Do you want to know another word for solution? It’s commodity. That’s right, any time your focusing on a solution, your solution, you are focusing on a commodity.
Let me share some examples:
- ABC company develops unique solutions. Really, it’s ABC company develops unique commodities.
- ABC’s dynamic solutions enable companies to create advantages. Really, it’s ABC’s dynamic commodities…
Think about that. How can a commodity be unique? How can it be dynamic? It can’t!
A commodity is anything with a perceived alternative – and every solution has an alternative.
Last year I shared some important insights into pricing and how to increase the desire people have to pay you more. I talked about the importance of focusing on the right-side of the value equation, not the left.
Solutions are at the core of “left-side value.” Results are the core of the right.
When you focus on the real results companies desire, you’re having a “what’s it worth conversation.” When you spend your time exalting the superiority of your solution, you are merely commoditizing yourself.
So, get out of your own way. Forget about you and focus on the customer. Understand them, and what it is they really want. What are their end results? Tie them back to your approach, and the solution takes care of itself.
The biggest sales mistake B2B salesforces make is focusing on process when they should be selling results, or vice versa.
There are two types of people in every corporation:
- Process Owners
- Result Owners
80-90% of people in a company are what I refer to as “Process Owners.” This simply means they “own” a series of tasks designed to manage and improve upon the status quo. These people tend to carry functional title like: HR, Operations, Logistics, Procurement, etc.
These are your status quo buyers. When you are selling to them, you must focus on making what they are already doing easier, faster, cheaper (with an emphasis on easier).
Results Owners are responsible for guiding the business. They own P & L’s. They’re looking for new advantages, or better/new ways to exploit their existing advantages. Where status quo buyers live in the present (or past), Results Owners live in the future. These are the buyers that are open to change.
If your message or sales approach is focused on your solution, the context of your conversation will almost always be process oriented. If that’s the case, then you need to be selling easier, faster, cheaper process. You can’t sell results to a Process Owner – they don’t live with results problems, so they won’t value results solutions.
It is equally bad to focus on process (solution) with a Results Owner. If you do, they’ll send you to the Process Owner, giving no authority along the way. Remember, if the Results Owner understood the need for your solution – they would have implemented it.
When selling to the Results Owner, you must:
- Focus on the result.
- Demonstrate a critical gap/barrier to attaining that result.
- Demonstrate that the status quo is no longer viable.
- Implement a process to manage the change you are proposing.
By doing this, you will be able to demonstrate right-side value and avoid being commoditized.
Who’s a more expensive quarterback: Peyton Manning or Rex Grossman? The answer is that it depends how you measure expense.
- If you look at it from the perspective of direct cost (who gets paid more) the answer is clearly Peyton Manning – heck, Rex Grossman is a bargain by comparison.
- If having a viable chance of playing in the Super Bowl is paramount then most people would agree that Rex Grossman is more expensive. The likelihood of making the Super Bowl if far, far lower with Grossman than it is with Manning.
Sellers deal with this paradigm everyday. Buyers naturally assess decisions based upon the perceived cost of taking an action. The primary job of a Demand Creator is to create the paradigm that allows buyers to make decisions based upon the desired returns.
This is why it is absolutely critical that sellers establish and focus on the desired results that a buyer is looking for, rather than focus on the means to achieving the result.
Sounds simple, but I’ve learned it’s not. A common mistake sellers make everyday is that they confuse “process goals” with “results goals.” For example:
- Reducing headcount is not a result – it’s a means.
- Consolidating vendors is not a result – it’s a means.
- On-time delivery is not a result – it’s a means.
Results are the impact of those means.
If a company is looking to reduce headcount, the result may be to lower it’s overall cost structure to be competitive in tighter markets. And that opens up a series of questions and potential implications, about what really drives their cost structure.
- The seller that focuses on how they support headcount reduction will be valued like Rex Grossman.
- The one that focuses on how they support a lower cost structure will be valued like Peyton Manning.
It’s your choice.
For as long as I’ve been in sales, guru’s have always focused on the differences between selling products and selling services. The approach, skills and talents required to successfully sell products are quite different from those needed to successfully sell services.
A major trend I’ve noticed over the last 5 – 10 years is that the distinction between “products businesses” and “services businesses” has become increasingly blurred; as product oriented companies have added services, and services companies have “productized” their offerings.
