Creating Value in a Commodity World

Volume 14 Letter 6

Pricing … it drives everyone nuts!! Customers complain about paying too much and companies complain about leaving money on the table. Too often companies and customers are locked in a power struggle in some vain attempt to extract as much value from each transaction as possible. But companies that view customers as adversaries and vice versa maybe getting it all wrong. Perhaps the biggest lesson we’ve learned from the numerous Customer InSight (conjoint) Studies we have conducted is that value is not fixed. It’s relative to the situation in which the customers find themselves. Here’s what I mean and why it’s important to your business.

Many of you may know the company Hilti, the European maker of high end power tools. Hilti sells construction grade tools into heavy industry. However market research revealed that not all customers necessarily wanted to own tools. Rather, Hilti found, in industries requiring a very specific work flow, what customers really wanted was the productivity those tools could deliver. Consider industries where the loss of one tool’s productivity can dramatically change the profitability of a project. For example, on a simple construction site if one of two jack hammers breaks down, only one of the operators on site can do the job, cutting productivity in half. Not only that but the front end loader used to remove the broken concrete is now working at half capacity. The dump trucks scheduled to haul the old concrete away need to be rescheduled as only half are needed but now for a longer period of time. What about the crane needed for putting the new pipe in the ground or the trucks booked to pour the new concrete? The headaches are endless and job profitability pivots on how well delays are managed.

For these customers Hilti isn’t selling tools — it’s selling an uninterrupted work flow! Given this information, Hilti launched its fleet management business and the slogan tells it all. “We manage your tools so you can manage your business”. By guaranteeing that tools are functioning properly either by servicing or replacing them, Hilti simplified the customer’s financial planning by reducing tool downtime. This new business model unleashed new opportunities for creating value. How much value was project dependent and priced accordingly. Authors Bertini and Gourville suggest specific steps you might consider to unleash value in your business model1:

 

  1. Focus on the relationship rather than the transaction: Find the pain point in your transactions and if possible plan ways to eliminate them. For Hilti, the customer pain point was broken tools and tool management. Customers were building tool redundancy into their inventory to prevent work flow interruptions. Hilti removed the pain point by ensuring tool servicing and replacement and charged for the service.
  2. Charge a premium on flexibility: By taking over a company’s tool maintenance, Hilti started selling tool availability. The value created was different for each customer and price for the service reflected this.
  3. Be transparent: Firms that aren’t transparent about how they earn money signal they have something to hide creating adversarial relationships. Transparency, in contrast, builds relationships.
  4. Manage the perception of "Fair": Research shows customers will buy more or pay a premium if they perceive the exchange to be fair. The opposite is also true as they punish companies who they believe are not fair.

Hilti created a new business by recognizing it’s customers’ pain points, and shared the value created by removing them. So now a few questions for you:

 

  • What are your customer’s pain points?
  • What are the downstream financial implications of removing or solving them?
  • How could your company and your customer team up to solve these issues and
  • How can you share the value created?

Take a lesson from Hilti. Find value for your customers!

1. HBR June 2012 Pricing to Create Shared Value, M. Bertini and J. Gourville

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