• Running

    You can learn a lot about how people approach their careers by looking at how they approach their hobbies. Running is such an important part of my life that I have created a separate blog for it, Predawn Runner. Whether you are recreational or competitive, I welcome you to join me there in discussing how we fit running into an already-full life.

Strategic Pricing Using Value Equivalence Lines

The number one variable that can impact your profitability is pricing.  Yet it is amazing how little many marketing and product managers really understand about pricing strategies, and therefore use poor decision-making processes to set price plans.  McKinsey consultants Michael Marn, Eric Roegner, and Craig Zawada have produced an excellent work on pricing approaches called The Price Advantage in which they discuss pricing at three levels:

  • Industry – set by supply and demand conditions, input prices, and overall competition,
  • Strategic – product / market level pricing set by comparing and positioning solutions within a given segment of the market, and
  • Transactional – executing pricing on a day-to-day basis, establishing “on-invoice” and “off-invoice” mechanisms and channel- and customer-specific agreements.

The product or marketing manager generally owns strategic pricing for their product or market.  Unfortunately, it is all too easy to rely on simple pricing methods such as “cost-plus” models to establish pricing guidelines.  There are three major issues with “cost-plus” pricing.  The first two are the cost competitiveness of your offering and your margin expectations compared to competition.  These are generally sorted out over time – you either improve your cost to get more competitive or adjust (most typically lower) your margin expectations.

The third issue is more significant and gets at the heart of poor pricing strategies.  This is the fact that your cost typically has very little to do with the value that your solution brings to customers.  It is conceivable, for example, that something that costs you $10 may bring $500 of benefit to a customer.  Your cost-plus approach might price it at $15 when in reality you could command far more.  Since you do need to “share” the benefit of your solution with your customer to encourage them to purchase, you wouldn’t be able to charge the full $500, but perhaps $100, or a 90% gross margin vs. the 33% or so you might realize under a cost plus strategy.

One tool to analyze and set pricing strategies described in The Price Advantage is the value equivalence line, or VEL.  The VEL identifies the perceived benefits vs. perceived price tradeoff that various customers are willing to accept within a given market, as shown below. In this graph, offerings that are to the right and / or below the VEL are perceived to be of greater value / benefit for a given price. While obviously a simplification (and in particular, this approach does not work well in categories subject to frequent disruptions due to innovation, new entrants, etc.), there are several powerful insights you can be gain from the process and result of creating a VEL for your solution space.  Most specifically, you can identify how your offering is positioned against competitive solutions and how adjusting your value proposition or pricing may impact your sales and margins.

Value Equivalence Line for Strategic Pricing
Value Equivalence Line (click to expand)

The graph shows the positioning of several offerings (the ellipses labeled A, B, C, and D) in the same “market”.  Note that these solutions can be different in nature, not just different versions of the same concept; you could compare materials like steel, plastic, and aluminum in their ability to fit the need for a certain component, for example. It also shows the pockets of demand (the bars along the line) based on various customer segments (and in a prior post I discuss a market segmentation approach).  When positioning your offering, it is important to note that demand is not spread evenly along the VEL, and there may be no demand for a certain price/benefit combination.  The graph also represents that fact that understanding of the price and benefit tradeoff may be a little vague (represented by the dotted lines on either side of the VEL) and perceptions of a given solution may vary from customer to customer (thus the ellipse to represent the offering instead of a dot).  It is not critical to get the exact size of these bands or ellipses correct, but it is in general helpful to consider how broadly perceptions might vary, as narrowing these differences may be an effective strategy for better positioning you r solution.

