The New Math for Pricing

 

It represents one of the most difficult decisions you will make: What price do I charge for my products? Many people, including myself, have always held that pricing should be based on covering all of your costs with some allowance for profits. However, thanks to Robert Dolan of Harvard Business School, there is a new math for calculating price that goes beyond the financial numbers.  

Dolan argues that what matters more is what people perceive as value. Dolan calls this the Incentive to Buy and this is where you have leverage. The problem for most of us is that we are focused solely on the Margin Gap (Price vs. Cost); what Dolan calls the Incentive to Sell. It is exceedingly difficult to make money when everyone is focused on margins alone and not the value perceived by customers. 

Your goal should be to increase the Incentive to Buy gap; i.e. give your customers better choices, allow them to customize their products, add features not provided by your competition, or give people different grades of products (low, medium and high). This is what enhances value and drives people to buy based on things other than price. Trying to compete based on price alone is a losing battle – you are chasing the lowest common denominator.  

Take for example plane fares: First Class vs. Coach. By providing some additional value, airlines charge a higher fare that certain people are willing to pay. Higher pricing allows customers to judge quality and perceive value on their terms. Luxury items from perfume to cars often follow this value-based approach to pricing. Bundling is another way of raising perceived value. Offer several related products or services for a lump sum price to raise perceived value.

One place where value-based pricing seems to work well is with heavy users. People who are strong buyers of your products are usually interested in other features or complimentary products. Companies should connect with their best customers, finding new ways of presenting their current products based on more value.

“Customers do not buy solely on low price. They buy according to customer value, that is, the difference between the benefits a company gives customers and the price it charges. More precisely, customer value equals customer-perceived benefits minus customer-perceived price. So, the higher the perceived benefit and/or the lower the price of a product, the higher the customer value and the greater the likelihood that customers will choose that product.” - Setting Value, Not Price

by Ralf Leszinski and Michael V. Marn, McKinsey Quarterly

Your power to influence pricing has dramatic implications on the profitability of your business. Your influence over pricing is best gained through a new math to pricing that is more value-based and less margin-based. Yes, it is true that most people most of the time will look at price as a major factor, but increasingly the best customers are those who are looking for value. It is not easy to increase perceived value, but if you can differentiate based on value, you can conquer a niche as opposed to going head on against everyone based on price. A value-based approach to pricing requires a lot of analytics about how customers view features and functions; how their buying decision was influenced by value.  

The bottom line is that if you analyze your pricing by looking at financials, then you are going to have to increase volumes (similar to Wal-Mart) in order to make money. In today’s hyper-competitive world, this is a perilous journey that will not distinguish your business. You have to address value and not just price if you expect strong profits in the future.

 

http://exinfm.blogspot.com/

The 100 Most Valuable Global Brands

 Apple is the most valuable brand in the world in 2023, with a brand value of $880 billion.

Google is the second-most valuable brand ($578 billion), and Microsoft is the third-most valuable ($502 billion).

That's according to Kantar BranZ's annual ranking of the world's most valuable brands.

An infographic (below) looks at the 100 most valuable global brands in 2023, covering each brand's total value and what industry it is in.

Check out the infographic:

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Visualizing value propositions and revenue models

 On the website Boardofinnovation 10 generic building blocks are presented to "build any business model". Each building block is presented graphically and the idea is to visualize different business models to enable mapping and comparison of different businesses and "a new way of designing and innovating business models." I find visualizing business models very powerful, see for example the business model canvas, and the way of drawing blocks and arrows is of course a commonly used method to describe business models.

The visualized building blocks are:
Company - the company whose business model is described
Product - from commodities to finished goods
Services - services around a product or stand alone
Experience - not only offering a product or service but an experience
Reputation - a brand experience shaping client identity
Client- receives the product and gives something in return
Money - the normal value of a good
Less Money - less money than the normal value of a good
Attention - a currency of paying attention to advertising
Exposure - a currency of spreading the word

Building blocks to describe value propositions and revenue models
The term business model can be understood in a broad or narrow sense and can be expressed, visualized and explained in many different ways. Common elements in a business model, not described by the 10 building blocks presented above are what internal and external assets and capabilities that are used, what activities that are performed, how the value propositions are delivered, what forms of relationships the company has with its clients and external partners, control mechanisms used and the business model cost structure.

