‘Your stuff looks great, but I need a lower price.’ Every sales rep in every sales force in every distributor hears this statement or some variation of it virtually every day. Buyers are trained and paid to drive prices downward, and the fact is most are quite good at it. So what’s a distributor to do? Get used to it, because it’s a fact of life? Train the sales force (again) to be tougher negotiators? Hold firm and ‘fire’ those customers that refuse to play along with your margin objectives?

Each of those alternatives is viable. All of them have been and are being tried. As far as I can tell though, price pressure is not going away or even becoming less severe. Maybe there is another angle. Think about classifying the value proposition for each deal you offer on a 1 to 6 scale. Keep track of how many fall into each level by individual rep, and challenge your sales teams to increase their average ranking.

Level 1 is differentiation by low price. This positions the product or service as a commodity. For all but the very largest distributors, this is usually not a good place to be.

Level 2 is differentiation by advanced features. This is the traditional feature/function/benefit sales method. ‘The unique design and advanced materials used in our new line of pumps enhances their performance, reduces required maintenance and increases their life cycle.’ Being first to market with new features can provide a substantial competitive advantage. Unfortunately, it never takes the competition very long to match or exceed the performance benefits.

Level 3 is differentiation by value add. A focus on value add has been around for a long while and has gotten really intense over the last five years or so. Just-In-Time delivery, kitting, assembly, consignment inventory, etc. are all now expected ? for no extra charge. A value-add strategy can work, but all too often it turns into a technique for shifting cost from buyer to supplier.

Level 4 is differentiation by providing lower Total Cost of Ownership (TCO) . For many distributors, this approach to providing value represents a radical change. At its core, TCO drives the product or service being provided into the background, and considers it in a much larger context.

Consider an example company that currently buys part A for $10,000, part B for $20,000 and bolts them together to make assembly C. This company needs a new C four times per year so they’re spending a total of $120,000 annually. A vendor is suggesting that they use component X instead of C because it would only need to be replaced three times per year. Since an X is priced at $43,000 and three per year would be $129,000, the vendor gets a price objection. (i.e., ‘Why should I spend an extra $9,000 per year?’)

A level 1 proposal would merely drop the price of X, and settle for a significantly lower margin. A level 2 proposal would talk itself blue in the face about better design, higher quality parts, etc. to no avail since the total price is still $9,000 higher. The level 3 proposal would offer more attractive payment terms, a better warranty and just in time delivery ? all of which merely shifts costs from the customer back onto the vendor and again reduces the margin.

A level 4 proposal, however, would analyze the cost of placing orders, receiving, stocking and picking parts A & B and then assembling and installing the C. It would then suggest just-in-time delivery of an X instead. Here’s what that analysis might look like:

Current Costs Associated with Assembly C:

Projected Costs of Replacing C with X:

Projected annual savings = $6,850;
a 4.9% reduction in Total Cost of Ownership

The level 4 proposal would also point out that the affected assembly line will only need to be shut down three times per year for two hours instead of four times. Since the line produces $100,000 worth of end product per hour, that translates to an additional $200,000 in 'soft' value. Finally, the level 4 proposal will emphatically note that other similar cost saving opportunities are likely to be found.

Notice how the level 4 proposal changes the question. It's not just the price of the part. It's about the total cost of everything and everyone that has anything to do with that part before, during and after acquisition, use, shipment and maintenance.

Level 5 is differentiation by Breadth of Impact. The level 4 example above, hints at and sets the stage for broadening the scope of a distributor's impact. Cleary the sales rep has talked to the buyer not only about price, but also about what it costs the buyer to place an order. There have also been conversations with receiving, inventory management, assembly and plant maintenance personnel. Finance was also involved to obtain a full picture of total cost.

What happened was, the sales rep demonstrated a broad perspective on total plant cost structure and productivity. That's the kind of effort that will get the attention of the customer's top management. It sets the stage for examination other aspects of the operation. It sets up the vendor to become a business consultant, and business consultants earn hefty fees for sharing their expertise.

The level 5 vendor's next proposal could (and should!) increase its breath of impact to include consulting services. These in turn could easily lead to supplying new and additional components, supplies, services, etc., and thus continue the

cycle of broader and broader involvement and impact.

Note that level 5 means more than what has traditionally been called ‘Integrated Supply.’ There is also a very strong focus on total financial impact, business consultation and how the customer deploys people and assets.

Level 6 is differentiation by Depth of Impact. After a level 5 competency has been established, a distributor could take the next step of assuming total responsibility for executing a portion of the customer’s operations; in other words, outsourcing. It could be purchasing. It could be plant layout. It could be scheduling. It could be something else. Think of it as getting more deeply involved as an integral part of the customers organization, now that you have such a broad perspective.

The Differentiation Scorecard

W. Edwards Deming once said that, ‘What gets measured gets done.’ He was right. This insight is also the key to kicking off your formal program to increase the level of your company’s differentiation. Institute a ‘Proposal Differentiation Scorecard’ that looks something like the following:

Proposals by Differentiation Level:

Make it clear, not only to your sales reps, but to everybody, that more and more proposals must be at the higher end of the scale. Publish the scorecard internally every month. Celebrate both individual and company progress. You will be surprised and pleased with the informal, healthy competition this stirs up. Your people are smart. They can accomplish much to enhance differentiation without a significant investment of time or money and without any additional training or guidance. They just need to think differently and craft value propositions with the six degrees of differentiation in mind.

Not that you should ignore training and guidance… In fact, I strongly recommend that you ask your top finance exec to conduct a series of sessions at sales meetings. The ability to make the leap to level 4, TCO-based selling depends on a solid understanding of Activity Based Costing. Familiarity with Balance Sheets and Income Statements is also very helpful in illustrating the positive impact of investments in your products and services.

Unique, just like everybody else…

It’s too easy to kid yourself about how you and your company are so different from competitors. As a consultant, it is downright painful to hear seasoned distributors bragging about the greatness of their quality, delivery and customer service. Everybody brags about those things. To customers, the claims have lost all meaning.

If, however, most of your proposals were level 4 and above, you could tell a very different story. It would be a story based on facts and figures; on detailed TCO analysis; on the broad, deep, positive financial impact your company can have on the customer’s operations.

Anybody can offer a low price. Almost everybody can describe features, functions and benefits. Value add is a bit different, but not at all uncommon. Not too many distributors can clearly articulate Total Cost of Ownership (TCO). A handful are aggressively selling TCO across the customer’s entire enterprise. And only a very few have the depth of knowledge and capability to outsource.

What are you proposing? Is it really all that different?

Copyright 2004, The YPS Group, Inc. All rights reserved. Todd Youngblood is managing partner and CEO of The YPS Group Inc., a sales process engineering and sales training firm. The YPS partners are all obsessed with the sales productivity of their clients. He can be reached at 770-514-1189, Todd Youngblood or at www.ypsgroup.com.