This week our post talks about how showing customers your true value, and avoiding the typical hefty discounts, helps you to grow your sales margins.
In 2020 we witnessed a great year as the pandemic hit and software companies surpassed their targets. But 2021 was a bit more challenging – and 2022 looks like it will be an interesting year ahead as companies get used to doing business in this new and much more digital normal. Software sales hit an all-time high at the start of the pandemic and technology developments triggered the rise of new business models, that generated new revenue streams and reduced the cost of software solutions. For software vendors, circumstances have changed drastically in the last two years.
Here are four ways that value management can help you protect and grow your sales margins
1. Ease off on the discounts – big discounts steal profits
Sales incentives focus on maintaining or growing the customer base – preserving a relationship with customer – and making sure they don’t jump ship. In the tough world of software sales, when a customer asks for a discount, they are usually lucky enough to receive one. Due to these kinds of situations, software vendors often forgo considerable profit.
When you dish out sales discounts, what happens to your sales margins?
For software vendors, discounts are the biggest profit thief. The issue here is that many decision makers come from a time when software was sold based on licenses and annual maintenance, which means they are used to massive sales discounts and relatively low maintenance. Most software buyers will be expecting sales discounts of up to 80%. But value selling can change this.
Customers’ price expectations for new apps, mostly cloud, are set on very low prices. But this overlooks the fact that, in many cases, companies have used the same solutions and functionalities for 10+ years with no improvements or upgrades – just because it was pretty expensive to do so. Right now, most software apps are in the cloud with yearly or bi-yearly upgrade releases, that result in incremental benefits for the customer year-on-year. These business benefits get missed for on premise, static, apps – but customers just remember the discount they managed to get.
On-premise sales require customers to make a big payment upfront (license acquisition). And, because software development amortization is mostly recovered through annual maintenance payments from the customer (which are usually around 15-20% of license cost), this is mostly profit. By offering sales discounts on the license costs (upfront payment), vendors were basically reducing their profit margin. Though for mature solutions, the annual maintenance of 15-20% means a good profit margin – since “upgrades” only represent a marginal cost opposed to the initial development cost.
What benefits do you get from applying business value management?
Just pause for a thought here – if you are able to prove a good return on investment, why wouldn’t your customers be happy to pay a bit more?
Value management can grow your sales margins as it shifts the focus of your sales discussions. When you apply value selling, you show your customers all the great benefits your offering will bring. And you can back up your claims with the most appropriate KPIs. More on this in a bit (and also in our earlier blog – four ways that value management reduces discounts).
2. Talk about value – sales that hinge on TCO tend to go sour
If you just focus on the bells and whistles, customers tend to only focus on the price and the internal costs of adopting and running the software solution – or the total cost of ownership (TCO).
By tradition, software sales pivot around TCO. But in this kind of sales, there is such little room to differentiate your product from competitors. And this often leads to lower win rates – and smaller deal sizes, with poor margins. Take it from us, focusing on TCO will not increase your profit margins.
By itself, the cost savings potential of your solution is not enough to prove your value either. In our recent experiences, your best-case scenario is that your solution or upsell delivers a neutral TCO. However, in many cases, TCO comparisons are negative – when compared with the customer’s current solutions or even with your competitors solutions. The temptation is always there to reduce your price. But in so many cases the reduction is so large that you would not carry on with the sale, as the sales margin is not high enough.
What can you do?
The best thing is to move away from TCO to talk value and benefits. With value selling, you align the benefits of your software solution with customer needs. By getting closer to customers and understanding their pain points, you will discover all the hidden places of value (or the opposite – you find out your solution won’t really add much value – and you don’t waste any more time for you or your target customer). With value management, you will make sure that you quantify the benefits based on the most trustworthy data and information. More on building trust in our earlier blog.
If you show the real value and benefits of your offering during your sales process, you will have much better control of the sales discounts you offer. For customers, TCO won’t be the sticking point when your salespeople can show them how much value your product can bring to their company.
