This article has been adapted from a two-part post by @claudiomkd which you can find here: Part1 and here: Part2
Reducing the sales cycle with laser-focused value propositions
If one thing I learned about B2B markets during my career is that business-to-business models, although very monetarily rewarding, can pose two huge challenges for sales & marketing organizations:
- Sales cycles can be very long, taking months or even years to close a deal
- Typically, the customer lifetime value (LTV) is relatively short due to high competition and pricing wars
There is a conflict here between the sales cycle and LTV, which can only be mitigated by minimizing the sales cycle and establishing a long-term customer lifetime value.
Beyond all product features and benefits, you always have to design your value proposition in a way that minimizes the sales cycle and establishes a long-term customer LTV.
Designing value propositions is one of the most interesting and rewarding tasks that are rarely performed within marketing organizations. Using the Business Model Canvas (BMC), you can lay out a simple business plan without having to write a lot.
The BMC focuses on the nine key components of a business model, including the two most important ones of all: what is your offering (Value Proposition), and for whom (Customer Segments).
Here is the Business Model Canvas by Alex Osterwalder:
When filling in a BMC, you always start from the target customer: Customer Segments, or “for whom it is”. Then you move onto the Value Proposition and explain what you offer to your target customers.
For example, you could formulate your value proposition like this: we provide small businesses with an HR management tool to reduce job application processing times.
Value Proposition Design — Mapping value to customer problems and goals
The job of your value proposition is to present a benefit to your customers so appealing, that they will pay as much as possible, as soon as possible.
When designing your value proposition, you will typically do root-cause analysis (RCA) in numerous iterations until you find the biggest pain point of your target customer and, based on that, build a product or service to palliate that pain.
Therefore, when in B2B, your question before designing a value proposition should always be: what’s the biggest pain point for businesses so that they pay me as much as possible, as soon as possible?
There happens to be a very common “problem” among every business organization, which is to maximize the shareholder value. That means all businesses, with no distinction, see everything in the light of return on investment (ROI). Every hire, every decision, every tool they purchase, is measured in terms of how much will it maximize the gross margin.
This is great news for you as a value proposition designer, because it simplifies your job to just presenting your value proposition in terms of ROI for your customer, which to them it means either:
- They are going to make more money thanks to your product
- They are going to save costs thanks to your product
A virtual reality (VR) company is developing a new headset to be launched at the next CES, in Las Vegas. They need to develop a software component that will make the VR headset secure before they release it to the market. However, they would need to hire 10 highly paid engineers to develop (and test) the component in time. On the other hand, your company offers a similar component which would need just a few modifications before it can be integrated into their headset.
In this example, your value proposition would be worked around cost difference. So, you can calculate how much would the VR company spend in building the software internally, and then offer them your component for a lower price. Let’s suppose the total cost for your customer is 10 engineers X $10k/month X 8 months of development = $800K. Therefore, your pricing strategy has to allow to sell that software component way under $800K, in order to justify their investment.
Google will launch a new phone that has built-in functionality for backing up the user data onto Google Drive, Google’s paid cloud service. On the other hand, your company has backup software for Android phones that is way more capable than Google’s built-in one. It can backup high-resolution photos, videos, and even social media content, which is a great deal for users.In this case, instead of focusing your value proposition around “features”, which is basically telling Google “your product sucks, ours is better, please replace it”, you will focus on how much more money Google is going to make.
Let’s say your backup tool will generate, e.g., 3.5 times more data which will be stored in the cloud. At the same time, Google Drive prices go in tiers ($1,99/month for 100GB, $9,99/month for 1TB, and $99,99/month for 10TB) and they only make growth when they get new users or existing users to exceed their capacity and need to buy the next tier.
Here, your technology can make Google convert users to the next tier 3.5x faster than they currently do. So, let’s say Google was making $3.4 billion with the current strategy and grows $560 million every year from Google Drive conversions. If you can make Google grow e.g., $780 million per year, that’s a $220 million difference. You can now use that calculation to base your pricing, be it a one-time license, a year license or a shared-revenue business model.
Using ROI to Justify Shorter Sales Cycles
Using return on investment (ROI) as a justification, it is possible to shorten the sales cycle and ensure decisions come faster from within the buying organization.
ROI is the #1 thing that matters for B2B customers when making a purchasing decision. This means that, after they have signed the contract with you, they’ll keep exploring future alternative solutions that are cheaper. Remember: their goal is to increase ROI, which in turn means they won’t settle with your solution if they can find something that is more cost-efficient. In other words:
ROI as a sales justification (a.k.a. “value for money”) will work when closing a new customer, but it won’t cut it in the long term.
Once the closing is done, the next challenge begins: how do you keep your customers buying from you, year after year? Enter Customer Lifetime Value.
