In today’s highly competitive environment, customers are more discerning and harder to satisfy. If you do not provide a value proposition that is notably superior to the competition, you will end up competing solely on price. This idea is not revolutionary. Creating “better” products has endured as a marketing cornerstone for decades. What continues to challenge sales and marketing organizations is the need to create and bring to market different value propositions for different market segments. While Henry Ford preached that you could have a Model T in any color, as long as it was black, his competition saw the flaw in his logic and began the era of differentiated marketing that thrives today. Differentiated marketing requires developing and marketing tailored offerings to specific customer segments. Successful differentiation creates a very profitable business; in contrast, flawed segmentation can cannibalize profits and destroy customer satisfaction. A major process equipment manufacturer recently faced this challenge. They experienced heavy competition in one of their traditional product groups. The product development group had developed a new design that offered an exclusive set of benefits at a lower price than its traditional product. The question for the sales and marketing organization was, “Who do we target for each product?” A mistake in targeting would result in cannibalized sales for the traditional product and potentially unsatisfied customers who buy the lower cost alternative, but expected the premium priced product’s performance. The process manufacturer needed a strategy to evaluate its markets that would identify optimal customer segments for each product. In order to develop this strategy and maximize customer value, they -contacted Steve Bassill, president of QDI Strategies. QDI Strategies is a marketing consulting firm accomplished in helping companies create and capture value in the marketplace. QDI has based its strategic work with clients on the premise that each customer segment requires a distinct value proposition. Understanding and Capturing Value A Case Study in Value Management QDI Strategies, Inc. Highly successful marketers can: • Define market segments that provide a competitive advantage • Develop value propositions that are unique to each segment • Convey the right value proposition to the right customer segment QDI’s Value Management WorkbookTM Software guides companies through a comparison of competitive value propositions and channel strategies to project market shares for specific customer segments. Marketers Need Greater Precision The fact that “as much as 80% of marketing expenditures on lead generation and sales are wasted because these efforts are ignored by sales*” is just one sign that too many marketing programs end up as shot-gun approaches instead of targeted rifle shots. In response to this problem, QDI has spent the last decade developing tools to assist clients in creating segment strategies that offer differentiated value to defined customer segments. The end result is higher market shares and profits to the marketer. Based on this work, QDI has developed the QDI Value Management WorkbookTM, interactive software that guides companies through a comparison of competitive value propositions and channel strategies. * Source: Research by Aberdeen Group, Palo Alto, CA A Case Study in Value Management Page 2 • Define the elements that comprise the value proposition a customer -perceives • Rate the importance of each of these elements to the customer • Evaluate how they believe customers perceive their offer and their competitors on each of these value elements • Determine the market presence each competitor attains in each defined market segment – geographic presence, segment presence and sales presence • Model the market share each competitor would have based on their projected value and market presence scores QDI’S Value Management WorkbookTM Empowers a Marketing Team to: In a half-day workshop, this sales and marketing team learned how to use the software and completed an evaluation of its existing product in one segment across all five regions. The level of detailed insight, illustrated in the worksheet below, generated the groundwork necessary to evaluate the value of the new offering to each customer segment in each region. The Detailed Market Share Evaluator exercise, which is the ultimate output from the workbook, shows our client’s team projected a market share in its major sales region of 19.9%. The team felt convinced their work was valid because their modeled share of 19.9% was almost identical to the 20% share their market research had measured. Most importantly, the existing product had a close rate of only 28%, versus competitors who had close rates from 33% to 35%. While our client had the highest market share – a result of long-term industry leadership – the share was more a function of the highest market presence in the industry (71%) than their 28% close rate. These findings reinforced the need to introduce a new product that would successfully attack portions of this market that did not highly value the existing offering. Steve Bassill guided this process equipment manufacturer through the application of QDI’s Value Management