For our March Webinar, Todd Snelgrove, Founding Partner at Experts in Value, shared the latest insights in quantifying value in services, the evolution of procurement towards value, and new pricing methods and models that align buyers and sellers around value. After the session, he answered questions from the webinar audience. In this blog, we share his live answers.
We have never implemented pay for performance contracting before. Where would be a good place to start?
First, I’ll give you one quote that was a favorite one for my old boss: If I can discount 10% easily, how come I can’t instead put 10% fee at risk? When we looked at it from that perspective, we said that there’s no real risk here. Number two, you don’t offer it to every customer every day, all at once. So what’s your walk away point? I was going to do 10% price. I’m not going to do 10% price, but I’m going to deliver that every year. Even if you only got half of it, it’s 5% free money. I signed about 200 of those agreements and they always renewed when I was around. I think a lot of them are still renewing, so customers are even happy with it. It’s not something I would turn around tomorrow and market to the whole world. It’s more that your key account wants price. Do we have the ability? Do we have the knowledge and the way to do it? Do we have the people to do it? Well, then I’m playing with free money on the table. That to me is where I would start before we try to make a big program around it.
Which of the new rules of purchasing do you see businesses struggling with most over the coming 3-5 years?
It’s interesting. I get comments that it all makes sense for big, huge companies, because they’ve got the resources and the people to do the research and these types of things. But I also find in the mid and smaller sized privately owned companies, it’s even better because run into fewer people that say “that’s not my benefit.” At some point that’s somebody’s money we’re talking about. If I say to a CEO that if I save 5% of energy, because you spent a little bit more money and you have more money in your pockets, he can look at that holistically where sometimes at big companies you get the “that’s not my backyard” or “I don’t get measured on that.”
There’s a lot of focus on the big companies going to the higher-level people because they see the big thing. But the mid-level companies I think it might be easier to do business with, because it’s back into the same wallet. The IT world’s done it for a long time, but I’m seeing with capital equipment that the lack of differentiation is so hard, that now it’s like, “I better show that I can deliver value.”
Do you think that the era of free services is going away for good in B2B?
Yes, if it’s free. Just think of how you act when something’s free – you take it and half the time you throw it away. Real quick example: if you used to check into a hotel and they would say, “don’t get your room cleaned, this good for the environment.” We might put the towels back up, but most people would get the room cleaned. Then some companies in some markets started to charge people for it. That was a fence. So they’re like, “whoa, I paid for the hotel room.” But then they went the other way. They now reward people, right?
I do some consulting with a company, and they offered rush delivery as a free service. The customer calls and says, “I need it now. I need it now, not my cost, but I’m huge.” And they work their butts off and get the stuff there. The salesperson shows up at the client a month later, the product is still sitting in the shipping floor. My client thought that it was an emergency, but the customer just wanted it. If there was a trade-off, maybe they wouldn’t have wanted it that badly. So instead of charging this customer, I said, “look, we’re going to give you four free rush shipments a year.” He says their behaviors have already changed. Now it’s just a limited choice, but it’s amazing how it’s changed. These are value drains – how much time and money you spend in giving away something that ends up a shelf somewhere else that they don’t use?
Can you comment on ESG considerations and how you quantify those value drivers?
I can talk about it just from some of the research that I’ve done. In certain industries, the question is what is the customer willing to pay? There’s actually research, believe it or not, that shows what customers and users, are willing to pay for sustainable packaging. So instead of just saying, “you know it’ll be good for the environment,” the question is what are customers willing to pay? And there’s five different pricing things you can use and say, “wait, customers are willing to pay in this marketplace this much more for that.” We’re also starting to commercialize these things, so there’s the selling value aspect of it, but there’s also the cost value (shipping etc.).
One ESG thing that I’ve always played with is local sourcing, instead of buying it from Asia. So yeah, we can talk CO2. We can calculate all that, but there’s also less cost being local. And then finally, there’s a lot of research on share price and corporate governance and stuff like that. Trust me, a bunch of Fortune 500 companies don’t spend all this money on ESG just because they feel it’s good. Somebody’s done the research, and there’s a payback there. You can start putting some numbers to it, even if they might not be perfect.