The delta value formula: Price premium ≤ (value of your product) – (value of your competitor’s product)

As time goes by and the picture gets clearer, I take one important learning from the Kellogg course with me. The good thing is: This learning can be summarized in one equation. Well, good thing for me since I have to admit liking mathematical rigor (No, please don’t take me as a boring/picky!).

Well, this is the equation:

Δ price ≤ Δ value

So, why do I like this equation? Let me explore it further.. in other words that equation equals:

Price(your price) – Price(your competitor’s price) ≤ Value(your offering) – Value(your competitor’s offering)

So, what does the left hand side of that inequality represent? That’s your price premium. What about the right hand side? That’s the additional monetary value your offering provides, the extra value that only your offering can provide (and that competition can’t match).

Thus, what if there is no Δ value? Or what if you “don’t know”/”can’t prove” the differential value your offering has in comparison to competition?

Well, this is what our equation gives us:

Δ price ≤ 0, that is to say:

Price(your price) – Price(your competitor’s price) ≤ 0, which finally means:

Price(your price) ≤ Price(your competitor’s price)

Yes, you got it all right. In case you cannot prove the value side of that equation in monetary terms, your offering/product might be, and as a matter of fact should be, perceived as a commodity. And how do you think procurement managers buy commodities? They buy the cheapest!

Then you might think: Great, that’s a matter of having my marketing people creating some smart business cases. Well, I wouldn’t simplify things to that extreme. Please have a look at the value creation arrow below:

Marketing should rightfully be held accountable for “Communicating the value, educating the market”. However, the value creation process should start much earlier. In fact, it should start as early as when you decide what to take to market.

Very well then. So, what is the monetary value proposition for the product/service you plan to offer? And how is it better than competition or the second best alternative (that solves the customer’s problem)? In case you can’t answer that, you better get prepared for a price war!

Links:

• Customer Value Management – I found some interesting info on customer value management in that link

Insights after the Business Marketing Strategy Executive Program from Kellogg School of Management

I know, that was too long a title…but fair enough, that’s my way to recognize the quality of the lectures/discussions I’ve had in the company of James Anderson and Dipak Jain (professors at Kellogg School of Management) the last few days.

I can’t say it has been long since I’ve last been lectured. In fact, six months ago, I was still taking my Mandarin lessons at Stockholm University (Gosh, how much I miss that…). What felt different this time though, in the Kellogg course case, was that we were not being lectured, we were discussing our own business issues with very knowledgeable people.

Background:

Some selected professionals in my company were offered the opportunity to participate in a specific Kellogg executive program. The program is called Business Marketing Strategy.

The program covered mainly the following:

• Customer Value Management
• Building Customer Value Models
• New Product Marketing Strategy
• Customer Value Propositions
• Managing Market Offerings
• Value-Based Pricing

Insights

You, my readers (whoever you may be), may already know what I do for a living. I work with a business development engagement model called Value Creation. In other words, I try to sell using what you may call consultative selling (in our case,  that’s more of a provocation based selling).  Therefore, in a way, I could possibly say I know a thing or two about managing customer value. Anyhow, I learned quite a few new things these last days and since there is always room for improvement in whatever you do, I also brought a couple of easy wins home with me.

The professors incited us to discuss our pain points in a special nonchalant manner. Thus, to discuss is what we did for coffee break, lunch and evening mingle. And what did we learn from all that talk? Well, it is high time to start acting! And we have a hell lot to do.

You may then ask yourself why we may have so much to improve. Well, take a short look at the topics for the executive program (bullets above). My question for you then is: Where (in which part of an organization) do you think the responsibility for managing customer value should sit? TIP: Don’t be mislead by knowing this was a Marketing Program.

Long Answer: Taking customer value management seriously isn’t about simply marketing yourself as the “Value Creator” and it isn’t a task for Marketing only. I prefer to see it as accepting a new company philosophy, articulating a new competitive strategy and dealing with the implications of that across several units. I.e., to take it seriously you have to dig its roots deep into the organization.

Short Answer:  Implementing customer value management is about changing the corporate culture!

So, how does changing the corporate culture sound as “a hell lot to do”?

PS: I received Jame’s Value Merchants book and as I read it, I may come back with more posts on the subject.

