As featured in our Q3 2013 Capital Ideas Newsletter. An article by Michael Weiss, Managing Director of our Seattle office.
When you finally decide to sell the business that you’ve dedicated your life’s work to create, there is one critical component that will be sought after by every potential buyer… your differentiation. If you are that company in your industry that has a product or service so proprietary and so unique that it cannot be replicated, you move miles ahead of your peers when investors are considering a purchase. However, that differentiation doesn’t just happen over-night. It takes vision, strategic planning and time to create a proprietary base that is highly sought after by others.
A proprietary product or service is any idea or object that is owned entirely by the owner, and cannot be recreated without the owner’s consent. The advantage to a business owner is that these products open up an unrestricted revenue base, which has the potential to change the financial fortunes of the company. The bottom line is, if managed properly, proprietary product lines and unique brands have a positive impact on cash, accounts receivable, inventory, and debt on a company’s balance sheet. The company, in turn, has a better liquidity and a greater overall value. Clearly there are many advantages to owning your own product lines, but it is also essential to know about how to manage unique product lines and ways to avoid the stigma of proprietary products and the wrong shadow they sometimes cast on sellers.
- Quality control in the creation of products. Ownership of product lines allows the owner the ability to ensure the best quality products for their customers. The distributor also has direct control of the sales channel and brand image. The sales and marketing strategies are targeted specifically to build brand awareness for the company’s own products.
- Large profits. With proprietary products and services, a company owns the exclusive right to the item, opening up the full advantage of receiving all the sales from said item. The distributor is the only source for the specialized product and has the full right to sell the products to their customers. Through this, they realize higher gross margins, higher pretax net operating income, and ultimately, a higher value for the business.
- Opens up more avenues for revenue. This is especially important when the item is connected with or made for exclusive use in an accompanying device the company sells. Digital camera companies are a great example of this benefit. These companies create the advantage of keeping the profits within the company by having the devices only work with their products.
- Control over gross margin. The distributor can easily pass the price increases or decreases on to their customers.
- Limit Risk to Distributors. Distributors can react more quickly to market needs and changes. Knowing they have control over their products allows distributors to limit their risks by being able to see changes in the market and modify their products accordingly.
Many consumers get annoyed with proprietary products. People don’t like products that only work with certain devices. In some cases, proprietary products can be seen as clogging the world we live in today. Many individuals use the products and never think why this disc only works with this media player, or why this film only works in this specific video camera.
Often, when companies capitalize off of their proprietary products, they can seem opportunistic. A great way to corner the market while also providing customer value is to make your products unique. Customers are drawn to unique products that provide something different than what they are used to seeing. You can have ownership over your products and make a great profit while also satisfying customers.
How to Best Develop Proprietary Product Lines
The best and most profitable products are uniquely distinct. When making the decision to start branding your products, your goal should always be directed towards providing something different and beneficial to the customer. A distributor should create innovative features and options so they may complement the needs and objectives of the customers. Maintaining a great relationship with your customers will allow for a more direct exchange of ideas and feedback on how to deliver product and service differentiation to customers. The features and options valued by customers will only become apparent and able to be implemented when there is a strong communication and relationship between buyers and sellers. This communication starts with asking customers about their wants, needs, and values.
Start with asking about their basic needs, like price, location, and delivery. Then ask about their expected needs, which may include quality and service, and finally their desired needs. Desired needs are things your customer would like to see, but does not necessarily deter them from your product or service.
Besides the customer approach, another way of effective and inexpensive differentiation is through brainstorming new products, features, and benefits. Testing your outcomes before implementation is important if you are not relying on customer input for initial product ideas.
Once you have gathered a sufficient amount of external or internal input, it is time to decide on a unique value approach to your customers. You may want to conduct a value chain analysis in relation to your competition. The type of industry in which you operate can greatly affect how you differentiate your product. With a large industry, it is best to differentiate on a cost basis, while in a specialized industry it is more effective to look for specialty applications for your product or service.
Support for the New Products
In order to keep and support your proprietary product lines, it is important to continually monitor service, experience, and performance so the products remain effective. You may also leverage existing sales personnel, catalogs, websites, and advertising to support proprietary products and brands. This helps cover fixed and variable overhead costs, which improves profitability.
Continually Develop Unique Value and Differentiation
It is now fairly obvious that effective proprietary products are built on unique value, which provides a competitive advantage. However, in only a short amount of time, competitors will copy and may even improve upon your once unique products. To combat the loss of advantage, your company must be persistent in continually integrating new value and benefits in existing products or services and developing new products and services to remain prominent in the market.
It’s these unique products and/or services that potential buyers look for, and that will set you apart from other companies.