Value Equivalence Line as used for pricing decisions
Using the Value Equivalence Line to Inform Pricing Decisions (click to enlarge)

As a theoretical example of using the VEL to inform pricing decisions, consider offering A, for which the provider desires to increase their market penetration.  There are three ways to do so, as shown in the accompanying picture:

  1. Change customer preferences: this is the hardest but has the least impact on the industry pricing structure; you can seek to move demand from one point on the curve to another through education, marketing, or other selling tools. Some customers may not be aware of the benefits that your solution offers that justify its price, so this approach can help for such a situation.
  2. Move your benefit-price ratio along the VEL to tap unmet demand.  It may be that there is latent demand that is unsatisfied by existing solutions and that by repositioning your solution, you can capture some of that demand (which is currently being filled by suboptimal solutions, if at all). This may be difficult as well depending on the work required to change your value proposition, but again it has minimal risk to the industry price structure.
  3. Move a new or existing offering off the VEL.  This could be accomplished through a new or upgraded offering at the same price, thus moving to the right, which would serve demand from E (who will be happy to find a cheaper solution that meets their needs) and A’s current customer base (who will be happy to get more benefit for the same price).  This could also be accomplished by cutting your price, moving down on the graph, and thus serving existing customers more cheaply plus potentially capturing demand from D by providing more benefit for the price.

Note that each of these approaches may (and probably will) provoke eventual competitive reaction.  The risk is greatest in scenario 3, as in fact the new offering from A will have shifted the VEL, and competitors are very likely to develop their own new higher-benefit solutions, reduce their prices, or both to re-establish their position on the VEL.  Some uncertainly is also added to the demand patterns, as some customers will choose to pay less for their existing level of benefits, and some will take the additional benefits at the same price, thus splitting existing demand pocket.

While clearly a simplified approach, with some challenges involved in collecting the data needed (or, in many cases, making meaningful assumptions and estimates), the VEL tool is a powerful approach to analyzing pricing situations and feeding decisions.  Like most good tools, much of the value is in developing and debating the data.  Should you wish to learn more about VELs (as it is impossible to give them sufficient treatment in a single blog post), I’d encourage you to read The Price Advantage.

Another good book recently published regarding the use of VELs (price-benefit lines) in assessing pricing situations, mostly from a crisis mode, is Beating the Commodity Trap by Richard D’Aveni, which I review in a subsequent post.

Bookmark and Share

You may also find these interesting:

Posted in Marketing | Tagged , , , , | 6 Comments

To Run or Not to Run? There is No Question

I don’t normally write personal posts, as this is more of a “how to” blog. But today marks the anniversary of a decision that changed my life, so I’m making an exception in the hope that someone finds some inspiration and decides to re-dedicate themselves to their passion.  My passion is running, and the reason I’m writing about it now is that today marks the one year anniversary of my return to the sport.

To those who knew me in the early 00’s, I was a pretty dedicated runner. As my “running resume” shows, I put in several marathons, including a BQ time and Boston itself.  After we had our first son in January 2003, my times started to fade, and once we had our second, there just wasn’t the time, or maybe it was the energy, to continue doing something that, frankly, I wasn’t doing that well.

On came the 20 pounds, slowly but surely. Oh sure, I talked about running again, even did it occasionally while traveling.  For my birthday in 2008, my wife bought me an elliptical trainer for my birthday. I probably used it a dozen times before giving up on it – I’m really not much of a cross-trainer.  Fortunately, my wife now uses it regularly, so we are getting good use from it.  For the 2009 edition of the birthday, my wife bought me a new iPod with the Nike+ sensor for tracking running times and distances.  Maybe I just finally took the hint.

However, being a bit obtuse, it took me over a month to take the hint, as I didn’t start using it until a trip to a remote region in Japan in early April (note – in Japanese, “remote” means “like Akron”). I’ve always loved to run when travelling, and this trip was especially conducive to running, to recharge after (well technically, before) long days of dealing with jet lag, language barriers, and technical disagreements. I’m honestly not sure how I forced myself to get up every morning to do this, after the unknowable amount of beer we drank each night. Those of you who have been to Japan will be familiar with the custom of instantly topping off the glass after every sip – thus you have no idea how much you have had.  But somehow it happened. And it felt good. Though I could not bring myself to drink the “Pocari Sweat” from the vending machine afterward – it just looked too much like the name.

When I returned, I kept running through April, and then for some reason took most of the month of May off. I believe this was a combination of  my wife’s travel schedules and fictional excuses.  I then bumped along for several months at 3-4 miles per run, 3-4 days per week, around a 9:00 pace – which for me is a bit of a “zombie” run. And I recall days of just resetting the clock for a later time when the alarm went off, and skipping the run for that day (hey, I ran yesterday, man).

