The Value Lifecycle: Generating Demand for Your Solution

This is Part III of a five-part series about the life cycle of value in B2B selling and marketing. This post examines Phase 2 of the Value Lifecycle: Demand Generation.

Last week we talked about value as it relates to pricing. In Phase 2 of the Value Lifecycle, our understanding of value shifts slightly.

Value phase II

Your aim in Phase 2 is to establish the total cost of the prospect’s current business problem (or problems). That cost could be represented by money the customer is currently spending needlessly, and/or revenue the customer is currently missing out on. As we often explain to our clients, shining a flashlight on the size of a prospect’s problem sets you up to illustrate to the prospect how much value your solution can create for them.

Let’s look at a simple example. Say your prospective customer has a process in place for posting new job openings. This process is paper-based and requires three people to manage it. The labor cost to employ those three people is the size of the problem. Now let’s say your company has a solution that’s electronically based and only requires one person to manage the process. Not only would the customer save the labor cost of two employees, they’d also save on spending money to buy ink and paper. That’s the value created by your solution.

These kinds of cost savings scenarios can exist almost anywhere for customers. Your solution might reduce rent, labor costs, IT support costs, etc. Or your solution might, for example, impact revenue by increasing the number of sales leads or improving an online store’s uptime. No matter the specifics, the general question is, “How much is not implementing our offering/solution costing you?” and/or, “How much revenue are you losing because you lack our offering/solution?”

A key metric in Phase 2 is cost-to-delay per month. That’s the total value of the problem over the period of time (and, again, could be represented by potential revenue lost, unnecessary costs, or both). A month is usually a nice time frame, but you could also quantify the problem in weeks or years. Essentially, this calculation allows you to tell the customer, “Every month you don’t solve this problem, it’s costing you X amount.” Again, this is a way to create a sense of urgency around solving the problem.

Note that Phase 2 analysis doesn’t take into account what your competitors are offering and how you compare to their solution. In the demand generation phase, you’re mostly concerned with what the customer is currently doing today. Why? The way you measure value changes based on where you are in the Value Lifecycle. In Phase 2, you’re not concerned with proving how you’re unique and different – that comes at a later stage. Your primary concern at this stage is to get the prospect excited about solving their current problem.

In Phase 3 you can start to explore the question, “Why should the customer buy from us,” (instead of either doing nothing or buying from your competitor). We’ll explore that concept in next week’s post.

What’s your biggest challenge in quantifying your prospect’s problems? Share your thoughts in the comments section. 

The Value Lifecycle: Establishing Your Value in the Market

This is Part II of a five-part series about the life-cycle of value in B2B selling and marketing. This installment explores how to establish the value of your offering.

Value Lifecycle Phase I

Although value in a B2B context is always about dollars and cents, value and price are not the same thing. When marketers start the process of setting a price for a product or solution, they usually look around to see what the competition is charging, and then they set a similar price. Or they look at their costs and tack on an acceptable margin.

That’s the wrong way to look at things. You need to first do the hard work to understand the value of your offering.

Value starts with looking at the economics of the customer and doing a pro/con analysis of your offering against their next best alternative. Sometimes that’s a competitor’s offering. However, it’s often “do nothing” or pursuing a homegrown solution that’s created internally.

If you add up those pros and cons (your value elements), you can establish the value your offering creates for a customer based on what you do differently. That value should be measurable in currency and should be specific to each customer (or segment). Once you do this analysis, you can set price. Here’s the formula: the maximum price you can charge is the value you create minus the value of the next best alternative, plus the price of the next best alternative. However, you cannot charge the maximum price, because at that price the customer has no incentive to change, because at that price you are leaving no value for your customer. You need to share some or even a significant majority of the value your offering creates to incent customers to buy and sustain your market.

As an example, let’s look at the B2B marketing and sales enablement tools that my company sells. Part of the value we create is additional leads and more closed deals. While our competitors may not be able to offer customers as many incremental leads and closed deals, they still offer something along those lines. The big value we create over our competitors is our consulting services — not only do we create the tool, we help our clients define and communicate the value of their offering in terms their customer will understand and accept. This not only makes the tools more effective but also gives our clients an inherent time-to-market advantage. Our pricing strategy is to then capture some of this incremental value we create vis-à-vis the next best alternative, which can be either “do nothing” or a competitive product (a competitive product could include an internal homegrown tool).

In our view, all marketers should spend time doing this analysis, but figuring out incremental value is a difficult task. That’s why many marketers take the easy route and set a price based on how much it costs them to make their product, or they take the competitor’s price and simply charge a 10 percent premium or discount. But neither of those things helps you establish your value, nor does it allow you to capture an optimal share of that value.

Phase 1 is all up to the product or marketing manager, but these decisions will heavily affect the sales team later in the value life-cycle when trying to find leads and close deals.

Next week we’ll explore Phase 2, demand generation.

Has your company/team performed an analysis like this to determine your value? What are some lessons you’ve learned about value and pricing in your career? Share your thoughts in the comments section. 

Getting to a Successful Close: The Four Phases of Value in Sales and Marketing

This is Part I of a five-part series about the life-cycle of value in B2B selling and marketing. Part I is an introduction and a summary four phases of the value life-cycle.

