I wrote, The Arrogance Of Creating Value For The Customer. Most of the time when sales and marketing people speak about value, we think of what we “inflict” on the customer. We tell them our value propositions, then letting them figure out whether it means anything to them.
Perhaps we take the time to understand what they value, then presenting our value in the context of what they value.
In the article, I suggested that value creation is really a collaborative effort, a journey we and the customer embark on, creating value together. It’s a journey of learning, discovery, challenging each other, understanding differing points of views, and determining a path to help the customer achieve their goals.
As sales people, we tend to think of the the value the customer is getting from this process–using this to get them to buy from us.
Which gets us to the concept of Value Exchange. Most simplistically, the customer gets value out of the process and we have to get value out of the process. For this to work we have to get value out of the process, as well.
The value each of us gets has to be roughly in balance, if it isn’t the relationship can never survive. (Revisit your physics books, looking at laws around static and dynamic equilibrium.)
When we understand the concepts of Value Exchange and balance in the relationship, we start to see more about how value creation must be with rather than for the customer. It’s also in this that we see the concept of value add is really meaningless.
The value the customer ultimately provides us at the end of the buying process is a PO. Certainly, we enter into the relationship with some risk/uncertainty. We may invest in creating value with the customer, only to see they choose to do nothing or, worse, to select a competitor.
We do everything we can to mitigate that risk in our qualification process. And we are constantly re-qualifying the customer throughout their buying process.
The customer is always looking at getting the best price possible for the value they need in the relationship. But sometimes, we go through the whole process of creating value with the customer–only at the end to have procurement get in to say, “Thank you for all the value you’ve created, but now you have to reduce your price by X%.”
This creates imbalance in the Value Exchanged in the relationship. In a single transaction, perhaps that’s something we can live with, but continued imbalance in Value Exchanged puts us out of business!
Our ability to create value with the customer, particularly over the long term is based on our ability to get a fair margin/profit out of the relationship we have with the customer–and with all customers. What we invest in creating value with the customer has a cost to us. If we aren’t getting fair value in exchange, we can no longer afford to invest in that relationship, or if we can’t get fair value from all our customers, we go out of business.
Clearly, from our point of view that’s a bad thing (somewhat of an understatement), but it’s also tragic for our customers.
Think about it for a moment, if there is no balance in the Value Exchanged, we have to find ways to reduce our costs to get things back into balance.
We might cut back on quality, reducing the costs of our products—but that adversely impacts our customers and their relationships with their customers.
We might cut back on new product development and innovation—but that also impacts our customers. We can’t afford to invest in new solutions to help them grow and improve. We can’t be investing in looking at the future trends with their customer and markets to develop new products to help them serve their own customers.
We might cut back in customer service and support—but this impacts them, they may not achieve their goals, or they may have to invest more on their own part to make things work as expected.
We might cut back on sales people—but then we have less time to work with our customers, creating value for them.
Systems always seek equilibrium (sorry, I just can’t escape my physics roots). If there isn’t fair Value Exchange in our value creation with the customer, we have to adjust things on our side to achieve equilibrium. But then, that causes the customer to adjust on their side, because what we were providing has to come from somewhere else.
You can see the death spiral this creates.
As sales people, we are obligated to make sure our customers understand the concept of Value Exchange and equilibrium—and why it’s important for them to value as part of the relationship.
One of the best examples I’ve ever seen of a vendor explaining this concept to a customer was with the COO of a great company. He took his company’s latest earnings report and used that to show they customer how maintaining their pricing and margins was critical to the customer’s future success. He outlined how the profits enabled the company to continue to re-invest in innovative/world class products that helped customers grow and performed. He gave examples how they could invest in continuing to improve the product, it’s quality and overall manufacturing process–at the same time expanding capacity to meet growing customer needs. He spoke to investing in customer service, marketing and sales—continuing to increase their ability to co-create value with their customers.
We create value with our customers. In that process, there is an exchange of value. If that exchange is not balanced, the laws of physics and finance force us to get it into balance.
There is no magic. There is no free lunch.
We have to create value with our customers. Are they pulling their own weight?
Nicely done Dave, as you know, a subject close to my heart!!
As you know, we’re very profitable at Microchip, and being publicly listed, our financials are available to all.