According to me what the 10 building blocks describe is not the business model but the different involved actors, value propositions and different types of revenues and benefits. It gives a first understanding of what a business model is about but it doesn't explain how value is created or delivered and only using the 10 building blocks will make fundamentally different business models look similar if they share some similar principles.

The main contributions with the 10 building blocks are according to me the blocks "experience" and "reputation" broadening the concept of value propositions from products and services, and "exposure" and "attention" broadening the concept of revenue model.

Broadening the concept of value propositions
A value proposition is often defined as "what the customer gets for what the customer pays" or "a bundle of products and services that are of value to the customer". I argue in my post about value propositions that a value proposition is how value is bundled and offered to potential value recipients where the term "value" is not limited to products and services and the term "value recipient" is not limited to customers.

Providing something new, something unique, something more convenient or accessible, customized, with higher performance or to a lower price are all common value propositions towards traditional customers. But value can also be to enable risk- or cost reduction for a supplier, provide access to databases or research tools for early-stage university research, provide user data to "upstream" application developers, out-license manufacturing or quality assurance processes to other companies, cross-license technology & IP, bring passengers to remote airports, provide jobs and environmental responsibility for a region, pay tax to a government, or take active involvement in a community.

The building blocks "experience" and "reputation" adds, according to me, important dimensions to the common perception of the value proposition. "Belonging" is another interesting dimension when the value proposition includes being part of a community, that shares common interests or values. I find conceptualization of products and services and the use of brands highly interesting and I plan to write separate posts exploring the subject in relation to business models.

Broadening the concept of revenue model
As with the term value proposition, the common perception of the term revenue model when used in relation to business models, is according to me rather narrow. I often talk about the "revenue and benefit model" and the main thing I want to understand is "What do I get in return for providing value to each value recipient?" The term revenue model implies revenues, money, but as the website Boardofinnovation shows in its building blocks, benefits can also be other things such as attention or exposure.

I would argue that what a business can get in return for providing value to a value recipient can be much more than attention and exposure, with examples such as cross-licensing of technology and IP to get access to new assets and capabilities, user data to improve services or improve the value for advertisers, adoption of a technology platform or service to create momentum and obtain network externalities, co-development efforts to lower cost and reduce risks etc.

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How to make yourself more valuable to your boss

 

Excerpted from The New Psychology for Managing People
By Mortimer R. Feinberg et al

• Be a source of good current information. — Industrial psychologists have noted that the higher a man goes in an organization, the more insulated he may become from what is going on.  Partly this is a matter of choice; he does not want to involve himself in everything. Partly it is an inevitable result of the broad nature of his responsibility, and partly it is because people tend not to tell the top man what is going on. You can be a source of pertinent information to your boss, but make sure it is information, not gossip. And make sure it does not in any way reflect upon the performance of others. Sometimes, just a brief anecdote about something that occurred at a departmental meeting can give your boss a valuable feel for what is happening in an area that has become increasingly remote from him.

• Cover his area of least interest. — Your boss is not equally skilled at all facets of his responsibility—no man is. Nor is he equally interested in all facets of it. As you get to know him, you can come to a pretty accurate determination of certain areas that, while important, do not intrigue him. To the extent that you can handle these areas for him, he will welcome your help, come to rely more heavily upon your judgment, and recognize the fact that your efforts are increasing the overall effectiveness of the operation.

• Anticipate. — Routine subordinates wait for the boss to give them instructions or direction, and then react. This wastes time and places a great burden on the boss. As you come to know your boss and the operation, try to develop the ability to anticipate what the boss is going to want and need. At first, make a few “dry runs”; anticipate and then see how well your anticipations work out in practice. Then, when you are able to, anticipate and move. When you conclude that the boss is going to want to move in a certain direction, begin to pull together materials that will assist him in his decisions. Prepare the ground for him. He will recognize it and appreciate it.

• Exercise Tact. — There may be times when you have every reason to be justified in raising hell with a colleague. You may go ahead and do it, and a fair-minded superior will have to agree that you are right. But agreeing that you are right does not necessarily mean that he appreciates what you are doing. Use your judgment in difficult situations. It may be best to hold back from “rocking the boat” for the simple reason that if you do, you will just be making a boss’s already tough job immeasurably more complicated and difficult.

• Be Willing to take on the Dirty Jobs. — Status is important to all of us. As a manager moves higher in the organization, he may well feel that he is no longer to involve himself in some of the more unpleasant tasks that were incumbent upon him at a lower level. And he is probably quite right in feeling this way. Nevertheless, “dirty jobs” do come up, and they have to be handled. The manager who is willing to step in and handle them, even when his status does not require it, is a manager who will be particularly valued by his boss.

