental breakdown of your value-based strategy. You have failed to create products for which your target customers are willing to pay your price. Your customers see your value-to-price ratio as inferior to that of your competition.
Prices Are a Function of Cost
Pricing your products based on what they cost you to manufacture is a complete disconnect from value-based strategy concepts. The price the market will pay for your product has nothing to with how much it costs you to produce it.
Using your cost as a basis for pricing can hurt you in two ways. One, you overprice your product and fail to win orders. Or two, you underprice the value of your product and fail to reach your profitability potential.
Value-based pricing is a function of how your product produces profit for your target customer and the degree to which it does it better than the competition. If your organization is pricing based on costs, it is ignoring this tenet of value-based strategy.
Prices Are Determined at Market Launch
This one’s not as crazy as it sounds. In many equipment companies, the first serious discussion about product pricing occurs when the pricing committee meets to approve a new-product launch.
Price is how an equipment manufacturer captures their fair share of the financial value that their product produces for the customer. It cannot be an afterthought that is slapped on just before the product goes to market. Expected-price determination must coincide with the original product definition. Usually, this is in the product roadmap and then in more detail in the market requirements document.
Your Products Look like Christmas Trees
An intimate understanding of the specific value drivers for your target market is the cornerstone of value-based strategy. Products and product roadmaps with random features hanging on them like ornaments on a child-decorated Christmas tree are a sure sign that you have failed on this front.
It might seem counterintuitive, but products that are born out of a value-based process are usually not the most feature rich. Instead, they are adorned with only the critical capabilities their target market values.
Sales Is Uncomfortable Defending Price
Is a discount-approval request routinely the sales force’s first reaction to tension in the sales process? If yes, then you have a value-based strategy breakdown. This breakdown likely happened due to one or a combination of these four possible causes:
- The value-proposition-to-price relationship was constructed incorrectly.
- The value proposition could not be substantiated during the sales cycle.
- The competitor’s capability and reference-pricing assumptions used to formulate your value proposition were flawed.
- You have not developed the competency in your sales force to defend your value proposition and pricing.
Precise on Price, Vague on Value
If your organization is precise on price but vague on value, it’s a sign that your organization doesn’t really understand how the customer profits from your product. A conversation between a prospective customer and a supplier with such an affliction might go something like this:
Customer: “How much should I budget for this equipment purchase?”
Supplier: “$3.5 million.”
Customer: “How can I expect to profit from buying your equipment versus the alternatives?”
Supplier: “You’ll get superior performance from a world-class supplier.”
Companies that have successfully implemented a value-based strategy can put a number on both the price and the customer value. The customer conversation with an equipment maker using a value-based strategy might go more like this:
Customer: “How much should I budget for this equipment purchase?”
Supplier: “$3.5 million.”
Customer: “How can I expect to profit from buying your equipment versus the alternatives?”
Supplier: “You’ll save $2 million per year in operating costs.”
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