Bridging the value gap

April 1, 2007
ROBERT NADEAU says that if he asked 100 manufacturers and distributors if they believed they were adding value for their customers, 99 would say yes.

ROBERT NADEAU says that if he asked 100 manufacturers and distributors if they believed they were adding value for their customers, 99 would say yes. And he says that if he asked those same 100 if they believed they were experiencing extreme price pressure, he'd get the same response.

“So everybody believes they're truly adding value, but in reality their profit margins are steadily declining,” he said. “Why is that happening?”

In “Communicating the Value of Your Product/Service Offerings,” he said it's happening because of deep price discounting and a failure to bridge the value gap by explaining why a product/service can eliminate the customer's root problems.

“With every sales transaction, there is a moment of truth when you know the sale is going to go down,” he said. “But at some point, the customer may push back and say, ‘It's down to you and another company. Why should I pay more for what you're offering?’ That's when a truly skilled sales person can figure out how to defend the asking price. If they're not truly skilled, they may say, ‘Well, I can discount it.’“

But he said the downside is that a 5% discount can reduce the net profit by 50%.

“Discounting is huge, because all of the other costs stay fixed,” he said.

He said Jeffrey Thall of the University of Minnesota came up with a concept called “The Value Gap” to explain why customers keep asking for more: Since the 1970s, the complexity of a customer's business problems has increased. The OPEC oil embargo hamstrung the US economy and led to double-digit inflation. Then Japan and Germany emerged as global competitors.

Then the driving forces in the 1980s were the deregulation of the banking, telecommunication, and trucking industries, the rapid growth of catalog sales, and merger and acquisition mania. And more recently, the e-commerce revolution, excess capacity, massive consolidation, everyday low pricing, and the emergence of China.

“All of these factors make doing business anywhere on the globe more complex,” Nadeau said. “That's not necessarily a bad thing. It just means customers are going to be more demanding.”

Faulty criteria

While all this has been happening, customers have been losing their ability to comprehend their business problems, evaluate proposed solutions, and implement the solutions they purchase. As a result, Nadeau said, they start to come up with faulty criteria for evaluating to whom they should give their business.

The driving forces in the past 20 years have been downsizing and re-engineering, the “lean” concept, information overload, the ever-increasing power of purchasing, and heavy reliance on “management dashboards.”

“Think about what happens when you put two companies together,” he said. “You have a highly leveraged debt position. You've got to get rid of all the old smart farts who know how things work but cost too much. So you get rid of your knowledge base and bring in a bunch who work for $25,000 a year. This leads to diminished ability to understand what's happening. The lean concept does the same thing. You're trying to do more with fewer people. Those fewer people have a hard time comprehending what's happening. You start to see the emergence of a value gap. It means you have large customers with very complex problems and they're trying to solve them by looking at this data.”

He said the current conditions include: a rate of change and complexity that remains high; predatory competition in many segments; revenue growth that has been hard to achieve; strong investor/owner pressure for growth and returns; and everyday low pricing that has heightened customers' price sensibility.

“You have competitors who will take actions to get short-term gains with little regard to long-term consequences,” he said. “It's the false assumption, ‘We'll make it up some other time.’

“Here's what we're up against: You're sitting down and talking to a customer who may not understand the complexities of their problems. They are information-rich and knowledge-poor. Most have no idea of the root cause of their problems. They're going to grab at the one thing that shows up on their radar screen, and it's price. In all likelihood, they're buying a solution that's not what they need, but what they think they need.

“It's up to you to change. If you're still using features and benefits selling, your approach is about 30 years out of date. That selling assumes that the customer understands the connection between those features and the root cause of his problems. So you have to change your approach and sell value.”

He said the bigger the value gap, the more price-sensitive the customer.

“All they see is price because they don't understand enough to make informed decisions as to what they should be purchasing,” he said. “They tend to view all offers as being ‘similar’ except for price. The value gap is not going to go away by itself. You have to change your sales approach. You have to bridge it.

“You have to construct your sales message from the customer's point of view. What customers know about their business is largely determined by their measurement systems. Most businesses rely on financially based, lag indicators of performance. The metrics they're using tell them what's already happened but give them little insight into what's happening or why.

