Tuesday, November 13, 2012

Dollarizing a Service

I recently received an email from a commercial real estate broker inquiring about how dollarization can be applied when selling a service.  This is one of the more frequent themes I see in reader inquiries.  The real estate broker’s note concluded, “Given that I’m not selling widgets, but service, it seems a bit harder to quantify my ‘value’.” 

Dollarizing a service may present unique challenges, but there is no inherent reason why one could not dollarize a service as they would a product.

Marketers and sellers of any offering – product and service alike – must always remember that customers do not buy products or services. Instead, they buy the outcomes, the benefits that result from these products and services. And when a business buys a product or service, they are ultimately buying the dollarized value of those benefits.

To return to my interchange with the commercial real estate broker, here are a few excerpts from my response to his questions:

Whether you are selling widgets or services (we have successfully dollarized plenty of both), there are a couple stages to work through.  You need to first identify and carefully articulate the specific areas where you create value for customers.  Next, you need to figure out a way to quantify those values.  A critical step is that you also need to persuade the customer that the advantages you offer are indeed real and unique to you

This area can be tricky with services, as a service is often not perfectly reproducible or predictable the way a product might be.  In those cases, you need to discover ways to create evidence of repeatable past success, or a documented methodology that the customer can intuitively understand as unique and differentiated.  This may mean publishing case histories, or customer testimonials. 

A difficult reality that some service providers must face is that their service offering MAY NOT in fact be all that different from what is available from other service providers.  In those cases, it IS in fact difficult to dollarize, because there is little differentiation to build on. 

Those situations may call for a broader strategic view:  you may need to find related ways to differentiate yourself and create value outside your traditional realm.   

As an example, a few years back, I worked with GE Capital, helping dollarize their lending to commercial fleets (what is more of a commodity than money?).  In order to get the conversation away from interest rate and fees, they looked at other services.  In one example, they worked with a trash collection company to install GPS devices on the fleet of garbage trucks, and then analyzed the routes the trucks traveled.  They optimized the routes, even taking into account topography, so the fleets could save money on fuel, brake wear and other maintenance.  (The GPS devices were installed for tracking... the innovation was to use the data to create value.)  This approach not only allowed the seller to dollarize the value it created for the customer, but it made it crystal clear that the seller was looking for ways to improve the customer's business.... a powerful message for any seller.

So, the summary message to service sellers is:

1.     You can dollarize the service you provide.
2.     You must identify the outcomes and benefits you create for a customer, and then determine how those benefits result in financial gain for your customer.
3.     You must determine how to use your past record to create a reasonable predictor of future performance (“we average reducing client inventory by 23%, which in your case would mean $29,000 less capital tied up in the warehouse.”).  Case studies and other carefully crafted tools can help build this case in a believable way.
4.     If it turns out your service offering can be closely matched by others, change your focus.  Think about your customer’s business and how you might find other ways to create value that will differentiate you from the pack.

Wednesday, August 5, 2009

Are you smarter than a first grader?

To encourage my kids to get an early start on saving, I offered to match each of their initial deposits in newly opened bank savings accounts when they turned seven years old. When I made this offer to my two older kids, the novelty of having a bank account of their own was too much to resist, and they each promptly plopped down the cash they had accumulated from odd jobs, gifts, lemonade stands, etc. It was relatively painless for me.

Recently, when my youngest (and perhaps craftiest) turned seven, things took a different turn. At first he wanted to race to the bank like the others. I was busy and didn't get right to it... and it would cost me.

During the delay, my first-grader realized that the bigger his initial deposit, the more "free money" he would get in the form of a match from Dad. The good news is he is now actively seeking any chance to make a buck to build his war chest. The bad news is he will be happy to wait until college to make his initial deposit, as he understands my matching funds will instantly out-pace any compounding of interest from the local savings bank.

In other words, he Dollarized the value of my fatherly largess. He understood that the more money he put away to invest, the more he would make from Dad.

Dollarization in business can help in a similar way. Once a customer understands that he or she is spending money to get money in return, a moment of recognition arrives signaling that more buying equals more savings.

