The crucial importance of money to customers

Even a cursory glance at the SKF Pricing example shown in Figure 1 illustrates the dramatic impact that is possible as a result of preparing financially quantified value propositions.

Figure 1

Yet according to McKinsey and my own research, fewer than 3% of companies  have them, in spite of the benefits, which are listed below.

  •  Even if you DON’T have any 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 2% to 10%)
  • It will help you reduce discounting by 20% to 30%
  • Hence, deals will be bigger (typically 10% at least)
  • It will help you make marketing campaigns more productive.
  • You will enjoy improved customer relationships
  • You will have longer lasting relationships
  • You will enjoy referrals from satisfied customers
  • You will have fewer no/delayed decisions to buy

My 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 words here are “the customer’s profitability, because if you can prove that dealing with you will make them 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, given that there are only three ways in which monetary value can be created for customers, as follows:

  1. Adding value (e.g. revenue gains, improved productivity, service enhancement, speed etc.)
  2. Reducing cost
  3. Avoiding cost

There is, of course, a fourth one, emotional contribution, but this is much more difficult to quantify financially.  Suffice to say that at the very least, all things being equal in benefit terms and price, most customers will opt for a brand that they know and trust.

There is, after all, only one lasting route for any supplier to grow their profits:Additionally, 90% of the buying cycle today is carried out by buyers before speaking to suppliers– such is the power of the internet.  Today’s buyers can easily research an entire market place in minutes.  They certainly don’t need someone to connect them with products any more: they need honest advice about how to grow their business profitably and can easily tell when someone is just trying to sell them products. 

  • Create demand from customers by creating value for them – the only sustainable future.

This blog will show you how to quantify this value financially and how to encapsulate it in a value proposition.

There is, however, a world of difference between merely helping your customer avoid disadvantage and creating advantage for your customer.

“ Me-too” organisations

 My work with the European Institute of Purchasing in Geneva and with the buying directors who are invited to address suppliers at the Cranfield School of Management Key Account Management Best Practice Research Club confirm that only 1% of their suppliers have financially-proven value propositions and for those suppliers they are prepared to pay a premium of up to 25% to deal with them.

I recently interviewed a buying director in the NHS.  He was surprised, to say the least, at the expressions on the face of sellers of IT/IS systems when he asked for a financial justification of the substantial prices they were demanding.  Even worse, ask any marketing manager for financially quantified value propositions for any product for market and 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.

By way of summary so far, let us state emphatically that 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 in figure 2 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. 

Figure 2

Developing value propositions

Value propositions need to be developed fortargeted segments and key accounts. This blog focusses on key accounts.

The six steps process we have developed and shown in figure 3 is obviouslly too detailed to explain fully here  This has been tested with many multinational companies and SMEs and it works perfectly.

Figure 3

Providing you have done all this work, you are now ready to prepare your financially-quantified value propositions.

Given the constraints of space, I am pleased to offer you here just one of seven quantifiable templates for quantifying value propositions financially--- in this case Porter’s Value Chain. 

 

The final piece

This is not the place to go into lengthy and complex explanations of return on investment (ROI), internal rate of return (IRR), net present value (NPV) and payback, but particularly for more sophisticated customers, it is necessary to calculate the financial return on what are frequently substantial sums invested in purchasing goods and services

Some customers are interested just in payback over a twelve-month period. Others are looking at return on investment over a longer period. Each method attempts to summarise a set of cash flows from a project into a single indicator. Each has its intended purpose and each has its strengths and weaknesses, so it is prudent to be prepared to present your case taking account of the particular interests of the customer and it is as well to remember that the customer’s accountants are frequently involved in major purchasing decisions, so check out your calculations with your own accountants.

In conclusion

As I  said earlier, there is obviously a lot more detail involved in going through the six-step process shown in figure 3, which requires substantial effort and skills on the part of the supplier, which leads us to one final point.

For readers who want a detailed explanation of how to develop financially quantified value propositions, please contact  m.mcdonald@cranfield.ac.uk

Key Account Managers and senior sales people today need business acumen to demonstrate the value they can bring to the customer and the financial literacy to support it. To do this, they need not just product knowledge, but insights from industry knowledge and from a deep understanding of the customer’s business.

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