From time to time, a prospective client will ask us to summarize what we do in a page or two. Here is a recent letter edited to eliminate specific company references:
Will E. Coyote
Thank you for considering VPP for this project. Your situation reminds us of two engagements we have done recently. In each case the clients were able to improve their price performance by 20% or more. The key to their successes were to focus in on what customers really value and give them more of that. When dealing with large powerful customers, like P&G or Walmart, it is vital to understand what they value and why. They don’t care what your costs are. They don’t care about what the market price is. They care about what’s in it for them. We call what they care about their Value Drivers, or their top business priorities. Those priorities determine their willingness to pay.
An important part of this process is value segmentation. That is a recognition that what is important to one customer is not important to another. If your customer is a specialty manufacturer, for example, their value drivers are much different than those of a commodity manufacturer. With a commodity manufacturer, the critical issue is 24/7 uptime. In the specialty case, uptime is important, but they are equally or more concerned with speed and cost of transition from one batch to another. If I am trying to sell a product or service solely on uptime, I will be missing at least half of what they need to hear from me.
We need to look at your customers and prospects in this way and discover what their value drivers are and how they differ from customer to customer. One customer may only value your product and its minimal requirements. Others may be willing to explore how your product may be of strategic value to their business. Others may find the most value in the technical services that only your firm can provide because of your depth of experience. In each of these cases, what they want to buy and what they are willing to pay is different.
The work we recommend is a combination of offering design and pricing. When we say offering, we mean the product plus services plus relationship plus social value that you bring to the table. In our experience, many companies focus too heavily on the functional value of their offerings and neglect the service, relationship and social dimensions. Across many industries, revenues from products are plateauing while the value of services is rising. It is important for you to capture your fair share of this service value.
The work on value drivers is a discovery process that begins with mining your customer knowledge and looking at your historical data. From there we develop Value Hypotheses that summarize your best thinking about your customers in a way that is easily understandable and testable. The value hypotheses are the basis for information gathering from customers. In some cases it makes sense for you to gather the information directly. In other cases, it makes sense to do quantitative research. In either case, the value hypotheses are validated and become the foundation for offering design.
The output of the offering design phase is a 4 part price menu, i.e. a well-defined set of options that permit customers to tradeoff value and price. That menu permits prices to go up and down during the negotiation process as you work with customers to discover what is in their best interest. Using a price menu means that all options are profitable for you, because that is inherent in the design of the menu.
The price menu, in turn, is the basis for the pricing model. The pricing model is the tool used to calculate price for a given customer. In some cases a simple Excel model will do. In other cases, scalability and sales requirements necessitate a more robust application. We work with you to implement the model you need to execute your pricing strategy.
To succeed on an ongoing basis, you need a formal pricing process with controls and incentives to support your pricing strategy. We have helped other firms establish pricing offices and identified the capabilities necessary to staff them. We can do the same with you.
Our work approach is to start with a single market focus and dive deeply into that market. We not only look at broad factors, but also dive into contracts and proposals. This is how we can drive not only long term success, but identify Quick Wins that make your investment in pricing self-funding.
We don’t know work effort yet, but we would envision a team of 2-3 people working on this project at a time. As a small firm, we don’t have a bench we need to empty. Rather we have highly qualified experts with proven credentials not only in consulting, but in operations. We know what is required to execute.
Tim Matanovich, President