So think of your product or service as a free bank account for your customer. Your are not selling a product or service, you are selling money.

PS: I am currently working on a retroactive adjustment to my matching-funds policy to prevent my first-grader from leveraging his initial deposit by borrowing from Grandpa. Kids learn fast these days!

Wednesday, July 29, 2009

Unmaking the omelet and other situations that may make Dollarization difficult

As enthusiastic as I am about the opportunities dollarization can present to a marketer, this approach is not without limitations. There are certain situations where dollarization may not be appropriate, feasible, or economically worthwhile. This is not to say that dollarization of real benefits is not always theoretically possible. It is always possible, just not always practical. Following are a few common contraindications.

  1. No Big Difference There will be times when two (or more) competitive product or service offerings deliver effectively the same value to a customer. Often, the seller’s focus on dollarization will, in itself, be enough to break the tie (as this discipline demonstrates a focus on the customer’s economic well-being). But if a company regularly finds that its incremental value to the customer is inconsequential, the marketer must evaluate its offering and seek enhancements that create new customer value.

  2. Regulatory Checkbox There are some products that businesses are required to purchase to satisfy a government regulation. If the product does nothing else but to satisfy the letter of the law, and other products are available that can perform the same function (e.g., safety signage), there is little room to create value.

  3. Unmaking the Omelet Once you mix the onions, cheese and eggs, it’s difficult to separate the ingredients of an omelet. At times, a product will be but one of many “ingredients” in a customer’s business formula. The business creates value due to its use of all the combined ingredients, but the downstream impact of a single "ingredient" might be difficult to track. Further, each ingredient needs all the other ingredients, so dividing the credit for value creation becomes unwieldy.

  4. Degrees of Separation Similar to the omelet scenario, a product may create a small impact that is several degrees of separation away from the final value-creating event. Again, tracing the allocation of final value back to that early input is a challenge that may prove unworkable. Your product may in fact contribute to a Dollarized outcome, but not before several layers of other products and services have their say. Distance and separation from the final outcome may cause the customer to discount the impact your offering contributes.

  5. Chance in a Million Some products create value by helping customer’s avoid rare, but costly (and sometimes catastrophic) problems. For example, consider a seal company selling to an aircraft maker. If the seller demonstrates superior seal durability and persuasively correlates that durability to reduced maintenance costs, he would have a good chance of success. But if the same seller then tries to claim additional value for the reduction in future costs due to catastrophic plane crashes, his dollarization attempt might be tossed aside. This is because the probability of that future event is so slim, and the timing so unpredictable, it is unrealistic to expect a customer to ascribe specific value in advance. This is not to say that there is no real probabilistic connection between the seal and the ultimate likelihood of catastrophic failure. There may be. But the connection may be too tenuous to merit real financial measurement.

  6. What is Life Worth? Sellers of certain products that deliver benefits in the areas of health and safety may find that the value they create, though real, may be difficult to use in selling. For example, I have seen medical products companies attempt to dollarize – to physicians – the value of reducing the likelihood of a catastrophic malpractice claim. Though technically all parties may agree to the analysis, the physicians involved refused to address an issue of human life in strictly financial terms. Likewise, a marketer of commercial door hardware found that the improved reliability of its products could improve the safety of, say, a college dormitory. But getting a college official to agree to a financial value for the potential reduction in harm done to students proved nearly impossible.

Friday, July 24, 2009

Translating technical want to financial need

A new product Dollarization story...

Developing a detailed protocol for freeze-drying a pharmaceutical compound (a common preservation step) is traditionally a months-long process, involving hundreds of manhours of manual trial and error experiments by biochemical PhDs (not cheap). The trial and error nature of the process typically yields a protocol that is “safe” for the drug compound, but is by no means optimized for productivity.

Working together with top academics in the field, FTS Systems, a leading maker of freeze-drying equipment, developed a software/ hardware product that automated this process and could deliver a truly optimized protocol in days or weeks. FTS expected the industry would quickly embrace the new “SMART Freeze-Dryer” but the initial market reception was mixed. Customers were intrigued by the technical cleverness of the concept, but struggled to justify the 5-figure pricetag, especially when there existed no line item in their regular budgets for such a product.

