Value Leverage

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=90 BGCOLOR="#006699" TEXT="#080000" background="3a1fd5a3.jpg"> <div> <FONT SIZE="5" COLOR="#000000" FACE="Arial" ><B>Eclicktick Consulting</B></FONT><B>    </B><B> |     </B><A HREF="index.htm" TARGET="_top" TITLE="Eclicktick Consulting"><U><B>home</B></U></A></div> <div>                                                   </div> <div> </div> </td> </tr><tr> <td valign="top" width=210 BGCOLOR="#FFCC66" TEXT="#080000" background="3a2d2b03.jpg"> <div> <IMG SRC="367b3ee0.jpg" border=0 width="179" height="238" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> </td> <td valign="top" height=390 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <I>Value Leverage</I></div> <div> <I>Value Leverage - A strategy for the resource constrained</I></div> <div> Part 1</div> <div> Copyright, Alistair Davidson, 2003.</div> <bR> <div> <B>For assistance on co-creating value with customers, finding, setting up and managing strategic partnering relationships with customers, suppliers and third parties, please contact the author at </B><A HREF="mailto:alistair@eclicktick.com" TARGET="_top" TITLE="mailto:alistair@eclicktick.com"><U><B>alistair@eclicktick.com</B></U></A><B> or call +1-650-298-9077.</B></div> <bR> <div> <B>Executive Summary</B></div> <div> In tough times, organizations often are forced to change what they do. Some increase their vertical integration. Some spin off non-core activities. But there is a third approach that is often not considered: “Combine forces and seek economies of scope with unrelated but complementary companies.” In military terms, this approach is analogous to creating alliances and sharing obligations rather than pursuing a guerilla marketing strategy.</div> <bR> <div> The big barrier to this type of strategic partnering is the difficulty of judging what types of relationships are likely to work and how they should be managed. Managing relationships with other unrelated firms is always a challenge. </div> <bR> <div> - One element of risk for joint marketing is the possibility that the partnering firm may end up as a competitor. However, in tough times, this risk is reduced by the more limited abilities of many firms. </div> <bR> <div> - A second and equally important risk is the establishing of an integrated product offering with a partner that goes out of business, jeopardizing the marketing campaign.</div> <bR> <div> The opportunity is that Value Leverage represents a way for firms to dramatically increase the probability of a successful product launch. And by increasing the value offered in the joint marketing and sales efforts, customer close rates are likely to be higher and trigger higher repeat purchase. Value leverage offers at least three major pricing opportunities:</div> <bR> <div> 1. Increase prices because customers value the integration of the products and services.</div> <div> 2. Maintain prices, but increase profitability due to sharing marketing, sales and service costs.</div> <div> 3. Reduce prices to gain market share because marketing and sales costs are lower and initial sales will lead to ancillary purchases or later repeat purchase.</div> <bR> <div> <B>Introduction</B></div> <div> At its simplest, selling a product is about persuading a customer that what you are offering is exceptional value. Few managers are surprised to learn of the research of Bob Cooper at McMaster's de Groote business school: he has shown over the past twenty-five years or so that if you are launching a new product, the single most important factor in producing results is offering a differentiated high value product. If you are in the top 20% of products on this dimension, you typically produce between 20 and 25 times better outcomes than if you are at the bottom 20%, i.e. offering an undifferentiated lower value me-too product.</div> <bR> <div> So, for many small companies experiencing sales problems, the answer <I>appears</I> simple. Increase the value of your product!</div> <bR> <div> But if dollars are scarce and dropping price alone won't help increase the profitability of the company, the options are often few and far between. So how can you leverage your value so that customers will buy faster?</div> <bR> <div> <B>Bundling</B></div> <div> Bundling products and services has a long tradition in business. Examples of companies bundling their own services abound:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Microsoft has dominated the productivity software market by its bundling of the software products included in MS-Office. While the individual cost of the software packages such as Word, Excel, Powerpoint, Outlook and Access have dropped, the revenue per customer has risen. And in class supermarket strategy, once the “software shelf” has been filled with the Microsoft family of products, there is little room left for SmartSuite, StarOffice or OpenOffice.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">High end car manufacturers frequently bundle the car purchase with leasing and extended warranties and service. If you spend a lot of money on a car you expect it to work or get fixed quickly without cost and hassle.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Insurance companies often offer discounts for clients that purchase both home and car insurance from them.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Medium sized financial institutions will often resell financial services products and services from other institutions more capable in specialized areas such as mutual funds or financial advice.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">IBM's turnaround under Lou Gerstner in the 1990s, reversed his predecessor's decision to break up IBM into 23 businesses. Instead he branded IBM around the emerging unifying theme of e-business, emphasizing IBM's ability to pull together solutions from its own and other firms' technology and services.</div> <bR> <div> <B>Segmentation</B></div> <div> A key issue in Value Leverage is identifying the segments in your market. What a segment values and is willing to pay for is to all intents and purposes the functional definition of a segment.</div> <bR> <bR> <div> <B>Informational Bundling</B></div> <div> In high tech selling today, budget constraints at customers have forced a more rigorous evaluation process on purchase decisions. As a result, launching a software product without a clear business case that describes and quantifies the benefits of usage is likely to slow purchase cycles. </div> <bR> <div> More sophisticated companies are using models to tailor evaluation models to the precise usage patterns of the buying organization. Buzz words proliferate in this area and sales people need to be conversant with the differences between TCO (Total Cost of Ownership) and TVO (Total Value of business Opportunity) and different types of return measures that vary from ROI to balanced scorecard to option based analysis.</div> <bR> <div> <B>Risk Reduction: Bundling a Small Purchase with a Contingent Large Purchase</B></div> <div> When you get a group of sales people together, they will often discuss the “corporate personality” and buying behavior of the organizations they are selling to. One frequent characteristic of prospects is their reluctance to innovate or take risks. Reasons for this reluctance vary widely. They may include a history of failed innovation; personal concern about being fired for failure, leading to risk aversion; budget constraints and freezes mandated on high.</div> <bR> <div> In this type of selling situation, innovation is often required. Reducing the size of and perceived risk of purchase can be addressed along a continuum of solutions. Techniques include:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Pilot projects to demonstrate small scale performance.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Reference sites and third party endorsement to validate claims.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Performance guarantees.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Involvement of larger firms to provide project financial stability.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Demonstration of test markets before purchase decisions are approved.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Providing a working solution with payment tied to delivering a functioning product or service.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Reducing the commitment level of the purchaser by offering month to month or usage based pricing with no term commitment.</div> <bR> <div> To take just one example of these techniques, Virgin has entered the US cellular market by riding on top of the Sprint network and offering a pay as you go service with a refillable stored value card. Virgin is targeting a group of customers with poor credit  histories or infrequent usage, but who are willing to pay a higher cost per minute as a result. This segment will finance Virgin's entry into the market and allow it to avoid the capital cost of building their own network.</div> <bR> <div>  </div> <bR> <div> <B>Small Business Partnering</B></div> <div> Small business partnering is perhaps more difficult. Smaller businesses have less attention span and fewer resources to play with. Results need to be produced more quickly or the firms run the risk of going out of business. </div> <bR> <div> Startups, in particular, may not have a clear idea of who will buy their product and sometimes need to go through a period of discovery to understand which customers and segments are buying most quickly, which are most profitable and what reasons are motivating purchase.</div> <bR> <div> <B>End of Part 1</B></div> <bR> <div> <I>If you are interested in seeing how co-creating value with customers and partners  can help improve your business, contact the author.</I></div> <bR> <bR> </td> </tr></table></body>