Yes, now is a great time to rethink why customers do business with you
You may feel like you’ve read one too many advice columns with ideas for how to respond to the current pandemic. (I’m not excluding our firm from the count.) Many of those articles have focused on how to better engage your customers with digital marketing and web conferencing tools when we’re (or they’re) stuck working at home. Or encouraging you to embrace e-commerce and online chat capabilities.
And while all of that is true – digital is more important than it ever has been – it’s probably even more important for your long-term success to take some time now to revisit why you are in business and what customers want and need most from you. Because that should drive everything else that you do. While most distributors have some basic sense of their value proposition and how they position in the market, business disruptions are a good opportunity to realize that what customers value changes with the times. If you make customer value central to how you run your business, you can thrive in uncertain markets such as the one we are seeing right now.
Why Talk About Value When We’re Just Trying to Survive?
Most distributors’ gut reaction to tough market conditions is to launch “fire sale” events where you offer low-price promotions and unqualified discounts thinking that it will help you maintain business and avoid business disruption – or worse – defections to competitors who “obviously must be” offering better incentives than you are. Instead, business downturns or interruptions such as the current global health crisis are ideal times to re-examine what your customers need and why you are the best partner to fulfill their needs.
I find stories are often helpful to better understand how to respond to new situations. When I was in high school one of my most influential teachers was my Spanish teacher who came to the U.S. around age 7. Even after more than 40 years in the U.S., after completing undergraduate and graduate education at UC Berkeley, service in the US Navy, and teaching more than 30 years, he never lost his thick Mexican accent, mostly as a matter of pride. He was a true scholar of Latin American literature and he introduced us to Spanish-language literature years before the authors were recognized with Nobel prizes and other literary awards. One of my favorite authors was Gabriel Garcia Marquez, whose novel “Love in the Time of Cholera” was one of my favorites.
The Marquez novel is a familiar story of a love triangle lasting over 50 years where two men pursue the same love interest. Because all such stories are really allegories, it is obvious that the beautiful woman is in fact your customer. You are one of the suitors and the other is your competitor. To see how the novel turns out, read the book (or see the movie). For this story, let’s talk about what it takes to win over your customer, and how to keep the customer for a lifetime. The answer is value: understanding what the customer values, how you can deliver what the customer wants and needs, and how value changes over time.
First let’s talk about what value isn’t:
Value is Not the Same as Your Value Proposition. To understand value and how to use it to your advantage to engage, serve and grow customers, we first need to understand what value “is” and what it “is not.” First, value is not the same as value proposition. When marketing and executive teams work to create a value proposition or unique selling position, we mean a well-composed statement that serves effectively as a “promise” to prospective customers of what they can expect from the company, and which serves as a continuing theme in all the messages and communications by the company to the market.
When done effectively this serves to remind customers and prospects of who the company is, why they want to do business with you, and creates a trigger when the time is right to follow up on transacting business. Value, on the other hand, is a direct consequence of how much the company is compensated for what you offer that customers purchase, and it is why you prevail over your competitors.
Value is Not Just a Value Claim. Throughout most of the communications from your company, whether in brochures, on the website, in datasheets and advertising, companies make value claims which are intended to describe why customers should do business with you.
But when you compare competitors, you will notice that most claims are common, including wide assortment, product availability, better pricing and great customer service. In far too many cases, distributors cite other so-called values such as being third-generation family-owned, the years you have been in business, combined years of experience of the senior staff, and the charities the company benefits. For the most part, claims made by distributors are largely irrelevant because they do not differentiate, and most importantly, because they do not communicate anything that the customer values and would be willing to pay for.
In our work with distributors, we have seen examples of service innovations by distributors particularly over the past decade that demonstrate a better understanding of value to end customers such as:
- Onsite vending, especially for safety/PPE, consumables
- Customer managed inventory
- Same-day delivery, especially for construction job sites
- Distributors performing cutting, kitting and assembly
- Tool rentals and rent-to-own financing
- Electronic integration (EDI), especially for invoices, purchases orders
While each of these is interesting to the right customers, the distributors that can clearly demonstrate the economic value of these capabilities consistently fare better than those who fail to understand in detail how much it really costs to deliver and how much it actually benefits their customers.