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Defining Value: The Most Ambiguous Word in Product Development

 One of my favourite questions to ask any new client is, “How do you measure success?” I pose this question to product teams, discipline heads and executives to understand what the organisation values and what they reward. One hundred percent of the time the initial response is, “That’s a great question.”

After giving it some thought the responses evolve into some variation of “we shipped a [thing]” where [thing] is whatever that person is responsible for creating — a product, a feature, a system, a policy or an initiative. My follow-up question is then always, “How do you know that this was the right [thing] to ship or that it was designed and developed well?” At this point, the answers fall into two camps (in most situations). One half of the responses end up being, “We don’t.” I like this camp. They’re the honest ones. They know that beyond getting [thing] implemented there is no further evaluation of it. The other half inevitably say, “We know it was right because we delivered value.”

And this is where their story starts to fall apart.

“Value” is the most ambiguous word in business. It means something different to every person that says it, primarily based on where they’re positioned in an organisation. Executives talk mostly about business value. Customer-facing product teams use the phrase customer value though there are still many teams I come across who speak in terms of business value. Finally, internally-facing teams — this includes teams like HR, DevOps, security, performance, infrastructure et al — will speak of organisational value as their measure of success.

Which is right? They can’t all be right, can they? Before we can choose a winner (there always has to be a winner) we have to define each of these terms. Let’s take a look at the following:

Term: Business value
Who says it: Executives and other leaders
What do they mean: Something that makes it easier for the business to be successful
What does it look like: In most cases this equates to making money
What gets rewarded? (examples) Increasing profit margin

Term: Customer value
Who says it: Product development teams
What do they mean: Something that makes the customer more successful
What does it look like: In most cases this equates to features or new products
What gets rewarded? (examples) Launching an app

Term: Organisational value
Who says it: Internally-facing teams
What do they mean: Something that makes the job of other teams within the organisation easier
What does it look like: In most cases this equates to features or systems used internally to automate or simplify tasks
What gets rewarded? (examples) Implementing a continuous deployment system

With customer value and organisational value organisations are clearly talking about creating output as a measure of value. “We made a [thing] and the [thing] works as designed therefore we have generated value.” Interestingly, with business value we are speaking about outcomes (in most cases). However, the metrics most executives use to measure business value are so high-level (e.g., revenue, profit, cost of goods sold) that understanding the correlation between what the teams are doing and business health is hazy at best. We call metrics like profit, revenue and sales “impact” metrics. These are high-level measures of business health and, while they’re important to measure, they are impacted by many lower-level metrics. (I have covered output, outcome and impact in previous posts.)

It’s these lower-level metrics that are the true indicators of value. If you’re a regular reader you’ll know that I talk about outcomes — measurable changes in customer/user behaviour that generate business value — as the true definition of success. It should come as no surprise then that when I work with teams to help them define value, I coach them to use outcomes.

Meaningful changes in customer behaviour — i.e., outcomes — are the only way to know if we’ve delivered value. Can customers complete a task faster? Can users be more productive in the system? If the answer is yes, we are delivering value. If the answer is no, we are not. Here’s the best part: if we ARE delivering value then our impact metrics — those high-level measures of business health — start moving in the right direction as well. The connection here is explicit and, especially with digital products and services, easily correlated.

At it’s most basic level, the relationship between output, outcome and impact looks like this:

If you look at it this way, defining value becomes clear. If we are making our customers or users more successful we are delivering value. And, here’s the part where most organisations trip up, if we measure success simply as creating products or services we are risking bloating our systems, frustrating our customers and losing them to competing organisations or tools.

Once an organisation — top to bottom — speaks of value in the same terms, many other things fall in line including incentives, prioritisation, and decision-making. Try redefining the value of your next initiative in customer-centric terms — i.e., outcomes — and let me know what changed.

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Switching Costs And Why They Matter In Business

 

By Gennaro Cuofano

Switching costs consist of the costs incurred by customers to change a product or service toward another similar product and service. In some cases, switching costs can be monetary (perhaps, improving a cheaper product), but in many other cases, those are based on the effort and perception that it takes to move from a brand to another.

Why switching costs matter

When launching a new product on the market, it’s critical to look at existing alternatives, as your solution might work, only if it is convenient (either in times of money, effort, or else) for existing customers.