Take Care!

Telco market in need of a Broker, part 2

I have been blogging in my company’s internal blog a lot more often than at my external blog. That’s a pity, since I started to blog out here.

In my Telco market in need of a broker post, I promised to come back with more on the alternative solution I was proposing and in this post I tell the rest of the story.

What was the issue then?

A2P SMS contract handling is traditionally managed locally, each operators sets up its own cross-operator contracts (as per example in the old post, Operator A may send A2P SMSs to other 100-150 countries, while operator B may send SMSs to other 80-120 countries). Consequently, their clients (the applications) will be limited to sending SMSs to only those countries. As I said before, by not growing the number of contracts with other operators, operators A and B are crippling the market by not creating the right conditions for it to grow. In other words, new applications would possibly either choose alternative operators offering greater reach or go with alternative technical solutions for their messaging problem.

So, in simple words, the proposed solution was: Implement an A2P SMS hub at the company group level (serving all Telco subsidiaries), i.e. put in place a simple piece of equipment with least-cost routing capability and get one single team to handle all your cross-operator contracts (I tried to depict the solution in the picture below). With the aid of centralized operations, you will be able to grow from having only 80-150 cross-operator-contracts to reaching between 500 and 600 operators.

By showing the market you are serious about the A2P business you will surely give it a kick. When it comes to the returns, by looking at the impact this could bring to just one Western European subsidiary, I could find approximately 271 million Euros in cash flow advantage (cumulative over a 5-year period). Now, what do I mean with cash flow advantage? Those 271 million Euros reflect the advantage that an A2P SMS hub brings to your business. In other words, without hubbing you would be missing all that cash.

PS 1: I have consciously neglected all the great cost savings upside that least-cost routing brings to the business case

PS 2: This is just too much money to be neglected and the basis for it is quite straightforward:

• Allow the market to grow
• Accept being just the enabler
• Leverage group efficiencies

Good to be back out here!

Telco market in need of a broker

I haven’t made it clear before, but I am strong believer that we (in the Telco industry) will one day sell and buy bits from an exchange. An exchange is a natural solution for a not so complex optimization problem: How can trade happen in a market with too many buyers and too many sellers?

However, I can’t dismiss the fact that to institute an exchange is no easy task and that to use a broker is usually a very good short term solution to the problem mentioned above.

Issue on my desk

To the issue I have on my desk then… I would love to solve my issue by saying to the operator in question: “Go ahead and pick us as your broker”. Sadly, that’s not what I will do.

The whole thing is about A2P (application to person) SMSs. A2P SMSs are SMS messages generated by an application (not a person) and sent to any normal mobile subscriber just like you and me. For instance, a bank could be sending on-request passwords to its customers via SMS. Another very common use of A2P messages is advertising: Automatic server messages buzzing your phone with “Today 50% discount over the discount price” type of message.

Business Case

You may say that numbers in this business are still tiny, but here is what some others are saying:

• About 4 trillion SMSs were sent globally in 2008 according to the World Cellular Data Metrics (these include also P2P (person to person) messages).
• British telecom  expects to see more than 30% of all text messages by 2014 coming from business or interest group related A2P messaging rather than from P2P.

Interesting…a very rough back-of-the-envelope calculation tells me this is good business:

A2P messaging in the UK alone = 30% x ~80 billion SMS messages (UK 2008) = 24 billion SMS messages

Assuming 10p charges for each A2P SMS, this business gives 24 million Euros in revenues in one year.

To make the case for it even better, from the growth rates I’ve seen for A2P traffic, UK A2P SMS traffic could grow to some 71 billion messages by 2014, taking SMS revenues in this market to the level of some 71 million Euros.

Obstacles to success

Since businesses rely on these messages, network operators are pressured to offer better service level agreements. P2P SMSs are liable to a “Send it again” response. In the case of A2P messages that’s unacceptable and could lead to serious operational consequences.

In the P2P messaging world, SMSs are sent and received freely. In other words, in case two network operators haven’t signed interconnect agreements, gentlemen’s agreements will rule and an SMS sent through Operator1’s network will be passed onto Operator2’s network with no hurdles (at least in theory).

