For our January Webinar, Tim Smith, PhD shared strategies for incorporating value into your sales process with strategy and tools. To conclude the webinar, he answered some questions from the audience. Here are his live answers:
How do you assess the right share of customer value?
So that’s more of a price setting question than a value communication question. When you’re doing these economic to customer analyses, the first thing you want to do is understand what the competing alternative is. So that becomes the first thing, because you know that’s the alternative. We then have the positives and the negatives. Now that’s roughly $2 million in the example. How did I come up with that? I’ll tell you there are two sets of rules one can use, and one of them is based upon behavioral economics. So it’s theoretical. Behavioral economics says that if there’s a $10 on the table, the customer’s going to want $5 and will give you $5 on average. Sometimes, according to economic studies it’s more like a 40/60 split. The customer’s going to want 60% and they’ll give you 40%. Those are the positive parts that would be applied to the fuel savings – just focusing on the differential value because that’s the part that’s at question.
The maintenance cost is negative. Behavioral economics says that you feel pain twice as much as you feel gain. Every time I take away a $1, you feel like I’m taking away the equivalent of $2. It would take $2 to make it up to you if I took away $1 from you, so one could double that $800,000 and say it’s about $1.6 million in losses, in which case your value to the customer is basically the same price as the competitor’s. 2 million (adding $1.5m subtracting $1.6m says I’m leaving you an even $2 million). That rule comes directly out of behavioral economics and it’s called “double the pain, half the gain.”
It’s theoretical. While it has good scientific studies, it’s not actually what’s practiced. It has been shown, but we have no reasons as to why it works, and different set of rules works better – it’s best called the 50/30/15 rule. You add the $3m, subtract $800k and you’ve got $2.2m. Start your list price at 50% of that $2.2m million of differential value. That’s $1.1m, so $1.1m plus $2m and you get the $3m price, which you’re seeing there. That becomes your list price. That’s 50/30/15 rule says that’s what you expect. So your actual expected closing price would be 30% of that differential value, and the 15% is your walkaway or your floor. So 15% of that roughly $2m would be $300k plus the $2m, so $2.3m is where you would just walk away from the deal and not close it.
That 50/30/15 rule is often stated by any of your major consulting firms. They will all tell you that rule and say, why? Oh, from our millions of years of experience. And you’re like, do you have any studies? Did you write anything? No, no studies written. I can’t find that documented anywhere, but they’ll all say it’s true. I’ve tested it out with a few procurement agents. They pretty much have the same expectations. So then again, maybe McKinsey, Bain and BCG are telling both sides the same thing. Anyway, it seems to work empirically. That’s what the market expects. Less price, the 50% of the differential value plus the price of the alternative closing price at 30% of your differential value plus the price of the alternative walkway or floor price at 50% of the differential value plus the price of the alternative. That’s a long winded explanation, huh?
When you have different roles (procurement, economic buyers etc), what’s your advice on customizing the conversation for the specific stakeholder?
End users are going to be the ones, are are going to be the members of your buying committee that are going to best know the situation. I’ve been in cases where the end user was an engineer and if you show them a spreadsheet, they’re like, “oh, let me play.” So you show them what it is you’re trying to calculate, and they say, “I don’t know what the number is. This is just an average number for a customer. You don’t know where it my situation.” So imagine you’re ADP Dealer Services and you’re managing service bay utilization of car dealerships. I don’t know how many car repair bays you have on average. Car dealerships may have 5, you may have 15, you may have to just put in a number.
Have the user tell me the number. These are non-objectionable numbers. And the end user will also tell you what kind of values they see as pertinent or non-pertinent. I remember when I was selling automatic meter reading solutions and I went to one territory. They weren’t really worried about getting the meter read or the savings of the meter read. They were worried knowing when there’s an outage. It was a rural America and it’s kind of hard to tell if a farm is out of power when nobody visits that house for a month. Maybe it’s a vacation home or something of that nature or when you have a pumping station and if it goes out of power, the crops don’t get watered and they all die. That’s absolutely atrocious for our farming community. But you don’t have anybody there monitoring the pumping station in the power. So they weren’t worried about savings costs.
