For our November Webinar, Todd Snelgrove shared best practices in communicating, selling, and getting paid for the quantified value you provide to your customers. At the end of the session, he answered questions from the audience. In this blog post, we share his live answers.
What are some common objections to switching to a performance based model?
From the sell side, a few examples. Shareholders expect sales dollars. Number of pieces of equipment sold, etc. [Some say that] “I can’t take it into a performance based [model] and spread it over time.” My answer to that is that, one, is that there are numerous banks that would be more than glad to buy stuff and then finance to the customer, so you would get that capital equipment sale, and you can put that revenue immediately [to work] plus get a little bit of performance based [revenue] over time.
Two, you would never take your whole business model and the next day turn it over to performance-based. Choose a market, choose an industry, start. If you are able to move 1% of your clients a year to performance-based pricing, that would be phenomenal. You’re not going to be doing performance based pricing with your customers below a certain size, etc.
I think it’s also great for incremental sales. There are customers that always talk about price – we’ve never been able to get the order. So going in with the same messaging – we’re faster, better, easier, for example – isn’t going to change how they think. Going in with a different business model is a great idea, since you’ve never had this customer, they’re not at risk. Now we’ve got them excited on a performance based model. That would be a place to start.
How do you steer a procurement conversation towards value and away from cost reduction?
Well, I think a few things. One is that you’ve got purchasing and procurement, and I don’t think [the difference] is just semantics. A lot of times salespeople talk to purchasing – they’re the ones that might write the PO. Procurement, more at the senior level, the Chief Procurement Officer, the reports to the CEO. So sometimes I get to the purchasing people and they say “we’re measured on this.” Measured on last year’s price versus this year’s price, on a certain index, whatever it is.
I’m not saying we’ve never lost. But when I say, “if I can guarantee you a profit improvement, would that count?” Let me check. I’ve never heard “well, that won’t count,” as long as it’s hard value. I think to get customers to change – think about those statistics: people that buy on best profit delivered are more profitable than people that buy on lowest price that meets the requirement. 35%. I mean, isn’t that worth the effort?
Now, what tool will you use to measure it? What numbers will we use? What happens if you don’t hit it? Okay. Now we’re into that implementation conversation, but I can tell you that all the procurement conferences I go to, they invite me for one reason: how do we extract value from our suppliers? And I tell them basically what I’ve been talking to you about: make them measure it, but then reward them for it.
How do I manage a shift towards value when it means increasing prices on long-time customers?
I think the important thing, especially in today’s world with purchasing, is to be proactive. So some people we’re saying six months ago “we don’t want to discuss price. Somehow it will be below the waterline and nobody will bring it up.” And every one of them was called me in the last two months ago. “Oh, we were wrong.” And they kind of laughed because they knew it.
They said, “guess what? Every week I’m getting the letter from a customer saying ‘times are tough. We need you to find a way to reduce our costs.’” So, hiding from it is not a good answer. Being proactive is. I know one client that I’ve worked with are actually proactively going to their customers saying, “you must be under intense pressure to prove your value, to become more profitable, and to reduce costs. Let’s discuss how we can help you do that.” So, that proactive component is key.
What characteristics distinguish companies that price on value versus those who think that they do?
That’s a good question. One thing you would look at is their profitability versus their direct competitors. And the most robust piece of research I’ve seen was done by Monitor, which is now part of Deloitte in their Commercial Excellence group. They looked at companies in the same industry (high-tech etc.) and they put them into four different buckets – do they take the value approach, and are they good at it? Or do they take the value approach and are bad at it? If you’re good at value, you’re 24% more profitable than the industry average. If you took the value approach and you were not good at it, you were still 6% more profitable. Then did you take the volume approach? And again, in this case, they were 12% less profitable. So I would look at the profitability first.
I would then start asking questions like, “what percentage of your sales are discounted or deviated?” “Do you have a program around guaranteed value fee at risk?” “What price premium are you getting versus your competitors?” You know, and if it’s 2%, 3% – what the academics like Jim Anderson calls “tiebreaker selling” – we’re all the same, but I added a little function here or there. Or are you getting 15% or 20% consistently over your competitors? And again, different industries, different percentages, but I would start with “how profitable are you?”
One example is when you’re launching your products, how do you price them? Look at your new product development process. Are you tying in the value messaging along the way? For us, we started to check the successfulness of our product launches, in terms of not having to reprice or make adjustments afterwards.