Understanding value

Value competition requires an accurate, consistent com­putation of your impacts on the customer operations that you affect. How much profit is being added? How soon has it begun to flow? How long before it fully accumulates?

There are three types of values that you must know about your business. Some of them will be restorative. They will restore insufficient values being generated by your cus­tomers due to unnecessarily excessive costs or correctible problems in their productivity. 

Other values will be opportu­nistic in the sense of enabling your customers to seize sales opportunities that would otherwise remain beyond their reach or increase the opportunity for them to earn higher margins on their current sales. 

A third type of values will be preventive.  Values that can prevent a customer from incurring a competitive disadvantage are priceless. No business can af­ford even a temporary disadvantage in either unnecessary costs incurred by its operations or in the opportunity costs of failing to fully commercialize one of its major markets. Failures that are not prevented must be corrected after the fact. At that stage, proposed remedies are expensive. They may not work. Even if they do work, it may be too late to regain a lost competitive advantage.

When you know what your value is worth to a customer, you and your customer can tell what kind of "partner mate­rial" you represent. If, working alone without you, the cus­tomer can obtain the same value as he would get from working with you, you will not be partner material. If your value is worth more than what the customer can obtain working alone or with any other supplier, you will be prime partner material.

If you want to be prime partner material, you must offer a prime value. Nobody must be able to offer the customer a better mix of value specifications, either as much value or as soon or as sure, depending on his needs. If you can achieve this position with your major customers, you will have a new basis for your price. No longer will your price need to reflect your costs or be constrained by competitive prices. You will be able to relate your price to the worth of your value on a return-on-investment basis. This is the way that value-based pricing can transcend competitive bidding. When competi­tion is no longer the index of price, the criterion of "fair price" shifts to customer value. All other bases for price become non-competitive.