As An Organization’s Value Proposition Changes, So Will Its Buyers
Originally published as part of, “The Day Before Digital Transformation” by Phil Perkins and Cheryl Smith
As an organization’s value proposition changes, it is likely the target buyer also will change. The more digitized the solution, the more likely the sale will move from selling to a single buyer within your current customer base, to a complex sale involving many stakeholders that have little to no experience with your organization’s brand. You may even create an innovative new solution that solves multiple problems for your existing customers, but you find out that none of your existing buyer relationships are designed to purchase that solution.
As an example, consider a shelving manufacturer for grocers that builds a smart shelving solution focused on reducing the number of out-of-stock events. The solution has a demonstrated impact on customer satisfaction while simultaneously reducing food waste by 8%. After unsuccessfully trying to leverage existing sales representatives to sell the product to existing buyers, the company leaders realized two things:
- Their existing buyers were measured on the cost per shelving unit. Those buyers had no incentive to improve customer satisfaction or reduce food waste. Customer satisfaction was owned by marketing, and food waste was owned by the department manager. For the shelving manufacturer to sell the new solution, the company would need to sell the product to multiple stakeholders across the organization.
- The existing sales teams were excellent at selling low cost shelving units to the warehouse manager, but they were ill equipped to sell a digital solution that required cross-department support that would often include CEO approval. What used to be a simple transactional sale with one buyer was now a complex, strategic sale with multiple stakeholders. The sales force was not equipped to sell the more advanced solution when they historically won deals selling as the low-cost provider.
Digital leaders must re-think three major aspects of their go-to-market approach: buyer profile, messaging, pricing strategy, and the digital cost of goods sold.
Buyer profile
As your digital strategy emerges, new components and potential benefits of your digitized offerings need to be identified. Accurate and appropriate messaging of the new components and benefits is critical to your digital success. However, these are standard marketing activities that take place in organizations today. The major change with digitized products and services is the language that is used and how the messaging is integral to the pricing strategy. We discuss that in the next section
But as the shelving example pointed out, once you identify the full list of components and potential benefits of your digitized offering, the leadership team, along with the marketing and sales teams, must think through who all the potential customers might be. It is particularly crucial to identify new buyers or business units from existing customer organizations to ensure that your sales teams are appropriately trained to handle questions and issues that will arise.
Another consideration when thinking about new customers is that competitors potentially can become customers when you take an exceptionally well-done internal digital capability and offer it outside. Most executives cannot see past the historical walls of competition which limits their opportunities. But considering Apple’s use of Microsoft (MSFT) cloud data centers for a substantial percentage of the storage of their iPhone/iPad/iMac users’ iCloud content. Microsoft had already invested in, and rolled out, a global infrastructure, which cost billions of dollars. Apple was able to quickly launch and offer that service, at a substantially lower investment cost, along with the risk hedge of not having to spend the capital and time ‘to build their own cloud service, even though Apple could have easily spent the cash to do it.
What if Domino’s offered its exceptional digital support software to competitors? Would it make more money from offering the software as a subscription or usage-backed service or from making and delivering pizzas?
In Chapter 3 we gave a smart battery sensor example as our case study when describing our digital strategy for Connected Product or Service Transformation. If a battery company could know the amount of power left in a battery, might this data prove to be of more value across original equipment manufacturers (OEMs), insurance providers, and other partners than their battery sales? Because their current investors valued the company based on the number of batteries sold, the company’s first impulse was to limit the incorporation of the connected device to their own batteries, rather than embracing a competitor as a new potential customer and partner in the new business model.
Messaging and pricing strategy
Maximizing profitability requires tight coupling between the messaging of the value proposition and the pricing structure. The messaging of price and value cannot happen separately. By communicating the unique value of the solution, you establish the projected benefits to customers before a negotiation about cost. You also differentiate your digitized offering price from the buyer’s historic price point reference charts for what may have initially been considered a similar solution.
There are many excellent references on maximizing pricing models, so we are going to focus only on a few key items directly related to digital.
It is important that the pricing strategy maximizes the entire customer ecosystem. Many organizations generate 80% of their revenue from 20% of their customers today.[i] Digital solutions have an advantage over non-digital solutions because digital solutions can take advantage of simultaneously maximizing the profit of the critical 20% of customers while using the remaining 80% of customers to support the business in other ways.
