Value Based Selling to Reduce Margin Risk

“We don’t know what our customers value”

“Our customers think we are a commodity”

“We are under significant price pressure”

"What should we be charging?"

"What are our customers willing to pay?"

"How much pricing power do we have?"

These sentiments and questions are often expressed by sales and marketing teams in B2B markets. The challenge here is two-fold. Often customers don’t know what creates value in a transaction, and thereby reduce their criteria for purchase selection to lowest invoice price only.

The account manager or sales representative who has undertaken traditional sales training is taught to listen, and then respond, to customer wants. They then start selling a product's features and benefits, that appears to match the customer’s wants. This approach to selling was created over 50 years ago, and has been moderately refined over the following decades.

However, this approach to selling has limited ability to create pricing power, because customers are often not aware of what they need. Instead, both buyer and seller are beguiled by an immediate series of wants. It also has the problem of being perceived as manipulative and “spin”. The result is customer skepticism, and potential rejection, due to loss of credibility and trust.

The challenge for sellers is to uncover a deeper level of needs and outcomes for the customer, that address potential 2nd, 3rd and 4th order consequences. It may not be possible to determine these consequences in a 60-minute sales meeting, or telephone call. Understanding value drivers takes an investment of time and requires a change to the selling process. ?

One of the most important aspects of value based selling is value frame control. When we talk about control of the value frame, we are referring to the process of guiding and educating the customer, to help them arrive at the best outcome. This is achieved by acquiring a deep knowledge of what will create value for the customer. This is in contrast to the customer defining to the seller the purchase criteria and terms, with price as the primary determinant of purchase selection [the typical procurement methodology].

The opportunity here, is to position your product or service as the best value, allowing you to hold your price. The flip side to this process, is that it may exclude your business as not being an appropriate solution. Our intention is to help the customer use a value-based approach to buying, to act in their best interest.

In order to maintain pricing power and transform a customer into a partner, you need to identify the customers unique set of value drivers.

But what are value drivers?

Value drivers are the methods, processes, infrastructure and intellectual property, in addition to the physical products and services, that can be employed to solve customer problems.?Customer problems have several dimensions. There are first order problems which relate to the immediate consequences if a problem is not solved. 2nd, 3rd, and 4th order consequences are the flow on effects from not solving the initial problem correctly.

In many cases, the economic costs of 2nd, 3rd and 4th order consequences can be exponentially higher than 1st order consequences. An example of these consequences can be found in the Cootes Transport fuel tanker crash in Mona Vale on Sydney's Northern Beaches, in the 2013 case, where Cootes management had cut back on safety maintenance, causing failure of the truck brakes, down a steep hill. The truck rolled, killing two people. An inspection by authorities revealed most of the company’s truck fleet was defective. The defects included ineffective brakes, oil and fuel leaks, steering, axle, suspension and exhaust failures, broken engine mounts and tread peeling from tyres. Cootes Transport was charged with more than 300 offences by New South Wales Roads and Maritime Services (RMS).

The trucking company faced 222 charges relating to interstate registration; 86 for operating unsafe vehicles, plus several for mass offences and fuel leaks. Additional consequences were fines for the company and, loss of major contracts with Shell and BP. The company was ultimately wound up. At some point, the suppliers of the Cootes maintenance contract agreed to provide low-cost maintenance, not fit for purpose. Cootes management were not held to account for buying on value, but achieving cost savings.?

When we talk about 2nd, 3rd, and 4th order consequences, the Cootes Transport case is a primary example. A value selling philosophy would have helped to avert this disaster.

If a company defines itself by the product or service it sells to address first order problems only, it will be reduced to negotiating invoice price alone. A simple summation of this concept, is found in the phrase “buy cheap, buy twice.”

?What the symptoms?