Back to the case of A2P, the gentlemen’s agreements unfortunately do not hold true. Operator1 in CountryA will provide the applications (bank/advertising company in my example above) with a list of countries Operator1 could possibly send A2P messages to. For instance, Operator1 in CountryA communicates with countries C, D, E, F and G. “Want your application to send a message to CountryB ?” “Sorry we don’t do that, CountryB is not in the list”. My drawing below may clarify things further.

What if Operator1 had an agreement with Operator2? Firstly, the picture would look a lot happier. :-)

Metcalfe’s law

Metcalfe’s law states that the usefulness of a network is equal to the square of the users. Right…that’s the story behind SMS, you need interoperability between network operators; you need end user interest. Have those in place? You won’t need to wait long for traffic volumes to rise.

So what is Operator1’s behavior (of saying “sorry we don’t reach CountryB”) doing to the market? It is crippling it!

The role of a broker

What value could a broker bring to this case then? As I mentioned before, in case you have too many buyers and too many sellers in the marketplace, you need someone to intermediate all those transactions. The optimal would of course be to leave it to someone that can do that efficiently, i.e. a broker.

The alternative solution

As I mentioned before, a broker won’t be the proposed solution for this problem. I propose something different…Watch this space, I will come back with more soon.

Ryanair and its operational excellence strategy

I’ve before mentioned the changes Michael O’Leary had to make to his company in order to transform it into a low cost player, leader in operational excellence.

One clear limitation Ryanair has is the physical constraints an airplane poses. They can’t squeeze more customers in there than they are squeezing today. But what if they could have standing passengers?

Well, now they are trying to assess public acceptance of this idea, through an online survey on their website.

Would you accept to stand for approximately one hour in order to fly for free/pay half of what seated passengers pay? You may want to participate in their poll…

Addition July 16, 2009:

The main message is:

A company with strategic focus has time/money/resources to push the boundaries in order to protect and improve its business model.

Ryanair exists to sell cheap flight tickets. Customer value = To pay very little (not 10% cheaper, but 80% cheaper). Ryanair didn’t start low cost, but was transformed in the hands of their CEO (Michael O’Leary). Flying from alternative airports; modifying internal space in airplanes (squeezing more people in); charging for several extras (allowing for upselling and scalable tickets); among other things…They are now questioning the so far accepted truth that a passenger shall travel seated in an airplane. With one single value discipline as focus, a company is able to direct the whole organization towards a common objective and is allowed to innovate.

Now, back to Telecom. Barthi is a good to mention example here. This issue of Ericsson Review comes with an interview with Sunil Mittal (Barthi’s CEO). Sunil talks about his enormous interest in MTN, willing to expand his company’s success based in scale, volumes, and extremely low prices to end users. Sunil also seems intrigued by the market nature in Europe (would it be possible to replicate Barthi’s business model in Europe?). Barthi’s strategic focus is beyond doubt an operational excellence one.

My intention with the post was really to exemplify an operational excellence strategy and the importance of having focus on one of the 3 value disciplines. More on strategy theory here, here and here

Spectrum Strategies and Network Sharing

A mature market operator (Operator A) received some several years ago the right to run its 2G network on 900MHz. Another peer in the market (Operator B) also received the same right. These two players have together 35MHz (paired spectrum) on the 900MHz band. There are five mobile players in the country and the other three run their 2G networks on 1800MHz. Important to mention that none of the players was ever charged for that right to use; that these 35MHz are today underutilized by the two players; and that to deploy networks on lower frequency bands brings very significant cost advantages given that signal coverage can be 2-4 times the coverage in 2.1GHz (i.e. a network in 900 MHz as a rule of thumb may be deployed with 60% less sites than a network in 2.1GHz).

So what about 3G? All 5 operators run a network on 2.1GHz and my mature market operator (Operator A) got only 10MHz in that band to run its network. i.e. 10MHz = 2 UMTS carriers. That ain’t much, huh?

The regulator and competition authority for communications in the country shows signs to be willing to engage in spectrum redistribution. Picture the situation… regulator x operator: “Dear operator, you haven’t paid for that asset you use, you don’t utilize it fully and still that is worth gold for your competitors. So…you better go auction it or I may not allow you a share of 2.6 GHz (potential LTE frequency), nor 800MHz (analogue and digital terrestrial television spectrum to be cleared by the regulator)”.

