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Value Merchants by Mind Map: Value Merchants

1. Introduction

1.1. Intent

1.1.1. Transform businesses and, especially, their sales forces into value merchants Assess customer value in practice Craft value propositions that resonate with target customers Achieve spirited implementation of superior profits

1.2. Problem

1.2.1. Common issues The salespeople have a poor understanding of what really creates value for customers Sells on price instead of value The salespeople makes vague promises of superior value without any supporting data Sells on promises instead of data The purchasing managers are focusing on price only Threaten suppliers with replacing their solution if not lowering prices Are being measured on cost reduction

1.2.2. Symptoms & Result A price war (race to the bottom) = "commodity business" Relentless cost cutting Moving production overseas to low-cost locations Trading low margins for (hopefully) higher volume Customer interaction dominated by purchase managers (low pricing flexibility) Suppliers leaves money on the table

1.3. Solution = Customer Value Management

1.3.1. Goal Deliver superior value to targeted market segments & customer firms Get an equitable return on the value delivered

1.3.2. Method Demonstrated & documented superior value (relative to 2nd best alternative)

1.3.3. Benefits Documenting the resulting value provides credibility to provider since they are willing to follow up the actual result after delivery Documenting the resulting value provides credit to the customer (purchase) managers success claim, potentially furthering their career Documenting the resulting value makes it possible to generate customer "value case histories" and other marketing material Is this really beneficial to the customer? Documenting the resulting value makes it possible to influence and improve product management with valuable customer insights

1.3.4. Strengths Superior conceptualisation of value Easy to understand A progressive approach to assessing value in practice Value elements Value equations Proven concepts and tools for translating knowledge of customer value into superior business performance Customer value propositions what resonate with customers Value-based sales tools that the sales organisation actually can and wants to use Intention to gather knowledge that provides superior business performance

1.3.5. Tools Customer value assessment Main tasks Report Customer value documenters Value case histories Value calculators

1.3.6. Prerequisites Senior management support is a requirement for success with implementation Attend launch of customer value management initiatives Serving as executive sponsors of customer value management projects Monitoring the progress of initiatives Attend business cases for change Provide feedback CVM needs to be a core component of the company culture "We have superior products" "I need to be able to sell based on value, not price" The "value story" is repeated in various different internal and external circumstances and documents Managers from all relevant functional areas in the supplier organisation should be involved in the creation and assessment of the value proposition to anchor result and improve a shared understanding

1.3.7. Customer examples Sonoco Requirements on value proposition All managers are measured according to the value propositions GE Infrastructure Water & Process Technologies Slogan: "Proof, not Promises" Sweden SKF Slogan: Real world savings - And we can prove it!

2. Conceptualize value

2.1. What is value?

2.1.1. Value in business markets is the worth in monetary terms of the technical, economic, service, and social benefits a customer firm receives in exchange for the price it pays for a market offering. Value in business markets is always compared to the second best alternative Competing comparable technology Outsourcing or making the item yourself Doing nothing The most recent offering from the same supplier Value compared to the next-best alternative fall into three categories Points of parity (more or less the same) Points of difference (the supplier or the next-best alternative offering is stronger) Points of contention (where the supplier and its customers disagree regarding which option is the strongest) The value of a given market offering can vary by segment and customer characteristics Important to understand Possible to capitalize on

2.1.2. (Value (firm) - Price (firm)) > (Value (alternative) - Price (alternative)) Changing the price of an offering does not affect the value the customer receives. Only the willingness to buy. Value is what the customer gets in exchange for the price it pays. The prices is never part of the value. Customer firms often do not have an accurate understanding of what suppliers market offerings actually are worth to them

2.2. What constitutes a customer value proposition?

2.2.1. Type A: All benefits The most common (and easy) value proposition since it does not require knowledge of neither market nor competitors. It is based on a "shotgun approach" where some bullets will hit and other miss different customers. This pitfall is often called benefit assertion. Many benefits may be on a "point of parity" level i.e. equal/similar to the second best alternative. The actual and important "points of difference" usually get lost in the crowd.

2.2.2. Type B: Favorable points of difference This approach also uses the "more is better" attitude which usually does not work as well as a resonating focus. It is slightly better than the "all benefits" approach though. Ineffective and challenging to use this approach without a deep understanding of unique customer requirements/preferences and competitor offerings (next best alternative). A common pitfall in this approach is "value presumption" where the supplier makes an (often erroneous) assumption of which "points of difference" that are important to the customer.

2.2.3. Type C: Resonating focus Should be the "gold standard" for measuring customer value propositions. "Simple yet powerfully captivating"

2.3. What makes a value proposition persuasive?

2.3.1. In general Select a few benefits that actually are relevant to the customer. Always 1-2 "points of difference" and perhaps 1 "point of parity" More is not better. Demonstrating and documenting the superior value of supplier solution for these benefits. Communicate in a way that conveys that the supplier understands the customer business concerns and priorities.

