Defining Value in Negotiations: K&R’s ViO™
“We’re giving you $100K of value for only $60K. This is a good deal!” How often have you heard that sales pitch?
Of course, this has nothing to do with business value. Value is derived from outcomes, and a statement like the one above derives from price. Yet defining value is one of the most critical negotiation steps. The strength of your value argument is what ultimately decides your ability to establish a uniquely defensible position and command your own price. Our negotiator training stresses that without a compelling value argument, you’re vulnerable to continued discount requests from a potential customer and price cutting wars with your competitors.
As a basic exercise in defining sales value, use this simple equation as a test:
BENEFIT – COST = VALUE
If you fail to calculate the benefit, then the buyer will look exclusively at the cost. (And if the benefit is truly zero, they will not buy at all.) In order to get a better deal, the cost has to come down. Plus, the buyer doesn’t really know when to stop. Any lower price is better. There is no identified cost of delay. This is true even if the buyer knows the benefit. Because you have not demonstrated that you know what the benefit is, you can’t use the information in your persuasive value arguments.
Public sector is not motivated by profit. In many cases, profit is not even allowed. In that case, value is defined primarily by the absence or reduction of risk, with some additional cases where a “public” reward exists that is not financial in nature.
In every case, if there is no identified value, the buyer will not recognize a cost of delaying a decision. Most sellers want the decision made as soon as possible (to get the associated revenue).
The buyer may act, even in the case where no value or cost of delay is known…to you! That does not mean that they don’t know internally—just that you did not do the work to figure it out and use it to your advantage.
Refining Value with the ViO™ Formula
The next step past the simple value equation is ViO. It offers a clearer picture of value. ViO shows the components of “benefit” from the simpler equation.
Value = Quantified impact from Client’s Business Outcome
It starts with a client’s business outcome – what business “thing” will happen as a result of the sale? It relates to impact, which is directly connected to that outcome, and quantifies it.
As power distributes from the top at corporations (and public entities), ViO works top-down. There is greater impact when you deal with industry-level issues. These can be tied to corporate interests, line-of-business interests…all the way to a department. At one client, the ultimate impact of a department-led technical solution was to enable the company to do business worldwide instead of in a single country. If the focus was on the department implementing the technical solution, the impact was low. At the top? Huge.
In the same way, impact from a product is usually much more limited and lower-impact than solution impact, operational impact or agency/corporate impact.
Build your ViO from the top-down, or bottom-up—but make sure that it links top to bottom.
ViO is strongest to weakest when impact relates to:
First, the entire business or agency output (such as sales/revenue or number of people served).
Second, operational improvements, such as influencing the cost of running a business.
Third, solution value that factors in total cost of ownership and efficiencies gained from the solution itself.
Fourth, product value, which is a feature-versus-price comparison.
Likewise, the strongest outcomes and impacts connect multiple business levels . Looking at it in reverse, what looks relatively weak at a department level, for example—providing better usability to end users— should link to LOB measures such as lowering support expense, which in turn should link to corporate or agency measures, such as servicing more customers to gain more revenue, which will enable to company to be more competitive based on industry measures.
Department > Function > LOB > Corporate/Agency > Industry
Training negotiators to measure impact in terms of value and outcome—and understanding how the value equation applies with impacts and outcomes—sets the stage for more convincing arguments…and bigger, better deals.