While the distinctions between companies has grown more nuanced, it’s impact in the selling process hasn’t. It’s critical that you decide if you are selling a product or a service. This simple statement of need can best illustrate the difference between a product and service sale:
Which word do you focus on – “it” or “now?”
If you focus on “it” over “now” you are making a product sale. You’ll focus your sales process, marketing and positioning on the product being offered. You’ll gear your sales efforts to late stage buy-cycle opportunities. Because your focus is on the product, you’ll deal with commoditization on a regular basis (you may even be the chief commoditizer), and as a result your margins will be tighter; hence, you’ll focus more on volume.
If you focus on “now” over “it”, you are making a services sale. You’ll focus your sales process, marketing, and positioning on the consequences of not getting it now. You’ll spend more time educating your customer base on the barriers to “now” and the impact that “now” has on their organization. Your efforts will focus on radical differentiation, and while your volume may be lower (everyone that needs “it” doesn’t need it “now”), you’re margins will be much higher.
A perfect example of the two can be seen between the two most profitable companies in the technology space:
- Microsoft focuses on “it,”
- Apple focuses on “now.” (Realizing that “now” is a metaphor.)
The Big Mistake
Everyday I see companies, especially small and mid-market ones, make a critical mistake. They try to focus on both “it” and “now.” At the risk of over-simplifying the issue, let me be clear:
You must focus on either “it” or “now;” you cannot focus on both.
For those that have been reading this blog for a while, you realize that the product sale focuses on “left-side value,” while the service sale needs to focus on “right-side value.” When you try to focus on both you fall in the middle, and there is no room in the middle.
The middle is Death Valley. You face the on-going margin pressure like a products company with the increased complexity and costs associated with services businesses.
When you’ve chosen which sale you will focus on, your job is to ensure that everything you do – the questions you ask, the ads you run, the social media strategy you implement, etc. – is completely aligned behind the decision.
I am not saying that the product or the service sale is either good or bad. My point here is that they are different. If you want to accelerate your profitable growth in the future you need to chose one – and only one.
Everyday, I hear salespeople complain and moan about how customers are so price sensitive. They tell how customers are less loyal than ever before or how companies’ sole buying goal is to commoditize sellers.
I always caution that these are symptoms of a much deeper problem. At the root of the problem is a complete breakdown of trust that buyers have with sellers – especially in the area of pricing.
A common sellers’ practice that drives me around the bend and contributes to this distrust is how sellers pad their pricing on opportunities that they perceive to be easy or already won. When sellers price their offerings from the perspective of “how much more can I get,” instead of pricing from the perspective of creating a true win/win – they are begging to be commoditized; after all that’s what the seller is doing to the buyer.
I understand that this practice is as old as the world of selling is, and I understand the motivation to “get what you can” when profit margins have the type of pressure that they do. But – and this is a big “but” – in today’s drought, there are no easy one’s. You may trigger a shop cycle when you didn’t need to.
I remember when I was young and first entering the world of sales. My mom cautioned me about some of the darker behaviors that occurred in that world. I asked her how would I know if something would be a mistake and she told me, “Doug, just pretend that whatever you do will show up on the cover of New York Times, if it would embarrass you – don’t do it.” I think the same advice applies to your pricing.
There is nothing more important for you to know than the questions the customers and prospects in your market are asking themselves. I’ve said it before, the company that provokes the right questions owns the market.
If you want to know what types of decisions someone will make and/or how they will allocate their limited budget dollars, knowing the questions they’re asking is critical.
|Are they asking:||Or:|
|How can they get additional price concessions from vendors?||How can they gain improved performance from vendors that can enable them to lower their total costs?|
|How can they centralize their decision making to their purchasing department?||How can they utilize the intelligence that lies outside their organization to gain and exploit competitive advantages?|
|How can we build our capabilities internally?||How can we transform fixed costs into variable costs by better utilizing the capabilities of others?|
|How can we utilize the past to drive improvements?||What do we need to know to ensure that we can compete effectively in the future?|
If your market is the questions on the left side, you are clearly in a “What’s it Cost Conversation.” If they’re asking the questions on the right side, you’ve got an opportunity to discuss what it’s worth.
What questions do you want your market to ask themselves?
I first learned of this concept from Dan Sullivan and The Strategic Coach. They taught it as a way for entrepreneurs to look at their business, and I’ve since applied it to how salespeople can position their products and services.
I have a question for you – does your product or service represent either:
- A freedom for your customer, and/or
- A capability for them?
Stop and answer these questions:
- What are my customers currently doing that my product or service frees them from doing? What impact would that have on my customer’s business/life?