2.3.2. Internally Good Shows that the company market strategy and goals are aligned with value prop Shows which customers that are most important to the company Shows which benefits the company wants to emphasise about its market offering Shows which promise the suppliers is making to their customers Pitfalls Some employees at the supplier firm might not want to communicate the value proposition to not disqualify some customers. This however usually leads to unnecessary sales effort, demotivation and less happy customers with non-ideal solutions.

2.3.3. Externally Good Use the value proposition as a foundation for building the brand Pitfalls If not really persuasive the customer will default to focus on price instead.

3. Formulate value propositions

3.1. Hypothesizing present AND potential "points of difference" to study that supplier believes are, or would be, valuable to target customers.

3.1.1. List the value elements Recommendations The value elements team should consist of individuals from various functional areas of the supplier organisation who are knowledgeable about the offering and target customers An individual analysis (list) should be performed for each unique (and interesting) target market segment. Do NOT forget unfavourable value elements as well for credibility. Customers will notice if too biased. Be elemental i.e. not to general and/or abstract but instead very specific when listing the value elements to avoid being to vague. Challenges Most companies do not really know how their value compares to the next-best alternative. Could result in no points of difference i.e. the offering is a "commodity" relative to the next-best alternative. Could be "points of difference" that do not exist yet but which the company plan to provide in the NEAR future. Or which are easy to quickly develop if found to be valuable.

3.1.2. Decide on the next-best alternative Usually the company that customers would consider the principal competitor of the supplier. Could be the suppliers own previous offering. Should usually only be one next-best alternative but could in rare cases be two. For example if next-best alternative is completely different in different markets. Geographical? Technical?

3.1.3. Compare firms offering with the next-best alternative Fundamental equations ( Value (f) - Price (f) ) > ( Value (a) - Price (a) ) ( Value (f) - Value (a) ) > ( Price (f) - Price (a) ) Δ value (f,a) >( Price (f) - Price (a) ) Identify prospective changes Questions Interviewees

3.2. Conduct qualitative research to further refine the potential value proposition.

3.2.1. Ensure that the value proposition is not biased by internal "echo chamber" or "outdated value estimates".

3.2.2. Approaches Focus groups Good for evaluating existing ideas and concepts. Customer visits Good for identifying until now unknown ideas and concepts.

3.3. Construct value word equations

3.3.1. General requirements: Precisely express each point of difference and point of contention (that will be estimated in subsequent customer value research) in monetary terms. Relative to the next-best alternative. Be expressed in words & simple mathematical operators Make it possible to access the difference in functionality or performance between supplier and next-best alternative Convert the difference in functionality and performance between supplier and next-best alternative into monetary terms Be available for each point of difference and contention.

3.3.2. Formatting requirements: The value element, expressed as either cost savings or incremental profit, is on the left side of the equal sign. The components defining the differences in functionality or performance and what they are worth are on the right side of the equal sign. These equations could be very industry specific and technical. It is important to use the same definitions and jargong as the customer representatives are used to. Accompanying each word equation are the assumptions that the supplier is making about the value element and how its monetary value is assessed. Needs to be explicit to establish trust and confidence from the customer side. Explicit assumptions makes it possible for customer to disagree with them and for both parties to improve the value proposition together. Each equation should be presented twice in the final report - with words only and with values

3.3.3. Audience requirements: Customer manager Be able grasp the value word equations. Be able understand how the value word equations are assessed. Be persuaded by the result of the value word equations.

4. Substantiate value propositions

4.1. Start

4.1.1. Decide on offering

4.1.2. Decide on target market segments Maximum two segments or sub-segments at the same time Recommended 6-8 customers per segment

4.1.3. Decide on customer(s) Present Prospective

4.1.4. Decide on team People 1 person who spends most of their time at the customer (field technician etc) 1 person from marketing or development functional area 2-3 sales people Structure One member should be the leader. Each team should have a senior manager as sponsor to increase success chances

4.2. Phases

4.2.1. Gaining initial customer cooperation Participants At least two from supplier Suitable customer managers Salesperson (if protocol) Format Call Gives & gets analysis Gives (customer) Gets (customer)

4.2.2. Gathering the data Participants At least two from supplier Suitable customer managers Salesperson (if protocol) Format Visit x 2 ToDo Provide value elements & equations Discuss timing and resource requirements for research and data collection.