3. Prove your worth – so that price comes after value
The best way to grow your sales margins, is to show your target customers that your solution will deliver more business benefits than any of your competitors’. This is more difficult than it sounds. Mostly because if your solution is truly much better than any competitions’, you are very likely to have higher costs than them, which will be reducing your margin significantly. But with value selling, you won’t give the openings so early on to talk about how much you cost. So, proving your worth becomes a lot easier.
In the world of software sales, the more places of value you can find to prove the benefits of investment to your customers, the more your consumers will be willing to pay for your solution.
What kind of benefits are we talking about here?
1. What capabilities do you offer?
Will your product streamline operations? Reduce costs? Increase efficiency? Help customers respond to demands faster?
2. How flexible is your solution?
Can you it in with customers’ current solutions – from anywhere and at any time (in on-premises and in cloud-based settings?)
By showing the real benefits you will deliver to your customer, you will give your customer a better understanding of your solution. Value management provides the chance for you to showcase what a helpful, knowledgeable and professional team you are to do business with. Also, by centring your sales efforts on value, you naturally build closer and more trusting relationships with your customers, which will help you uncover more concerns and objections. Building trust, by focusing on how you can ease customer worries, will boost your margins.
4. Find the windows of value for renewals – make hay while the sun shines
The first point to make here about value selling is that doors will open to take business conversations beyond the IT department who can only really ever validate your solution. Software and IT purchases involve a network of people. For vendors, the question now is how your salespeople can connect with all the right people to grow your sales margins in this new normal. With value management, it’s a much smoother journey to start business conversations with the buyers and the decision maker.
Upsell and cross sell chances are always much more rewarding when sales focus on the monetary value the renewal or upgrade could bring. For renewals, customers will be pushing hard to optimise costs for the same type of solution. But you will be in a better place to talk about the price of your solution when you can prove how much value it has already delivered and how much more it will deliver in the coming years with KPIs.
How do KPIs help?
KPIs are the best leverage for renewals. In value management using a customer’s pre-selected KPIs to work out benchmarks and track and communicate the value created by your solution since the implementation and through product lifetime, will help you with renewals and to gain credibility for upselling.
Remember that a customer will always try to negotiate a discount whenever they can. When it comes to renewals, customers think they deserve a reward for being loyal. They are also likely to be looking for ways to ease their own budget tensions. And it’s common practice. In fact, at TVST we can only think of one case where the customer didn’t try to negotiate a discount with a vendor. And that was because the vendor had developed the interface. So, the customer didn’t know what was in there. They were so scared of the vendor leaving them and the interface breaking that they would have paid any amount of money to keep them.
The point here is that, if you can focus on the business benefits and can show your customers how you have proven your value over time with the KPIs you’ve been monitoring (and hopefully already communicated to them periodically), customers will find it much easier to take your discount knock-backs. Your customer will see you as a trustworthy partner with value selling. This means they will be a lot more open to buying extra or new solutions from you, with less effort from your side.
Positive KPIs are your ammo. They will defend the current price your customers are paying – or even better, your price increase. And retaining customers and securing renewals will help you to protect and grow your sales margins.
If you can demonstrate the value of your software solution and show an attractive rate of return on investment, your customers will be looking at your offering from a different angle. Their questions will move away from ‘how much do you cost?’ and your sales will centre on your value, not your price.
In order to shift the focus from price competition, you need to prove that you deliver better value (business benefits) than your competitors. From this point, you will be in a better position to defend your sales margins and minimise discounts.
When you approach sales through value management, you can expect to reduce the discounts you give out by up to 50%. Offering better prices might increase your sales but it won’t grow your margins. Focusing on your value will help you to grow your sales margins.
Thanks for reading!
Can we help?
At The Value Search Team, we can build, operate and scale your value management practice. Any time, and from anywhere. Do you need any support to grow your sales margins?
If you have any questions, we always love to hear from people. Please message us through the ‘get in touch’ link or visit us on LinkedIn and a specialist member of our team will get back to you.