- What does my product or service enable my customer to do that they are not capable of doing now? What impact would that have my customer?
The value of your offerings is limited to your ability to clearly answer these questions. When you clearly understand these answers, you can guide the conversation to clearly articulate just what you’re worth.
There’s an interesting blog series at Brad Farris’ blog about different pricing strategies for service providers. There is probably no other topic that lights a fire or starts a debate amongst service providers than the questions about charging by the hour, retainers or hybrids.
This is a question of increasing importance as more and more “product” providers are “moving up the value chain” by providing services.
Here’s my thought – I think it’s the wrong question. The question is steeped in industrial age thinking, and by looking at it that way, you’re forced to choose the least bad approach.
The winners of tomorrow will be the businesses that gain access to the best capabilities. Going forward, the lines between employees, consultants, outside providers, outsourcing, and insourcing will continue to blur, until for all practical purposes, they no longer exist.
It’s interesting, the very same service providers who lament over how they should charge for their services, don’t seem to struggle with the question when they hire executive talent (ie executive capabilities). They typically pay the executive a salary commensurate with the executive’s abilities and some form of rewards/incentive program for delivering results. In enlightened companies, this approach seems to make everyone happy.
The service providers that gain disproportionate rewards in the future will be the ones that position their services as capabilities and charge accordingly.
If I had but one wish I could grant to anyone selling, it would be the ability to recognize whether they are having a conversation about a problem or a conversation about a solution.
- A conversation about a solution is highly commoditized and causes the focus to be on what’s it cost.
- A conversation about a problem creates value and causes the focus to be on what’s it worth.
At Imagine, we define a problem as something important to someone not performing the way they want it to. By that definition, there are two types of problems; what we call opportunity problems (sort of like good problems) and trouble problems. The key to getting your product/service properly valued is to ensure that the context of your sales effort is focused on the problem the customer has and the consequences of not addressing it.
The problem with the vast, vast majority of salespeople (defined as anyone selling) is that even when they think they’re focused on the problem, they’re really focused on the solution. Until they become aware of that, they can’t do anything about it.
The first step in getting from a left-side (commodity/cost) focus to the right side (differentiating/worth) focus is to identify a clear gap in performance.
You help people reduce the costs of their operation by implementing a technology that enhances workflow processes.
If the conversation is focused on your ability to enhance workflow processes and its impact, then you are having a solution-oriented conversation and in all likelihood you will be commoditized. That means lower closing rates and tighter margins.
If the conversation is focused on the customer/prospects costs, cost structure, and their efforts to control and reduce costs – you are on your way to a radically different sales conversation that creates value.
If, further, you are discussing the gaps and shortfalls in the customer/prospects approach and the total impact those gaps are causing – you’re having a problem-focused conversation and will be rewarded with dramatically higher closing rates and enhanced margins.
Next time you’re having a sales conversation, be certain which type you are having.
If you’re a long-time reader of this blog, you know that I’ve talked a lot about the need to monetize the value of what you do. In today’s Drought, merely talking about benefits is not enough to drive successful results.
I’m working with a great company in the Southeast who has taken this idea and is literally changing their entire approach to selling. Recently, they sent me a list of programs and processes they offer to their clients. These programs and processes are what makes their company a superior solution. They were developing a worksheet to show to their prospects the value of each program rather than spouting the features and benefits.
It is here where Diagnostic Selling completely separates itself from traditional solutions-oriented sales. In Diagnostic Selling, there is a key principle that you must keep in the forefront of your mind at all times:
Solutions Have No Value
A solution isn’t worth anything – unless it addresses is a specific problem for a specific customer. Think about it, what’s a computer worth? It’s not worth anything if you don’t need one.
As I’ve discussed in several recent posts, you are always in one of two conversations – either “What’s it cost,” or “What’s it worth?” When you focus on the solution, you cannot escape the “What’s it cost” conversation.
Therefore, the goal of your sales and marketing efforts should not be to value the solution, but to enable you prospects and customers to identify, understand, and value their problems. When you do that your solution becomes far more valuable.
Our growth rate is accelerating and our profit per sale is increasing
I often caution selling organizations: just because the fish are jumping in your boat, doesn’t mean that you’re an expert fisherman. For most of the last 20 years, demand was growing so fast that businesses could fool themselves into thinking they were smart, even when they were doing dumb things (pointing out another word of advice: Never confuse brains with a bull market).
