DifferentiatedValue.doc February 27, 2004
Differentiated Value—Another Look
The equation as given is:
DV x q = $.
That is, Differentiated Value times quantity produces maximum dollars for a business.
There is no doubt that if a business can not differentiate itself from its competition, it is in trouble.
The other day, I was in a client’s office—they were pitching promotional products to a security company, let’s call it Acme Security. Well, Acme is in competition with others, primarily Jones Knight and Beta Security.
Each of these companies offers virtually the same product—a basic installation for a homeowner at $800 plus a $20 per month monitoring charge for 24/7 coverage. How can they differentiate themselves?
Well, Jones Knight tells their clients that they should buy from them because they are locally owned and that they can get the owner on the phone at any time.
The other two pitch the fact that they are not locally owned; they are publicly listed and they have strong financials and will be around in the long term, or so they say.
So how does a homeowner really choose? The arguments either way are pretty weak…
My client decided to pitch his client (Acme Security) on a new approach—each of Acme’s sales reps would give every new client two premium incentives to sign up—a) a digital camera and b) a pre-printed pad. Their pitch now is: “We care about you. We want you to take a digital inventory of everything you own and write down everything you buy (at least the major stuff) so in the event of a loss (Heaven forbid), you have a record.”
Now this is differentiation.
I think there is, however, another dimension to the equation and maybe it should be written like this:
DV x Q = $
or
DV x (M x v) = $.
By capitalizing ‘Q’, I am implying that there are other atomic sized ‘particles’ within this variable—these are M (for Mass) and v (for velocity).
In other words, if you want to boost sales, you need to have not only Differentiated Value but also hefty contract proposals (higher prices or simply bidding on more massive contracts) and then you need to be able to move more of them through the pipeline faster.
Higher prices based on significant product differentiation and bidding on larger contracts or jobs and moving them speedily through the pipeline is a triple whammy for your business; it implies faster revenue growth, higher margins and greater profitability.
For many of my clients, it takes just as much work to prepare a bid for a $10,000 order as for a $100,000 order, so why not pitch more $100,000 orders.
I know that some of my clients seem to take forever to get a proposal out the door—I am continually forcing them to re-engineer their internal processes to get the proposal writing stage down to a few days or even a few hours. If you can do all four (faster proposals, higher prices, more massive bids, greater differentiation), you can really make a difference in year end results.
Now let’s go back to the Acme Security Company example. How can we use this equation to predict future revenues and future GP (Gross Profit)?
Well, say that the average sale is $800 of equipment and $20 of monitoring a month for five years—this produces ‘revenues’ of $2,000 from an average customer. This is our Mass variable. Now what if we can change the client profile by changing the way we differentiate ourselves resulting in the addition of more commercial establishments and more upscale homes. Now let’s say that our average Mass is $1,200 worth of equipment and $30 worth of monthly monitoring for an average of six years—now the Mass variable equals $3,360.
Let’s further assume that by changing our DV, we increase the probability that we will make a sale from one in three (i.e., we are just one of three nearly identical security companies) to a success rate of 0.400, which would be a pretty good long term success rate for any sales organization.
The last assumption we will make is that Acme has invested time and money in equipping their sales agents with portable PCs wirelessly connected to the network with a handheld printer so that they are be able to make up quotes on the spot and get them signed by the client instead of having to take down all the details, go back to the office to prepare the Agreement and then go back to the client’s home or place of business to ask for the deal. So now Acme reps are capable of doing 15 presentations a week instead of 10.
So for Acme at time = 1,
Revenues per rep = .333 x $2,000 x 10 = $6,660 per week.
But at time = 2,
Revenues per rep = .400 x $3,360 x 15 = $20,160 per week.
You don’t think this type of re-engineered company would really see such huge changes? Think again. Many companies, especially US-based ones, are making just these types of changes—that is why they tend to be the fastest growing and most profitable companies on the Planet.
Note that the changes are coming from three sources—one is technology, two is differentiating yourself from your competition and the other is from re-engineering the sales process. Too many managers think that just asking employees to work harder will produce these types of results—all that will do is produce higher staff turnover.
I should elaborate a bit on how DV also affects profitability and GP. For many industries, the way they calculate their prices looks something like this:
Price = Cost/(1 – GPM).
So let’s say that Acme buys its remote equipment for $460 and they want to make a Gross Profit Margin (GPM) of 42.5%, then they will retail the equipment for
$460/(1 - .425) or $800.
Now let’s assume that because of the greater differentiation they obtain with their branded promotional items (digital cameras (or disposables if the client prefers) and pre-printed pads), this allows them to increase their GPM on equipment to 47.5%.
We’ll assume the GPM on monitoring is 50% and that it doesn’t change in the before and after case.
So the Gross Profit is determined this way:
GP = Price – Cost = Price – Price(1 – GPM) = Price x GPM.
GP(t1) = .333 x ($800 x .425 + $1,200 x .5) x 10 = $3,130.20 per rep per week.
GP(t2) = .400 x ($1,200 x .475 + $2,160 x .5) x 15 = $9,900 per rep per week.
So in this case, Revenues per rep have increased by a factor of 3.02 and Gross Profit per rep has gone up by a slightly higher factor of 3.16; this is because Gross Profit Margins have increased somewhat because of greater service differentiation.
People I coach in business, in government and in the not-for-profit sector are often asking me to help them find the ‘magic button’, you know the button you press and the spigot just gushes money. There is no magic money spigot out there.
Fundraising for not-for-profits is tough; getting sales for your business is a slog; raising taxes for government operations is unpopular. Even with government services, maybe particularly so, people want to feel that they are getting value for their money.
In any case, it seems you can never do enough: to differentiate yourself from the competition, to give the client enough reasons to buy from you or to contribute to your good cause or to not grumble about your services. First, fix your value proposition; after that, it’s just hard work.
Dr. Bruce M. Firestone, Ottawa, Canada. Feb. 2004.