Helping Manufacturers And Distributors
Improve Sales Performance And Profitability
Published by the Industrial
Performance Group, Inc.
800-867-2778
Issue
No. 32

Selling Economic Value in a Price-Focused World

Excess capacity, combined with the everyday-low-pricing mindset that exists in most industry sectors, has created customers who are more price-sensitive than ever before. In this environment, you can no longer get by on the notion that you are a value-added supplier. Unless you can justify, in terms of dollars and cents, the economic value of your offer, you leave the customer no choice but to view your product as just another commodity.

Given this reality, you have two choices: become the low-cost provider in your industry and compete on price, or get more money for your offer by justifying its economic value to the customer.

The good news for those who choose not to compete on price is that almost every product offer has some economic value above and beyond the acquisition price of the core product. However, the bad news is that most salespeople do not have the ability to deal with the customer's number one objection, "Why should I pay more?"

Economic Value

What is economic value and from where does it come?

Economic value is the total monetary worth of your offer, from the customer's perspective. It stems from the core product in addition to the information, services and support that are provided to the customer before, during and after the sale. In other words, economic value stems from the product and the organizations involved in taking that product to market. Economic value is created for customers by improving their performance, reducing their overall costs and/or by reducing their exposure to risk and liability.

Customers are generally not aware of the economic value the products they purchase create for them. This is in large part due to the changing role of the purchasing function.

In the past, the primary function of purchasing was to acquire the products and services an organization needed to conduct its business. Decisions about which products to purchase were based on input from the people who actually used the products, or on technical or performance criteria. However, in many of today's organizations purchasing has been saddled with the additional responsibility for making a major contribution to the bottom line. They fulfill this responsibility by aggressively driving down the acquisition price of the products they purchase on a day-to-day basis.

As a result of this change, the people involved in the actual purchase decision are not motivated or rewarded for understanding the true monetary worth of the offers they consider. Rather, their focus is on reducing acquisition price. Customers, however, are not totally to blame for this lack of understanding.

Features-and-benefits selling, which has been the standard in most industries for the past 30 years, evolved during a time when the customers’ primary source of decision-making and pricing information was their feet-on-the-street salesperson. There is no doubt that this sales approach has been an excellent means of communicating how manufacturers’ marketing departments perceived customers would benefit from the unique attributes of their products, such as "lasts longer," "runs faster," "easier to use," etc. However, in the current marketplace, features-and-benefits selling does little to counteract the intense downward pressure on price.

Today, customers have access to an ever-increasing amount of information and numerous sources of supply -- primarily via the Internet. As a result, they are better informed, more demanding and, in some instances, more adversarial than in the past. This new breed of customer is usually aware of the features and benefits of a product, as well as its market pricing, long before they talk with a salesperson. Armed with information and choices, they tend to focus their efforts on reducing acquisition price, unless they are provided with a reason to do otherwise. If salespeople do not have the ability to quantify and communicate the true economic value of their offer, they leave customers no choice but to perceive the offer as an empty marketing promise which does not address their number one objection, "Why should I pay more?"

Selling Economic Value

Economic justification selling begins with understanding why customers purchase products. The majority of business purchases are made to solve some sort of problem, e.g., productivity problems, delivery problems, quality problems, etc. These problems consume resources and drive costs within the customer's organization.

Depending on the size and sophistication level of the customer, they may -- or may not -- be aware of the true economic impact of these problems. Therefore, the first step in the economic justification sales process is to identify the problem the customer is working to resolve, then to determine how much this problem is actually costing them. This is a very important step because you must have accurate dollars-and-cents information in order to quantify the total economic worth of your offer.

Next you need to determine the root causes of the customer's problem. People have a tendency to treat symptoms, rather than taking the time to understand the root causes of their problems. As a result, today's solutions quickly become tomorrow's problems unless the root causes are identified and addressed.

Determining the root causes of your customer’s problems will enable you to provide a long-term solution that will create more economic benefit for them. This will also allow you to increase the total economic worth of your offer.

You then need to look for opportunities where you can help the customer address these root causes, either with your product offering alone or with a combination of your product and any additional information, services and support you may provide, such as problem solving, application engineering, start-up assistance, etc.

Once you have identified these opportunities, you need to quantify how the customer will benefit economically from your offer.

Can you help them improve productivity?
If you can, how much more product could they sell, and how much is that worth to them?
How much could they save in terms of labor costs, overhead, etc.?


Can you help them improve quality?
If you can, how much could they save in terms of reworks, scrap, overtime, corrective action costs, etc.?

Can you help them improve delivery performance?
If you can, how much could they save in terms of cancelled orders, expediting costs, airfreight charges, etc.?

Can you reduce their exposure to risk and liability?
If you can, how much could they save in terms of penalties and litigation?

By determining the true monetary worth of your offer, you will not only be prepared for -- but anxiously awaiting -- that inevitable moment when the customer asks, "Why should I pay more?"

Click here to learn more about economic justification selling

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