Value-Based Selling^©

A Strategy for Growing Contract Services^©

Published in Sbusiness, AFSMI Journal, July / August 2002

Difficult economic environments, such as the one we are in, need clear thinking and planning to ensure growth—not just survival. Reacting to circumstance and following the herd is a sure-fire recipe for disastrous results. Service, in particular, must innovate to find ways to create and demonstrate customer value.

One aspect of today’s economic environment manifests itself with declining product sales as customers defer purchases and try to extend the usable life of their existing equipment. This is an opportunity to “partner” with the customer and solidify the relationship by finding ways to help him stay profitable and viable by creating and offering innovative new service offerings that increase service revenues and create additional ways of retaining the customer.

Unfortunately, instead, in its efforts to sell additional product, the sales force often reacts by discounting or “giving away” products and services. This approach results in service providers being committed to delivering service offerings with inadequate revenues to fund the resources deployed. This, in turn, leads to a downward spiral, where the service provider, faced with declining margins, reduces resources. Fewer resources lead to a diminishing ability to serve customers and to increased dissatisfaction, which, in turn, leads to contract cancellations and further diminished revenues. The downward spiral winds on ...

One of the causes of the tendency to discount services is the commonly held belief among sales and marketing personnel that service margins are too high and that service pricing causes them to lose product sales. This flies in the face of numerous surveys that show most service customers are not price-sensitive. The small percentage of price-sensitive customers are usually those looking for “commodity” service and deliver the least margin.

We believe service organizations must proactively find ways of generating value for their customers, and they need to educate the sales and marketing force and the rest of the company on the value service adds to the sales and marketing effort—and how it adds value to the customers’ operations. Service also must collaborate actively with sales and marketing in communicating the added value to the customer. Finally, service must find ways of sharing in the benefits of that added value.

A General Business Scenario:
In an effort to boost sales, companies often resort to discounting service heavily or giving it away altogether. While this sometimes achieves the immediate goals of increasing product sales revenues, the long-term consequence is a steady loss of service revenues. Since the service infrastructure still must be maintained or grown despite a declining revenue base, service profitability declines, steadily choking off the revenue stream needed to fund the field service organization, call center operations, and support infrastructure necessary to provide value.

Value-Based Selling—A Better Approach
We contend that establishing and demonstrating service value is the better approach. This is particularly important when customers shut down some existing equipment to adjust to decreasing product sales. However, the need for service to ensure the maximum availability and performance of the equipment becomes more important than ever before. Contract services now become a vital component of the customer’s strategy to stay profitable by getting the most out of the equipment.

Value-based selling demonstrates the value of the assured source of service guaranteed by a service contract. It shows how this contractually assured service makes a significant contribution toward increasing customer productivity, profit, and in some instances, capacity. Rather than resorting to price reductions to avert contract cancellations, the salesforce actually can sell premium service at a higher price.

Value-based selling requires an understanding of how the customer uses the product and the contribution the product makes to his business operations. It also requires that service sales personnel understand cost behavior and their customer’s P&L structure. They need easy-to-use tools to help demonstrate and quantify the financial contribution and service value to senior customer management.

Availability—A Key Parameter to the Customer’s Profitability
Availability is the main service parameter that affects how the customer uses the product and how the product affects production and profitability. Consequently, maximizing availability is the key to maximizing the value the customer gets from his equipment. Availability is defined in Figure 1.

Equipment Availability = Total Time - Lost Time Total Time

OR

Equipment Availability = 1 - Lost Time Total Time

Where
Total Time	The maximum time the equipment is used per year, often defaults to 8760 hours
Lost Time:	The time the equipment is unavailable to the customer for normal use. For this discussion, we will ignore scheduled downtime for other than normal uses, such as routine maintenance.
Lost time =	Number of Failures per year X Average Lost Time per Failure
MTBF:	Mean Time Between Failures. MTBF is the average number of hours between equipment failures
MTFR:	Mean Time For Response MTFR is the average time between when the equipment failureis reported and the diagnostic and repair process actually starts.
MTTR:	Mean Time To Repair MTTR is the average time it takes to bring the equipment back to customer use.

Simplifying the mathematics, the availability equation is:

Equipment Availability% = 1 -	MTFR + MTTR
	MTBF

Figure 1. Service provider strategies to increase availability should, therefore, focus on increasing MTBF and reducing MTFR and MTTR, as seen in Figure 2. Strategies to increase MTBF include, but are not limited to: Routine preventive maintenance Predictive maintenance Remote system performance monitoring Routine software enhancement and fix installation Strategies to decrease MTTR include, but are not limited to: Over-the-technical assistance (help desks) Highly skilled help desk and field service personnel Comprehensive documentation written and on-line Manual and automated diagnostic routines State-of-the art test equipment and tools Software patches, fixes and enhancements Local or on-site spare parts if required Strategies to decrease MTFR include, but are not limited to: Dedicated customer support centers (Call centers) Strategically deployed field support resources close to the customer base On-line FAQ’s, self-help routines, expert systems

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

Total Usage per year Failures per year MTBF MTFR MTTR Lost time per event Lost time per year	Self-Maintenance 8,400 hours 6 1,400 hours 0.25 hours 48.00 hours 48.25 hours 289.50 hours	Service Contract 8,400 hours 2 4,200 hours 0.25 hours 4.00 hours 4.25 hours 8.50 hours
Availability Availability%	8,110.50 hours 96.55%	8,391.50 hours 99.90%
Production Production Rate Selling Price, each COGS Gross Profit	50 units per hour $285 $171 $114	50 units per hour $285 $171 $114
Losses Lost Production Lost Revenues Lost Gross Profits	14475 units $4,125,375 $1,650,150	425 units $121,125 $48,450

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:

Increased Production Increased Gross Revenue Increased Gross Profit Service Benefit

14,050 units $4,004,250 $1,601,700 $1,601,700

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.

If you'd like to discuss concepts or ideas in this article,
or how to apply them to your particular situation
please call 971-217-7860 or email us.

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