Gave the business case some final proof-reading today and the following is what I propose in it:

Operator A, go partner with your 900MHz peer (Operator B) and together free-up 2×15MHz of your spectrum on the 900MHz (each of you keep 10MHz for continued GSM services). Build an UMTS network together, sharing actively all its resources (down from baseband processing level and deep into the Core), and provide nationwide coverage.

Now, why do I propose so? In case each operator would free up its share (i.e. 2×7.5MHz each) and deploy their own network there, the network would have maximum one UMTS carrier=5MHZ (given that only 7.5MHz would be available). Huge investments in a network with limited possibility for expansion does not look very smart in my eyes!

Fast forward into 2014-2016 and the two operators may start to think of a shared LTE network. In case they deploy their network with a Multi-standard-radio (MSR) base station they will be able to easily transition from UMTS to LTE, helped both by the fact that deployment costs will be significantly lower (no site acquisition, no über complex logistics of additional big base stations, same operating systems) and that freeing up spectrum for LTE can be done in little impacting phases. Instead of those 5MHz needed for UMTS carriers. LTE can be deployed in spectrum shares as little as 1.25 MHz.

Some final words:

Value (talking well above 100 million Euros in cost savings) in the proposition comes from:

• the fact that the shared network is on 900MHz (60% less sites could be considered)
• it is a shared network (cost efficiency coming from shared costs)
• Receiver Sensitivity advantages (% further less sites) (being the percentage an equipment vendor specific advantage)

What I should also consider in the business case (but unfortunately haven’t yet) are the revenue flows coming from some possible wholesale/roaming charges into areas not covered today by the other players in the market.

A fixed mobile convergence business case

Imagine you are a mobile operator. You run your 3G network on 2.1 GHz and your 2G network on 900 MHz. You lease all capacity on your transport network from your big incumbent competitor. You bought a LLU player in 2006, trying to get yourself a share of the fixed broadband market. Two years later, your market share has grown over 200% but unfortunately you’ve got still less than 2% market share. Two of your competitors are about to combine forces under a new company that will rank second in the overall market (waiting regulator approval). What to do?

I was playing with this business case this morning and pushed by the green light given by regulator to the acquisition mentioned above, I thought of sharing it here while I organize my thoughts.

Well, what if you start charging less? Let’s say…

• charge half of what your competitors charge for fixed broadband access;
• or…offer a bundle of voice and broadband for the price your competitors charge for broadband only.

Would it be then reasonable to consider this could bring your market share up to some 35% around Q3 2011? In case it is, break-even for what I am about to explain comes in 2 years.

So, how do you actually get about doing it?

Put a Mobile Broadband Router (MBR) on a pole and share access between three households. Break-even in 2 years could be brought forward if you review the pricing strategy I mentioned above (I think you can charge more than just half of what your competitors charge) and I am considering extremely conservative estimates for operational expenditures in the business case (to be fine tuned).

What does it bring to your cash flow?

• You may renegotiate your contract with the big incumbent competitor mentioned above. You won’t need to use all that copper going into the houses any longer, will you?
• You may lower your OPEX on your fixed operations some 4-5 times. No copper; pre-set CPEs (no parameters to be set as in DSL modems); no DSLAMs, lower customer services enabled by remote support; and the customer pays for power at the access point.

Isn’t that wonderful?

Provocation based selling, a new sales approach

You may have heard about consultative selling, but what some of you may have never heard of is what was once called by Harvard Business Review, Provocation Based Selling.

Well, the HBR article is called Provocation based Selling – Taking Solution Selling to the next level and in summary it preaches that in a downturn, you should be bold in front of your customers. No need to spend hours in a dialogue with them, trying to understand their issues in order to answer to these by offering a solution. According to Harvard, provocation based selling is about standing in front of your customer and say: “You are thinking about your business along the following conventional lines….But the way we see things, that puts your success in jeopardy. You should be thinking about it in this completely different way….”

So how do you know what issues your customer has without actually talking to them? Well, you got to understand the industry, research the market, hear the analysts! There is high chance that an issue flagged by an analyst is a signal that your customer’s top management is being pressured to solve that issue. And yes, that’s exactly the issue you should tackle!

