Written by Kevin Jones, Principal – Ignite Selling
We have said it before and we will say it again. Every sales person has something to sell. And every product and service has a price tag. As we think about quantifying value, one thing we need to think about is the price. We will refer to the price as Concrete Costs. The Concrete Cost represents the fixed, out-of-pocket expense to purchase the product or service. But the Concrete Cost, is only one component of Cost. Other factors, which we categorize under the heading of Abstract Costs, also must be accounted for.
Concrete and Abstract Numbers
A collector’s item can cost $75,000. That is the Concrete Cost, or money paid out of pocket. If the owner knows they can resell it for a total of $125,000, then they would realize a Concrete Benefit (a hard dollar amount). In this case – with only these two values, Concrete Cost and Concrete Benefit – the final Value in our equation would be a positive $50,000. Easy math, right? Unfortunately, it is seldom that simple or easy.
While certain elements of any Value Equation are going to be simple and easy (for instance, “price” and increased insurance costs are Concrete Costs), others will be much more difficult to quantify. We call those elements which are more difficult to quantify Abstract. Abstract costs for a collector’s item can be time spent researching or the risk involved in making a bad decision. If the Value Equation is to be complete, these values must also be quantified in a meaningful way.
And the Real Cost is…
Abstract Costs are those cost elements that are difficult to measure effectively. Risk is an excellent example of an Abstract Cost. Your customers face risk whenever making purchasing decisions, the bigger the purchase, the bigger the risk. It could take the form of reputational risk. What if they buy, but things go badly? What will people say? It could be professional risk. They decide to buy, but their boss is angered because she prefers another provider. There could be the risk of business disruption, such as learning a new process, which requires training and takes time to master, or installing new equipment, which ends up having reliability problems.
Your customers ascribe worth to these Abstract Cost elements, even if they only do it informally in their heads. It’s up to you to discover what that worth is. By getting a complete understanding of what the customer sees as the Concrete and Abstract Costs, you can begin to see what you’re up against when it comes to establishing the worth of the Benefits. Creating a compelling case of change can come from two directions. You can either reduce the costs or increase the benefits. The former will likely cost you something, while the latter will cost you less or nothing but effort (and some selling skills).
And the Up Side Is…?
One challenge in selling is trying to ensure that the Value Equation ends positively. That means that a seller must work to ensure that the customer sees that Benefits of their solution outweighs the Costs. Benefits come as either Concrete or Abstract.
Formal ROI studies, established payback periods, or net present value studies are a few examples of measurements that companies use to evaluate investment decisions. If a company can complete these equations, it can also complete the Value Equations, because the same elements exist. If your value equation won’t end positively, then neither will these other evaluations.
Is this Fuzzy Math?
A portion of an effective sales strategy is developing and implementing a strategy that leads to a positive final value to the Value Equation. A step in that process is gaining a clear understanding of how the customer defines – and quantifies – the Costs of your solution. A second step is working with the customer to define and quantify the Benefits of your solution. You should notice that the word “customer” is in both statements. You could make your best guess as to the definition of Costs and Benefits. Unfortunately, our experience tells us that sales people have a tendency to overstate the Benefits their solutions bring and understate how the customer would define Costs.
In October 2000, George W. Bush coined the phrase “fuzzy math” to describe the economic analysis used by his opponent, Al Gore. It is commonly used today to describe math calculations that are debatable or questionable. Some of us may have even had customers accuse us of “fuzzy math” when proposing the value we were providing (in some cases, they might have been right). But the days of “fuzzy math” ought to go the way of the hanging chad . The single best way to get customers to accept your Value Equation is to get them to collaborate with you on the calculations. As the old sales proverb has it, if you say it, they doubt it, but if they say it, it’s true.
Naturally, all that’s required for this to happen is a simple conversation between you and your customer, right? Simple enough. Except, it’s never that simple. It is, however, unavoidable. Among the many challenges you will face is that your customer may not have answers to the questions you’re asking. If they don’t, the completeness of your Value Equation may suffer. Rendering a good decision which relies on a thinly constructed Value Equation may be shaky. As any mathematician or statistician (or long-serving CFO) will tell you, decision-making is about minimizing variables so that you understand the situation as clearly as possible.
A Real Example – Please
I took a class on pricing models while enrolled in the Executive MBA program at UNC-Chapel Hill. The professor challenged the class by claiming that there was no such thing as a commodity (defined as a product with a price that was determined by other like products), and whose primary characteristic is substitutability . Pricing was unique to the value of the product, argued the professor. Students were quick to take the bait. “Salt” yelled one student. “Water” yelled another. “Wrong and wrong,” replied the professor. “You can buy a 25 lb. bag of Morton’s table salt for $8.00; while a 9 oz. jar of Himalayan Pink Artesian salt costs $10.00.” For those keeping score at home, that is $0.02 for an ounce of Morton’s salt compared to more than $1.00 for an ounce of the Himalayan salt. What’s the difference? Well, there might be many (and we have friends who will tell us there surely are significant differences), but for our purposes, the primary difference is that someone will pay more for Himalayan than for Morton. The eye of the beholder determines its beauty. Is the value scale working in these instances? Yes, we think it obviously is.
We have a client that manufactures and sells a small piece of equipment to hospitals. This small device costs nearly 20 times what a hospital currently pays for a competitive product. It isn’t complicated, and given the scope of healthcare cost, it isn’t very expensive. In fact, most hospital purchasing departments consider this device a “commodity.” Our client’s product cost $20 per unit, whereas competitors seller a cheaper version, albeit a less effective substitute, for about $19 less per unit. This is a big disparity. The challenge for the hospital is that they buy hundreds, if not thousands of these small devices. So, the price difference can add up pretty quickly.
Let’s say that a hospital intends to purchase 1,000 units. The total outlay on the cheap substitute would be $1,000. For our client’s version, the tab is $20,000. That delta between the two represents a Concrete Cost of $19,000 (because they have to buy one or the other product as a necessary tool of their operations). The product attributes of both devices are similar, but the more expensive device has two added features, which have proven to reduce infection cases by at least 20%. This particular infection is not very common. In fact, for every 1,000 units of this device purchased and used, a hospital might have only 15 occurrences of this particular infection. The problem is that this infection is quite expensive for a hospital, with an average cost of $50,000 per case, none of which is reimbursable by governmental or insurance organizations. By investing an additional $19,000 (Concrete Cost), the hospital could potentially eliminate three cases, thereby saving at least $150,000 (Concrete Benefits) by not having to treat as many cases that acquire this infection.
In this case, there are Abstract Costs, as well. For example, there is the cost of change, which means, among other things, training staff on the new product, lost staff productivity during the training period, the hassle of migrating the old product to the new one, and potentially angering and alienating some clinicians who could be resistant to a change to the new product. Each element could potentially be measured and calculated into a financial number, thus resulting in higher costs. Our cost is well beyond the original $19,000 price tag.
In this case, there are also Abstract Benefits. Because the infection prevented by this device is very detrimental to a patients’ health, eliminating – or even just limiting – that infection not only saves the hospital money (when it doesn’t have to treat the patients), but the level of care for each patient is improved. This alone eliminates many health complications and leads to shorter hospital stays, better patient outcomes, and improved healthcare availability. Each of these elements can also be turned into a financial calculation to add to the $150,000 benefit the hospital would get by reducing this particular infection by three patients per year.
This example shows us that quantifying value is not just looking at the price tag. By looking at the Concrete Costs and the Abstract Costs it forces us to examine the issue deeper. It requires us to prepare the right questions to ask and it requires us to identify and message the benefits in order to sell the value of our product or service to the client.