4.2.3. Analyzing the data ToDo Evaluate monetary value Comparison of studied segments Sensetivity analysis Identify value placeholders Goal Identify most interesting prospects based on which characteristics (variables) that drives the most value for companies. Identify new segments or sub-segment based on most influential characteristics (variables)

4.2.4. Documenting actual value provided Value documenters Value calculators Value case histories

4.3. Goal

4.3.1. Business case for change Actions Examples Resources Concerns Milestones Profitability

4.3.2. Better understanding of segments and sub-segments

5. Tailor market offerings

5.1. Creating Naked Solutions with Options

5.1.1. Do A naked solution is the bare minimum of products and service that all customers in a market segment will value. Typically one naked solution for each segment with a couple of selected well-chosen options Well-chosen options are product enhancements and services that some, but not all, customers in that segment value

5.1.2. Do not One and the same "vanilla solution" for all different segments Some get to many and some get to few feature Some profitable customers subsidize other less profitable customers Provides an opportunity for some customers to haggle on price instead of adding and/or removing options

5.2. Refining targets

5.2.1. Segmentation Initial segmentation Industry Customer size Refined segmentation Application Customer capabilities Usage situations Customer contribution (to profitability) Transactional vs Collaborative Customers Supplementary services (as well as programs & systems)

5.3. Becoming more flexible in offerings

5.3.1. Strategic alternatives Do not offer services Market service as standard (without charge) Market service as optional (with a charge)

5.3.2. Status New Based on supplier strengths and capabilities Based on target customer needs It is a good idea to position new services primarily as stand-alone options instead of part of standard solution Existing standard Existing optional

5.3.3. Important notes Prune from offering Rarely used offerings or offering requested by a very small fraction of the customer base in the segment Possible to outsource or let other firm provide the service if there is a market Retain in the standard offering Some offerings that are not profitable might still be worthwhile to keep in offering to match competitor The recommendation is to position them as in "parity" i.e. equally good as competitor but provide them at a lower cost than competitor Typically does not drive the decision to buy from a customer perspective (regarded as hygiene) Recast as a surcharge option Make a previously standard included option something to pay extra for - typically challenging. Great candidates (seldom used services) Possibile to include "base level" in standard and charge extra for "higher levels" Keep it on the shelf Customer does not yet realise value To costly to provide Cannibalisation of existing products Augment the standard offering A way to sustain customer relationships A way to hinder the progress of competitors by forcing them to: Also a good idea when: Introduce as a value-adding option Provide additional value only for those that need it A good way to benchmark the market interest in a new service, program or system

5.3.4. How to break away from the pack Service guarantees Hard for competitors to claim the same thing without actually having the same capabilities A great way to turn discussion away from price How to safely be a industry paradigm breaker (introduce something revolutionary) Pilots Saying no to customers that want full-service offerings at no-frills prices

6. Transform salesforce to value merchants

6.1. Common issues

6.1.1. Salesforce becomes a customer advocate for price cuts instead of supplier value

6.1.2. Compensating salesforce on profitability is not enough to transform them to value merchants

6.2. Value Merchants vs Value Spendthrifts

6.2.1. Routinely trade more business for lower prices OR routinely gain more business at the same price.

6.2.2. Make unsupported claims about superior value to customers OR demonstrate and document claims about superior value in monetary terms to customers.

6.2.3. Focus on the revenue/volume component of their compensation plan OR on the gross margin/profitability component of their compensation plan.

6.2.4. Give price concessions without changes in the market offering OR give price concessions only in exchange for cost-saving reductions in the market offering.

6.2.5. Complain that our prices are too high OR complain that our proof of superior value is lacking.

6.2.6. Give services away for free to close a deal OR strategically employ services to generate additional business.

6.2.7. Prefer to give quick price concessions to close deals and go on to other business OR are willing to hang tough in the negotiations to gain better profitability out of each deal.

6.2.8. Believe management pursues a capacity-driven strategy OR believe management pursues a value-driven strategy.

6.2.9. Sell primarily on price comparisons with competitors OR sell primarily on customer cost-of-ownership comparisons with competitors.

6.2.10. Tell us customers are only interested in price OR tell us customer insights to improve the value of our offerings.

6.3. Suggestions

6.3.1. Compensation Compensate salesforce on profitability of accounts (instead of pure revenue and/or volume) Example: make gross margin a higher percentage of incentive compensation. Subtract sales expenses (within the sales persons control) as well as bad dept occurring from the total customer gross margin dollars. Invent a way to make sales persons prove that the use the value-based approach as well as related tools. Examples SKF Rockwell Automation

6.3.2. Leadership Have a SVP Sales that is able to persuasively discuss and talk about the benefits of value selling at any time Begin and sustain a culture that celebrates value merchants Titles (both sales and other) Marketing Wins (what is celebrated) Important that everyone in management is completely on board with value selling to not give mixed signals to organisation (especially sales).