“The balance sheet and income statement tell you nothing about the root causes of your problems. They tell you, ‘We're not making any money.’ Your customer thinks, ‘We can't raise the bridge. We've got to lower the water.’ So they cut costs.”

Activity cycle

Nadeau said every business has an activity cycle. The business acquires goods, possesses them, uses them, maintains them, and disposes of them. He said there's “no chance” that your customers are proficient in all of those areas.

He said the root causes and economic impact of the customer's activity cycle consist of:

  • Acquisition.

    He said problems, mistakes, and inefficiency drive costs in the following categories: higher existing costs (“It could be labor”); unnecessary costs (“replacement, litigation, injuries, waste, overproduction”); and opportunity costs (“sales that are never realized, or, if you have a piece of equipment that's down because of bad maintenance and that piece of equipment could have been making money”).

    He said one of the common problems in the acquisition phase is selecting the wrong product for the job.

    “Does it perform well?” he said. “If it doesn't, what unnecessary costs might they realize? What if it takes twice as long because you ordered the wrong thing? What does that do to the labor cost? It's going to be higher. What if it breaks down because it's light duty but you've been using it 24 hours a day, seven days a week? You got it cheap, but you got the wrong thing for the job. It happens all the time.”

    Another problem: delivery scheduling errors.

    “What happens when a customer schedules something and then it shows up and they're not prepared to take it?” he said. “Now they're wasting your time. What's the economic impact on their business? They have to pull people from a revenue-producing activity and say, ‘Go to the dock. Get a forklift.’

    “Value-based selling means you are going to have to start talking to the customer to show them, ‘Because of this, here's what's happening.’ And have a solution. You don't want to make them aware, then not be the person who can make the problem go away. That's bad.”

  • Possession.

    Common problems include: poor handling of received goods, poor warehousing and inventory management; ineffective internal order processing; and poor internal distribution.

    “If they bring it into their inventory and lose it, you might think, ‘Well, that's really good because I'll sell them another,’” he said. “But it also hinders their ability to grow and drives their costs higher.”

  • Use.

    Common problems include: unsafe operations/injuries; inefficient utilization of equipment and facilities; poor utilization of labor; reworks and damaged goods; and delays and shutdowns.

    “This is probably the mother lode,” Nadeau said. “This is where most of the waste problems will show up that you can put dollars and cents to.

    “So if we add all of these things up and we start to show the customer what happens in each phase, do you think he'll be as price-sensitive at the end when we show him how we can help him grow revenue and reduce these costs? Some will, but the vast majority will not.”

  • Maintenance.

    Common problems include: unplanned shutdowns; poorly timed and ineffective maintenance; unnecessary maintenance; and inefficient utilization of equipment, people, and facilities.

    “The impact is huge, because they'll typically be out of business,” he said.

  • Disposal.

    Common problems include: handling and storing reusables (containers, pallets, etc); excessive packaging; and ineffective or high-risk waste disposal.

“Let's just say they're throwing it in the river and they get caught,” he said. “What is the impact on their business? Unnecessary costs — fines and penalties.

“You can start to see how this plays out. You have to drill down deep to help them understand the root causes and economic impact. The truth of the matter is, customers love it when you approach them to do this. You're adding a tremendous amount of value.”

He said that once a customer has been made aware of the root causes, then and only then can solutions be offered.

“This is where sales people get in trouble,” he said. “You have two ears and one mouth. Use them in proportion. You want to spend more time asking questions than talking.”

He suggested presenting it to them like this in a hypothetical example: “As a result of on-the-job injuries caused by your current equipment, you spent $130,000 last year on unnecessary legal fees and additional health-care costs. I can help you reduce the unnecessary costs associated with these on-the-job injuries by 90%. Here's how: With our equipment, the operator will no longer need to pump hot material from the top of the unit. It will automatically drain from the bottom of the unit directly into the storage container.”

Said Nadeau, “Now we're selling value, and it's all dollars- and cents-based. It isn't subjective. It isn't saying, ‘You should do business with us because we're nice.’ You have closed the loop. You have bridged the value gap.”

About the Author

Rick Weber | Associate Editor

Rick Weber has been an associate editor for Trailer/Body Builders since February 2000. A national award-winning sportswriter, he covered the Miami Dolphins for the Fort Myers News-Press following service with publications in California and Australia. He is a graduate of Penn State University.