Value Talks, %&#@$! Walks
Historically, market leading companies have several compelling advantages over emerging and mid-market companies that make it difficult to unseat them even when the market leader’s product is (significantly) inferior. Some of their advantages include deeper marketing budgets, a larger sales force, broader product lines, and richer ecosystems. For emerging and mid-market suppliers that compete against the market leaders, the quantification and communication of a product’s economic value to prospective and existing customers has never been more important. There are several current factors that make economic value important. First, even though the global economy has improved, budgets are still tight. Second, products can be compared and price shopped with much greater ease through the web and other sources. Third, and most important, there is a growing presence of at least one economic buyer in many corporate purchase decisions.
In this “David vs. Goliath” scenario, David has to have a superior product/service offering to offset the other advantages of the market leader. By some metrics, the offering from David needs to be several times the price/performance of Goliath’s to overcome perceived switching costs, actual switching costs, and risk. Suppose David’s product offers five times (5X) the price/performance of Goliath’s. In this instance, the customer will likely negotiate a 15%-20% discount with Goliath. So now, David’s product only has a 4X price/performance advantage. The customer might decide to wait a few months until the next upgrade from Goliath which will be built on a processor that is twice as fast. David’s advantage over Goliath has been reduced from 5X to 2.5X or 3X. This is still enough to potentially unseat Goliath. However, a product that is only 30% to 50% better than the leader’s before these price/performance discounts are applied will be insufficient to move the customer away from the leader.
By the way, in this David-Goliath analogy, David does not have to be a start-up or mid-market company competing against, e.g. a Global 1000 company. It could well be a $2 billion dollar company competing against a $30 billion company. The same dynamics between the challenger and the market leader still apply even though the scale has changed.
With a superior offering whose economic value is quantified, David has a critical weapon to overcome the buyer’s tight budget concerns and its ability to compare products. The dialog can shift from cost to value. However, the paramount benefit of the product’s quantified value is as a tool to persuade the economic buyer in the corporate setting to select the challenger. Without this tool, the challenger is severely handicapped in its quest to convince the buyer to bear the risk of buying from anyone besides the market leader. Thus, “value talks, %&#@$! walks.”
In the economic value modeling work that we do for clients, we have developed an approach for concisely comparing the value between two or more different offerings. This approach builds on traditional ROI/TCO modeling techniques that quantify total-cost-of-ownership (TCO), financial benefit, and net present value (NPV). Several value maps are shown in the figures below. Each value map includes several offerings whose annual benefit is plotted against its annual TCO. The bubble size represents the NPV. For products plotted above the diagonal line, the benefit exceeds the TCO, for products below the line, TCO exceeds benefit. Our approach has the advantage of combining several elements of value, e.g. productivity and increased revenue and measuring them against several elements of TCO, e.g. one time personnel costs and infrastructure costs. This concise depiction provides a rich illustration of total value. We will explore each example below.
Value Map 1 – Benefit Larger, TCO Larger As shown in Value Map 1, there are two challengers to Lodgenet who is the market leader for video services and high speed Internet to the hospitality industry. Lodgenet has significant market share of these services to hotels. Their offering is low price which plays well within the capital constrained hospitality industry. They can effectively “buy” business with low price in some cases. Challenger 1 is able to deliver a better service that has significant productivity benefits for hotel staff, reduced power consumption from equipment, and improved overall experience for the hotel guest. By understanding this economic value, Challenger #1 is able to position their offering as delivering much more for a slightly higher price and TCO. In a number of cases, this allowed Challenger #1 to shift the dialog from cost to benefit and translated into key accounts wins. They are making good progress in the market with their new offering.
Value Map 2 – Benefit Similar, TCO Smaller The challenger in Value Map 2 provides a software program for archiving email in medium to large corporate enterprises. In the process of modeling economic value, they realized that their offering not only uses less storage resource, but more importantly, it makes IT and end users more productive in searching for lost email and managing mail quotas. Challenger’s problem is that Symantec is a well known enterprise software brand with many different products that can be sold. So, in competition, when Symantec is bidding on a number of products, they can afford to discount one of those products against a vendor with a single point solution. The challenger is well positioned against the customer’s Present-Method-of-Operation (depicted in the lower right corner of the value map.) So, when there is no competition, they have a high win rate. However, Challenger only offers a similar or slightly better product for a 20%-30% lower TCO. They are not close to the 5X or even 4X price/performance requirement that we discussed above. This has significantly hampered them against Symantec.
Benefit larger, TCO smaller In Value Map 3, the challenger is competing primarily against two large incumbents in the media transmission service market: Akamai and Juniper. Akamai stores frequently accessed web content closer to the point of consumption. Juniper has developed optical communication products for use by communication service providers. Prior to the challenger’s market entry, the dialog about Akamai and Juniper has primarily been about lowering cost. In z2m4’s work with the challenger we were able to analyze and they were able to empirically demonstrate that their product can significantly reduce bandwidth consumption and thereby improve response times dramatically for downloading video from companies such as YouTube and Hulu. The net effect is to improve an aspect of customer satisfaction that makes the difference between retaining and losing a customer. Challenger is able to position with much higher value for much lower cost and well exceeds the 5X requirement. They are making rapid progress in the market with a new product as a result of their technology disruption.
Benefit same, TCO different In Value Map 4, there are two main incumbents and three challengers who each provide a medical diagnostic for respiratory problems. In this case, the benefits are identical between all of the offerings. However, the price of the unit, the price of disposable materials, and maintenance and administration time necessary to use the diagnostic all vary widely for each product. So, the TCO is different for each one ranging from $80,000 to $350,000 per physician office per year. In our value paradigm, we would predict that Challenger #3 will have a difficult time competing. Indeed, it has recently gone out of business. While the market is early, we believe based on our knowledge, that Challenger #1 will have a good chance of succeeding whereas Challenger #2 will need to adjust either its benefits or its TCO to compete more favorably with the incumbents.
Given the enormous advantage that market leaders have over emerging and mid-market companies, a superior product/service offering is frequently the best and sometimes the only way for the challenger to compete. However, buyers today more frequently require economic justification for purchases that they make. The quantification of economic value and its use in value maps is a clear way to show this value.