If your job description includes creating new services or products that become profitable, you know how hard your job is. You have an infinite number of ways to fail and only a few to succeed. So, lets explore why you are working so hard.
What makes a successful new service or product?
A successful launch means that customers will buy enough of your offering to cover development costs and produce an acceptable gross margin. Why then will customers buy what you are selling? Ian Dainty, the well-known Sales Coach, says that B2B customers buy for all or some of these reasons:
- Performance improvement
- More opportunities
- Competitive advantage
- Risk mitigation
- Personal wins
When I think about this list at a higher level, I combine the first four into a single category: getting their work job done better. And the last item is also getting their job done better but here their job is to further their career. Actually, prospects only make a purchase decision when they perceive the decision helps them do their job better. And the things that contribute to doing a job better are the only things that create value.
What is value?
Value is usually defined as:
Value = Benefits – Costs
We know how to quantify and manipulate costs (selling price + implementation costs) but how do we measure benefits? The answer to this question is much more complicated that we would think based upon the simplicity of the equation. The rest of this post will give some insights into why it is so difficult.
Why is it so difficult to quantify benefits?
There are numerous reasons why quantifying benefits is next to impossible to get right. Here are the most important.
- They are based on the buyer’s perception of the amount of improvement to their jobs. Perceptions are individual and cannot be generalized to a large group without making some errors.
- Perceptions are based on what is happening with the buyer at the time he draws his conclusions. For example, if they are under great pressure to succeed and the company culture is to punish failure then the buyer’s attitude is to avoid risk and disbelieve any value arguments.
- As the buyer’s circumstances change, so do their perceived benefits. This one happens unexpectedly. Something totally unexpected arises in the business and makes a dramatic change in the buyer’s perception of value to be created.
When I was the Americas VP of Service for a large multinational company I was occasionally called by the CEO and told, “You cannot share what I am going to tell you. Tomorrow, the XYZ business will announce it is purchasing a business in the U.S. You need to be there at 8AM to meet with the employees and explain how their Service department will be integrated into your existing business.” You can imagine what that would have done to any purchase plans I was working on.
- Changes come randomly and can be all over the place with no rhyme or reason. This means that the seller can never feel comfortable that the buyer will not change their mind about your offer before they sign the contract. And, maybe not until the check is cashed.
- Perceptions are influenced by cost, both absolute and relative. Absolute cost is your offer. It informs how people think about the value they will enjoy from purchasing your stuff. If the buyer feels your offer is too high, she may feel that her coworkers will think she overpaid, no matter how beneficial the value. Or, if the offer appears to low, she may have second thoughts because “how good can it be if the price is so low?”
Relative cost is the price of your offer compared to offers for alternative ways to get their job done better. Too high and she feels she is being cheated; too low and she is concerned the quality will be crap.
Once you get your head around these potential issues, you need to consider the realities of B2B purchasing today. For all but the most basic decisions, many businesses now have a “purchasing committee” or a “value analysis committee” made of about six members representing different disciplines or departments. And each one will be influenced by the above five points. Since one of the jobs of individuals in larger businesses is to avoid personal risk, each of the members has their own agenda and value criteria. This may be the reason that many, if not most, purchase decisions today lose to “do nothing.” In any case, you and your team will have to work with the individual members of the purchasing committee to guide them to a common understanding. Or, at least, a point where they can sit down together and come to a decision that works for all of them.
Today, many businesses have Value Pricing and Value Selling experts on staff to help the Sales, Service, and Marketing departments prepare their stories to be understood and accepted by the largest amount of buyers. If you are fortunate to have these people available to help you, then you would be a complete fool to not take advantage of their skills and expertise.
I wish you great success as you create customer value!