Value-Selling Your Value

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1. Selling Your Value 2. Part 1 - Measuring the Impact Your Products/Services Provide A friend of mine complained the other day that customers didnt seem to value the relationship anymore, that they just wanted a lower price. This surprised me because I knew he had good relationships with his customers and was not the lowest price supplier. After a brief discussion, the real problem became clear: several of his customers had been given cost reduction goals. As a result he was told that he must reduce his price. Like many suppliers, he can no longer just talk about the value his company provides. He has to show it, in dollars, or he risks loosing the account or being forced to drop his price to keep it. 3. Measuring the Impact Your Products/Services Provide The reason for this is simple: most customers dont know how to measure total cost. And when they are given cost reduction goals they focus on what they can measureprice. Even when they know one supplier adds more value, they either dont know how much more it is worth, or dont have the ability to justify paying a higher price. Yet value added services/products offer suppliers a significant competitive advantage precisely because they can help reduce the customers costs, if the supplier can get the customer to see the impact. 4. Measuring the Impact Your Products/Services Provide Getting the customers to see your value, whether from services or product features, comes down to four key points: 1. Document the impact your value provides the customer (Part 1). It is up to the supplier to document their value because very few customers know how. 2. Knowing who to sell your value to (Part 2). Identify those within the customers organization who are responsible for the cost savings you provide. Selling the value to the right person (person responsible for that cost) is as important as showing the impact. 3. Show how your value helps customers to achieve their objectives (Part 3). Determine which company objectives, departmental goals and key performance measures are affected by your services/products. 4. Differentiate your company in the proposal (Part 4). Too often the customer sees little or no difference between suppliers. In such cases it often reverts back to price as the deciding factor. 5. Documenting Your Value The first step in effectively using value to create a competitive advantage is to determine what it is you do that adds value to your customers. For example: 1. Vendor Managed Inventory (VMI) 2. Introduction of a new product that reduces warranty costs 3. A product substitution that results in energy savings 4. Process/equipment design support 5. Installation support 6. Early project involvement 7. Project management 8. Testing 9. Predictive/preventive maintenance 10. E-commerce solutions 6. Documenting Your Value Each of these events can be a value added opportunity with measurable results. A mistake suppliers make when trying to explain their value, is to promote their strengths and assets as the value added opportunity. While these strengths and assets often provide the means to add value, they are not themselves measurable. 7. Value Examples To better understand this, consider the following examples: 1. Inventory. Many suppliers look at the fact that they have lots of inventory as a value added service. But as hard as this sounds, having inventory does not add value. It does, however, offer the means for suppliers to provide certain value added services, such as: emergency deliveries, inventory reductions, or Just-In- Time deliveries (J.I.T.). This may sound like semantics, but it is not. You cannot measure the cost reductions that occur because you have inventory. But you can measure the cost reductions that the customer achieves because you were capable of doing an emergency delivery or providing J.I.T. 2. Salespeople. Having knowledgeable salespeople is not a value added event. But when the salesperson applies that knowledge he/she may be adding value, such as when the salesperson solves a downtime problem, finds ways to reduce energy costs, or introduces a product that performs better. These actions add value that is measurable. The salesperson is the critical asset or strength that allows the value to be added. 8. To effectively document and sell your value, you have to separate your companys abilities that allow you to provide the value, from the services and products that actually make the customer more profitable. With that said, it should also be pointed out that these strengths and assets need to be part of your value proposition. They can help create the distinction between you and your competition, even when the competition offers the same value added services/products (see Part 4). Value Examples 9. Once you have identified your value added product/services, you must determine the impact these have on your customers profits. The impact on most customers will fall into four primary Total Cost of Ownership categories: 1. Revenues: minimized downtime, increased production rates, or other changes that increase the customers sales. 2. Assets: reductions in possession costs when inventory, equipment or facility requirements are minimized. 3. Expenditures: reductions in the price paid for products/services, energy costs, freight, or other aspects of annual spend. 4. Process costs: reductions in personnel costs due to the elimination or minimization of tasks needing to be performed. Value Examples 10. Accurately determining which categories are impacted is critical for measuring your value. The diagram below can help facilitate this evaluation, and it can also help you to identify who is responsible for these costs (Part 2) in order to sell your value more effectively. Using VMI as an example, the diagram depicts the potential impact this value added service could have on a customer. Value Examples 11. The diagram starts on the left side with the name of the value added opportunity being provided. The user then determines which TCO categories are affected, in this case all four. The user then moves to the right side, which is the most critical section. This section shows the Primary TCO Components Impacted (or the where the supplier impacts a customers profits). To better understand the impact shown, an explanation of each TCO component is provided below: Revenues - In some cases (not all) VMI leads to reduced stock-outs. If this reduces the customers downtime it could allow the customer to produce more products. Assets VMI can result in reduced inventories. This in turn could also reduce storage space and storage/handling equipment requirements (minimal impact in most cases). Expenditures When providing VMI services, the suppliers usually consolidates shipments. Fewer shipments can lower overall freight costs. Additionally, some suppliers charge for this service, which should also be shown. Processes Consolidated shipments lead to lower processing costs such as: ordering, invoicing, and receiving/stocking. Value Examples 12. Once the primary TCO components have been identified, the supplier must now measure the cost savings. To aid in this process, suppliers who dont already have their own methodology, may want to utilize the worksheets shown here. Value Examples 13. You will notice that the first column of the worksheets and the last column of the impact diagram show the same information (TCO components impacted). The impact diagram is used to identify what is impacted and the worksheets are used to measure the dollar value of the impact. A explanation of each TCO component, and of the calculations / data in the worksheets, is provided below: Reduced Downtime The supplier was able to eliminate one downtime from occurring: A. 1 - downtime reduced * 1 hour - production time saved (based on previous downtime situations) 50 - units produced per hour B. $100 - selling price for each unit being produced C. $45 - raw material cost for each additional unit produced Result: A $2,750 increase in profit. Value Examples 14. Reduced Inventory Initial value of inventory on hand was $50,000. Current inventory on hand is $40,000 D. 1 - lot of inventory reduced (all lines and quantities) E. $10,000 - dollar value of the inventory reduced F. 18% - customers carrying cost for inventory Result: $1,800 in possession cost savings. Reduced Freight A review of deliveries from last year showed an average of 3 per week, this has been reduced to an average of 1.5 per week. A. 1.5 - number of deliveries reduced per week (average) * 52 - operating weeks per year (no shut downs) B. $75 - average cost customer is charged for freight Result: $5,850 in freight savings. Value Examples 15. Reduced Ordering, Invoicing, Receiving As the number of deliveries decreased, so to did the number of time the ordering, invoicing and receiving processes had to be performed by the customer. A & C. $35 - estimated cost for processing an order (before and after the change) $25 - estimated cost for processing an invoice (before and after the change) $15 - estimated cost for receiving (before and after the change) B. 3 - average number of orders per week before VMI * 52 - operating weeks per year D. 1.5 - average number of orders per week after VMI Result: $5,850 in process savings. Total annual savings: $16,250. Documenting an event is a good first step. But most suppliers add value in a number of ways each year. Each event needs to be measured and reported to the customer so they can understand the value you bring and the risks they run for not having your company provide your services/products. Value Examples 16. While documenting your value in this way may not stop your customer from demanding a lower price, it may make them hesitant about loosing your support. And if a supplier can estimate the value of additional opportunities, these may provide you with an alternative to lowering your price when the customer com