What is Customer Lifetime Value?
Customer Lifetime Value is the total amount of revenue that a customer can bring during the whole history of the company. It is often shortened as CLV, CLTV or just LTV. It is extremely important to know how much money a customer will generate to the company, in order to plan your customer acquisition strategy. This will help you calculate how much investment you can put into customer acquisition and customer retention.
Customer Lifetime Value distribution — Neil Patel
The main math behind the Customer Lifetime Value is that, typically, the closing itself is not the biggest source of revenue from a customer. Instead, a customer will generate the majority of the total LTV revenue for the company through retention.
That is why customer retention is extremely important for the company’s long-term revenue. When talking about B2B models, the two main reasons why customers typically leave are (in order of frequency):
- They find a similar solution that is cheaper
- The customer satisfaction is very low
Obviously, the long-term revenue and net profit from customers is not coming from the closing itself, but rather from fruitful customer relationships that last many years. And the only way to assure this is through a customer retention program.
It’s All About Customer Success
Although Wikipedia often has a very traditional way of defining things, I personally think the one for Customer Success is quite spot on:
“Customer Success is the function at a company responsible for managing the relationship between the vendor and its customers. The goal of customer success is to make the customer as successful as possible, which in turn, improves customer lifetime value (LTV) for the company.”
In other words, Customer Success’ purpose is to make sure your customers will get the necessary help from you to grow their own business. The assumption here is that, if your customers succeed and grow their business, they will have more reasons to keep investing in your solutions. That is, if you help your customers grow, they’ll help you grow with them. Sounds easy, right?
Customer Success (CS) is still very poorly implemented in the majority of companies today. Most of the CS teams in the tech industry are actually working on “customer support”, which is a reactive way of doing customer success by fixing stuff that is already broken. Instead, true customer success should focus on being proactive and making sure the customer is constantly elevated with great service, new features, and even unexpected good news.
The secret to great Customer Success is to have a strategy that will help you grow your customers’ business and strengthen your existing relationship. Here’s my suggestion for creating your first simplified Customer Success strategy:
1 — Have a team dedicated to Customer Success
First and foremost, you must have a dedicated team to help your customer. This implies you will have to separate customer support from customer success, preferably into different teams.
The job of the customer success team is to represent the voice of your customers’ shareholders within your company. That will make sure that your customers are always heard and taken into account within your organization’s priorities. Moreover, this will enable your customers to continue growing and improving their market position thanks to your organization’s unconditional support.
2 — Build a feedback loop
Feedback loops are simply bi-directional communication channels to ensure mutual understanding:
Choose a channel that your customer loves, to communicate with you. Some customers prefer face-to-face meetings, some prefer WhatsApp and some may prefer email. Use what feels the easiest for each customer.
Establish a 2-way feedback loop: don’t use the channel to push news to your customer. Instead, use it for asking questions and listening to their problems.
Document every message, request or complaint your customer is communicating over the feedback loop. Bring this information to product planning meetings.
Periodically check that the feedback loop is still working and being used by the customer. If not, then rebuild it so that the communication keeps flowing.
Remember this: no news is bad news. — A silent customer could be a customer looking for an alternative solution.
3 — Understand their business
In order to have a deeper understanding of your customers’ business and what makes them grow, it is vital to understand the entire value chain, all the way down to the end consumer. This will help you design a plan for your product to empower your customer to deliver higher value and, in turn, make more money and grow. Here’s an oversimplified example:
Customer value chain — How does your company deliver value beyond your customers
This figure shows an oversimplified example of the B2B value chain. Your company provides value to the B2B customer which, in turn, delivers value to the end consumers. It is important to notice that, no matter how many B2B layers are in between, in the end, the money paying back to the whole value chain will come from consumers. So it is really important to understand how your product affects the entire chain, in order to improve your value proposition for your direct customers.
4— Make product management embrace Customer Success
Now it’s time to improve your product or service to make sure you can support your customers’ business growth. It is the product manager’s job to make sure the product roadmap is built to enable and support your customers’ growth (= success).
Therefore, make sure your product managers have as a top priority to understand your customers’ business, their main issues reported in the feedback loop, and where their growth comes from. Then, they should use these three inputs to build the next features of your product.
Read also: The Importance of Customer Feedback
When it comes to B2B markets, there is only one thing that sells: money. Either you make your customers make more money or save costs (ROI). However, it is not only about just closing a deal. If you want to keep your customers around and increase their lifetime value (LTV), you’ll need to design your value proposition around Customer Success.
Customer Success helps you plan your product development to enable your customers’ products in new ways that will bring growth. This, in turn, will also make your customer stick around and therefore increase their LTV and your company’s long-term revenue. That’s why true Customer Success is becoming central to modern organizations that seek sustainable growth.