In order to be able to improve the profit contribution of a customer's business or business function, you must know three things:
The current values in the customer business or function that you can affect—the dollar values of a customer's current costs, current productivity levels, and current sales
The prospective dollar values that you can add
The net worth of your added dollar values when subtracted from the investment required to realize them
All customer operations are cost centers. Only one, the sales function, can also be a profit center if profits from sales exceed the cost of sales. Customers have a choice of three strategies for managing their operations. One is to avoid or reduce costs while maintaining productivity. Another is to increase productivity while maintaining, reducing, or even increasing costs. The third is to eliminate an operation altogether, either spinning it out as an independent profit center to remove it from the corporate books or outsourcing it.
In order to consult with a customer line-of-business manager (LOB), you must be expert in the customer's markets. This means that you must have three kinds of smarts. You must be process smart, knowledgeable in the flow of the customer's products through their distribution processes and where their critical values are added. You must be applications smart, knowledgeable in how to apply your products and services to the customer's sales and distribution process so that revenues or margins can be increased. And you must be validation smart, knowledgeable in how to quantify your contribution.
"Knowing your customer's business" means having all three types of smarts. In the areas of your expertise, you must know how a customer's distribution process flows. You must be able to chart it from start to finish. You must know the 20 percent of its critical success factors that contribute up to 80 percent of its income and earnings. You must know the value of these revenues and profits. You must know your norms for the products and markets that account for the majority of profits and by how much the customer's earnings deviate from them. You must know how to bring the customer's profits closer to a norm if they are below it or keep them above it if the customer is doing better than the norm. You must know by how much you can do this and how soon. When you know all these things, then you can say that you know the customer's business as far as the products and markets you affect are concerned. Anything less is vendor selling.
In order to consult with a customer function manager, who supports or supplies a line of business, you must be expert in his or her operation. This means that you must have three kinds of smarts. You must be process smart, knowledgeable in the flow of the customer's process and where the critical costs cluster. You must be applications smart, knowledgeable in how to apply your products and services to the customer's process so that costs can be reduced or productivity can be increased. And you must be validation smart, knowledgeable in how to quantify your contribution.
"Knowing your customer's business" means having all three types of smarts. In the areas of your expertise, you must know how a customer's process flows. You must be able to chart it from start to finish. You must know the 20 percent of its critical success factors that contribute up to 80 percent of its costs. You must know the value of these costs. You must know your norms for these operations and by how much the customer's costs deviate from them. You must know how to bring the customer's costs closer to a norm if they exceed it or keep them below it if the customer is doing better than the norm. You must know by how much you can do this and how soon. When you know all this, you can say you know the customer's business as far as the operations you affect are concerned. Anything less is vendor selling.
Vendors like to say that they are value adders. Yet all they can usually quantify is the value of the cost they add when a customer buys from them. Rarely, if ever, do they know the value of the customer costs they reduce or the productivity they increase or the new revenues and profits they contribute to. Yet these are every supplier's most crucial values. Unless you know them, you are selling blind. You will only be as valuable as your most recent discount.
Even worse, you are selling costs, not improved profits, when you vend. If you do not know the value you add to a customer, you must sell what you know: your product's cost and its justification. As soon as you sell cost, you will come under the control of the customer's purchasing function, whose primary purpose is cost control. You will be imprisoned in vending.
In Consultative Selling terms, a sale is a transfer of values: A customer's resources—time, talent, and money—are transferred for the contribution to customer profits made by a supplier's products and services. In the same terms, a sales call must be an exchange of values as well. The customers must come away with new knowledge: They must be aware of the supplier's norms for profit contribution and how the current contributions of their operations compare with them. The suppliers must come away with new knowledge as well, consisting of data on customer businesses or business functions whose profit contributions can be brought closer to the suppliers' norms—in other words, they must come away with leads. Unless the suppliers come home with data on which to base a Profit Improvement Proposal, or with an approved proposal itself, they have not made a sales call. They have been socializing on company time.
All value is customer value. Adding value does not take place at the factory. It takes place in a customer's business. If you are going to add to a customer's value, you must first know what it is without your addition. This is the customer's "before." The new value will be the customer's "after." The difference between before and after is the value added by your business. In truth, it is your business. It is what you do and the reason why you are in business to do it.
For the purposes of Consultative Selling, the value you add must become the product you sell. You must become a value-added seller. This means that you must know your "product," the value that you represent.
In common with all products, value has its own specifications. These give it its performance capability, that is, what it is able to do inside a customer's business. Your performance capability is customer-dependent and will vary for each customer application. Each of your "products" will be unique to its customer. No two values will be the same, except by chance. As a result, you will no longer be able to print a price list. As values differ customer by customer, moving up and down within the range that establishes your norms, the price you require in the form of a customer's investment to achieve each value will also differ.
Value has three specifications:
It has "muchness": You will be able to add a lot of value or only a little.
It has "soonness": You will be able to add value quickly or not for a while.
It has "sureness": You will be able to add value with a high degree of certainty or you will hedge.
A mix of "muchness," "soonness," and "sureness" forms the value benefits that you will be able to offer to each customer. You must be able to quantify each one. Otherwise, if all you can say is something like, "We are pretty sure that we can provide a lot of value to your operation very soon," you will be saying nothing. Once you have quantified your value, then you will be able to know your most important sales tool: what your added value is worth to your customers.
If you are able to offer your customers the added value of one dollar as the result of doing business with you, what are you really offering them? The dollar has three values. One is its money value. A dollar is a dollar. Another value is its time value. A dollar today is worth more than the same dollar will be worth tomorrow. Finally, the dollar has investment value. It can be invested at a rate of return that will multiply its original value several times.
Your value is worth what customers can do with it—a function of how much they get from you, when they get it, and what they do with it. This is the ultimate worth of your dollar. Like value, dollars appreciate only inside the customers' business. In order to create new worth for customers, you must therefore get into the customers' business—into their critical lines of business and critical business functions—and help them manage them. You cannot create worth without the customers. Nor can they achieve the added worth you offer without you. To magnify the worth of a business, you and your customers need each other. This congruence of need makes you partnerable.
As a consultant, the most important knowledge you can have about your business is your value to your customers; that is, how much you typically contribute to their profits and how long it typically requires to make your contribution.
When you know what your value is worth to customers, you and your customers can tell what kind of consultant material you represent. If your value is the same as what the customers can obtain working alone without you, you are not consultant material. If your value is worth more than what the customers can obtain working alone or with any other supplier, you may be prime consultant material.
If you want to be the customers' consultant, you must offer them the prime value. Nobody must be able to offer better value specifications—as much value or as soon or as sure. If you can achieve this position, your value becomes the industry standard. Not only do you deliver the greatest value, but it is worth the most to your customers.
When that happens, you have a new basis for your price. No longer does your price need to reflect cost or competitive market value. You are able to relate your price to the worth of your value on a return-on-investment basis. The customers' added worth becomes their return. Your price becomes their investment. A premium return to the customers is all the justification you need to require a premium investment.
If you sell without knowing your value, everything else you know is rendered valueless for margin building. What price would you charge—or, in Consultative Selling terms, what investment would you require—for sixty two-way wireless radios installed on the manufacturing floor of an engine maker's plant? If you guess $150,000 because you do not know that the customer's first-year cost savings from reduced downtime is $1.5 million, what kind of a deal would you have made if you had given your product away while its value-to-price ratio was 10 to 1? You would have booked the sale, but you would have made yourself a philanthropist.