WorkbookTM, comparing the value and market presence of their traditional product versus their competitors. The focus was to understand the reasons customers valued the existing product and /or the competitive offerings. Mr. Bassill worked with a client team comprised of sales and marketing managers from five global regions. Because the team realized that customer segments in each region valued products differently, each regional team evaluated the key segments for their own regions. Numbers you should enter Numbers that are calculated Competitive Close Rate Presence From Market Presence Modeler Model Share Believed Share Enter your best estimates Difference From believed share Total Market Sales = Total Market (from Addressed Market 2.2) X Close Rate X Presence Company A 28% 71% 19.9% 20.0% -0.1% $11,931,879.48 Company B 36% 54% 19.7% 19.7% $11,818,080.36 Company C 35% 54% 19.0% 19.0% $11,370,954.13 Company D 33% 36% 11.9% 11.9% $7,146,270.90 Company E 33% 26% 8.6% 8.6% $5,170,813.42 Company F 36% 59% 20.9% 20.9% $12,562,001.72 2.9 Detailed Market Share Evaluator Total $ Sales Team Workshop Company A’s market share is the product of a value proposition that generated a 28% competitive close rate and 71% market presence. A successful attack requires close rates above the highest competitor in the targeted industry and market segment . After this exercise, sales and marketing management used the data from each region to roll up the projected revenue across the key market segment to arrive at a projection of revenue and market share. These exercises helped the team determine where to target both products and what channel strategies to employ to reach these customers. Page 3 Here we show key steps from the workbook to help readers visualize the detailed analysis the team created. The following schematic shows the workbook structure. Market Share (and sales) estimates – which are the output of the workbook, are based on defining a company’s Close Rate and Market Presence to the market it competes in. The Addressed Market is a definition of the market segment that the company competes in. The Close Rate is simply a measure of how often a company wins a sale versus its competitors. Close rate is a function of Perceived Value and Perceived Value is driven by the customers’ perception of the benefits and costs they receive from each company trying to win his business. Thus, once a team defines a specific market segment, or an Addressed Market to evaluate, the team needs to determine the Value the customer perceives from each potential supplier. This perceived value is a function of the “BENEFITS” and “COSTS” from each supplier. Next, the marketing team defined the individual criteria that make up each benefit category. For example, the product /service category was comprised of benefits such as “saves installation cost, space savings, sealess design,” etc. The team then weighted each of these criteria in terms of their importance to the customer. Thus, the criteria, “saves installation cost,” received a weight of 15 points out of the total 100 First, the team determined which benefit category is most important to the defined customer segment. The team allocated 100 points across the four benefit categories, assigning the highest number of points to the most important benefit category. For example, since the “product benefit” category was designated the most important decision factor for customers in this segment, the team allocated 45 points to this factor. points in the product benefit category. The marketing team completed this preparation work prior to the workshop. During workshop the team worked with the regional managers to determine the appropriate weights for the segment and performance scores for each company, companies A through F. Company A was the client and B through F the competition. The Workbook The Detailed Buyer Benefits Assessment on the next page is the worksheet that our process client team completed (criteria have been changed to protect our client’s data). They have defined the benefit criteria that they think are important to the customer. They have estimated the importance of each benefit, and then they have scored themselves versus their competitors based on what their team believed is the performance of each company. The Detailed Buyer Benefits Assessment The Buyer Benefits worksheets identifies four categories of benefits in the table below: Market Share Evaluator Market Presence Modeler Addressed Market Definition Benefits Costs Perceived Value Close Rate x x Product /Service Functionality, fit (ease of use and adaptation), form (ease of replacing the present product, service or function) and Performance (benefits of using this product versus Service Ease of doing business together – service quality. Service empathy – the customer’s perception that someone cares Relationships Personal linkages to the supplier Brand The fit of your brand image with the customer’s perception of risk and product suitability, i.e. are you a reliable supplier, and a leader in this product class? Buyer Benefit Assessment Worksheet A Case Study in Value Management Page 4 Category Importance Description Benefit Criteria Weight Benefits Relative Importance of Category (100 Point Allocation) Benefit Item