It’s not the price, stupid. It is the value (proposition)
We always hear that the customer is not buying because the price is too high. Is the price important?
Of course, most clients will say yes in any survey or in sales negotiation. Actually, there are departments at your clients that know only two words: Too expensive!! Give me rebates! That is the purchasing department and it is their job to negotiate the price of a purchase. However, is this true, that even for B2B customers only the price is important?
Observe the jobs-to-be-done of your customers. Don’t ask the customers
Let’s take an example from RWE, a huge German utility firm. Let’s take the case they need to purchase electronic testing equipment. Nothing fancy, just a plain vanilla device for 30 to 50 Euro. Traditionally, this purchase would be a C category purchase. C means not critically important to the firm and therefore the firm usually shops around among different suppliers for a good price.
So you would assume that price is the decisive criteria for a firm to purchase from you. And yes, if you survey customers what is important in their decision to purchase C goods, the price will be on top.
So, all B2B marketplaces of the late 1990s and early 2000s like Onvia had the value proposition that price of the goods are the most important criteria for the B2B market. So they offered everything economics told them what to do in a price sensitive market: Make auctions, offer pool buying for larger quantities or make requests for proposals.
Not the price of the good is important but the whole cost of purchasing
However, they had to learn the hard way (most disappeared from the market) that this is not the case. Let’s go back to the testing device of 30 to 50 Euro at RWE. Saving an extra 20% on a purchase of 50 Euro is great. But is it just 10 Euro. But the costs for the internal purchasing process can easily be 150 to 200 Euro for the traditional process according to Karl Czech from RWE purchasing.
So if you see the total price of purchasing (TPPs), you immediately see where your value proposition should be based upon.
Yes, customers are very price sensitive but not for the single price of a good but for TPP of it. The TPP is the price for the good and the costs of process of purchasing it. So if you lower the cost for the process and make the life of your customer easier, better and thereby cheaper, you can charge more for your product.
That’s what the guys from Mercateo, a German B2B marketplace had to learn over the last ten years. Luckily, their learned it in time and observed their customers. Yes, at the beginning they also followed the crowds and the market analysis that B2B will be a huge market like 180 other B2B market places did in Germany alone during the new economy hype.
But over time they discovered that the price for a good is just one part of the total equation.
- A good value proposition does not start with the product. It starts with understanding who is your customer and what job you solve. Think about Krinners Christmas tree stand and the badly solved job to put easily the Christmas tree straight up.
- Then you define what benefit you create for your customer and how you solve the job-to-be-done.
- Then you compose the rest of your business model to fulfill the value proposition.
All other components than have to fulfill the value proposition. It is not just the product or your services but all other building blocks. Think about it, how badly a business will perform if it claims that it has the best customer service in the world, but then treats its employers badly and you feel this on the hotline or in the shop.
Here are the core questions, you have to answer for a great value proposition.
You can either start with pain points or gain points as Alex has shown recently in a post but you should always ask what job you solve for your customer. And that can either be a pain killers or gain creators for your customers. However, focus on Customers’ jobs.
All the best to my American friends and readers. Hope this post finds you well after Sandy!
Case and figures are taken from brand eins, a great German business magazine. I did not crosscheck the information. Source: Frank Pollack “Spätes Glück” in: brand eins, Juni 2012, pp. 74-79
I dispute that the whole cost of purchasing is the criteria for the purchasing decision.
The costs to be considered are “total costs of ownership”.
@Daniel, you are right when it comes to products that have different TCOs, but in the case I use, the TCO of all products are more or less the same, since they are simple products or even commodities. While theoretically, the TCO is a great measure, in reality other factors play an important role, particularly in a world where quarterly results count. The long term perspective is often lost in such an environment. Tx for your comment.