Bumping along through the summer of ’09 with no real goal in mind.

I think I got a little more motivated in late August, after a company physical indicated that I still had those extra 20 lbs, and my BMI (body mass index) was at 26 (recommended max is 25). I started picking up the pace and distance a bit. I found the Nike+ site to be good for statistics but not particularly social (OK, actually not at all), and it was only in late September that I would realize how important that could be.

A friend on from high school who I had found on Facebook, Athina Kaviris, organized a challenge for the month of October where everyone could set their own self-improvement goals. I was relatively new to Facebook but decided to join in, and committed to do 100 miles for the month. As the month progressed, I noticed people starting to comment on my runs (and I, of course, trash-talked in return).  I also did a local 5K on a whim that month. Somehow, I finished third. Not in my age group – in the whole race. I even took a wrong turn. Now this was a small race (maybe 60 or so runners) and the 21:07 was nowhere near a PR, but I remembered that I actually enjoyed competing. I blew by the 100 mile goal and suddenly found my pace was consistently under 8:00 per mile.  And oh, did I mention that I was fighting off H1N1 most of that month (according to my wife, the good doctor)?

I took on another 4-mile race on Thanksgiving, and felt pretty good when I calculated that I had finished at a 6:37 pace. When I re-ran the numbers and found it was actually a 6:23 pace, I felt even better. I came in 24th out of a few hundred that day, but didn’t stick around to see how I did in my age group. Now I knew I was onto something. I think it was that weekend that I floated the thought of getting back into marathons to my wife. She didn’t hesitate to support the idea, even though she knew it meant early morning alarm clocks, and occasional fatigue from too long of a run too early (but with the tradeoff being those 20 pounds melting away, and usually a better energy level).

It was about this time that I started thinking about my running brand as well. I know that’s an odd concept, but at the least it helped me let my mind productively wander while running. This led to the development of The Running Manifesto which, while a little extreme (OK, I’ll admit it), is not that far from how I approach running.  I knew that I was re-discovering my enthusiasm for the sport, and there is no combination more powerful than passion and talent. How can you ignore that pull?

I also made two more breakthroughs at this time, both suggested by a friend I had met on Twitter, Tim Hibbard. The first was to move from the Nike+ to a Garmin GPS watch, to get better accuracy and more data on splits.  I was finding the Nike+ to be about 10% short on distance as my pace improved. The second was to move over to dailymile to record my runs. Oh, and there was a third thing, which was to focus on achieving progressive splits.  Suddenly, the data mattered and my world opened up to a few, then dozens, and eventually over a hundred other runners who have similar, passions, talent, and experience.

Ramping up for the Cleveland Marathon and hopefully a Boston qualifying time.

So here I am, one year later, on the verge of achieving at least as as I was when I was at my prime over 7 years ago. I didn’t think I’d be able to do that again. I thought I was getting too old and too busy. Maybe age has brought wisdom instead of decay, and maybe busy-ness has kept me focused on being speedy. While I have to be careful not to get too overconfident (after all, this is all just training for now), I am credibly setting goals I never thought I would, like breaking a 3:00 marathon (not just yet, but maybe in the fall).  I am also more patient and focused than I used to be on reaching those goals – I’m not running any other races until the marathon, so that I stay crystal-clear on my mission.

This post is my commitment to never go back to the “just get the miles” mentality that led to a loss of passion, and eventual cessation of my running previously.  You, my esteemed readers, are the witnesses to that commitment, and I thank you all in advance for keeping me to it. Run on!

Bookmark and Share

You may also find these interesting:

Posted in Running | Tagged , , , , | 11 Comments

Spreading More Crumbs of Cogitation

I’ve had the opportunity to contribute a more guest posts of late to two of my favorite blogs.

On the IMTS blog, I discuss lessons learned from their recent Exhibitor’s IMTS 2010 - Connecting Global TechnologyWorkshop on extending your brand presence at trade shows.  This is in essence a follow-on to a previous post here discussing extending your brand presence at industrial customers, and I suggest focusing more on your upfront show efforts than your booth design, as 75% of booth visitors have pre-planned their stop by your booth.