Description Importance Scores Company A Company B Company C Company D Company E Company F Product Benefits Category 45.0% In the expanded column below, describe each criterion in as much detail as possible 100 Point allocation of importance scores Saves Installation Cost Freight benefit -envelope dimensions 15% 9 6 7 6 6 6 Saves Space 10% 9 4 4 4 4 4 Sealess Design 10% 9 7 7 7 7 7 High MOP/MAWP 15% 6 7 9 7 6 7 Simplify Piping Design 5% 9 6 7 6 6 6 Accelerate Project Completion 20% 5 8 8 8 8 8 Noise Reduction 10% 6 7 7 7 7 7 Ease of Repair 15% 6.5 6 6 6 6 6 Product Benefits Category Totals Weighted Scores 1 3.18375 2.9475 3.1725 2.9475 2.88 2.9475 Service Benefits Category 30.0% In the expanded column below, describe each criterion in as much detail as possible 5 Year Warranty 5% 9 4 4 4 4 4 Modularity 10% 9 5 7 5 5 5 Timely Delivery /Inventory 15% 7 6 6 5 6 5 Customer Service /Timely Response -Pre Sale 15% 5 7 8 6 5 5 Field Engineering Support 15% 8 6 6 6 6 6 Local Distribution 15% 8 5 5 5 5 5 Process Design Assistance 10% 6 7 8 7 6 6 Web Site Sizing and Tecnhical Support 15% 7 7 7 7 7 7 Service Benefits Category Totals Weighted Scores 1 2.16 1.815 1.95 1.725 1.695 1.65 Relationship Benefits 12.5% In the expanded column below, describe each criterion in as much detail as possible Existing Installed Base 20% 9 5 5 5 5 5 Technical Support Relationship 15% 6 8 8 7 6 5 Experienced Field Sales Reps 5% 8 6 6 6 6 6 Sales /Channel Network 15% 8 6 7 6 6 6 Customer Alliances 10% 7 7 7 7 7 7 Valve OEM Relationship 15% 6 8 8 8 6 8 Engineering Contractor Relationship 10% 5 8 8 8 7 6 Direct Sales Support Relationship 10% 5 8 8 7 6 6 Relationships Benefits Category Totals Weighted Scores 1 0.8625 0.8625 0.88125 0.83125 0.75 0.75625 Brand Benefits 12.5% In the expanded column below, describe each criterion in as much detail as possible Brand Equity 25% 9 8 8 6 6 5 Technological Leadership 20% 7 6 7 6 6 7 Premium Price 15% 8 6 7 6 6 6 Brand Recognition /Leadership 20% 9 7.5 7.5 6 6 7.5 Creadibility /Reliability 20% 8.5 6.8 7 6 6 6 Brand Benefits Category Totals Weighted Scores 1 1.04375 0.87 0.91875 0.75 0.75 0.78125 Weighted Scores 100.0% Sum of weight times score for all items 7.25 6.495 6.9225 6.25375 6.075 6.135 2.3 Detailed Buyer Benefits Assessment Data you should enter Numbers that are calculated Performance Participants typically fill out the description column. Our team did not do so because members felt the criteria were self-explanatory (to them). Company A has the highest benefit score at 7.25, while company E has the lowest score at 6.075 (the higher the number the better on a 9 point scale). Marketing defined the individual criteria that make up each benefit category. The sales and marketing team came to agreement on these benefit criteria weights during the workshop. The next step in calculating value is to calculate the total cost the customer incurs, as illustrated in the worksheet below. This required the same type of definition and weighting exercise to prepare the worksheet for the team’s use. Category Importance Description Cost Items Importance of Category (100 Point Allocation) Cost Item Description Cost Criteria Weight Company A Company B Company C Company D Company E Company F Price Competitiveness 50.0% Entry From Price Competitiveness Sheet 100 Point Allocation across each criterion Purchase Price 100% 9 6 6.7 6.3 6 5.4 Product Cost Category Totals 100% 4.5 3 3.35 3.15 3 2.7 Purchase and Adoption Costs Category 20.0% In the expanded column below, describe each criterion in as much detail as possible 100 Point Allocation across each criterion Direct buying costs 50.0% 9 5 6 5 5 5 Easy to Retrofit for Competitive Products 10.0% 8 5 5 5 5 5 Low Installation Costs 9.0% 8 5 7 6 7 6 Parts Inventory (Modularity of Parts) 3.0% 4 7 7 7 7 7 Training Costs 2.0% 5 5 5 5 5 5 Ease of Integrating into Control System 25.0% 7 6 6 6 6 6 Ordering Costs 1.0% 5 5 5 5 5 5 Purchase and Adoption Costs Category Totals 100.0% 1.608 1.062 1.198 1.08 1.098 1.08 Risk Costs Category 30.0% In the expanded column below, describe each criterion in as much detail as possible 100 Point Allocation across each criterion Product Failure 40.0% 4 6 6 6 6 6 Reliability 15.0% 8 6 7 6 6 6 Availability 15.0% 7 5 5 5 5 6 Other Costs of Failure 30.0% 4 6 6 6 6 6 100.0% 1.191 1.269 1.314 1.269 1.269 1.314 Weighted Scores: Sum of weight times score for all items should = 100 If the cell to the right is not 100, reallocate. 100.0% Sum of weight times score for all items 7.299 5.331 5.862 5.499 5.367 5.094 (From Exercise 2.5 Buyer Cost) Weighted Scores: Sum of weight times score for all items should equal 100; if the cell to the right is not 100, reallocate. Weighted Scores: Sum of weight times score for all items should equal 100; if the cell to the right is not 100, reallocate. Weighted Scores: Sum of weight times score for all items should equal 100; if the cell to the right is not 100, reallocate. Data you should enter Numbers that are calculated 2.5 Detailed Buyer Total Cost Assessment Performance High performance scores on costs are not good Page 5 Buyer Cost Assessment Worksheet Notice Company A has the highest Total Cost Score of 7.299. Like the real world, high costs are bad. This implies that our client’s offer is perceived