For example, the economic value may occur as lower operations costs, less cash utilization, or faster response times to end-user opportunities. As part of working with many distributors to develop value propositions, competitive positioning and growth strategies, we are helping clients go beyond traditional thinking by analyzing competitors and customers to uncover opportunities to differentiate and better fulfill the needs of the market. All of this requires primary research and detailed analysis such as the following:
What Value Is: Economic Value
For business customers, value is what the customer understands in terms of economic benefits compared to costs and compared to competitive alternatives. While consumer brands can often compete based on selling prestige and social status, or security and peace of mind, distribution customers must make purchase decisions that make financial sense. The art and science of communicating value, selling value and competing based on value is a discipline that requires knowing how to match what you offer to the customer’s needs and priorities based on economic constraints.
In particular, economic value includes multiple dimensions of tangible and intangible costs and benefits that must be understood in economic terms. If you can’t measure it and demonstrate it to your customers, someone else will. The obvious first aspect most customers and distributors think of is price, and both customers and distributors often fail to move beyond price discussions. For example, most customers know that there are many other costs related to the total acquisition and use of a product, such as labor costs, training costs, tooling costs, costs related to switching or substituting a product, maintenance costs and many others. Sophisticated buyers understand Total Cost of Ownership (TCO). Also, most large customers or frequent purchasers involve their own financial gatekeepers in the process who demand that the purchases be justified and that the transactions demonstrate expected benefits to the customer.
Value Analysis: Establishing economic value for customers is a business process that must be performed repeatedly for products, services, lines of business and other strategic activities. While the key management and senior sales personnel of most distributors have a good basic understanding of what customers want and need, years of primary research and interviews with actual customers show that many important aspects of what customers value most are often neglected or misunderstood.
The first step in establishing value as a key differentiation and a strategic advantage over competitors is to conduct fundamental research with customers and prospects to determine what they value most, and basic competitor research to understand how they position themselves in the market. It is important to realize that this type of analysis is not a one-time event but should be part of regular re-occurring measurement and analysis to track how well you are meeting customer expectations and uncovering new opportunities in your market.
Value Modeling: Based on the initial research, distributors should consider modeling or otherwise estimating how your offerings deliver business value to customers as a way of validating your assumptions and as a way of getting customers to buy in to your competitive value. At a minimum, this process provides a business case to justify purchase. In other ways this process can simplify the decision-making process, shorten the sales cycle and exclude competitors.
Over the years, we have developed financial calculators and modeling tools that distributors have used successfully to win business over competitors. In the “new normal” market environment, this can be especially valuable to sell more value-added services by illustrating the financial benefits to customers. A detailed understanding of what services cost and how much they benefit customers is an essential part of what is required to succeed with services by “productizing” them and making services a strategic part of the business.
Value Pricing: For the distributor, one of the most important gains from understanding what the customer values is the ability to be compensated fairly for your value. Specifically, the overall goal of value-based marketing is to maximize revenue, profits and growth. This may be measured minimally on a transaction basis to ensure strong margins and profitability.
Over a longer term, the impact on customer lifetime value through customer loyalty and on bottom-line profits is more significant. Value-based pricing is both strategic and opportunistic. As we have worked with clients, we have shown how small percentages of pricing optimization improve bottom lines, which in turn strengthens cash flow and ultimately increases the enterprise value when it comes time to raise financing or in a merger or sale.
At Distribution Strategy Group, we’ve been teaching people how to identify, reach and engage customers more effectively for years as the go-to provider – by offering what customers truly want and need, and getting compensated well for what you deliver. Reach out today.
As always, we welcome your feedback. Please feel free to post a comment below or you can email me at firstname.lastname@example.org.