Capital equipment buyers buy for one reason and one reason only. It is to improve their organization’s profit. They expect their equipment purchase to either increase revenue, decrease cost, or some combination of the two. For capital equipment buyers, value is pure economics. When selecting among alternatives, they will choose the equipment with the most potential to improve their profitability. It follows then that your value proposition must describe the superior financial outcome the buyer can expect when choosing your equipment over alternatives.
The value proposition for capital equipment is an expression of the financial outcome the buyer can expect.
In product strategy, this concept of value drives your product roadmaps. In product marketing, it forms the foundation for everything you do to attract, acquire, and keep customers. All your marketing campaigns, sales tools, media, and demonstrations must be designed to communicate and substantiate your value proposition. But before you can do any of that, you must define it. To define your value proposition, follow these four steps.
- Determine how the customer defines value
- Define the competition
- Determine the buying-decision drivers.
- Use comparative financials to reveal your value proposition
Determine How the Customer Defines Value
Capital equipment buyers represent a market segment that we can clearly define. They are organizations that buy equipment to provide a service or to make, market, keep, or transport products to make a profit. All capital equipment buyers derive financial value from their purchases from a common set of value drivers. This is true whether they are buying manufacturing equipment, bulldozers, or jet airplanes. These value drivers are shown in the table below.
|Revenue/unit||Revenue that the buyer can achieve from each unit of the product or service that the equipment is used to produce|
|Throughput||The rate at which the equipment processes the unit|
|Yield||The percentage of good units that the equipment produces out of the total processed|
|Uptime||Percentage of time that the equipment is available for use and not in a repair or maintenance state|
|Costs to Acquire |
Gains Value Drivers
|Operating costs||All costs associated with running the equipment, such as utilities, maintenance, and consumable materials|
|Capital expense||Equipment purchase price (or period depreciation expense)|
From the universal, capital-equipment value drivers above, we can create a comprehensive, value expression for capital equipment shown in the figure below.
This expression is in the form of output (or gain) over the cost to acquire that output or gain. You may recognize this expression as the reciprocal of an equipment’s total cost of ownership.
Knowing the universal capital equipment value drivers, however, is just a starting point. There are countless capital equipment market segments. Each with its specific use cases and buying behaviors. If the customer defines value, it follows that you must have a precise description of the market segment or segments to which your value proposition applies. Note that a single product may have more than one value proposition. The number of value propositions that a single product has is a function of the number of market segments it serves.
Market segmentation is the process of defining and subdividing a large market into clearly identifiable segments with similar buying behaviors. Defining the market segment or segments that you will target is the first step in defining your value proposition. To determine the value proposition for each market segment that you intend to serve, you must answer these two questions.
- What problem do your target customers have that you are proposing to solve?
- How does solving this problem make or save them money?
The answers to these for each target market segment will lead you to identify that segment’s most important capital equipment value drivers.
By way of example, let us turn to our fictional Mr. Melty. Recall that Mr. Melty is a multicrystalline silicon ingot growth furnace sold to photovoltaic (PV) wafer manufacturers who in turn sell these wafers to PV solar-cell makers. These ingot growth furnaces represent a type of capital equipment sold to a specific market segment. See the figure below for an example of ingot growth equipment market segmentation showing Mr. Melty’s target market.
Mr. Melty turns polysilicon feedstock into multicrystalline silicon ingots. This is the problem that Mr. Melty solves for its target customer. From your engagement with the market, you have determined the following about how solving this problem makes or saves money for PV wafer manufacturers.
- The price that the PV wafer manufacturer gets for each wafer has a big impact on his profitability. Material quality from ingot growth furnaces determines wafer pricing.
- The total output of each ingot growth furnace is very critical to the PV wafer manufacturer’s economics. This means that the equipment must produce acceptable material, process it quickly, and be reliable.
- Processing the polysilicon feedstock consumes an enormous amount of electricity. It is one of the largest costs associated with producing multicrystalline ingots.
Given this information, you can see that all the capital equipment value drivers are critical to this market segment’s ingot growth furnace economics. See the table below.
|Value Drivers||Critical to economics?||Description for Ingot Growth Furnaces|
|Revenue/unit||Yes||Material quality affects ultimate solar-cell efficiency and ultimately the revenue that can be derived from each kilogram of material produced|
|Throughput||Yes||The amount of material (charge size) divided by the time it takes to process it|
|Yield||Yes||The percentage of good material in each ingot produced; called mass ingot yield|
|Uptime||Yes||Percentage of time the furnace is available for use and not in a repair or maintenance state|
|Operating costs||Yes||All costs associated with running the equipment, such as crucibles, utilities, and maintenance|
|Equipment price||Yes||Furnace purchase price (or depreciation expense)|
Define the Competition
It is the combination of your target market’s critical value drivers and your competitor’s ability to address them that will enable you to determine the customer’s buying decision drivers. You might think that who your competitors are is obvious. They are the other folks selling equipment like yours, right? Sure. But you must look beyond them to understand the full competitive landscape. Your competitors come in three forms:
- Direct competition
- Alternative approaches
- The decision not to buy
Direct competition is the obvious head-to-head, equipment-to-equipment competitor. This is the easiest situation for evaluating relative value. It is as simple as lining up your performance on the key value drivers with that of your competitor. Apply a little math, and you can determine your equipment’s value proposition.
Alternative approaches refers to indirect competition. These are the alternative ways that your target market can solve their problem.