We do get procurement folks saying to us “I’ve seen your financials. They’re great. So, you can afford to give me a very big discount today!”
How do you respond?
Simple, and it opens up the door to several wonderful discussions about what really matters…
If your supplier is also quite profitable, you could cheekily counter with “Hmmm… OK. I’ll tell you what… You start – you’re profitable, so you do the same for your clients first, and we’ll see how that works out… you might find your margins becoming unacceptable, at which point we’ll really have something to talk about, though I may want to pull my investment in our relationship if you’re going to put your company in that position – it’s not great grounds for a sustained, growing and healthy business!”
Or you could say “Mrs Client, that does seem reasonable, until you stop & think. It maybe true that I can afford to do this with you. But you’re not alone in pointing out our financials and asking for a discount. Other clients do it. If I gave in to all of those, I’d be out of business in a month. I know… I know, you’re going to say not to give it to them, but only to you, but they all say that too.
But here’s the other thing – I might be able to afford giving you a discount. But you can’t afford for me to give you that discount. And here’s why. That profitability underpins a number of things that you need and I know deep down, value. You just don’t know it. If I can’t make enough margin on some of the things you buy from me, I’ll stop making & selling them. Then you will have to redesign your products to use an alternative.
You may not know, but on average companies like yours spend 30% of their development budget just redesigning existing products because of suppliers no longer making certain parts. And you know what the single biggest driver is of suppliers no longer offering parts? Pressure from procurement officers at their clients, insisting on a price reduction.
Actually, to be fair to you all, the biggest driver is suppliers giving in to those demands! That 30% development spend that goes on redesigning existing products is actually more than the discount you’re asking for, so we could do your company a favour by avoiding that redesign… I’ll keep my pricing to you at the current rate for now – how about that…?”
We actually categorise client relationships in terms of the extent & nature of the investments each party makes in the relationship. No one level is inherently good or bad, it just ‘is’… So a relationship which is mainly about price and delivery returns typically the lowest value to the client and us. It can still be very good for both parties. The other end of the spectrum is a relationship where the CEO or COO – somebody at that level, is closely involved in the relationship, and a similarly ranked person at the client is too – the discussion topics being about long term future developments & directions at the client. We can’t do too many of these at any one time – perhaps one or two. In our history I think we *might* have done this once, ever.
Anyway, the benefit of this framework is in how it facilitates a more useful conversation… it lets procurement know there are consequences to them getting what they ask for… without being all combative etc.
And whilst they might try to bar you from talking to other functions in their organisation, it allows us to say “Mrs Procurement, relations between suppliers and clients in our industry are not restricted to just procurement. There is a lot of value to be generated for clients when they are able to engage on accelerating product development, which often needs close technical engagement. So professional courtesy means at the very least I have to tell the VP of product development why we can’t provide him with the level of technical support he needs to get to market on time, or ahead of schedule. We can only invest so much in our relationship. If it is to be all on price discounts, as you request, he can’t get any of it. The tragedy is that your company will benefit much more, as will its employees, by us investing all of that in helping him get to market quicker – it will bring in so so much more profit dollars than the price reduction your asking for…”
When you shift the conversation from price back to value, it is always going to lead to a better outcome, which, of course, can include you qualifying them out for really solid reasons, having made sure the decision isn’t solely driven by procurement, who, by the way, have a legitimate, and tough job to do, balancing financial risks and supply chain risks – not beating suppliers up on price… that’s just the most obvious tool they have at hand… so next time, you might want to try engaging with them on that basis, not price. You never know…
This is so awesome Martin! I hope people read this, because you’ve done a deep dive into the issue that I was seeking to address in the post. We always have to bring the conversation around to value we create with the customer and value we exchange. The moment we get focused on price, we drive dysfunction in the relationship.
For example, the objection, “Give me the discount and charge your customers the high prices” is really a terrible trap–bad for the customer and bad for us. Customers check each other out, they want rough parity in pricing. If one group of customers starts seeing another group getting different pricing, they will feel taken advantage of—rightfully so. So giving in to the demands of one customer creates dysfunction and pricing–consequently value erosion all around.
Fantastic comment! (I wish I were smart enough to have written it)