Photo courtesy of Brooks Elliott via Creative Commons License

On Apollo Sikevicius‘s Lean Startups Blog, I contributed an article on why implementing Six Sigma in your startup or small business can put you on the fast path to irrelevance.  The premise is that Six Sigma (as typically employed) is inward-looking and can slow down your pace of product, business model, or process innovation, speedy execution of which is critical to the success of many startups.  Feel free to contribute to the debate on this, as my views certainly are open to criticism.

Additionally, in case you don’t follow my Posterous blog, Impulsive Cogitation (where I share briefer thoughts generally on content found elsewhere on the web, with a similar focus to this blog), I have put up two lengthier posts that, in reality, generated a bit more than just “impulsive” cogitation.  The first is a reference to an article from strategy + business regarding the major demographic shifts we will see over the next 40 years. I provide some thoughts in the impact to your business planning and argue that the forces of demographics are stronger than even global warming in impacting what the future will look like.  The other post is a summary of an article in the San Francisco Chronicle that reviews some of the leadership lessons from Jack Welch in his tenure as CEO of GE.  Since I worked at GE towards the end of the Welch era, I had the fortune of witnessing many of these practices, and it is a bit disappointing how much Jack’s star has dimmed since his departure (due to both his own personal choices and the unravelling of some of GE’s more aggressive financial activities).

Bookmark and Share

You may also find these interesting:

Posted in Leadership, Marketing, Strategy | Tagged , , , , , , , | Leave a comment

Mitigating Strategic, Operational, and Organizational Business Risk

In a recent series of posts on his blog, Jeff Davis, for whom I worked for several years at GE, proposes some tools and processes for managing strategic, operational, and organizational business risk.  These provide an outstanding set of recommendations, so I wanted to take this opportunity to highlight some of the key posts Jeff has made, and I encourage you to read them in more detail and consider implementing some of the practices in your next annual review process.

Porter's Five Forces Applied to Strategic Risk
Porter’s Five Forces Applied to Strategic Risk (via Jeffrey J Davis)

In Stress Testing Your Business Strategy, Jeff suggests using Michael Porter’s Five Forces model to consider significant changes that may occur in your customers, competitors (direct, indirect, and new), and suppliers that would put your strategy at risk.  Instead of thinking about these as risks to your own company, think about them as risks to your nearest competitor, to eliminate the inherent bias we have that supports our own strategies. Jeff then proposes ranking the probability and severity of these risks from high to low (any number of scoring matrix approaches would work for this) and arranging them on a two-axis grid.  A series of questions then help determines the potential impact to your existing strategies and how you might react, and Jeff finishes by proposing that key executives each be assigned a few of the 10-15 risk you have identified to monitor and review periodically throughout the year.

In Safeguarding Your Daily Business Operations, Jeff points out that “LEANing” your business (as many have in response to recent economic challenges) creates greater risk to your daily functioning by significantly reducing your margin for error.  He suggests first using the elements of a typical Ishikawa diagram, or “fishbone analysis”, to identify potential areas of risk (machine, materials, “man”, method, and “mother nature”), and then using a Failure Mode and Effects Analysis (FMEA) to assign a risk prioritization number (RPN) to each risk you identify to serve as a ranking mechanism.  The highest risks (those with a “severity” of at least seven in the FMEA, or an overall RPN of three hundred or above) should drive development of plans to either bring the likelihood of occurrence or the resulting severity down.  While I have performed FMEA’s for specific projects such as new product developments, I have never seen it applied business-wide in such a manner, and it seems a potentially useful approach if done to the right level.

In Vulnerabilities in Your Team, Jeff walks through some scenarios that often develop in small and medium-sized companies – technical know-how concentrated in the hands of an expert, a sales manager who is the linchpin to your customer relationships, and similar.  While a little shorter on specific process recommendations than the other two posts in the series, this post suggests the importance of organizational planning and development.  This is especially important for small- and medium-size business that lack the bench depth of a GE, but all too often such processes are overlooked or treated as a once-per-year “performance review” event.  Jack Welch, the former CEO of GE, often stated that he spent over 50% of his time on people, so if you aren’t investing that type of time as a leader, then you are running a risk that critical talent retires or walks out the door without backup plans in place.

