Sometimes capital equipment is not used in the profit-making process. Instead, it is used to “get ready” to make a profit. For example, if your equipment performs processes during product development, its job is to help its owner get ready to make a profit. The value of your equipment, in this case, is directly related to how quickly it helps the customer finish development and get to the profit-making process.
The value model for this scenario considers the total profit from the time the get-ready process starts to some relevant time after profit-making begins. See the figure below.
To illustrate, let’s try another example. Suppose a solar power company is developing its next-generation solar cell. During that development, the company will need to analyze the results of many design iterations before the solar cell design is ready for production. If
- your equipment type is responsible for analyzing the design iterations,
- there are differences among alternatives in the time it takes to do it, and
- that time drives the buying decision,
your value model might look like the example shown below.
| Units | Your Equipment | Competitor’s Equipment | |
|---|---|---|---|
| Design iterations | # | 30 | 30 |
| Time to develop (each) | Days | 15 | 15 |
| Time to analyze (each) | Days | 0.5 | 1.5 |
| Total development time | Days | 465 | 495 |
| Total development time | Months | 15 | 16 |
| Factory capacity – cells/month | M | 1 | 1 |
| Production months 1st 3 years | # | 21 | 20 |
| Net capacity cells/year | M | 21 | 20 |
| Price per cell | $ | 12 | 12 |
| Total revenue | $M | 249 | 237 |
| Your equipment type price | $M | 10 | 5 |
| All other equipment | $M | 100 | 100 |
| Total equipment cost | $M | 110 | 105 |
| Depreciation expense (5 Year) | $M | 22 | 21 |
| All other costs of goods | $M | 50 | 50 |
| Total cost of goods sold | $M | 72 | 71 |
| Total gross profit | $M | 177 | 166 |
| Difference | 11 |
This example shows how shorter design-analysis-cycle time accelerates time to market for the solar power company. That acceleration translates into more profit in the three years after product design started. Like an adjacent effects value model, tremendous value can be created by a single piece of equipment when it makes other equipment and operations more profitable. For the equipment seller, that translates into a lot of pricing leverage if the value can be substantiated during the sales cycle.