One of the most challenging issues for any business is to understand the relationship between value and pricing. On the one hand, business leaders understand that to be in business the company must create valuable outcomes for customers and have that outcome recognized, and quantified, through monetary compensation, the price. On the other hand, determining how much value is created and what price to put on it can often be an enigma. Recently, I did some interesting work with a client on this subject, the results of which are relatable for all businesses. I will explain what was done and the results below:
The problem the client wanted to address was how to capture the most value from each business transaction. So I asked them, “Where is the company creating value, and for whom? They replied, “For the client.” But did not know where. So, I asked them to answer two questions:
- Where do you create value?
- What does it cost? In time and money.
At our next session my client came back with the following:
- My business creates value for my customers and my vendors. Customers get value because we address their concerns about…. And, our vendors get value because we bring them business that keeps them working.
- On an average job, we employ a qualified technician for 3 hours.
- If the customer wants the financing package we add another 4 hours for the technician plus 2 hours of administrative work.
At first glance, they answered the questions. However, on closer inspection we discovered that the company was not capturing enough of the value for any of these stakeholders. The following key issues came out:
- Do the vendors compensate you, directly or indirectly, for the business you bring them? Do they share in your costs of client acquisition?
- Of the 3 hours of work done on an average job, how much is for the project managing the vendors? Do they compensate you for any of this?
- How much you building into your price for all the labor required to get them the financing? Are you cannibalizing your profit margin from elsewhere?
- In pricing are you also including benefits, other overhead costs, interest, and a profit component or is it just remuneration?
From this one exercise and the ensuing discussion, the company was able to determine where value is being created and for whom but is not capturing enough of it from either customers or vendors!
In the ROKC Method we see businesses as owning and/or controlling an asset which is used in their products/services which customers seek to acquire because it gives them a competitive advantage in achieving a specific outcome. In applying this method, it helps to breakdown the process by which this transformation occurs into all the sub-processes and then treat them as individual micro-businesses. At the very least, the transformative process should be broken down into pre-production, production, and post-production. For example:
- Acquiring a client
- Sales funnel
- Closing the contract
- Organizing the job
- Informing Vendors
- Executing the contract
- Client sign-off
- Collect payment
- Pay Vendors
Next, determine who creates value where and the price at which it is being valued. To use my client’s business as an illustration, in the pre-production sub-process “Sales funnel” each prospective customer who makes an initial contact is called back. When the company was asked who does this and how long does it take? They replied it is the technician because it didn’t require much of their time: X minutes. Fair enough. However, in this case their salary is being viewed as a sunk cost because it is already being paid so we don’t need to count it again.
However, I know – from prior work with this client – the technicians are run ragged and would like to free up their time to do other things, more “valuable” activities. Consequently, even though this sub-process may only be a marginal part of their workday, by the end of the month it will be a significant amount time, and that time is either being built into the price asked of the client or eating into profits. So, one has to ask, “Can this work be done by a lower cost – internal or external – resource?”
When discussing this question, the client happily brought up a company they had recently encountered who impressed them with their call center service and would – potentially – be an excellent addition for this portion of the process. Perfect! They are already thinking about this.
As I hope you can see, when this sub-process is viewed as a micro-business, the value the company can ask of its customers and the costs associated with it will undoubtedly produce a loss. However, by adapting the value needed to that created it may result in a neutral, or slightly positive, outcome. Lastly, if the company can get both the client and the vendors to recognize the value in this process then the result will surely be positive for all stakeholders and the business will capture the value it needs to have recognized for its making this come positive outcome come about.
In some cases it might not be possible to create a positive outcome. In this case, you may want to seek out a substitute sub-process that allows the business to pass on the right amount of value to the customer. One such new sub-process might be automation; use an online service to walk your customer through the sales funnel. Another might be to sub-contract the work to a low-cost service provider.
It is the leader’s responsibility to adapt the value needed with the value created and to do it for the right price.