Rainmaker panel reveal how to make deals go in your favor in BOTH good times and bad
The semiconductor market, although looking somewhat better, will still experience an uncertain and bumpy ride through 2023. According to KPMG, 81% of chip manufacturers project that their company’s revenue will grow, with half (50%) expecting growth of more than 10%. Although less optimistic than last year’s numbers (95% and 68%, respectively), this is still encouraging given the uncertain economic climate.
Leaders are slightly less positive about growth for the industry as a whole. Only 64% forecast revenue growth in 2023, and just 19% are predicting growth of more than 10%. These projections are also significantly reduced when compared to those from KPMG’s previous survey (97% and 49%, respectively).
A newly released WSTS semiconductor industry forecast is even bleaker. After minimal growth of just 3.3% in 2022, WSTS adjusted its 2023 forecast to predicting a double-digit decrease. The worldwide semiconductor market is now projected to reach $515 billion, which represents a reduction of 10.3%.
To help our semiconductor manufacturing customers. Model N organized a special panel at Rainmaker 2023 – its latest and most successful users’ conference, held in Nashville in June – to focus on ways to sustain profitability in uncertain economic environments. On the panel were notable industry experts Jeet Mukherjee, Mark Stiving, and Malcolm Penn. The panel was moderated by me, Donald Barlow, senior solutions consultant, Model N.
All the panelists agreed that key to success in today’s market is value selling.
“Value selling means understanding your customer’s business,” Jeet Mukherjee, chief strategy officer for Holden Advisors, told the Rainmaker 2023 audience. “How do they make money? What are their biggest challenges? Value selling means knowing all that so you can position your offering the right way.”
In this blog, I’ll explain what value selling is – and what it is not. I’ll then dive into challenges of value selling. Finally, I’ll relay some best practices from the panelists.
Value selling: A definition
Let’s start with what value selling isn’t. It’s most definitely not cost-plus pricing, the panelists agreed.
Instead, according to Mark Stiving, chief pricing educator, Impact Pricing LLC., value selling is the ability to make a business case for customers to buy your product. It means providing a reasonable argument that shows specifically how your product will help them make money. Most salespeople have a sense of what is valuable to a client, and probably even talk about the key features that drive value. But they don’t go through the step-by-step process of building a business case, said Stiving.
But how is value selling an actionable concept?
“I believe that charging what a customer is ‘willing to pay’ is a great practical definition of value-based pricing,” said Stiving. “Value selling is really more of an attitude or a goal. The real question is, how can we capture more of what a buyer is willing to pay?”
Customers don’t really understand the value they will receive from deploying a product or service, said Stiving. “The better a job we do at educating them, they will be usually willing to pay more,” he said.
Value-selling challenges
One of the biggest challenges of switching from cost-plus pricing to value selling is simply that cost-plus calculations are just always the way it’s been done, said Malcolm Penn, founder and CEO of the Future Horizons consultancy. First, semiconductors have always been considered components, or commodities with little value. “Thankfully, the shortage changed this perception by making people realize that they can’t survive without semiconductors, because without them they don’t have businesses,” he said. “So why are we treated so badly?”
A second reason is that the industry grew as a cost-plus business. “We’ve been reducing the cost 60% per annum at the transistor level since the beginning of time,” Penn said. “It’s in the DNA of our industry.” The market is in the habit of seeing prices drop even when a new product isn’t being introduced, he stressed.
This is why semiconductor firms have to constantly reinvent themselves. “If you stand still, you’re eventually condemned to oblivion because you can’t generate enough revenue and margin to pay for R&D,” said Penn. “It’s a vicious downward cycle.”
Best practices on value selling
The first thing to do to eliminate this pattern is to understand the value you offer the market, said Mukherjee. He pointed out that theoretically, if everything is a commodity, then each market participant should get an equal share. “If your market share is not equivalent to your competitors, something is going on. Your job is to find out what extra value you offer, and get paid for it,” he said.
Stiving agreed, “Are you appreciated for on-time deliveries or higher-quality products, or packaging that makes it easier for customers to manufacture their own offerings?” he asked. “What do you customers value?” What’s fascinating, said Stiving, is that “different customers value different things.”
Great value-selling salespeople know this – and they understand each individual customer, and what they care about, so they can package their negotiations or contracts around those things, said Stiving.
A second best practice is for the entire enterprise to learn from pricing professionals and the sales team. Everyone throughout the company should understand the product inside and out. Why did we build it? What problem does it solve? What results does it get? What’s the value? “When you start to articulate that throughout the company, when your product management team starts thinking like this, and then marketing, and then your website starts to reflect it, then customers will love you,” said Stiving.
A third best practice is to refrain from negotiating price increases internally before communicating them to the customer. Said Penn, “especially during the pandemic, one of the mistakes that we saw was sales organizations arguing internally rather than going out and actually talking to the customers about potential price increases.”
Not a single business was surprised that prices were going up given all the circumstance surrounding the pandemic and post-pandemic, said Penn. But salespeople were notably skittish about raising the issue. So, say you’ve decided you’re going to raise prices 60% due to market conditions. “You start negotiating with your sales guy, it goes down to 30%. It goes down to 20%. Then, okay, 15%,” says Penn. “That is one of the biggest mistakes you could make. Instead, offer customers a carrot that goes along with that price increase – something that doesn’t cost you a lot, like extra customer service, or a guarantee on supply.”
Often, the biggest challenge companies have when trying to raise prices is their own fear, Penn stresses. To help the audience with their next price change, Mark Stiving laid out his five-step formula on how to communicate a price increase to customers.
- Step 1: Tell them your costs went up. “Now, we know we don’t want to do cost-plus pricing, but no customer wants to hear that you’re going to charge more money for no reason,” said Stiving.
- Step 2: Describe all the added value. Tell them all the extra features or services they’re getting over the competition.
- Step 3: Remind them that you haven’t raised prices in a long time (if ever). They need to hear this.
- Step 4: Tell them because they’re a loyal customer, you’re going to do something nice for them. For example, if you want – and you’re able to – you can tell them that you’ll hold prices steady for three or six months.
- Step 5: Explain that even with the price increase, they’ll pay less than new customers. “This is because relative prices actually matter,” says Stiving.
How Model N can help
Model N supports value-based pricing with capabilities that allows semiconductor companies to easily configure and quote complex products, quickly come to terms on complicated contracts, have more accurate and timely channel data ensuring visibility into channels, and efficiently manage incentive programs avoiding overpayments.
“When you’re up against inflationary times, speed is key,” said Mukherjee. “You need software and toolsets that allow you not only to set value pricing, but to swiftly execute on changes. You need a platform to support commercial strategies. Model N is the perfect example of that.”
Model N enables chip makers to dissuade what Mukherjee called the “ankle biters” during tough times.
“That’s when your low-end competitors come in and get a foothold because they’ve got the cheapest prices, and slowly they start getting bigger and better,” said Mukherjee. “And when the market starts going up, they’ve got a customer base now to build on.” So he encourages his clients to get a “flanking product” to stop those competitors from entering the market, and “keep your customers within your four walls until things start looking up.”
For more information about how Model N can help with value pricing, go to https://www.modeln.com/products/price-intelligence/