Indeed, for customers to change brand, and use your product there will be an element of friction, defined as switching cost.

Switching costs go beyond price and money

Let’s imagine a simple example.

You use Google as a primary search engine, and Google Chrome as a browser. With Google and Chrome, you get a set of advantages and products (for instance, the Chrome extensions marketplace enables you to download any app to do anything within your browser).

Even if those serivces are free it’s still very hard to switch to any other search engien or browser, as the effort it takes to get used to a new combination of search engien, browser, extensions and so forth is too “expensive” psychologically to take the leap.

Building up moats

Companies that are able to create high switching costs (either through cost leadership, differentiation, or else) will also be able to create a competitive advantage.

A higher friction fro customers to change toward a new product or service might help the company to “lock them in.” Yet, this strategy to be successful it also needs to offer a great customer experience across the several products.

Thnk for instance the case of Microsoft Office that bundles up its products to create a lock-in experience for users to prevent them to switch (together with Office, customers also get other services that go from email to company’s chat like Microsoft Teams).

This closed environment might make it harder for users to switch to a new brand. Yet, the experience can be also frustrating and limiting if those products don’t work extremely well.

Monetary switching costs

A lower price can help as switching costs in those categories where products and services are more commoditized, therefore, the price will have a higher impact and importance on customers’ behaviors.

A lower price will also be more attractive. In those cases, building up switching costs become harder as the

Imagine the case of the gas station selling gasoline. If it is able to offer a lower price compared to the gas station half a mile away, consumers will prefer it, as it might not make much of a difference were to fuel the vehicle, if not the price.

Non-monetary switching costs

Other non-monetary switching costs can be classified in several ways. Some key switching costs require:

• Effort: it might take the time or mental energy to move from a product to another. Think of the case to change the software that costs less, and yet it’s more complicated to use, therefore requiring more time and effort to learn. The user might still stick with the other more expensive software if that perceived as more comfortable to use.
• Perception: other switching costs are more related to perception. Let’s take two cases:
  • Branding and status quo: imagine you can buy a pair of shoes from a less known brand, which costs less. Who is passionate about shoes knows that those are fashion statements, not just things to cover your feet. Therefore, the more recognized brand or the brand that is more in line with the perception of the individual will be the preferred one, independently from price (or at least price is less critical).
  • Branding and reliability: imagine the case of a person buying a laptop from a known brand vs. an unknown brand. At the same time, the unknown brand’s laptop might be cheaper, more performant, and overall better. The customer might not switch to it as she/he fears it won’t be reliable.
  • Offering an alternative: think of the case of DuckDuckGo, a search engine prioritizing on privacy. Even if that might not be as good as Google, it will still be the preferred choice for those switching to it due to privacy. And those people will stick around.

Low vs. high switching costs

The inability to create high switching costs (either through pricing, better and simpler product, brand, or all these) might prevent the company to create a long-term competitive advantage.

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Switching Costs

Switching costs are the costs associated with changing from one value provider to another and can be costs relating to learning, finding alternatives, compatibility costs, uncertainty costs, psychological costs, transaction costs, or contractual costs. It is a control mechanism that exists in most markets and can be real or perceived costs such as frequent flyer programs, in which passengers don't want to lose credits earned in one program by switching to another.

Switching costs give the value provider market and pricing power, thus current adoption or market shares become important determinants of future success. Social networks such as Facebook and Twitter base their business models on future revenues generated from a large base of user and developers that won't switch to another social network due to real or perceived switching costs.

Understanding switching costs is a key component to create sustainable business models for both incumbent firms and start-ups trying to break into an existing market or build a new one. I will follow-up this post with identified strategies on how to use switching costs as a value provider and how to manage own switching costs in relation to external partners and suppliers.

Not limited to customers

The traditional way of looking at switching costs is between the value provider and paying customer but I believe the concept is valuable also in relation to other stakeholders. When companies develop strategies in relation to suppliers, government/regions, own employees, developer communities, companies providing complementary products and service etc. switching costs are an important factor to include. The economic downturn makes this kind of reasoning evident for many suppliers and governments.

Switching costs and network effects

In most cases switching costs go hand in hand with network externalities or network effects. If adoption by different value recipients is complementary so that each value recipient's adoption payoff, the incentive to adopt increases as more others adopt. Thus, the more users of a communication service such as Skype, the more valuable the service is to each user and the higher the switching cost to switch to another communication service bringing all users or friends.