Meanwhile, I live in Chicago. The cost of a meter reading is actually expensive, so the end user can help you understand those concerns. Those concerns are probably going to be part of the scoring mechanism within the procurement. So we need to understand how we stack up and how those concerns and our value add impacts our score and procurement needs to know what’s important, where the value is. The economic buyer, they’d like to see the whole picture. Now notice I’ve kind of left out the support, the gatekeeper. I may or may not include the influencer. The visionary may want to see the high picture, but not the details. Don’t talk to the competitors. Everybody knows that. And the screener, they just screened you. They’re done.
How do sales teams figure out the difference between a price buyer and a value buyer? Are there ways to move someone into being value buyer?
Kind of, no. If they’re price buyer, they’ve kind of told you to just buying the cheap thing. I remember when I used to sell shoes the men would come to me that ask for the cheap pair of shoes. Cool. I’ll bring them out. They’re pet size, size 10 and a half, D and a wing tip. That’s what they wanted. Cheap. Dexter’s. Got it. At the same time, I’d bring out the Johnson Murphy, same style, wingtip black, 10 and a half deep, and I’d let that customer put on the cheap thing. They want it. And say, would you like to just try this other one though? And about half the time the men would actually say, wow, I can stand all day in a pair of Johnson and Murphy’s. These Dexters, they look nice. I’ll go to church in them, but I’m not going to stand on the trade floor. This doesn’t make sense for our selling salesperson or for somebody who actually has to go to work and walk in them all the time. Now that price buyer who’s just buying a cheap shoe for special occasions did not trade up very often. Got it.
The other people simply didn’t know the value of buying a better shoe. And that was 20 years ago. Now, you know, there’s much better shoes one can purchase than there were back then, but I was young and those were the only two shoes I knew. You’re going to have to identify them pretty clearly on what they say they want. If you need more details, read “Negotiating with Backbone.”
When you look at good team efforts in selling value, how do you look at commercial team roles – who comes up with the initial value quantification, and how do they work with different members of the team?
Somebody has to create the initial economic value to customer. I find that to be a 1-2 month process. Four weeks is my go to answer, but sometimes coordination makes it take longer and we have challenges. Somebody has to do that and that would be somebody who is very mathematical and I’m not going to say exactly what title. They have a very mathematical, very market oriented. Usually they work with or are in product management. They come up with that value proposition and then expand it out to include the commercial team, commercial team lead, the finance team, and the finance team lead so that they all agree on the value proposition and the value you’re creating for the customer.
That’s one step and that’s work. Somebody has to do this. The next thing is I’ve got to put it into LeveragePoint. Anyone can who’s trained in the software can do that. Next, I’ve got to train the sales team. I’ve been on a team where you had a technical salesperson who actually understood the technology and how it all works and was in charge with explaining exactly how things would work. And then there was the relationship development person, who’s out there hunting for areas where you have a problem and then the executive sales person whose job was to close, whose job was to clarify that value proposition. Now the input for that, a value model would probably come from both the technical salesperson more heavily than the relationship manager who’s out there detecting and hunting for opportunities. But it’s the executive sales person’s responsible for putting the picture together and determining what to include, what to strip out, and how to position the information.
Now when they’re positioning the information, you know, again, some of the data comes directly from that customer. Cool. The other data is researched. So you may need to actually position as to why this is a definitive truth, our representative understanding of what reality is and that that may require other documentation or statements about the studies that were done to support that claim. But you have to claim the value. You don’t want to argue with the customers about certain things you just said, this is our understanding. If you want to change that number, go ahead. And if the new number says that there’s no value in it, great, I’m selling you the wrong thing, let me sell you something cheaper, let me sell you something else. They just revealed that they are a price buyer, but it’s a way of managing the entire sales cycle of a very complex selling situation.
Where in the sales cycle do you raise value?
Early and Often.