Read this if your product is sold to OEMs or through distribution channels!
We’ve written many a blog post about customer value quantification: namely the virtues, the challenges, and most importantly the how-to-do-its. So if you are interested in that topic, there’s a great base of content to draw upon: Quantifying Customer Value: How Good Do the Data Have to Be?, The BIGGEST Challenge to Quantifying Value (It’s NOT What You Think), How to Quantify the Value of Service, [Infographic] The Six Steps for Quantifying Economic Value, Embedding Customer Value in Your B2B Enterprise: Transcending the Revenge of the Nerds.
Beyond the basics, there’s one advanced topic that continually challenges a lot of proficient value modelers. It occurs when your product is one or more steps removed from the final end-user customer. Some refer to this sequence of players as the “value chain”; but since that term can also refer to functions inside a company, I’ll use the term “supply chain” instead.
Here’s an example that describes the value quantification challenge within a supply chain. Btw, this story is a mash-up of multiple customer situations we’ve encountered at LeveragePoint and does not divulge any proprietary information.
The story begins with an innovative material supplier. This supplier’s R&D team has developed a breakthrough material with superior technical properties. Next, the supplier’s product and marketing teams analyzed their markets and identified an attractive opportunity with aerospace customers. A key attribute of this new material is lighter weight – an obvious differentiator because it can directly be tied to reducing jet fuel consumption which translates into lower operating costs. Here we have a clear-cut, quantifiable value driver.
Correct, but who really benefits from lower fuel costs?
Consider the fact the material supplier sells to a parts fabricator, who in turns sells to a component manufacturer, who in turn sells to a large aerospace manufacturer, who in turn sells to airlines, who in turn sells to all of us. Which player in this supply chain truly benefits from this lighter-weight material?
Trick question. Answer is they ALL can potentially benefit from lighter-weight material, but only the airlines will benefit from it in the form of lower jet fuel costs. How the other players may benefit requires an understanding of how this attribute impacts the player’s business model. Let’s follow the flow of value in the supply chain, working backward:
- The airline, of course benefits from having lower fuel costs.
- The aerospace manufacturer gets to offer a more fuel-efficient aircraft for its airline customers and this may result in higher revenue, i.e. sell more aircrafts, perhaps at higher prices.
- The component manufacturer may benefit from lower shipping costs (lower weight shipments).
- The parts fabricator will need to buy less pounds of material to make the same parts (material efficiency) and therefore spend less on materials.
This leaves the material supplier with the challenge of setting a price that is higher than existing materials so it can capture some of the value from its innovation. It must do so in order to fund R&D for future innovations.
It is important to realize that each supply chain player’s share of the value depends on forces like competition and relative bargaining power. Getting a fair share isn’t automatic or guaranteed. As many of us air travelers understand, lower jet fuel costs usually don’t drive lower fares. Also, value capture is dependent on how quickly a player can make faster and better use of this differentiator before its competitors can match it.
In our experience, any player in the value chain stands a better chance of capturing value if its sales and marketing team can tell a compelling value story to its customer. Otherwise they risk leaving money on the table that somebody else will certainly grab.
A moral to this story is that one technical attribute means different things to different players in the supply chain –and therefore are evaluated and quantified differently. Knowledge is power. And knowing about value is profitable.