Value-Based Selling©

Service provider strategies to increase availability should, therefore, focus on increasing MTBF and reducing MTFR and MTTR, as seen in Figure 2.

Figure 2

The key to value-based service selling is quantifying the results of service efforts in improving availability, in terms of increased revenues and profitability, and the return on the investment in a service contract.

How Does One Establish Service Added Value?
To help illustrate this important concept, let’s use the example of a customer who has the equipment to manufacture and sell a wide variety of standard and custom-made valves. We will not discuss the manufacturing operations in detail, but only refer to the items of interest to us.

For the fiscal year under consideration, the manufacturer plans to sell 400,000 valves at an average of $285 per valve. Their cost of goods sold (COGS) is $171 per valve average for raw materials, labor, energy, and manufacturing overhead. Given their capacity and historical equipment availability, they operate for 50 weeks (two weeks major maintenance shutdown), seven days a week, and three shifts or 24 hours a day.

Self-Support Parameters
The manufacturer performs his own support with occasional help from suppliers. Production is around the clock. They historically have experienced six failure-driven production interruptions due to any combination of mechanical, control, network or manufacturing production scheduling, and information management system failures a year. It typically takes 15 minutes to begin diagnostics and two days to fix the problem, including diagnostics, consulting suppliers, securing and installing repair parts or software fixes, repairing, and testing.

We now will explore how to go about quantifying the service added value.

Contract with Service Provider
Let’s assume that the service provider’s approach to support, using technical skills and expertise, can reduce failures from six to two per year. The call center takes the customer’s trouble call and starts over-the-phone (or remote-connection) diagnostics within 15 minutes after receipt of the call and diagnoses the problem while the field engineer is en route. The field engineer, who is fully trained and experienced on the equipment, uses the call center’s diagnosis, resolves the problem, and returns the equipment to production within four hours of the original call.
The following four assumptions are implicit in the scenarios described above:

1. Cost of any specialized service and repair tools and equipment is ignored for now.
2. Customer maintenance staff maintain a wide range of equipment, so they do not have high levels of expertise in any one piece of equipment; i.e., they take longer to resolve the problem and restore the equipment to full use.
3. Service provider staff is well-trained, has all the required specialized tools and equipment available, and has an acceptable complement of spares. The call center staff download required firmware and software fixes while the field engineer is en route.
4. The customer can sell all the valves they can manufacture

Incremental Financial Performance Improvement

Figure 3

Figure 3 shows what happens to production and productivity under each scenario.

By using service provider support, the customer can manufacture more valves and increase gross revenues and profits for a total service benefit to the bottom line of over $1.6 million, as seen as follows.

Service Benefits:

Thus, an investment of $45,000 in a service contract has an ROI of 3,459 percent:

Value-Based Service Selling—A Never-Ending Cycle
The financial performance improvement just illustrated, or one similar, will get the customer’s attention. Rest assured, however, that the customer most likely will require proof that the service provider can deliver the value promised.

This approach is only the first step in the selling cycle. You must carefully select the accounts you plan to target. Do your fact-finding. Engage the account. Match customer needs with your service capabilities to qualify the account. Build relationships and secure support from key buying influences and authorities. Model the customer’s business. Identify and quantify opportunities for improvement. Handle objections and skepticism. Prepare and give the appropriate financial presentation and, of course, close the order.

Once the order is secured, it is also important that you schedule routine performance reviews with key customer management personnel and process owners to review progress, quantify and report the financial performance gains, and work toward continuous delivery improvement so that the customer continues to see tangible, measurable value added.

Standardized Approach, but No Standard Model
Since every market, product, application solution, service delivered, financial performance, and expectation is different, there is no standard model, except for the equipment (or application solution) formula to quantitatively demonstrate the financial improvement a customer can expect from increased equipment (or application solution) availability. A service marketing effort is required.

Assuming there is a commitment to move away from the traditional approach to selling services, here are a few important steps to consider:

1. Do a feasibility study. Select and partner with a few major accounts that represent a good cross section of your target markets to fully understand their business dynamics, cost behavior, P&L structure, and how increased equipment (or application solution) availability can impact their financial performance.
2. Do a total market opportunity assessment. Determine if the requirements, value, and how the approach will be accepted are the same for other customers in your target markets.
3. Create a simple, yet easy-to-use model similar to the one shown in the tables above that shows typical MTBF, MTTR, and MTFR improvements using your service delivery and the typical improvements in P&L. This is in case the customer is reluctant to share financial data.
4. Develop appropriate sales support collateral; e.g., proofs, references, testimonials, etc.
5. Train service sales engineers on cost behavior, the typical P&L for your target market, businesses, and applications, so they are comfortable in their new financial and return-on-investment selling role.
6. Train service sales engineers on the service resources, processes, and methodologies you employ and how they impact MTBF, MTTR, and MTFR.
7. Work out sales support and recognition details. Determine how sales and service operations make joint sales calls (nothing’s more creditable than having the manager responsible for service delivery call on the customer) and make routine customer contract service performance reviews.
8. Work out details on how the product sales organization is recognized and rewarded for helping position, sell, and renew contract services. It is important that the reward is sufficient (or big) enough to prevent their giving services away.

One last comment: A lot has been written about the difference between “rainmakers” and “hard-hitters.” Rainmakers are successful because of the wealth of experience, knowledge, and entrepreneurial flair they bring to the proposition. Hard-hitters are only as effective as the training, support, tools, and methodology you give them. Using the value-based selling methodology covered here increases the probability of success for both.

Summary—A “Win-Win” Method
A value-based service contract selling approach, built on quantifying the impact the service makes on the customer’s financial performance, offers these benefits in return for the effort:

1. It results in more customers purchasing service contracts.
2. By demonstrating the value of the service, it supports the service price structure.
3. By increasing customer loyalty, it provides the service provider with a more stable, predictable revenue stream.
4. Increased customer loyalty assures new and repeat business.
5. Customers see how much they benefit from the service provided by the service provider and have the information to justify their contract purchases to their internal management.
6. Because customers can see how much they benefit from the service provided, they are less likely to demand price reductions or switch service providers.

In summary, everyone wins.

Ted Gibbon is president OACES North America, a division of Tata Honeywell, a Tata Industries and Honeywell joint venture and offshore industrial automation instrument and control engineering service and software development provider. He also is a consultant to SKF Performance Monitoring Group, and he has his own service business development consulting practice, Global Support Solutions. Ted can be reached at 619-427-2811 or tgibbon@msn.com.

Roy Sequeira is president of Sequeira Consulting, LLC, focusing on creating the right combination of analysis, tools, and processes to improve the effectiveness and profitability of service organizations worldwide. Roy has over 30 years of first-hand experience gained with companies ranging from multinational giants to startups and focused companies in a dozen countries. Roy may be reached at 508-481-1190, or visit his Web site at www.SequeiraConsulting.com

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