6.3.3. Anchoring Involve progressive salespeople in the customer value management project teams as well as in the process of pilot-testing the resulting tool and processes. Anchor understanding within sales organisation Avoid value selling being perceived as a top-management-driven "black box" Create future value sales evangelists Introduce value selling early in internal "sales councils" to anchor new tools and processes with respected sales people

6.3.4. Tools & Training Put together a value-based sales process Investigate customer requirements & preferences Puts together and proposes responsive market offerings, Demonstrates that they are superior to those of the competition, Negotiates a fair price in return, Makes sure that the business delivers on what the salesperson has promised the customer. Put together value-based sales tools Value calculators Value case histories Providing the sales force with meaningful initial and ongoing field experience in selling value Provide initial success in selling value to customers Maintaining comfort with selling value to customers

6.3.5. Motivation CV initiatives CV competitions CV stories (internal marketing)

7. Profit from value provided

7.1. Willingness to pay

7.1.1. Price premiums Seeking and gaining a price premium establishes a reference point in the minds of the customer of what the supplier believes is a fair exchange. AND encourages competitors that will try to emulate the supplier to also seek a price premium for their offerings. Performance based contracts? Example: SKF

7.1.2. More profitable mix of business Involve more departments within the same organisation Add more/additional products with a higher margin

7.2. Cost to service

7.2.1. Greater share of the customers business Accounts with a high percentage being bought from the supplier indicates customers that believe the supplier has superior products. Also gives an indication of suggested sources of differentiation. Becoming single-source provider for certain customer target offerings

7.2.2. Eliminating value drains and leaks Definitions Drains Leaks Tools Customer value assessment Activity-based costing analysis

7.3. Value-based pricing strategy

7.3.1. Penetrating pricing strategy Sell more Less margins

7.3.2. Skimming pricing strategy Sell less Higher margins

7.4. Pricing tactics

7.4.1. Examples: discounts, rebates, reductions and allowances Initial use discount To cover switching costs Sets the expectation on supplier of equitable pricing from the customer side - works both ways Trade-in allowances Old equipment etc Early payment discounts Often some percentage - for paying on time Volume discounts Lower unit prices for larger quantities Freight allowances Reduction on the invoice for transportation and delivery charges Rebates & bonuses (no charge) Money Additional products Services Terms & conditions When and where delivery Payment schedules Return policies Warranties Installation procedures

7.4.2. Only offer discounts that are ties to those customer actions that benefit the supplier in some way. Typically lowering supplier costs.

7.5. Pricing transactions

7.5.1. Realising the greatest net price for each individual order

7.5.2. Measured by what percentage of the transactions (orders) follows the pricing guidelines Costs if not followed Time spent allowing "out of policy" prices Some "special" prices are not communicated internally to accounting with erroneous customer bills Communicates to customers that there is always room for more discounts etc. Pocket-price band analysis Insights to gain Todo

8. Prosper in business markets

8.1. Common internal CVM objections

8.1.1. Our business is not like any other business

8.1.2. We have it more difficult in our business than does any other business.

8.2. Reasonable expectations

8.2.1. Changing the company culture is an EXTREMELY slow process

8.3. Keys for initial success (which is crucial for future momentum)

8.3.1. CVM Pilot Members General Manager Senior Marketing Executive Senior Sales Executive 3-5 projects 3-4 months Limited and defined scope as well as a clear picture of success Example: Business case with X amount of incremental profitability within Y months Success stories of the CVM project Profitability of supplier Learnings of customers Ensure that team had enough time to carry out the project If the teams are spread to thin neither success nor entusiasm will be the result Base Product Management prioritisation on the most valuable points of difference (related to potential projects/features) Should be based on solid data from research (not guesses or wishes) Should be evaluated on at least two customer segments Implementing the insights is called "value realisation". This change is always based on a customer case. Track financial result Enhance data when necessary Develop sales tools & training Follow the recipe by the book the first time and do any potential improvisations in the next project

8.4. Building on initial success

8.4.1. Compare successful vs not successful CVM projects to learn how to improve methodology and circumstances Learn from failure Learn from success

8.4.2. Publish CVM project success everywhere! Internal publications Intranet Verbal recognition

8.4.3. Use CVM research as the base of NPD selection i.e. ask what are "the points of difference" for a new offering including value word equation and value estimates Also true for changes in supplementary services, programs and systems that argument the core product or service offerings

8.5. Continue to provide superior value

8.5.1. Do value documentation after delivery

8.5.2. Keep track of cost saving and added value Encourage service people to listen for "insights" from customers on how to provide "new & additional" value in the form av products and service Remind the customer of delivered value before new contract negotiations and/or when competitors appears

8.5.3. Cross-pollinate value insights between different market segments and industries