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Managing Value: Where the Problem Lies

February 2015 Pricing, Selling

After a firm adopts value based selling it comes face to face with the next big challenge: How to manage the process of value based selling? To understand the challenge better we need to first revise the key challenge of adopting value based selling.

Value Based Selling as a process requires firms to set prices based on the value that the product delivers over the next best alternative that the customer can consider. The first challenge of value based selling is locked in the definition itself: How well do we know the next best alternative? Is the next best alternative identified really the best available option for the customer? Even if we have identified the right next best alternative, how do we quantify in dollars how much better /worse our offering is?

Companies that are experienced in value based selling have answers for the above questions at the time of product launch and initial price setting. In fact since the price projection is an important component of future revenue projection, a lot of research goes into unlocking the true value of the product. However there is a catch: The person or team that unlocks the value and sets the price may not be responsible for pitching the product to the customer! The sales guy who is at the customer meeting room — trying hard to answer the purchaser’s crisp questions on why they should pay more for this product than they pay for the competing product — may not be aware of the entire value calculation process.

The above problem is apparently easy to solve: Why not train the entire sales force on the value proposition of the product at the time of launch? Training should not be difficult — all you need is a well-crafted slide deck that explains the dollar value of each feature, the segmentation, the pricing rationale etc. As an add-on you may handover scripts for explaining the value proposition to the sales team. Whenever the negotiation gets tough they can refer to the script!

However in the next level there are few problems that remain unsolved. Allow me to list out the most powerful ones:

  1. How static is your value? How frequently do you update your next best alternative database? Do you update your product value regularly? Do you adjust your prices as per the new discovered value?
  2. How accessible is your sales force? Only a small portion of sales is may be achieved by the company’s inside sales force. A larger portion of business may be managed by distributors, web retailers and independent sales representatives – How accessible are they? Do you train them too?
  3. How appealing is your communication? Like I mentioned, a good amount of your business may be dependent on channel partners. Your distribution sales representative may be representing multiple companies (including some of your competitors). Is your training interesting enough to keep distributors engaged? What if the only language that a very important channel representative understands is Japanese while all your value selling tools and training materials are in English?

 

In a lot of cases unfortunately the above challenges remain unsolved. What happens consequently is as follows:

A company launches a product expecting a fair average selling price (ASP) of X. The average selling price of the next best alternative is 30% less than X. Customer refuses to pay any premium over the next best alternative as he is unable to understand any additional value. The sales-guy (the face of the supplier for the customer) cannot help him much and has to resort to seeking help from the product/pricing management team. Email debates ensue between sales and pricing and by the time an understanding is agreed – the business is gone! “Well your competitor gave me a good price without a second thought, so I gave him the business”, the Purchaser smiles. The Sales guy leaves the customer site having lost faith in value based selling!

Another scenario is also possible:

A company launches a product expecting a fair average selling price of X. the average selling price of the next best alternative is 30% less than X. Customer refuses to pay any premium over the next best alternative as he is unable to understand any additional value. The sales-guy comes back to the pricing team, firmly requesting price X-30%. “If you don’t agree to this price – the business will be lost and you will be held responsible”. The price gets approved – the business is won but effectively only 70% of the true revenue potential of the business is realized.

The problem thus zeroes down to – You cannot achieve your value-based price without knowing the situation completely and negotiating as well as the situation demands. This process is time consuming and thus there is a risk of losing the business altogether — and the customer will not wait forever.

This rephrases the key challenge for selling on value: Provide a price derived from the value. Provide the price quick. When the customer receives the price he should be aligned.

Providing a price derived from Value: Value based selling is not a one-time exercise. Throughout the product life-cycle the value must be updated. All factors that are subject to change need to be tracked routinely. “We set the initial price based on value and later adjust the price down depending on the market response” – is definitely not the step in the right direction.

Provide the price quick: It is important to measure the time taken to respond to the customer’s price request. Once this get’s measured this needs to be improved. However, in your endeavor to provide a price quick you may start losing focus from the value selling aspect. To keep both aspects intact it is important to ensure the value based pricing process is not too complicated and the right tools are in place.

The customer should be aligned: There is also another piece in the problem: How did you select your next-best-alternative price? Did you ask lead customers? Did you refer to web pricing? Did you resort to mystery shopping?

You may have offered a price of $10.00 because you have calculated a value of $12.00. In the process of calculating the value you may have assumed the next best alternative price to be $8.00. In reality the customer pays $5.00 for the next best alternative – thus your value calculation and price proposal makes no sense to him.

Maybe you need to recalculate the dollar value for every opportunity (based on information that you get from your customer). However is that a feasible option, given the fact that time is also a constraint?

Automation is one of the best methods to overcome the above problems. For calculating the value of a product, Economic Value Models (EVM) are well known powerful tools. Most often the marketers, while calculating value using Economic Value Models, provide the value equation along with the dollar value for each variable. I personally don’t think this is the right process. My suggestion is as follows: During initial price setting calculating the dollar value is important. However it’s better to not be fixated with this value.

Instead make the Economic Value Models dynamic and customizable. The value experts can provide the equations but let the dollar values be populated in the field. In the ideal world this population exercise should happen along with the customer so that when the final value pops out – he has no choice but to agree.

It is useful to create/purchase a web-app using for Economic Value Models creation. From the back-end the equations can be fed and edited periodically. The user populates the dollar using a user interface (A good idea would be to set default values which can be overwritten.). However setting the Economic Value Models totally free may end contradicting the very purpose of creating them. Thus we would require an approval process for the Economic Value Models.

Once approved, an Economic Value Model becomes an authorized value scenario. With time the database of approved Economic Value Models could become a data gold-mine for understanding the true value of a product. This would make the process of resetting a price easier, and in the process the price would be accurate enough to be easily accepted by a customer.

Using the above process not only are we streamlining the process of providing a good price quick but also educating ourselves with information that makes our task smoother in future. Well of course we cannot avoid the third benefit. Remember the golden words of Confucius, “I hear I forget, I see and I remember. I do and I understand.” If training doesn’t help, making them a part of the value derivation process might!



About the author

Anirban is a core-team member at Lifkart (an Early stage Indian Construction Start-up). Prior to the current gig he worked for about 5 years as a pricing manager at Cypress Semiconductor. He holds a BE in Electrical Engineering from National Institute of Technology , India and an MBA in Marketing from Symbiosis Centre for Management and Human Resource Development (SCMHRD), Pune, India.

Anirban Sengupta
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