Value Pricing: Insights, Tools, and Skills to Maximize Your Profitability.
By Robert S. Brodo, Executive Vice President
September, 2010
Throughout the last 18 months of global business unrest, I have heard clients with different types of business strategies discuss and fumble the execution of effective “value pricing”. Based on requests from several close Advantexe Learning Solution clients, I have decided to write this month’s edition of the AdvantEdge™ about the tools and skills needed to successfully execute a value pricing approach. These ideas are based on both research and practical experience with industries including Financial Services, Healthcare, Technology, Chemicals, and Applied Materials. In conducting the research we have discovered several interesting concepts and compelling best practices that support the achievement of successful Value Pricing.
Our intent is that this AdvantEdge will provide a deeper understanding and insights on the following topics:
- Defining what Value Pricing is in 2010
- Linking your Business Strategy to Value Pricing
- Understanding your Organization’s role in the Supply Chain and its impact on Value Pricing
- Value Pricing and the Sales Approach
- Utilizing Business Acumen Skills to position Value Pricing
Defining Value Pricing in 2010
Perhaps the best way to start defining Value Pricing in 2010 is to describe what it is NOT. Many misguided business people assume that the internal cost of a product or service “plus” some perceived value component that is equal to or greater than a targeted margin should be considered value pricing. That is not the case. In reality, effective value pricing in 2010 should be defined solely from the customer’s perspective and should be based on the perception of the value created between your organization and the customer’s organization. In our business acumen skills development programs, we use the following business equation to develop an understanding of the concept of customer value:
Based on this approach, the key element of the Customer Value Equation is the customer’s idea of the relationship between perceived benefits and perceived costs. Traditionally, “value” has been defined or thought of as a certain set of tangible attributes of a product or service that can include features, reliability, consistency, service, support, etc. Too often, however, organizations – and the sales professionals representing them – call on and deliver a value proposition to decision makers that don’t care about those benefits but rather only care about costs. A purchasing manager or a contracting manager only cares about price; a line manager or a manager focused on business performance is more likely to understand and care about added benefits and the impact of those benefits on his/her business. Therefore, if the selling organization can deliver perceived business value that is equal to the perception of the benefits related to the perception of the cost, that organization will be able to present and capture true value pricing.
By way of example, I was recently working with a client who designs and develops innovative applied material solutions to customers in a variety of different industries. In this example, the sales person working on a major semiconductor account took a different approach to a big (over $25 million) deal. The customer needed a design for inclusion of a high-speed silicon wafer manufacturing process. The solutions my client designed was bold and innovative and used new materials that increased efficiency, eliminated waste, improved chip quality, and reduced cost. In a traditional pricing approach, the sales person would have worked directly with the purchasing department who would have looked at the solution and assigned a price based on the cost of the materials – not the value of the solution. This time, however, the sales person – through great strategic business selling – approached line managers, marketing managers, and senior decision makers to develop a new perception of the value. Specifically, she was able to quantify real and true business impacts to the customer’s P&L, balance sheet, and cash flow. On the P&L, her solution reduced the Cost of Goods Sold (COGS) by almost $.02 per chip. On the Balance Sheet, her solution reduced the assembly process and, therefore, the amount of time the chipsets were in inventory; a reduction in inventory had a $2 million per month impact on asset utilization. In terms of cash flow, this new solution increased free cash flow by at least $30 million per year in just one fabrication plant. All together, the estimated financial value that was created by this unique solution had a positive impact on the semiconductor manufacturer of more than $60 million. When the sales professional sold the solution – based in this real economic analysis – she was able to close the deal for more than $25 million. If she had gone the traditional route, she estimated that she probably would have closed the deal for about $10 million and would have been in competition with other solutions that were not as effective.
The key point of this example and illustration of value pricing through a business acumen approach is that you have to talk the language of business to create and share the true value.
Link to Your Business Strategy
I am always amazed to hear clients whine about all of the reasons that they are unable to get “value pricing”. When I ask them about their business strategy and what value proposition they communicate to their customers, I am further amazed that they don’t understand the link between their strategy and price that leads to this inability to capture value pricing. There are a couple of very simple rules of business here. First, you must understand that each of the three different value propositions of business strategy have unique pricing strategies and expectations.
