President's Message: Forget The Margin, What's The Value?
Posted on Sunday, September 1, 2013
By Chris Reding
Throughout this year as president
of PCI®, I have promoted
“Return to Growth” as a rallying
cry for our industry. It is easily said,
but for powder to return to growth
(beyond the pace of the economy), organizations
must achieve financial results
that enable adequate investment in
growth infrastructure (technology, people,
plant, etc.). For that to happen, as
an industry we need to get radically better
at capturing the value of the products
and services we offer.
Though I am by no means a “sales
guru,” I have had the privilege of learning
from people (bosses, colleagues,
customers, mentors, etc.) who I consider
to be the best in the game. I’ve also
learned from my own experience (which
I assure you, includes more than a few
mistakes made along the way). Because I
think that value-selling is so inextricably
linked to achieving our collective goal to
return to growth, I would like to share
some thoughts on what I consider a prerequisite
to value-selling.
Value-Selling Begins with
Value-Pricing
Too often, the cost to produce a product
is the first consideration when formulating
a price (“cost-plus” pricing).
It typically begins with adding a target
margin amount to the cost to produce
a product. Next, a price-range is established
(lower prices for bigger volumes,
and vice-versa). Then sales takes the
product to market and attempts to sell
within the range. Finally, if the product
doesn’t sell within the specified range,
the price is adjusted until it is one that
the market will bear. So the formula
looks something like:
Target Price =
(cost + margin) +/- (adjustment for size of sale)
Actual Price =
target price +/- market acceptance
Value-Pricing: Never an
Accounting Function
Value-pricing is primarily a marketing
function, secondarily a sales function,
but never an accounting function.
It begins with developing an understanding
of how your product is different
from alternatives, what those differences
mean to your customers and potential
customers, and the tangible value of the
differences. Next, the same process is repeated
for each market segment in which
the product might be used (because the
differences in your product have more
value in some segments than in others).
Total value prices for each segment are
then formulated as:
Total Value Price (TVP) =
(price of incumbent alternative) +/-
(sum of added value)
Assuming an example wherein the
value of your product is greater than the
alternative:
Price of Incumbent Alternative................ $6
+ Sum of added value ................................ $4
= TVP ........................................................ $10
The next step in the process is to
determine how you will split the additional
value with your customer. In other
words, if the TPV of your product is $10
($4 of which is the value-difference),
how much of the value difference must
you give to your customer in order to
make the sale? For the example, let’s assume
that the customer needs 50% ($2)
of the value-addition. This amount is deducted
from the TPV to calculate the net
value-added price = $8
Finally, after fully understanding and
establishing pricing that reflects the value
of your product, it is time for the accountants
to have their say. Based on the
cost to produce, is the value-added price
sufficient to provide an acceptable margin?
Rather than an input to the pricing
decision, cost is considered only when
making the go/no-go decision for the
product in each market segment.
Time to Launch
Unlike a cost-plus pricing model,
which focuses the sales organization on
achieving minimum margin targets, a
value-added model asks sales to focus
on capturing the value of your product
(with the only price variable being the
determination of how much of the value-
add should be surrendered in order
to close the sale).
In closing, I suspect that many readers
will see this short introduction to
value-selling as little more than common
sense. After observing the powder coating
market for many years now, I have
come to the conclusion that when it
comes to value-selling, common sense is
not a common practice.
If you want to dig deeper, I recommend
reading The Strategy and Tactics
of Pricing (by Nagle, et.al, available on
Amazon) as an excellent primer.
Chris Reding, President
The Powder Coating Institute