For example, hard-disk drives solve the problem of nonvolatile storage for large volumes of data for personal-computer users. To the hard-disk-drive manufacturer, its direct competitors are the other disk-drive manufacturers. But alternatives exist where the computer users can avoid purchasing a large hard drive. They can subscribe to a cloud-based storage service and get away with very little local storage. The cloud-based storage service is an alternative solution for the personal-computer owner and an indirect competitor to the hard-disk-drive maker targeting personal-computer buyers.
The last type of competition is the decision not to buy. This is a subset of alternative approaches. It deserves special attention because it is often overlooked in the context of value proposition development. In the equipment world, the decision not to buy can take many forms, including a decision
- Not to expand production capacity,
- To repair instead of buy new,
- To operate at a lower yield,
- To operate at lower productivity, or
- To operate at a higher cost.
For example, let’s say you have an equipment solution that will improve the yield for a customer in your target market. That customer decides to pass on your offer, not buy anything, and continue to operate at his current yields. The customer chose your decision-not-to-buy competitor. In this case, your customer is deciding between avoiding new capital investment and living with current yields and making a capital investment in return for higher yields.
To define value, you are going to need to account for each type of competitor relevant to your market. For markets where solutions like yours have become the industry’s process of record, you may get away with focusing on direct competitors only. In markets where there has been a broad acceptance that the problem must be solved but viable alternatives exist, you must also consider indirect competitors. And last, for target markets where the problem exists but solving it is not a given, you must consider the decision-not-to-buy competitor. No matter what form your competitors take, you need to develop a detailed understanding of their performance against the key value drivers for your target market.
Determine Buying Decision Drivers
Armed with a deep understanding of how the customer profits from equipment like yours, and your customer’s next best alternative for doing so, you can determine which factors in the comprehensive value expression drive the buying decision. Namely, the value drivers that are both
- Critical to your customers’ profitability and
- Where meaningful differences exist or are likely to exist among your customer’s alternatives.
These buying-decision drivers are the foundation of your value proposition.
Continuing with our Mr. Melty example, suppose your competitive intelligence has revealed the following:
- Ingot growth furnaces are the industry standard for turning polysilicon into multicrystalline ingots.
- All ingot growth furnaces on the market produce the same quality material.
- There are big throughput differences among ingot growth furnace suppliers which is a function of the polysilicon charge size and process time.
- The amount of good material vs. scrap material produced from each furnace run also varies across equipment suppliers.
- All ingot growth suppliers use similar resistive-heating technology, so no meaningful electricity consumption differences exist.
- Equipment reliability across all suppliers is roughly the same.
From the above, you can see that meaningful differences exist among ingot growth furnace suppliers on throughput and yield. With that, you can determine which value drivers are the PV-wafer manufacturers’ buying-decision drivers. See the table below.
|Critical to |
The last column in the table above marks the value drivers upon which buying decisions are made. Note that price is always a buying-decision driver for capital equipment.
Use Comparative Financials to Reveal Your Value
For capital equipment buyers, the decision is simple. They will choose the equipment that results in more profit for their company than alternatives. Profit in this case is simply the financial gains produced by your equipment minus the cost of acquiring those gains. See the figure below.
Your price is part of the customer’s cost to acquire your equipment’s gains. Therefore, equipment buyers need to understand your price to assess value. As an equipment supplier, you want value-based prices. Talking about gains without talking about price will keep you both from achieving your objectives. Thus, your value proposition needs to be in the context of both gains and the cost, including price, to acquire those gains. When you communicate your value proposition in a sales cycle, your objective is to establish two things:
- How your value differs from your competitors’
- How your equipment’s price relates to your value proposition
Comparative financials reveal how your product at your price delivers on your value proposition. They take the form of a mini-financial statement that reveals your value proposition. These comparative financials compare the financial outcome of buying your equipment to the financial outcome of buying from your competition. It is the difference in the financial outcome that defines your value proposition. See the figure below for the elemental form of capital equipment comparative financials.
To develop comparative financials, create a direct comparison with your competition and limit the analysis to the buying-decision drivers.
Let us return to the Mr. Melty example, where your competitive intelligence has revealed the buying-decision-driver data shown in the table below.
|Value Drivers||Mr. Melty||Competitor|
|Charge size||650 kg||700 kg|
|Process time||<65 hrs||<75 hrs|
From this data, you can create the comparative financials shown in the table below.
|Mass ingot yield||%||75%||65%|
|Target annual capacity||kg/yr||1,500,000||1,500,000|
|Total capital expense||$US||15,065,000||17,400,000|
You will notice that
- The analysis is limited to the buying-decision drivers,
- Equipment throughput and yield produce the customer gain of manufacturing capacity,
- The only cost of gain where material differences exist is equipment price,
- Mr. Melty is compared directly with the competition, and
- The difference in financial outcome is a 15% capital expense savings if you buy Mr. Melty instead of the competition.
These comparative financials reveal that Mr. Melty’s value proposition to PV-wafer manufacturers, looking to add 1.5M kg/year of capacity is a 15% capital expense savings versus the competition.
The value proposition for all capital equipment types and markets can be determined using the four-step process shown here. However, it is important to note that a piece of capital equipment can play a variety of roles in the buyer’s pursuit of profit. These different roles will lead to variations in the buying-decision drivers and resulting comparative financials. Understanding these variations is born out of market intimacy. There is no escaping the need to understand how your target customer derives value from equipment like yours and your competitors’ ability to deliver on that value.