Switching costs and standards

Almost everything is affected by standards, in relation to different forms of compatibility, interoperability, safety or quality. Standards can be both a solution to avoid high switching costs and a source of the same. Standards are most often developed to reduce switching costs in having several products or systems based on the same principles, technologies or formats.

When a company manage to get a dominant position for its technology, products or services, by tradition, enforcement, or market dominance, it is said to have a de facto standard. A classical example is Microsoft Office that is believed to have a perceived switching cost of over $1000 thus buyers are paying hundreds of dollars for Microsoft Office even when free alternatives exists. In the case of Microsoft Office almost all different forms of switching costs occur. What would be the alternative? Would this be compatible with everyone else that are using Microsoft Office? Can I transfer my templates? Would I learn fast enough to work in the same pace? Would I miss any functions or features? etc.

Switching costs and competitive pricing

Switching costs shift competition away from a single value recipient's needs in a single period to needs over time, thus the outlook of higher profits later provides a strong incentive to buy adoption today. Each value provider faces a trade-off between investing in adoption by charging a low price or give away something for free to attract new value recipients or on the other hand charging a higher price reflecting the value of what is being offered. When network effects exist the share of adopters makes a valuable asset, reflected in strategies such as penetration pricing. Examples of aggressive competition for market share before the customers have developed switching costs are banks providing free banking services to students, online poker sites offering cash bonuses when opening accounts or free access to proprietary databases with training material to schools to make students used to tools and available data.

Smaller actors often have a stronger incentive for price competition than larger ones as they can enlarge their customer base without hurting their revenues from their current customer base that is small. Larger actors on the other hand, have little incentives to cut prices because this hurts more with their current (larger) customer base.

Switching costs varies over time depending on the business model

The switching costs vary over time and depending on the business model it can either increase or decrease over time. If you sell a computer storage device the value of the device depreciates over time and the customer might chose another brand when it is time to replace it. If you sell online storage, the service will become increasingly valuable to the customer over time as it gets dependent on the increased amount of stored data and relating services such as back-up, mobile access or file sharing possibilities. With the increasingly popular concept of cloud software and platforms, that in some cases uses nonstandard APIs and proprietary technologies, some companies will probably find themselves facing high switching costs in the near future.

Switching costs and lock-in

When the value recipient is dependent on a single value provider or cannot move to another value provider without substantial costs or inconvenience, the value recipient is said to be locked in to the value provider. Lock-in is seldom absolute but when lock-ins is created by dominant companies and there are too high barriers to market entry, it may result in antitrust action.

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Value Proposition Versioning

 

Value Proposition Versioning basically means offering different versions of a value proposition for the customer to choose from. The objective is to charge each customer just as much as he or she is willing to pay for. A common example is books that are sold in hardback copies priced higher initially to customers who are impatient to get the book, while later released as paperback to lower-value customers that can more easily wait.

Versioning works for all kinds of goods and services, and it has become almost a standard in web based products and services even though the marginal costs to distribute a high-end version often is identical to the low-end version. The Freemium Business Model is basically a way of versioning where the free version is provided to create the lowest possible barrier of adoption with the objective to gain a large customer base, build loyalty and trust, and convert some of the customers to fee-based premium versions.

Pricing the different versions

Value is subjective and people attach different values to different value propositions so the challenge is to properly segment users and features such that customers who are able and willing to pay high prices do so. If the low-end versions are too attractive, it may attract some customers who would otherwise pay a premium price for a high-end version. To avoid this cannibalization the relative price difference or the relative value provided can be altered.

Identifying dimensions that are valued differently

The basis for versioning is to identify dimensions that are highly valued by some customers but of little importance to others. The goal is then to develop value propositions to sell to different market segments at different prices. Below is a list to be used to identify potential dimensions from which different versions of a value proposition can be developed. To identify what dimensions that are relevant, each of the different business model components and the potential markets need to be analyzed.

Dimensions to build different versions of a value proposition from

• Annoyance
• Capabilities
• Comprehensiveness
• Convenience
• Delay
• Delivery time
• Experience
• Exclusivity
• Features
• Flexibility
• Functions
• Performance
• Quality
• Rights
• Service
• Speed of operation
• Support
• User interface

How many versions?