Whether you’re in sales or marketing, it is obviously in your best interest to understand what value you offer to customers. What most sellers and marketers don’t realize is that value has different meanings depending on where you are in the marketing/sales cycle. The “value life-cycle” has four distinct phases (listed below) – as you’ll see, different phases require input from different roles in the company.

Stratavant Value Lifecycle

Stratavant Value Lifecycle

Phase 1: Establish Offering Value (and price)

Initially, a marketing/development team defines value and sets price for a new offering. The common mistake here is that marketers set the price based on what the competition is charging or, worse yet, based on their own cost – not based on the value they create relative to the competition. During Phase 1 you will always be measuring value against the customer’s next best alternative (often a competitive offering).

Phase 2:Demand Generation

At this phase, marketing aims to project to the customer a picture of how your value can help them relative to what they’re doing today. At this point in the value life-cycle, you are trying to “shine a flashlight” on how much the problems that you can solve are really costing them. During Phase 2 you are measuring value against their current state.

Phase 3: Competitive Differentiation

At this point, sales (with support from marketing) needs to show the customer why their offering provides more value and is a better fit than competitive offerings. In Phase 3 you are showing that the total value your creates – throughout the life-cycle of the solution – is higher than the total value created by the next-best alternative (aka, a competitor). This is often referred to as TCO, or Total Cost of Ownership.

Phase 4: Business Case & Cost Justification

By Phase 4, the sales team is actively trying to close a deal. A cost-justified business case is key to convince a financially minded approver (often a CFO or someone from finance) that an investment in your solution is in their economic best interest.  During Phase 4 you are showing the Net Present Value (NPV) and Return on Investment (ROI) of investing in your solution (as we’ve written before, this is why it’s important to understand financial terms and communicate intelligently with CFOs). This type of analysis compares their current state of cash flow against what their cash flow will be after they invest in your solution.

How you think about value should change based on which phase you’re in. Phase 1 is strategic marketing, and the meaning of value is very different from Phase 4, during which sales is talking with the customer. The way you think about value at each phase will have an enormous influence on your ability to successfully position your product in the market and keep deals moving through the pipeline until they end in a successful sale.

While most people in sales and marketing do think (and talk) a lot about value, they don’t necessarily think about it within this framework. We’ll explore each of these phases more in four upcoming blog posts.

A final note: the word “value” is always about dollars and cents in the B2B world. If you can’t lower the cost of doing business for your customer and/or find a way to help them increase revenue, you’re not offering value and customers shouldn’t buy from you.

How do you think about value for your offerings? Do you have tools that help you to show value across the various stages of the value life-cycle?

An End to Cost-Based Pricing?

It’s that time of year again. The media is filled with year-end lists, projections, resolutions and wishes. Compared to all that drama, my wish for 2014 is simple: let’s have this be the year that puts an end to cost-based pricing.

For more than ten years, we have been preaching the evils of pricing based on costs. We truly believe its only place is in government contracts that require cost transparency and a margin or ‘fee’ on top of those acceptable costs.

The arguments against cost-based pricing are well-known. First and foremost, if you are pricing based on cost, you are not thinking about value. This is critical because value is the lens through which your customers look at your offerings – “what is this worth to me relative to my next best alternative?” Your costs do not factor into their ‘value equation. If you do not understand value, you have no way of knowing if your prices are too high or too low, and importantly, you also have no idea what you can do to make your offerings more valuable (what is the alternative – become less efficient so your costs go up so you can justify a price increase?).

In our consulting work with enterprise clients in the industrial manufacturing and technology industries, we have come across situations where cost-based pricing led to prices that ‘seemed fair,’ but were capturing only a fraction of the value created. In some cases, the prices were too low by more than a factor of ten!

In reality, cost-based pricing is even worse than just not knowing value. If you price based on costs, then when your costs go down, you may be tempted to lower your prices, or at least not argue as hard for price increases. And try getting those prices back up when your costs increase! Further, even if you want to price to cost, very few companies know the actual cost to serve a given customer.  So, you end up pricing based on your average cost, letting customers self-select (we get more than our share of the customers that we priced too low!) rather than targeting those where we create the most value and leaving yourself vulnerable to competitors who better segment the market.

So if cost-based pricing is so obviously wrong, why does it persist? I think there are a few reasons:

  1. It is simple. By contrast, understanding customer value takes work and is an ongoing, time-consuming process – costs and target margins are based on history or dictated by the finance people.
  2. It is precise. Value is always an estimate and always changing – cost is given by the accountants to three or four decimal places (even though it is usually last year’s average cost, not the right cost for any specific customer this year).
  3. It seems fair. Value is usually derived from product features or service benefits that took many years to build and strengthen; the cost for all this investment is often invisible to customers. Tacking a margin onto current costs seems easier to defend, especially when your customers may be facing a profitability challenge themselves.

So, how about it? Can this be the year we stamp out cost-based pricing? Let’s start spending our time with customers to understand what they value and worry a little bit less about those detailed cost spreadsheets. Are you with me?

Thought questions:

  • Does your company still practice some kind of cost-based pricing?
  • Why do you think cost-based pricing is still so common?
  • What can you do to shift your company’s thinking to customer value?