Below I review each value proposition and the impact on pricing and relative ability to successfully capture value pricing for that strategy.
Operational Efficiency
If your organization’s strategy is operational efficiency – providing customers with solid but low cost products/services – then by definition there is a customer expectation that the price will be relatively low. As a result, it is very difficult to achieve “value pricing” with this strategy.
Customer Intimacy
If your organization’s strategy is customer intimacy – providing customers with highly-customized solutions supported by world-class service – then you can achieve value pricing by creating the right perception of the value for the right decision makers.
Product Leadership
If your organization’s strategy is product leadership – providing customers with bold and innovative products/services that no other competitor has – then you can achieve value pricing by identifying for the right decision makers the true economic value of the solution including the built-in “cost” of the innovation and the impact on financial performance.
Your Organization’s Role in the Supply Chain
Another critical aspect in terms of the ability to achieve value pricing is the capability to understand your organization’s role in the industry supply chain. In Michael Porter’s industry structure analysis, he describes the concept of the “balance of power” in the industry and the impact of the behaviors and competitiveness of the organizations within the industry.
Based on Porter’s compelling framework, I propose that the ability to achieve value pricing is contingent upon the bargaining power your organization has over the industry in which your customers compete! If your solution is unique and small in supply, with only a few competitors, it is significantly easier to achieve value pricing. However, if your solution is considered a commodity – and you have a large number of comparable competitors – there is little to no bargaining power over the industry in which your customers compete; therefore, you have very little chance of achieving value pricing!
The Right Sales Approach
In today’s complex selling environment, there are many different sales approaches. They can range from “Transactional” sales professionals – like “pit bulls” who don’t let go of the customer’s leg until he says “Yes” – to “Relationship” sales professionals – those who develop long-term, trusted advisor relationships with key customers. Other sales approaches use terminology such as “Hunters”, “Growers,” and “Keepers”, and even “Whales” and “Big Tuna”.
I believe that no matter what nomenclature your organization uses, if it wants to achieve real value pricing, it must have a correct and consistent sales approach.
In our experience, the sales approach that is best suited for positioning value pricing to customers is an approach that is equivalent to a “Consultative” or “Relationship” approach.
No matter what you call it, a relationship-based sales professional exhibits the following traits:
- Deeply understands the customer’s business
- Focuses on developing relationships rather than pushing deals
- Is seen as a trusted advisor
- Has multiple contacts within the account and regularly speaks with line managers and business leaders as opposed to purchasing managers and contracting departments
- Is able to speak the language of business with executives and translate solutions into financial impacts on the customer’s business
- Practices and is in tune with effective need dialogue conversations that utilize the language of business
Advantexe has developed a business partnership with The Relationship Capital Group (www.relationalcapitalgroup.com )– world leaders in tools to understand and develop sales relationships. RGC shared with us several insights about developing sales relationships and they strongly support the traits listed above.
Once your organization has the right sales strategy and skills to approach customers from a business perspective, you are much better positioned to benefit from real value pricing.
Utilizing Business Acumen Skills
I hope that I have been clear throughout this document that I believe there is one explicit and universal truth in terms of achieving value pricing with your customers: business people buy from business people, and if you position the value from a business perspective, you will have a better chance of success with value pricing.
The remainder of this document shares insights and ideas about Business Acumen. Specifically, we’ll discuss what it is and how you can develop the right skills within your organization.
When discussing the concept of business acumen, it’s important to start with a clear definition of what it actually means in the volatile business world of 2011. The following graphic illustrates our unique take on what it is and the framework we use for developing skills and competencies.
Based on more than 25 years of experience developing business acumen skills, we created this framework to put into perspective the skills needed to be an effective business person. When sales professionals have strong business acumen skills, they are able to sell more effectively and position value from the business perspective.
To understand the framework better, you need to follow the path of skills. It starts with industry knowledge and includes elements such as P&L focus, Balance Sheet focus, and being able to communicate value from a business perspective. Once the foundation of those skills is firmly established, the tenets of Strategic Business Leadership are laid on top to provide the tools to effectively lead and organization in executing the chosen strategy.