This is a highly context dependent question that comes down to what makes good business sense. Too few versions and the customer have limited choice to pay what he or she is willing to pay for. Too many versions and the customer might be confused and the costs for maintaining and offering different value propositions might be too high.

A common approach in everything from drinks at McDonalds to million dollar consultancy projects, is to have at least three versions; one low-end version to advertise and get attention, one very high-end version and one "standard" offer. The rationale for having the very high-end version is to enhance customers’ perceptions of lower-priced products and make the standard version look more attractive in comparison to the very high-end version. One very interesting approach to versioning is The Trent Reznor case study that resulted in $1.6 Million in a week for music offered in many different versions, with one of them being free.

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10 Tips on How to Market & Sell Your Offer around Value as Opposed to Price

 

1. Decide who you don’t want to sell to

Segmentation entails better meeting the needs of different groups of customers and better communicating to them, recognizing that not all potential buyers and users of an offering have the same firmographics, needs, behaviors and attitudes.

Segmentation, therefore, helps companies prioritize audiences to target. This also includes deciding which companies not to do business with so that resource can be allocated where it will provide the highest return on investment.

2. Recognize what the customer really wants

Up to half of companies in many b2b sectors believe that product quality and price are all that matter. This parochial misperception is perpetuated by sales teams who are a powerful influence and widely listened to in b2b companies, but ironically they can be poor listeners themselves. Driven by short-term targets, salespeople in b2b companies often misunderstand, oversimplify and miscommunicate customer needs.

B2b audiences increasingly require suppliers that will help them differentiate and better serve their customers. Innovation and partnership are key requirements to assist in delivering against the needs of customers’ customers, but these needs are often insufficiently met and require a more long-term, marketing-oriented approach.

3. Sell an experience and outcomes, not products

Business-to-business audiences are looking for solutions to their problems, or/and offerings that better meet their needs, such as more customized products, a faster service, or higher productivity.

Influenced by the consumer world, b2b audiences are also seeking an improved experience in using a b2b product or service. Savvy b2b suppliers sell an experience and outcomes, not products.

4. Appeal to the emotional drivers

Business-to-business customers are also consumers who do not leave their emotions at home.

Trust and peace of mind are emotions weighing heavily on buyers and users in most markets, who need confidence that the b2b supplier shares similar values and won’t let them down. Relationships are vital in driving and maintaining an emotional connection, and are what transforms the vendor to buyer transaction into a partnership.

The b2b customer also has an ego which should be recognized in appealing to the emotional mindset. A brand that promises to make the buyer look good, or the job easier for the user, is a brand leveraging an emotional pull.

5. Target the highest appropriate decision-maker

It is important to determine the most senior person within the target company who will place value on the offer. Aiming high in the organization where the ultimate decision is made and the budget is approved increases the chances of a big sale. Decision-makers in strategic positions are also most likely to think strategically about the offer and therefore place value on it.

It is equally important to win over influencers on the decision who are usually responsible for shortlisting potential suppliers. It should not be underestimated just how much they can sway the decision towards their preferred brand.

6. Evidence the value of the offer

Key to value marketing and selling is a focus on benefits for the customer and return on investment. When assessing potential suppliers, b2b companies are looking for evidence that their needs will be met and that they will obtain a return on investment. Quantifying the value of the offer with examples such as productivity gains, reduced downtime, lower cost in use, etc. help give potential customers reasons to believe in the investment and the ability to justify it to the budget holder.

7. Never bargain

A willingness to bargain risks stripping the value from an offer and entering the commodity trap, resulting in a ‘race to the bottom’ in the market. The b2b buyers bartering on price and making apples-to-apples comparisons on itemized costs do not recognize or appreciate the value of the offer. Such buyers are arguably an audience to screen out of the target market.

Value selling works when a coherent package of benefits is provided. Dissecting the offer into its component parts reduces the coherence of the offer and removes the holistic synergies of a total solution.

8. Remember that for most b2b buyers, it is NOT all about price

The average proportion of b2b markets that prioritize price over all other decision drivers is 20%. This means that price-focused salespeople could be leaving money on the table across a significant proportion of customers they serve. Sadly many b2b companies slash prices as a result of pressure from the salesforce who only knows how to sell––or only wants to sell––on price.

9. Protect & build the brand

A strong b2b brand is among a company’s biggest assets as it provides credibility and differentiation, supporting price (in particular premium) positioning. The value marketer and seller recognize the power of brand in communicating and delivering value to the customer, and in extracting value from the market. A company that sells on price as opposed to value, however, is at risk of denigrating its brand and destroying its value drivers.

