It’s time to show your cards. You’ve got your equipment proposal ready to show the buyer. You’re prepared to defend the $2.8M price circled on the second page. You’ve role-played the scenario several times with the guys back at the office. You’re ready for anything the buyer throws at you. Just the same, you’re a little nervous. Then just as you’re ready to slide the proposal across the table and make your pitch, the buyer says:
“This is exciting! Once we get this process up and running, we stand to make $500M a year in additional profit.”
You can’t believe what you just heard. You’ve never heard a buyer make a gaffe like that at the start of a negotiation.
You worry that you’ve priced the proposal too low, perhaps orders of magnitude too low. You quickly tuck the proposal back into your briefcase. There’s no way you’ll let the buyer see it until you add at least another zero.
Hang on a second! What if the buyer didn’t make a gaffe?
Sure he shared the value that equipment like yours has to his business. But is that the same as the value of your equipment?
Value is Relative
Suppose the buyer also shares that a competitor has offered to sell them an equivalent piece of equipment for $2M. Now, what do you think tethers your price? The $500M in extra profit, or your competitor’s $2M offer?
It’s the $2M offer. Your value is relative to the value of market alternatives. Suppose your system produces 1.5 times more value for the customer than your competitor’s $2M system. The full market value of your system is 1.5 times your competitor’s $2M system or $3M.
Go ahead and pull that proposal back out of your briefcase and show it to the buyer. Your $2.8M proposal is not a giveaway. It represents a defendable value proposition versus your competition.
Who are Your Competitors?
You might think that your competitors are simply the other folks selling equipment like yours. Yes, they are your competitors. But that’s not the complete picture. Your competitors come in three forms:
- Direct competition
- Alternative approaches
- Decisions to not buy
Direct competition is the obvious head-to-head, equipment-to-equipment competitor. With direct competitors, it is easy to determine relative value. It’s as simple as lining up your performance on the critical value drivers with that of your competitor. Then apply a little math, and you’ve got your equipment’s value.
Alternate approaches refers to indirect competition. These are the alternative ways that your target customer can solve their problem.
For example, hard disk drives solve the problem of non-volatile storage for a large volume of data for personal computer users. The hard-disk drive manufacturer’s direct competitors are the other hard-disk drive manufacturers. But alternatives exist where the computer user 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 this market.
The last type of competition, one often overlooked, is the “Decision not to buy.” In the equipment world, the decision not to buy can take many forms, including these:
- Not to expand production capacity
- To repair instead of buy new
- To operate at a lower yield level
- To operate at a lower productivity
- To operate at a higher cost
For example, let’s say you have an equipment solution that will improve the yield for a prospect in your target market. That prospect decides to pass on your offer, not buy anything, and continue to operate at current yields.
Your prospect arrived at that decision by making relative value determination between:
- Don’t buy: Avoid new capital investment and live with current yields
- Buy: Make a capital investment and achieve higher yields
By choosing “1,” the prospect chose your decide-not-to-buy competitor.
No matter which of the three forms your competitors take, relative, not absolute value is how your customers make purchasing decisions. Therefore, you must define your competitors’ ability to create value for your target market. Only then can you determine your equipment’s actual value.