Put your management team in a room. Hand out a small piece of paper to each team member. Ask them to write down what they want out of a value-based strategy.
What do you think you’ll get?
Most likely you’ll get a chorus of something like “More customers at higher prices.” Everyone seems to know exactly what they want from a value-based strategy.
Now imagine that same exercise. Only this time, you ask them “What is a value-based strategy?”
Now what do you think you’ll get?
This time the harmony is not so obvious. On those sheets of paper, you’ll probably get a cacophony of ideas that include:
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Actually, it’s a great start. All of these are part of a value-based strategy. But what you’re looking for is a clear, holistic definition. One that you can use to guide the organization’s value-based strategy decision making and implementation.
If you were ask the group to summarize these ideas into key themes perhaps you’d be looking at something like these four:
- Economic value for the customer
- More value than the competition
- Fair, profitable compensation
Now you’re getting somewhere. These themes tell you a lot about what a value-based strategy entails. Let’s take a closer look at each and then try to tie it all together.
Economic Value for the Customer
This value-strategy theme tells you that value is defined by the customer in economic terms. Therefore you’ll need a very precise definition of the target customer. Market segmentation will not be an off-the-cuff decision.
Also capital equipment buyers buy only to make a profit. This is the lens through which they define value. If you’re intent on pursuing a value-based strategy, you’ll need to understand how your equipment affects your customers’ economics.
More Value than the Competition
Your customers measure your value relative to the alternatives in the market. A value-based strategy seeks to create more value than those alternatives. This has implications for the equipment supplier. Your competitive intelligence efforts will need to go way beyond reading competitors’ web-sites and reviewing stale CRM entries.
Want to count yourself among the best value-based strategy practitioners? Then, you must develop an understanding of your competitors’ ability to create value that rivals your own.
Fair, Profitable Compensation
A value-based strategy is only interesting if it enables you to make more profit. As an equipment supplier you’re entitled to a portion of the value that you provide your customers. Your fair compensation is defined as the maximum that the market will bear in the context of your competitive environment.
But, fair compensation must produce profit for you. Your products must produce target profitability when sold for fair compensation.
Consistently achieving the returns promised by a value-based strategy isn’t a just-add-water endeavor. It’s a deliberate decision to make defining, creating and marketing customer value a core competency. The decision to adopt a value-based strategy is going affect the way you:
- Define and select customers
- Define and develop products
- Market, price and sell those products
There’s nothing casual about it.
Bringing it all together
Put these four themes together and you get your clear, holistic value-based strategy definition.
Value-based strategy is:
A business strategy that deliberately creates more economic value for the target customer than alternative offerings. And then extracts fair, profitable compensation for that value.
It’s only twenty five words. But it contains everything you need to guide your quest for more customers at higher prices.