On average, around 5% of a company’s stock value derives directly from a company’s brand image. Sales revenue, prices, and profitability can all be increased through building the brand and delivering on the brand promise. Brand and value are, therefore, strongly interlinked.

10. Embrace a cultural change

In order for value marketing and selling to succeed, it needs to be deeply embedded in the company culture. In most b2b markets, however, the limited size of the target audience requires a labor-intensive marketing and sales process. In such organizations, there is a heavy emphasis on salespeople, sales volumes and short-term results. Value marketing and selling requires a reversal of this approach, with marketers joining salespeople at the forefront of the business, profit as opposed to volume-focused KPIs, and a longer-term outlook endorsed from the top down.

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Business Model Innovation

 Business Model Innovation is a hot topic today. In its bi-annual CEO study, IBM concluded in 2008 after interviewing 1130 CEOs in 40 countries across 32 industries, that two thirds of the companies are implementing extensive innovations in their companies, especially around their business models.

In the last decade new technology has enabled close to zero cost of reproduction, storage and delivery of everything that can be made digital. It has enabled business model transparency, ways to interact and communicate with external actors, and tools to collaborate and globally distribute innovation and value creation. The increased transparency together with a cultural change, forces companies to not only focus on increasingly demanding customers, but on all affected stakeholders. Companies are bombarded by change, and business models need to be adjusted for companies to keep up. Important to keep in mind is that business models change but economic laws do not. For tips on how to approach business model innovation read 10 Tips on Business Model Innovation.

Three tools for Business Model Innovation

The Business Model Innovation Matrix

The matrix, that has recieved some great attention, consists of 40 principles developed to solve complex inventive problems on the vertical axis, and 8 business model components on the horizontal axis generating 320 areas for Business Model Innovation.

A systematic approach to identify Business Model Innovation opportunities is to identify the different parameters that can be innovated upon, and the different principles for innovation.

The Business Model Innovation Matrix is based on 40 principles to solve complex problems that were originally developed for technical inventions and published 1969 in the book Algorithm of Inventing, by Genrich Altshuller. The principles were a result of an analysis of 200000 inventions and has become a cornerstone in TRIZ. Now 40 years later the principles has been further developed based on the results of analyzing close to three million inventive solutions in science, arts, politics, engineering and business.

The Business Model Innovation Matrix consists of the 40 principles on the vertical axis and the business model components and the horizontal axis. As there is no dominant and widely accepted definition of the term business model I use the components below to explain the framework. If you prefer another business model template, with other components, you can of course apply the principles of innovation on that model.

Often discussions on Business Model Innovation are limited to the improvement of value propositions. By creating the matrix with the 8 parameters presented below and the 40 Principles of Innovation I have 320 unique areas to generate ideas for Business Model Innovation.

Business Model Components

• Value recipient - Who are we providing value for?
• Value Proposition - What values are we providing?
• Delivery - How are the values delivered?
• Assets, Capabilities & Activities - What internal and external assets, capabilities and activities are needed?
• External Relationships - What forms of external relationships are needed?
• Control Mechanisms - How is the value creation and extraction controlled?
• Benefit and Revenue Model - How are benefits and revenues generated?
• Costs and Harms - What are the costs and harms?

Some combinations of principles and business model components are easier than others and I will exemplify with Principle 1 applied on each of the components presented above.

Using 1 of 40 principles for Business Model Innovation

When using Principle 1 - Segmentation the objective is to divide the business model parameter into independent parts, make the system or objects easy to disassemble or increase the degree of fragmentation or segmentation.

Value recipient

• Can we segment the value recipients into micro-niches?
• Can we go from mass market to mass customization?
• Can we provide value for sub-groups of the value recipient?

Example: Spreadshirt

Design and sell your own t-shirts with a free online shop

Value Proposition

• Can we unbundle value propositions into different parts or modules?
• Can we move from one service level to several different service levels?

Example: RyanAir

You get nothing but the seat in the basic value proposition

Delivery

• Can we deliver the value proposition in parts?
• Can the value recipient be part of the assembly?

Example: IKEA

Providing disassembled furniture for the user to assemble

Assets, Capabilities & Activities

• Can we unbundle important assets, capabilities or activities into several smaller ones?
• Can we more effectively use the unbundled resources?
• Can we improve deployment of individual skills?
• Can we use flexible systems to respond to individual conditions?