?A business that is not aware of its value drivers, is often a business where a cost-plus culture is prevalent. In this type of business, prices for products are often set based on the cost of the product, with a nominal percentage markup applied on top of that cost. Oftentimes, detrimentally, this percentage is a generic, flat, nominal amount, set across many of the products in the business.

Another symptom of a business with undefined value drivers, is one where there is a culture and belief the product or service they sell, has become commoditised. Commodity thinking is apparent when sales teams believe they must offer the lowest price in the market to win, or retain, business.

?Another key characteristic of a business with undefined value drivers, is one where there is excessive discounting, or price overrides undertaken, across multiple products and services, indiscriminately across all customers.

Why does this matter / what is the opportunity? [every customer has a unique set of problems that need solving – knowing value drivers aids this process]

It is critical to understand the unique set of problems faced by each customer and identify associated value drivers that can solve these problems. Having thorough knowledge of the value drivers offered by your business will help your sales teams better educate customers in their purchase decisions.

Doing so will enable your reps to teach customers to invest appropriately in the required quality of product or service upfront, assisting them to avoid unexpected costs, or unforeseen product/service failures, months, or years, after the purchase has been made.

When sales teams have the knowledge to uncover the first, second and third order problem sets of customers, they can present your companies unique capabilities and value drivers as the perfect solution for your customers’ requirements. When this scenario plays out, customers no longer focus on price, but concentrate on required outcomes, and value. For your business, this will translate into greater pricing power, better protection of margins, and significant earnings growth.

?What are the potential risks if we don’t address this problem? [price pressure, competitor threats to buy cheap, additional discounting margin erosion will result]

Failing to understand customer value drivers, leaves a business exposed to aggressive competitors who will compete on price. Customers will be driven to make purchase decisions based on price alone, and sales teams will believe they are only selling a commodity. In this case, the net result is extreme pressure on prices, erosion of margins, and a decline in earnings and profitability.

How do we solve this problem? [top 3-5 steps we should take?]

Developing a comprehensive understanding of customer value drivers requires initial research into understanding customer problem sets. It also entails identifying the consequences to customers when these problem sets are not solved. It is important to identify whether your products or services are perceived by customers as being “mission critical” to their survival, or purely discretionary, having limited consequences if supply were to be disrupted.

Mapping your companies’ capabilities to deliver value to customers is a crucial step in moving your company away from a culture of cost-plus, or commoditised thinking, to one built on a deep understanding of customer value. Developing a sales and marketing execution that reflects this deep understanding of value, is also critical.

Education of sales and marketing teams in the fundamentals of customer value will enable your business to market, and sell, with increased levels of pricing power, to drive margin expansion and earnings growth.

?How long will it take to solve it?

Developing an understanding of customer value drivers, and education of sales and marketing teams, is an 8-to-12-week process. However, conducting research and understanding of customer value, and customer problem sets, is an ongoing critical sales activity that should be supported by the senior management team.

Pricing University teaches your teams to understand critical customer value concepts and techniques, and how to translate this understanding into generation of pricing and negotiation power.

Who should be involved?

Everyone involved in the sales and marketing conversation, or quoting prices to customers, should be involved in the customer value discovery process. It is often the people in non-customer facing roles, such as operations or supply chain, that can contribute the most to developing a deep understanding of customer value.

What outcomes should, we expect if we do we solve this problem?

Once a company has embedded an understanding of customer value across their business, it is now incumbent upon sales and marketing teams to educate customers to purchase on value. Every buying cycle differs depending upon the product or service in question, however immediate results should be evident for all new customer enquiries when a value-based marketing and sales approach is implemented.

An understanding of customer value can deliver significant levels of pricing power to a company, across their product or service portfolio. A value-based marketing and sales approach will deliver an additional 200 to 300 basis points of margin expansion, across 30 to 50% of total addressable revenues.

If you have any questions or comments relating to this article, please post them below. To discuss how Customer Value Discovery will enhance your sales process, feel free to get in touch via the Pricing Insight website, or make contact through Linked In.?