Excerpt from Get Your Price!: Value-Based Strategy for Capital Equipment Companies
The idea that capital equipment makers have it easy can be hard to swallow. After all, capital equipment companies are subjected to
- Vertigo-inducing market cycles,
- Constantly changing technologies,
- Long, costly, bet-the-company product development,
- Aggressive competitors, and
- Demanding customers with sophisticated buying processes.
But when it comes to implementing a value-based strategy, capital equipment companies have the edge.
In the broadest sense, a value-based strategy must deal with both economic and emotional value to the customer. Economic factors are simply those that either
- Reduce costs or
- Increase revenue.
Economic factors can be quantified and verified. They can usually be expressed in a spreadsheet. This is not so for emotional factors. They include things like
- Peace of mind,
- Aesthetics, and
These are all intangible, subjective, and hard to measure. It is very difficult to create a universally acceptable, objective measure of emotional value.
For the capital equipment maker, this is not a concern. For you, a value-based strategy is completely based on economic factors. Emotional factors can be ignored.
Emotions Complicate a Value-Based Strategy
Ask yourself, “How would I create a value-based strategy for a shirt?”
It’s not so straightforward, is it?
Assume that the buyer is of reasonable means and already owns several shirts. You can’t directly calculate the value the shirt creates for this buyer. Fashion, feelings associated with the brand, and pleasure derived from owning the shirt drive the purchase decision.
It’s impossible to plug these factors into a hard-coded pricing formula. It gets even harder when you try to use these factors to set value targets for future shirts on your product roadmap. It’s all emotion. It’s all subjective.
In some industries, economics factors are present and can be measured. But emotions still drive the purchasing decision. Let’s consider cars.
Cars are sometimes marketed on the idea of cost-of-ownership savings. Cost of ownership is a direct expression of financial value. Toyota has done this with the Prius, their gas–electric hybrid car. Part of the marketing message for the Prius can be paraphrased as:
“The money that you save in fuel more than makes up for the higher price of a hybrid car.”
This may be a technically accurate statement of a Prius’s financial value vs. nonhybrids. But is it really how customers buy?
Cameron Diaz, Dustin Hoffman, Miley Cyrus, and Leonardo DiCaprio all drive a Prius. It seems a reasonable assumption that these wealthy celebrities didn’t make their buying decision based on total cost-of-ownership savings.
What about the rest of the market? Are they buying the Toyota hybrid to save money or because it’s cool to drive the same car that famous celebrities drive?
In both the shirt and car examples, emotional factors contribute significantly to the buying decision. For markets like these, value cannot be expressed in purely financial terms. This makes defining value, competing on it, and establishing value-based pricing difficult.
Capital Equipment Is Pure Economics
Capital equipment is any equipment used by an organization to provide a service or to make, market, keep, or transport products.
Capital equipment is purchased for the sole purpose of making a profit. It’s purchased to either save or make more money.
It follows that the capital equipment buying process is designed to identify the most economically valuable option. This is necessary for the buying organization’s success. It’s also fundamentally the same regardless of the specific industry. The buying process goes something like this:
- Verify critical performance specifications and operating costs.
- Obtain and negotiate offers.
- Do the math.
- Select the offer that produces the most profit.
For capital equipment product and marketing strategy, emotional value factors can be ignored. Your strategy can be based completely on producing a superior economic outcome for your customers. As a capital equipment supplier, you can
- Express value in purely financial terms,
- Use that value expression to set product roadmap targets, and
- Use that value expression to set and defend pricing.
For you, pursuing a value-based strategy is
- Objective, and
This is a luxury not shared by the shirt and car makers of the world.
Buyer As the Enterprise vs. Buyer In the Enterprise
When you are selling capital equipment, you are selling to an enterprise. For the enterprise, only economic value drivers matter. The enterprise does not have feelings. Emotional value drivers can be ignored.
However, the individual in the enterprise does have feelings. That individual may need to feel secure that his equipment-purchase decision won’t put his job at risk. Or he may need to demonstrate that he’s a tough negotiator to earn the boss’s respect.
Individuals can satisfy an overwhelming portion of their emotional needs by looking after the economic needs of the enterprise. By consistently making decisions that lead to higher profit for their employer, individuals can expect to feel secure, appreciated, and respected.
But you cannot expect that the enterprise and the individual are always one and the same.
For example, suppose an individual decided to buy your competitor’s equipment the last time he purchased. This time around, he’s changed his mind and wants to buy yours. However, he’s worried that doing so will appear as an admission that his previous decision was a mistake. This individual has an emotional need to “appear competent” in both decisions.
You can think of value-based strategy as having two distinct phases. See Figure 9. The first produces valuable products. When producing valuable products, the focus is 100% on the buyer’s enterprise. Value is defined in purely economic terms.
In the second phase, the focus is on winning discrete purchasing decisions at prices that reflect the product’s value. When selling value, the product’s economic value will be the principal driver of your success.
Figure 9: Value-based strategy expressed as two phases
However, the salesperson must ensure that the individuals making the purchasing decision also achieve a personal win. For that, emotional value drivers may need to be addressed. See Figure 10.
Figure 10: Buyer’s enterprise vs. buyer in enterprise impact on value drivers