Example: P&G

Providing technology and IP to its competitor Clorox instead of launching competing product

External Relationships

• Can we go from one large partnership to several smaller ones?
• Can we go from one organization to a franchise concept?

Example: McDonalds

Probably the world's most famous franchise

Control Mechanisms

• Can we control the value proposition by controlling parts of the value creation or value extraction?
• Can we control the value proposition by controlling the underlying assets, capabilities or activities?

Example: Myriad Genetics

Controlling underlying databases and patents

Benefit and Revenue Model

• Can we divide the object for transaction into smaller parts?
• Can we divide the payments into smaller payments?

Example: American Express

One of the first to create a worldwide credit card network

Costs and Harms

• Can we use temporary workers for the value proposition?
• Can we use short term contracts with external actors?
• Can we distribute costs and harms by diversification?

Example: Goldcorp

The famous GoldCorp Challenge

The Value Proposition Hierarchy Explorer

The basic idea underlying the tool is to identify assets and capabilities that are really valuable and identify how value could be created by combining own and external assets and capabilities into new value propositions.

I have developed a tool I call the Value Proposition Explorer to clarify the space around an originally stated value proposition by broadening or narrowing the scope. The basic idea underlying the tool is to identify assets and capabilities that are really valuable and identify how value could be created by combining own and external assets and capabilities into new value propositions. The outcome of repeating this several times is a hierarchical list of value propositions, from which the company is able to select and assess business opportunities.

The tool should not be mixed with the idea of positioning a company in the right place of a value chain (One-sided business models) but a tool to break free from the value chain thinking. A value proposition can be directed not only to the company's existing customers, but other stakeholders, traditionally not considered to be customers (see Two-sided, Horizontal and Multi-layer business models). A value proposition does not have to be based on developed products and services (even though that is almost always the definition) but what one actor has to offer another actor:

An example

P&G is constantly looking for ways to leverage its assets through its external business development and connect & develop initiatives. Based on the original value proposition of Pampers diapers you now find lots of co-branded or co-commercialized products such as bibsters, wipes, swim pants, underwear and concepts going upwards in the Value Proposition Hierarchy Explorer. At the same time P&G is offering to license technologies and IPR relating to developed odor controlling bio-component film to be used in human contact products, cleaning devices, medical supplies such as bandages and hospital bedding, and even to use the technology in airline cabine space to control odors and smoke.

Finding own, others' or joint value propositions

When searching for valuable assets and capabilities, it is important to not only focus on own business model and industry, but also the potential need of others:

• How can we strengthen own value propositions?

• How can we strengthen others' value propositions?

• How can we create joint value propositions with others?

Business Model Innovation using Ideality

Ideality is a simple yet powerful tool to generate new ideas for business models. It is a tool that instead of starting from current business model and current value propositions, starts from the theoretical ideal situation.

Ideality is a simple yet powerful tool to generate new ideas for business models. It is a tool that instead of starting from current business model and current value propositions, starts from the theoretical ideal situation. The theoretical ideal situation can be defined as all potential benefits at no costs or other harms. Using Ideality helps you look at the constraints of a business model and creates out of the box ideas. The most common approach is to apply Ideality on value propositions and analyze the ideal value proposition from the value recipients’ perspective. However, Ideality can be used as a tool to improve all business model components.

• Value recipient - Who would be the ideal customer and other value recipients?
• Value Proposition - What would be the ideal value proposition?
• Delivery - How would the values ideally be delivered?
• Assets, Capabilities & Activities - What internal and external assets, capabilities and activities would be ideal?
• External Relationships - What external relationships would be ideal?
• Control Mechanisms - What would be the ideal way to protect value and profits?
• Benefit and Revenue Model - What would be the ideal benefits, and revenue model?
• Costs and Risks - What are all costs and risks that theoretically could be removed?

Ideal for who?

What is ideal for one stakeholder is often not ideal for another. Customers want perfect products and services for free, not to be in a lock-in and get the value delivered instantly while the suppliers want to provide better-than-competition products and services, and make a profit from it. By mapping out what would be ideal for the different stakeholders, contradictions and constraints can be identified. To solve contradictions is a classical way to improve business models. Below an example looking at the value proposition from the customer perspective.

Working backwards

With the ideal situation identified, the next step is to work backwards to something that is achievable. This is carried out by a systematically decreasing benefits and/or increasing costs and harms.

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