Posted in: Industry News

President's Message: Forget The Margin, What's The Value?

Posted on Sunday, September 1, 2013

By Chris Reding

Throughout this year as president of PCI®, I have promoted “Return to Growth” as a rallying cry for our industry. It is easily said, but for powder to return to growth (beyond the pace of the economy), organizations must achieve financial results that enable adequate investment in growth infrastructure (technology, people, plant, etc.). For that to happen, as an industry we need to get radically better at capturing the value of the products and services we offer.

Though I am by no means a “sales guru,” I have had the privilege of learning from people (bosses, colleagues, customers, mentors, etc.) who I consider to be the best in the game. I’ve also learned from my own experience (which I assure you, includes more than a few mistakes made along the way). Because I think that value-selling is so inextricably linked to achieving our collective goal to return to growth, I would like to share some thoughts on what I consider a prerequisite to value-selling.

Value-Selling Begins with Value-Pricing

Too often, the cost to produce a product is the first consideration when formulating a price (“cost-plus” pricing). It typically begins with adding a target margin amount to the cost to produce a product. Next, a price-range is established (lower prices for bigger volumes, and vice-versa). Then sales takes the product to market and attempts to sell within the range. Finally, if the product doesn’t sell within the specified range, the price is adjusted until it is one that the market will bear. So the formula looks something like:

Target Price = (cost + margin) +/- (adjustment for size of sale) 

Actual Price = target price +/- market acceptance

Value-Pricing: Never an Accounting Function

Value-pricing is primarily a marketing function, secondarily a sales function, but never an accounting function. It begins with developing an understanding of how your product is different from alternatives, what those differences mean to your customers and potential customers, and the tangible value of the differences. Next, the same process is repeated for each market segment in which the product might be used (because the differences in your product have more value in some segments than in others). Total value prices for each segment are then formulated as:

Total Value Price (TVP) = (price of incumbent alternative) +/- (sum of added value)

Assuming an example wherein the value of your product is greater than the alternative:

Price of Incumbent Alternative................ $6 

+ Sum of added value ................................ $4

 = TVP ........................................................ $10

The next step in the process is to determine how you will split the additional value with your customer. In other words, if the TPV of your product is $10 ($4 of which is the value-difference), how much of the value difference must you give to your customer in order to make the sale? For the example, let’s assume that the customer needs 50% ($2) of the value-addition. This amount is deducted from the TPV to calculate the net value-added price = $8

Finally, after fully understanding and establishing pricing that reflects the value of your product, it is time for the accountants to have their say. Based on the cost to produce, is the value-added price sufficient to provide an acceptable margin? Rather than an input to the pricing decision, cost is considered only when making the go/no-go decision for the product in each market segment.

Time to Launch

Unlike a cost-plus pricing model, which focuses the sales organization on achieving minimum margin targets, a value-added model asks sales to focus on capturing the value of your product (with the only price variable being the determination of how much of the value- add should be surrendered in order to close the sale).

In closing, I suspect that many readers will see this short introduction to value-selling as little more than common sense. After observing the powder coating market for many years now, I have come to the conclusion that when it comes to value-selling, common sense is not a common practice.

If you want to dig deeper, I recommend reading The Strategy and Tactics of Pricing (by Nagle,, available on Amazon) as an excellent primer.

Chris Reding, President The Powder Coating Institute