Many digital platforms offer the first tier for free to get user adoption. Tiered pricing models allow the user to pay more as they increase the level of service they receive from your digital products or services. Many organizations want to maximize the pricing of each individual tier, but that could be to the detriment of the overall strategy.
For example, adding advertising to a free tier can seem like free money, but it can have a significant negative effect to your overall profitability. If you have 100 new users in the free tier and 5% of those new users in the free tier eventually become premium users at $5/month for 24 months, then every group of 100 new users in the freemium tier has a lifetime value of $600. If you attempt to advertise to the new 100 users in the freemium tier, you will receive some short-term revenue, but you also might increase the rate users abandon the platform. If advertising decreases the conversion rate of free users to premium users to 4%, then the lifetime value of that 100 customer block decreases to $480. In this scenario, advertising not only decreased the value of the premium users that are critical to the business model, but it may also have sent those premium users to a competitor.
Pricing the middle-level tiers is equally as important. Lower pricing in middle tiers can support monetization and prevent competitors from entering the market. If the lower tiers are perceived to be expensive (because users may not yet fully understand the value), it can open the door for a lower-priced competitor to come and steal that market. As competitors make money on that lower tier, they gain momentum that might allow them to come and take your premium customers.
Pricing for the premium tiers must balance maximizing short-term revenue and minimizing customer churn rate. If a $5/month price point will keep the average customer paying for 24 months ($120-lifetime value), and a $10/month price point will keep the average user paying for six months ($ 60-lifetime value), then the lower price point will create longer-term and more stable profitability, while giving your organization time to create more value that supports the superior pricing point.
As a corollary to understanding all aspects of pricing strategy throughout the entire customer life cycle, an organization must have governance that protects it from sales reps that are adept at getting price concessions approved internally. These sales reps have been greatly rewarded in the past. Organizations that do not proactively manage price concessions will find they have set precedents with customers that are impossible to roll back.
Buyer procurement offices are equipped with competitors’ pricing and history of account negotiations, and their only focus is commoditizing your brand to get price concessions. If your organization’s approach to price negotiation is not equally sophisticated with a focus on maximizing both profitability and revenue, then you will leave money on the table. Procurement teams are experts at gaming your pricing policies. Do not send an untrained sales team to play against a professional procurement team.
Non-profits and government agencies need to understand digital pricing approaches when operating on the purchasing side of a digital product or service because the traditional low bid procurement strategy very often will not get your organization the best, most cost-effective outcome any longer.
Digital cost of goods sold (COGS)
Understanding and accounting for the cost of goods sold (COGS) is different with digital.
Today, in overly simplified terms, the primary economic goal of selling a physical product or service is to make sure that the total cash you are receiving for delivery of your product or service is in excess of the total cost to produce, deliver, and possibly maintain the physical product or service. You pay for the manufacturing or infrastructure capacity, including labor, whether you sell any product or service or not, and the customer will pay the full price of the product regardless of whether they actually use it or not.
When selling a digital product, the problem is a little different. The need is to make sure to maximize the amount of cash received in excess of the cost to keep the system up and running. The costs of a well-designed digital infrastructure will be more variable than trying to scale up or down a fixed physical manufacturing capability. They will scale up and down as usage of the system scales up and down.
In addition, many executives do not understand the typical fees charged by the digital ecosystems for mobile and digital partners. Linking your digital solution into an ecosystem of mobile and digital partners can accelerate time to market, but these costs can add up at scale. For example, because of the mobile duopoly enjoyed by Apple iOS and Google Android when this book was written, they take 30% of the revenue of all mobile products. That percentage does not change with volume. If the value of your solution is delivered inside one of their apps, you are going to pay that commission, regardless of how many units you sell.
If the value of your solution is delivered outside one of their apps, you will not need to pay this fee, but you will most likely pay another partner a fee. For example, if you are using an eCommerce and/or payment platform, you will pay a percentage on every transaction and it can vary significantly across partners.
[i] “80-20 Rule,” Carla Tardi, reviewed by Marguerita Cheng, Investopedia, updated May 25, 2020.