What Jeff has done in this series is point out how you can take a subjective and difficult to address topic like strategic or operational risk and use a process to quantify it and build plans to mitigate it. I’m a big fan of any tool that can bring order and reason to the normally chaotic process of strategic planning, and I look forward to trying out some of these approaches in the near future.

Bookmark and Share

You may also find these interesting:

Posted in Leadership, Strategy | Tagged , , , , , | Leave a comment

10 Ways to Extend your Brand with Industrial Customers

Disney Expands their World to Be More a Part of Yours
Disney’s stores – like this one in Downtown Disney – are just one example of how they extend the brand experience (photo courtesy of Rennett Stowe)

A few years ago, I had the pleasure of attending a session put on by the Disney Institute in Orlando covering the Disney Customer Experience.  This Saturday morning workshop covered some of the techniques that Disney uses to excel in customer service.  The topic that stuck out most for me was their efforts to “extend the brand” to help visitors to Disneyworld gain a better overall vacation experience and further build a positive impression of Disney.  Some of the tools they use to accomplish this include:

  • Well designed vacation packets sent with your reservation information and other useful (and promotional) information in preparation for your visit.
  • Branding and greeting at the airport, including shuttle transportation to the Disneyworld area with video entertainment to get you in the mood.
  • Signage placed well out from the park itself to make you feel surrounded by “Disneyness” (again, my word, not theirs).
  • Special treatment by the hotel staff, including (as an example) entertaining arrangement of any plush Disney toys you may have purchased and left in your room for the day (such as Mickey finishing off your room service meal).
  • Development of Downtown Disney, to make even your adult or nightlife activities encompassed by the Disney brand.

This may seem an obvious step for an entertainment or destination company, but it can’t possibly apply in industrial marketing, right?  Well ever since that session, I’ve looked for examples of companies employing such practices in a B-to-B or technical market, as well as brainstormed how we might implement such practices at my own companies.  You would be surprised at the ways in which this can apply.  Some ideas to consider:

  1. Offer to engage with your customers in their specification process, to help ease their burden and, at the same time, create specifications that provide your solutions a slight edge.  You can even charge for these services for some customers, and perhaps credit back the cost should they select your solution.
  2. Provide thorough supporting information on your quotes, leveraging your marketing communications material where possible to reinforce your value proposition and overall corporate message.
  3. When you receive the order from your customer, provide an acknowledgement with your thanks and, should the project involve engineering time or project management, keep in steady communication with them on its progress.
  4. Provide a branded token of your appreciation after completion of a successful project, something of nominal value but meaningful (and creative, if possible).
  5. Sandvik Coromant Yellow Coat Specialists
    Sandvik Coromant’s “yellow coat specialists” are a common sight in factories and at trade shows

    Make sure your service personal wear visible and quality company attire; one company in the tooling industry equips nearly everyone who touches the brand in front of customers in bright yellow work jackets, even at trade shows (where their technicians can often be seen in their customers’ booths, making adjustments, real or exaggerated, to equipment).

  6. Invite your customers to meet with you at trade shows, and employ other minimally intrusive ways to keep your brand in front of them on a timely basis.
  7. Offer to create and share a success story – often companies have internal newsletters that need content, and if you have provided them something that helps fulfill a corporate mission (like sustainability, continuous improvement, etc.) they will be happy to promote the success internally.
  8. Offer complimentary periodic inspections of your installed equipment, perhaps in conjunction with other service trips you are making to the area to cut down on costs; this provides an opportunity to generate revenue through spare parts and to identify other opportunities to provide solutions to this account.
  9. Offer to do a consultative review of the customer’s operations and where your solutions may help, along with an analysis of the payback and ROI on such solutions (this may only be possible once you have credibility from providing a successful first solution).
  10. And, perhaps the most common solution – develop a blog, newsletter, company magazine, or other method of communicating more regularly with your customers even when they are not in the buying cycle, so that you are front-of-mind when they are.

Have you  implemented or observed other practices for extending a brand presence at industrial accounts?

Bookmark and Share

You may also find these interesting:

Posted in Marketing | Tagged , , , | 1 Comment