While economic and market conditions determine the fate of the vast majority of companies, there are always a few that are able to grow – and grow profitably – in virtually any market condition. The critical commonality of these companies is maniacal ability to focus, and stay focused, on their core business; rather than being distracted by what seems to be low hanging fruit.
These companies know where they can be indispensable, and they allocate disproportionate resources to growing in those areas. Because of this focus they are able to move beyond price as three powerful things occur:
- They get more for their products and services,
- It costs them less to sell their products and services,
- They grow faster while enhancing their margins.
Now rate yourself on a scale of 1 – 10, where 1 would mean there is tremendous negative pressure on both your revenue and your margins, and 10 would indicate significant strength in this area. With your rating clear, start brainstorming with your team things you can do to better focus on the areas where you can grow both revenue and margins.
I’d love it if you shared some of your thoughts in the comments.
It occurred to me yesterday that I’ve been writing a lot about the dangers of letting price competition damage your positioning and your margins, but I haven’t written much about the mechanics of protecting, and even raising your prices in markets like the one we’re in. So, today I’m going to share with you a specific example of how to enhance your margins.
First, you need to understand that you there are only two sales conversations you can be in:
- The What’s It Cost Conversation or
- The What’s It Worth Conversation
If you’re not sure which conversation you’re having, then you’re having The What’s It Cost Conversation. In my experience, 95% of sales conversations are in the “what’s it cost” category.
When your sales process is focused on your solution, it is difficult to impossible to escape “what’s it cost.” The reason for this is:
- The focus quickly goes to product/service features, attributes, and benefits; which naturally connect to costs.
- This focus naturally sets you up to be compared to other “solutions.”
- Further, because the focus is solutions oriented instead of diagnostically oriented, you must deal with a misunderstood or not fully understood problem. This often makes the comparison unfair and further commoditizes you.
- When this happens, you fall into the deadly specs/price trap. Think about what you want when you’re searching for solutions. We all want the solution that is good enough at the lowest price possible
It is far more effective, and profitable, to get into the “what’s it worth” conversation. To do this, you must change the focus of your efforts from a solutions focus to digging deeper on problems. As you begin to probe the problem and dig deeper, you can begin to monetize the value of your solution. In essence, I’m asking you to begin pricing the problem – not the solution.
Let me share a real life example to illustrate my point. At Imagine, we solve sales problems. We could easily be compared to a variety of training “solutions,” but a) what we do isn’t really training, and b) that would badly commoditize us.
Instead, we help our prospects and clients first understand their problem and understand the cost of the problem. In our business, like many of yours, we face a challenge that the difference between our approach and our competitors is not huge. We’re all saying many of the same things. These little differences, however, are huge when in comes to the results companies can enjoy.
So, to gain the price advantage that our results create, we must enable our clients to uncover just what the value difference is. That’s precisely what “pricing problems” and monetizing value does. Here’s how we do it:
Let’s say that your sales team produces the following:
- They average 40 proposals
- They average a 40% close rate
- So they’re closing 16 new opportunities on average
- The average sale was $30,000
- Average gross margin of 22%
This means that each salesperson is producing (on average) $480,000 in sales and $105,000 in gross profit.
The Little Difference
Let’s say that as a result of working with us you improve your results by just 5%. Now keep in mind, that a 5% difference is virtually imperceptible. But, this virtually imperceptible difference can lead to extraordinarily valuable results this 5% difference means:
- Instead of 40 proposals you average 42
- Instead of a a 40% close rate, you average 42%
- Instead of average $30,000 per sale, you average $31,500
- Your margins would go from 22% to 26%
- Total sales would be $555,000, up from $480,000
- Most powerfully, your gross profit you go from $105,000 to more than $142,000 – a 35% difference.
Now, if you maintained this performance improvement, you’d grow faster. So instead of growing at say 10% per year you’d grow 12.5% per year. That difference over a 10 year period of time would result in an increased gross profit of just under $1 million.
I ask you, what would that be worth?
With the problem fully understood and, more importantly, the cost of the problem clear, the proper context has been created to enable you to effectively discuss the appropriate solution (yours) and to have the solution properly valued.
My be is that your business and your approach create such value for your customers/clients. However, if you don’t build out your business case to enable customers to understand the value of your difference, it can’t be valued and your profits will suffer as a result.
There’s an interesting post on my friend Gini Dietrich’s blog, SPIN Sucks. I found it and one of the comments both interesting and insightful. It actually created a bit of a visceral response from me (you can read my comment here).