This barrier became painfully clear to FTS when they pitched the system to one of the original inventors – an academic who had since returned to a commercial pharmaceutical company. Despite his involvement in the development of the system, he reasoned that he and his team could accomplish what the product would accomplish, without having to spend tens of thousands of dollars.

In response, FTS set out to detail the financial benefits the SMART system would deliver to clients. These included manpower savings, materials savings (each manual experiment would consume valuable compounds), and the opportunity cost of lost time.

I worked with FTS to identify these costs and to craft them into an interactive tool their sales team could use to walk through the evaluation with customers. The tool listed every variable in question form (see image below-click to enlarge), enabling the sales person to gently alert the customer to the numerous costs involved… costs that would otherwise be overlooked by customers accustomed to doing things the way they had always done them.

The sales team was trained to encourage customers to specify the input values, so the ultimate analysis would be highly tailored to the customer situation. Importantly, this engagement would also create a heightened ownership of the analysis by the customer. Gradually, the customer would see the tool as his or her own analysis, not a sales ploy.

The tool used these inputs to activate a series of calculations, which were then summarized in an executive summary report (see image below-click to enlarge). This report highlighted the customer’s savings, return on investment and several other metrics. The results were also provided in a printable report format that the customer could share with colleagues when reviewing the potential investment.

Some of the impacts of the SMART system were too speculative to accurately quantify, but were nonetheless of interest (for example, the value of getting to market with a drug months faster). These items were included in the report to trigger discussion with the client so that some value would be inferred.

Within the first few months of implementation, the tool enabled FTS to shift the conversation from technical novelty to compelling economics. They quickly earned success with key leadership customers, and the rest of the market began to follow.

As FTS built a record of successful customer implementations, they began to integrate the ROI message into their marketing communications. Advertisements would tout the savings achieved by others, and pointed interested prospects to a website that included a simplified version of the calculator. If the online tool produced attractive results, the prospect could then contact FTS directly to begin further discussions.

Friday, July 17, 2009

See my article in Truck Parts & Service Magazine...

Occasionally, I am asked to contribute short pieces on Dollarization for trade magazines and other business publications. Recently, Truck Parts & Service Magazine dedicated an entire issue to the topic.

Here are links to a series of Dollarization-related articles in the issue:

Value-Added: Math or Myth (my guest column)

File Under Value

Add it up: Calculate, communicate your company's true value

And finally: Industry Perspectives: Company Value

Thursday, July 16, 2009

Dollarization and the "Art of Selling"...

In future entries, I'll write about how Dollarization must be integrated into the selling process. It is not enough to unilaterally calculate a claim of value and dump it on the customer. The process must be architected from the beginning.

On a related topic, I'm proud to share this tidbit: the editors at Soundview Executive Book Summaries (the folks that publish those brief digests of leading business books) have included The Dollarization Discipline in their "Art of Selling" Collection. This collection includes 15 titles from the past several years. Visit Soundview Art of Selling Page

Soundview editors had previously selected The Dollarization Discipline as one of the Top 30 Business Books of 2005. With approximately 9,000 new business titles appearing each year, being included in this prestigious company was quite an honor.

Wednesday, July 15, 2009

Welcome to the Dollarization Blog...

For those of you unfamiliar with the concept of "Dollarization", I'll start with a definition:

"Dollarization is the act of translating into dollars and cents the benefits your customers get from the products and services you deliver."

In other words, rather than simply claim your product is faster, lasts longer, is more reliable, Dollarization allows you to show your customer that an investment of X dollars (the price) will produce a return of Y dollars.

On its surface, Dollarization is a pretty simple, intuitive concept. But putting it into practice can be tricky and must be done with care.

I plan to use this blog to share examples of how companies have used Dollarization and lessons they have learned. These examples will cover a range of industries — from healthcare to oil fields to financial services. Despite the diversity of industries, the principles are universal, and lessons can be applied to nearly any business-to-business sales and marketing environment.

Stay tuned for more...