I’d be very happy to hear your stories. How does business development work in your world?

Low cost competition, how to fight

What to do when a competitor starts eating (with hunger) your cake? What if this is about competing with a low cost player? Should you enter a price war? Well, that’s usually not sustainable. As I already mentioned before, truly low cost competitors are low cost, from top to toe. Elaborating all this a bit further, I hold the opinion that no sales strategies, marketing, pricing or brand can alone be held accountable for you winning or losing your market position. Choosing to focus your efforts on being either an Operational Excellent, a Product Leader or a Customer Intimate company could, on the other hand, help you win a share of the market or protect the one you’ve got. Well, that won’t be the task of one individual/small group of individuals either. Therefore, I believe the options are:

• You (your top management team) ponder your desired competitive position. That could for instance mean you decide to differentiate yourself even further (powerful choice in case you are in consumer business), become customer focused or even transform into a low-cost player yourself
• You go for the trivial alternatives:
  • You launch a low-cost line of products
    • Considered usually to be extremely hard to succeed with, since the rest of your business (including all your support activities/functions) was not created with the low cost mindset in place
  • You transform yourself into a solution provider
    • These product + services packages will only get profitably sold in case the customer believes that procured separate products or services are insufficient to solve the problem they have in hands. Gosh, and how difficult it is usually to promote the value of such a package!

Some final personal notes:

1. So, what keeps your CEO awake at night?
   • From what malaise is my industry suffering from?
     • If you believe this is what your CEO is trying to answer, I would suggest him/her to start being customer intimate
   • How to give innovation wings?
     • If otherwise he/she is trying to answer this, the suggestion is: Do your best to promote your product leadership!
2. Needless to say that the one that best serves its customers’ needs will win in the long-run. That should make your life easy, agree? What does your customer really want? A leading product? A partner? Or simply the lowest possible price? Sorry, you can’t provide all the above. Not without hurting your business.
3. And a good to remember note: Culture is a long-term result of your strategic decisions, a long-term result of how well you communicate your strategy. Ryan-air preaches low cost, Apple preaches design, Retail banks preach customer partnership. Their employees understand that. What do you preach to your employees? Do you make your message clear?

Right strategic focus

Getting back to the “Does your company have strategic focus?” question (link here)…Let me assume you answer “Yes, my company does have strategic focus”. What then? Well, strategists can always ask some more…Does your company have the right strategic focus?

In order to answer that question and make sure your company has made the right choice for a value discipline, Treacy & Wieserma (T&W) suggest a senior management team should get together and answer some tough strategic questions (staff to provide decision support material, such as customer feedback, market trends, competitive intelligence)

First batch of questions aims at understanding customers, competitors and the company’s own reality:

1. What are the dimensions of value that our customers care about?
2. For each dimension of value, what proportion of customers focus upon it as their primary or dominant decision criterion?
3. Which competitors provide the best value in each of these value dimensions?
4. How do we measure up against our customers on each dimension of value?
5. Why do we fall short of the value leaders in each dimension of value?

Second batch: Here the management team starts to visualize their wanted position and identify possible gaps to achieving that:

1. Irrespective of industry, what are the benchmark standards of value performance that will affect customer’s expectations? How do firms achieve these standards?
2. For value leaders, what will be their standards of performance three years from now?
3. How must the operating models of these value leaders be designed to attain those levels of performance?

The third and last batch of questions for investigation allows for strategy development:

1. What does the required operating model look like – i.e. what are the design specifications for the core processes, management systems, structure and other elements of the model?
2. How will the model produce superior value?
3. What levels of threshold value will the market require in the other value dimensions? How will these be attained?
4. How large will the potential and captured market be for this value proposition?
5. What is the business case – including costs, benefits and risks – in pursuing this option?
6. What are the critical success factors that can make or break this solution?
7. How will the company make the transition from its current state to this new operating model over a two- to three-year period?

I definitely appreciate the approach, it blends the need for passive analyses with the need for active strategic planning. The biggest challenge in my world is to make sure the process won’t die before you get to the strategy development phase. That takes a lot of securing executive commitment but also of helping others stepping out of their comfort zones.