Writing about The New York Times’ plans to start charging for its digital subscriptions through Kindle (which it already does and plans on raising), and the iPad (which, apparently, it’s going to start to do); guest blogger, Nick Harrison, and a commenter put forth an idea that is commonly accepted, and inherently wrong.
The idea is that you cannot charge for information on the web. Mr. Harrison, says, “My first reaction at the time was, if you are already losing subscriptions and advertising dollars, is actually charging for content the best strategy?” My answer – Yes!
The commenter added: “This is an example of a company not understanding that they have to change with the times. The Internet has made nearly everything free, and people aren’t willing to go back from that.” Outside of the fact that this isn’t true (The Wall Street Journal has been charging for content online since it started providing it), it doesn’t address the ability of a company to create a new experience worth charging for.
The reason I share this is because these thoughts are symptomatic of what is silently killing really good businesses – the idea that you cannot charge for what others are doing for free, or for less than you.
One of the first business lessons I learned (ironically from running a lemonade stand for a couple of days) was that if you charge less than it costs you to produce your products and services, you cannot make it up in volume. If raising your prices means selling less volume, than so be it, because if you’re not making money – WHO CARES?!
The fundamental job of marketing is to create enough value so that people would be willing to pay more for something. If all The New York Times does is charge for the same information and experience that other newspapers are giving away for free, then the author is right – it’s a bad strategy.
However, if you’ve had the opportunity to sample The New York Times’ iPad application (which I have) it will take you less than a second to realize that this is not the same experience as others. Would I pay for it? Yes I would.
Would everybody who reads The New York Times online pay for it? Of course not, but who cares! Would everybody pay for a phone that costs $600? Hell no, but Apple made more than $1.5 billion doing it!
As I’ve been writing a lot lately, the newspaper or the information in the newspaper is the commodity. The Internet has placed the value of that commodity (what I call the left side value) at zero. The Intelligence or Enterprise Value (what I call the right side value), however, is unlimited.
The New York Times was one of the first partners to jump in with Apple to develop meaningful applications for the new iPad, so much so that they were one of the few content providers highlighted in Steve Jobs’ announcement of the device. I give The Times a tremendous amount of credit for their willingness to innovate and experiment. I give them even more credit for asking people to pay for it.
Agree or disagree with The New York Times editorial slant, you cannot deny that they provide superior content and their new app provides a superior experience. My only fear is that they won’t have the guts to stick with the plan. Sure, maybe they’ll be smaller as a result, but I’d rather be smaller and profitable than larger and broke!
What’s the lesson for fast growth businesses? Stop focusing on The Left Side (commodity) Value of your business and start building The Right Side Value. If you don’t reinvent your business, some upstart in a garage will.
What do you think of The New York Times Strategy?
For more than twenty years I’ve talked about the effects of commoditization and working with small and mid-market companies to grow revenues and margins despite commoditization.
Last month, I wrote about the two sales that take place in any non-commoditized sale:
- The Account Sale – where you establish the value that you and your company bring
- The Transaction Sale – where the focus is on the sale of the commodity
As we’ve been rolling these ideas out to our clients and to their salespeople, we see a common area of resistance in the belief that, regardless of what you do, customers are going to increase the pressure they place on your price.
In fairness to that argument, I completely agree. No matter what you do, pricing pressure is going to increase. The question is where do you want that pressure – on your core product or service, (the commodity) which has, by definition, less margin or on the account value you bring, which is where you margin premium lies?
When your value proposition is effectively focused on your account value, it serves as a moat protecting the margins of your commodity. In my experience, if a small or mid-market company fails to build that moat, trouble lies ahead.
Over the last six months, I’ve been writing about price and pricing a lot more. It’s been my intent to help you identify ways that you can not only protect your price (and by extension your margins) but enhance them as well.
To further support that ideal, we’ve just finished our latest training video Moving Beyond Price. This 30-minute video will introduce you to the critical ideas, philosophies, and actions that successful companies use to consistently and sustainably earn higher margins. We’re going to be making available to the public soon for the (low, low ) price of $24.95.
However, before we do that, I’d like to do two things. First, I’d like to thank the most loyal of my readers, and second, I’d like to get some feedback to make the video better. To that end, the first 15 people who leave a comment sharing why they want to move beyond price or how they’ve been able to move beyond price will get a free copy of the video. All I ask is that you provide your feedback after watching.
Here’s an excerpt of the video: