As the economic downturn deepens, customers will reign in spending making sales more difficult.  That will in turn increase pressure on pricing.

But is your price too high, or your value-in-use too low? 

Value-in-use is the total value delivered by your produt or service to your customer.  In accounting terms, this is the net present value of the benefits arising from using your product.  However, in practical terms, value-in-use is really about how compelling your value proposition is.

A product or service’s value proposition is basically what a customer gets out of the product or service in relation to what the customer has to pay to benefit from it.

Value = Benefit – Cost

So if your customer is complaining about high cost of your product, could it be that the real problem is that the benefits generated from your product is too low?

If the benefits that flow from adopting your product or using your service are high, then your real concern should not be the price of your product but how well you are marketing or selling those benefits.

A well recognized metric for marketing productivity in industrial markets is to compute the in-year return on net marketing contribution. This metric measures the number of dollars captured in the market for each dollar spent on sales and marketing.

The metric by itself is no where near as revealing as when it is used as a benchmark against similar companies.  As the example below indicates, such a benchmark does not necessarily have to be against competitors or even against companies in the same industry segment.

• Example
• Benchmark Selection

Marketing Productivity Calculation

This is an easy 3-step calculation that can be readily computed using published financial information disclosed in SEC filings.

• Gross Profit = Total Revenue − Cost of Revenue
• Net Marketing Contribution = Gross Profit − Total Sales & Marketing Cost
• Marketing Productivity = Net Marketing Contribution / Total Sales & Marketing Cost

This metric is an accurate measure of marketing productivity because sales expenses are a consequence of the channel design in your marketing strategy, and marketing expense is a consequence of the effectiveness of your marketing programs.

The result tells you how much incremental market value you capture for each incremental dollar spent on sales and marketing. In other words, a score of 50% says that you capture $1.50 of incremental gross profit for every $1 spent on sales & marketing expense. A score of 100% indicates $2 of return for each $1 spent. A score of less than 100% is usually a sign of serious gaps in marketing strategy, or in marketing process.

This metric is best applied in technology industries such as enterprise software, communications products, telecommunications and IT services where sales cycles are less than a year long and revenue can be recognized rapidly once a sale is made.

In other markets where there is a lag between initial sales and revenue flow (e.g. semiconductors, optical components, embedded software industries), a modified version of this metric should be used to account for the lag between spend and related cashflow.

Care should also be applied when using this metric in startup situations as marketing expense often leads sales until breakeven cashflows are reached.

Morgan Stanley studied all high technology IPOs in the USA from 1980 to 2002. During that period over 1705 IPOs occurred, creating $1.6 Trillion in shareholder value.

However, virtually all of that value was generated by only 5% of these IPOs.

25% of companies actually destroyed shareholder value and 31% failed to generate any incremental value post-IPO.

A further 39% were either acquired or produced marginal value for their shareholders.

A big part of the problem is that many high tech companies are built to be sold rather than built to last.

Source: Morgan Stanley, “The Technology IPO Yearbook – 22 Years of Tech Investing”, 8th Edition, March 18, 2002