By Malcolm McDonald
This is the first post of a series exploring why financially quantified value propositions are critical for success with strategic and key accounts.
The crucial importance of money to customers
Even a cursory glance at the SKF pricing example shown below illustrates the dramatic impact that is possible as a result of preparing financially quantified value propositions. (SKF is the global engineering group that specializes in ball bearings and assemblies.)
Our definition of a value proposition is “the translation of the supplier’s offers into monetary terms that demonstrate their contribution to the customer’s profitability.” The key phrase here is “customer profitability,” because if you can prove that dealing with you will make your customer richer, they will buy from you.
This is why value propositions are so important in business today and why it is crucial to quantify them financially, a task which one would think is comparatively easy since there are only three ways in which monetary value can be created for customers:
#1: Adding value (e.g. revenue gains, improved productivity, service enhancement, speed, etc.)
#2: Reducing cost
#3: Avoiding cost
(There is, it should be said, a fourth form of monetary customer value, namely emotional contribution. This is much more difficult to quantify financially, but suffice it to say that, all things being equal in benefit terms and price, most customers will opt for a brand they know and trust.)
The benefits of financially quantified value propositions
Financially quantified value propositions will help you increase profitable sales for a number of reasons:
- Per McKinsey & Co., fewer than 5% of companies have financially quantified value propositions, so developing them will differentiate your company in the eyes of your customers.
- Even if your products and services lack actual differentiation, the very act of financially quantifying the benefits, even if they are standard benefits, will give you an advantage over your competitors.
- You will close more deals, typically an additional two to five percent.
- It will help you reduce discounting by between 20 and 30 percent.
- As a result, deals will be bigger (typically by at least 10 percent).
- It will help make your marketing campaigns more productive.
- You will enjoy improved customer relationships.
- Your relationships will last longer.
- You will enjoy referrals from satisfied customers.
- You will have fewer no and delayed decisions.
Let us give a quick summary of just one of the above benefits – sales velocity – illustrated in the figures below.
As many of you already know, as much as 90 percent of the buying cycle today occurs before buyers even speak to suppliers. Such is the power of the internet. Today’s buyers who can easily research an entire marketplace in minutes certainly don’t need someone to connect them with products any more. What they do need is honest advice about how to grow their business profitably. Today’s buyers can easily tell when someone is just trying to sell them products.
There is, after all, only one lasting route for any supplier to grow its profits: by creating demand from customers by creating value for them. It’s the only sustainable future. However, there is a world of difference between merely helping your customer avoid disadvantage and creating advantage for your customer. What do I mean?
Most products and services fulfill functions that customers need, in the sense that they can’t do without them. For example, a restaurant needs tables and chairs, an airline needs planes, an office needs computing capability and so on. The problem, however, is that these organizations always have a choice of suppliers, and since most products today work perfectly well, they will mainly buy on price — unless a supplier can prove that they will create advantage for them.
We have already explained that it is possible to succeed by financially quantifying standard benefits when other competitors don’t, but this is unlikely to lead to sustainable success. The process of creating advantage for the customer, however, will lead to sustainable success.
I invite you to take the value propositions self-assessment below, which will give you a good idea of how your company is doing in terms of quantifying its value propositions. For the 12 questions that follow, please answer with (1) “Strongly agree,” (2) “Partly agree,” (3) “Do not agree or (4) “Don’t know.”
#1: “Our return on capital is satisfactory, and there is good evidence that it will stay that way for the foreseeable future.”
#2: “Our turnover is increasing.”
#3: “But not at the expense of profitability.”
#4: “We do not sell unprofitably to any customer.”
#5: “We analyze our cost-to-serve customer figures to be sure of this.”
#6: “If we do, it is for rational reasons known to us all.”
#7: “We are wholly satisfied that we offer what the market wants rather what we prefer to sell.”
#8: “Our value propositions consider the combined effect of all external factors that have an impact on the customer.”
#9: “Our value propositions take account of our own deep understanding of the customer’s value chain, their financial ratios and all other internal factors that affect their performance.”
#10: “We can clearly state the reasons customers should buy from us rather than from competitors and can prove the financial impact on the customer’s bottom line.”
#11: “We have strong proof to substantiate this.”
#12: “Our value propositions create advantage for our customers, rather than only helping them to avoid disadvantage.”
A significant number of “Partly agree,” “Do not agree” and “Don’t know” answers indicates that you may have a lot of work to do on your value propositions.
In spite of the evidence, it is remarkable that, as we mentioned earlier, only 5 percent of companies in the U.K. have financially quantified value propositions. Our own research indicates a much lower percentage. Indeed, my work with the European Institute of Purchasing, in Geneva, and with the buying directors who are invited to address suppliers at my Cranfield School of Management Key Account Management Best Practice Research Club, report that only 1 percent of their suppliers have financially-proven value propositions. And for those suppliers, they are prepared to pay a premium of up to 25 percent to deal with them.
We recently interviewed a buying director in the National Health Service in the U.K., one of the largest organizations in the world. He reported being surprised at the expressions on the faces of sellers of Information Technology/Information Systems when asked for a financial justification for the substantial prices they were demanding. In my own experience, if you ask a marketing manager for financially quantified value propositions for any product for market, it will often elicit a blank expression — which makes us wonder what they think their role is.
It is blindingly obvious that, in the absence of financially quantified value propositions, buyers will inevitably drive prices down, and unless your business costs are lower than everyone else’s, discounting is a losing game.
The dreaded websites
Most websites appear to say the same things — things like:
- “Our products have great quality.”
- “We have an outstanding reputation.”
- “We are trustworthy.”
- “We are the market leader in…”
- “We help our customers get exceptional results.”
- “Our customer service is excellent.”
- “We are very innovative.
In other words, “Me, me, me, me, me!” These suppliers all sound the same, and their marketing is usually on the supplier’s, rather than the customer’s, needs. Any operating board of a company that cannot explain why customers should buy their products rather than those of competitors should replace their Chief Marketing Officer.
The components of a value proposition and added value
There are many ways a supplier can add value to their customers’ business. The list is too long and complex to set out here, but a comprehensive example is shown below in relation to an Information Systems/Information Technology supplier. This figure illustrates the detailed use of Porter’s Value Chain as an analysis tool to delve into every aspect of a customer’s business from beginning to end.
Porter’s Value Chain
Improved productivity can come in many forms, such as revenue gains for the customer by:
- enhancing the end-use flexibility of the customer’s product
- improving the quality and reliability of the their product
- adding functions or new applications to the their product
- improving post-service value
- increasing the customer’s production capacity or speed
- enabling more, or more productive, sales calls
- enabling price increases
- reducing debtor days
- speeding up time to market for new product launches
- improving agility
- improving intelligence/insight
- improving the accuracy of the customer’s sales forecasts
- risk reduction through reducing the customer’s cost of capital
Cost reduction and cost avoidance are perhaps the easiest to quantify financially, and the case from SKF shown above is a classic example of how to charge a high price up front by justifying a significant reduction in lifetime costs.
But companies such as SKF, General Electric, 3M and the like have substantial databases of examples by sector and company size that prove the financial benefits of their products and services. They also have computerized models to enable the sales force to apply them to individual customers.
This process works just as well for small companies, as can be seen from the example of the label company given below.
Developing value propositions
There are two main domains for which value propositions need to be developed. The first is in those parts of the market shown in the center of figure 7. The other is in the strategic account domain shown in the top right.
Financially quantified value propositions for strategic accounts
We can now turn to the main purpose of this blog, which is how to prepare financially quantified value propositions for your strategic accounts. You will of course understand that if you are to be successful, there is an awful lot of preparation required. First, you will need to do some critical homework, including:
- STEP ONE: Targeting those strategic accounts where you are most likely to get the best results
- STEP TWO: Listing the macro-environmental challenges and issues (i.e., PEST: political, environmental, social, technological) confronting your strategic customers
- STEP THREE: Summarizing Porter’s Five Forces’ analysis
- STEP FOUR: Summarizing the customer’s annual report and the financial challenges facing them
- STEP FIVE: Summarizing the customer’s value chain using as an example the chart labeled “Porter’s Value Chain”
- STEP SIX: Gaining an in-depth understanding of the customer’s buying process
These steps are too complex to spell out here but are essential to the preparation of value propositions.
The six-step process shown above has been tested and validated by many multinational companies and subject-matter experts, and we will expand on how to undertake this process in the next post in this blog series. Read part two here.