as the most expensive offer in this market segment. After scoring each company’s performance in terms of benefits and cost, we can easily translate these scores into Close Rate Scores. We compare the perceived value scores for each competitor (Value = Benefits /Costs) to calculate Close Rate Scores. The chart on the next page shows the perceived value scores and Close Rates for each competitor. Also, the chart models the maximum market share potential for each competitor based on the market size of $60 Million and presence to 100% of the market opportunity. Competitive price comparisons were created in a separate exercise and then imported into this step. Close Rate Worksheet A Case Study in Value Management Numbers you should enter Potential Market Based on Close Rate Numbers that are calculated Total Market Listed Below (From Addressed Market Worksheet 2.2) $60,000,000.00 Perceived Value Score Manually enter scores from Exercise 2.7 if Evaluating Price Sensitivity (B) Relative Perceived Value C = A /average value score Close Rate D = C /# competitors for a sale Potential Market Based on Close Rate = Total Market X Close Rate Company A 0.99 0.868 29% $17,359,915.69 Company B 1.22 1.065 35% $21,293,322.99 Company C 1.18 1.032 34% $20,639,069.77 Company D 1.14 0.994 33% $19,876,035.56 Company E 1.13 0.989 33% $19,782,795.24 Company F 1.20 1.052 35% $21,048,860.76 2.7 Detailed Close Rate These calculations use the data from the first cost estimates & the Perceived Value Score The table shows Company A, which had the highest benefit and highest cost score, realized a Close Rate of 29%, whereas company E, which had the lowest benefit score but an average cost score, realized a 32% Close Rate. The Final Steps Numbers you should enter Numbers that are calculated Competitor Geographic Presence Account Presence Sales Presence Calculated Presence Or Enter Your Estimate of Presence for Each Competitor Adjusted Presence Divides the Calculated Presence by the Theoretical Presence Estimated Presence Based on Introductory Exercise Difference Between Calculated Presence (F) and Estimated Presence (G) Company A 85.0% 90.0% 90.0% 68.9% 71% 90% 19% Company B 65.0% 90.0% 90.0% 52.7% 54% 42% -12% Company C 65.0% 90.0% 90.0% 52.7% 54% 34% -20% Company D 55.0% 70.0% 90.0% 34.7% 36% 10% -26% Company E 40.0% 70.0% 90.0% 25.2% 26% 18% -8% Company F 90.0% 70.0% 90.0% 56.7% 59% 10% -49% 2.8 Detailed Market Presence Modeler Numbers you should enter Numbers that are calculated Competitive Close Rate Presence From Market Presence Modeler Model Share Believed Share Enter your best estimates Difference From believed share Total Market Sales = Total Market (from Addressed Market 2.2) X Close Rate X Presence Company A 28% 71% 19.9% 20.0% -0.1% $11,931,879.48 Company B 36% 54% 19.7% 19.7% $11,818,080.36 Company C 35% 54% 19.0% 19.0% $11,370,954.13 Company D 33% 36% 11.9% 11.9% $7,146,270.90 Company E 33% 26% 8.6% 8.6% $5,170,813.42 Company F 36% 59% 20.9% 20.9% $12,562,001.72 2.9 Detailed Market Share Evaluator Total $ Sales The final step in the workbook led the team through an evaluation of market presence. The table below displays the market presence scores for each competitor. As shown below, our client, Company A, has a market presence of about 71%. The presence scores are the product of estimated geographic presence, account presence and presence to the sale. Once Market Presence is calculated, the workbook models the projected market shares and revenues for each competitor. Thus, in this example shown below, our client, Company A, could expect 19.9% market share and sales of $11.9 million. Company E, despite a higher Close Rate, will realize a market share of 8.6% because its market presence is only 26%. Page 6 Each regional sales and marketing team developed estimates for Geographic, Account and Sales Presence for their regions. Model Share virtually equaling Believed Share convinced team of model validity. QDI’s Value Management WorkbookTM provided the structure our client needed to understand his position in the market and the potential impact of changes in his value proposition and go-to-market strategy. These insights enabled our client to make the right decisions that would maximize his new product sales while minimizing the cannibalization of his existing products. For more information about QDI’s Value Management WorkbookTM and how to conduct a segment strategy-planning workshop, contact QDI’s President, Steve Bassill at 847-566-2020 ext. 229. Phone: 847-566-2020 ext. 229 Email: sbassill@qdistrategies.com QDI Strategies, Inc. 1580 S. Milwaukee Avenue Suite 620 Libertyville, IL 60048 QDI Strategies, Inc. Page 7 About QDI Strategies, Inc. QDI Strategies is a marketing consulting firm dedicated to helping clients make critical strategic decisions. For over a decade, our work has focused on two significant stages for our clients’ business: • The creation stage of products, markets, and channels, and • The growth/reinvention stage when faced with maturing markets. We leverage our experience to help you navigate through new avenues of change and to help your company create its own marketing breakthroughs. For more information, case studies, white papers, QDI’s tools and theories, visit our website at www.qdistrategies.com.