Integrated Offerings will More Easily Provide Greater Returns than the Cross-Sell Opportunity
Many commercial diligence exercises and value gen plans based on platforms and add-ons (a plurality these days) call for testing customer interest in, and potential for, the “cross sale.” While cross-sale opportunities have value gen potential, I have seen scant evidence that even the better ones produce much more than modest returns and valuation yield - i.e., maybe an increase in earnings, but little to no increase in multiples.
The problem: customers in 2020 are too scrutinizing and have far too much information at their fingertips to be swayed by what worked well in the ‘80s and ‘90s. All too often, we have found the ease of the cross-sale purchase does not compete particularly well with preference for "best of breed" – especially with the abundance of solutions that provide useful stitching between activities and processes.
With this observation in mind, I advocate that the diligence and value-gen plan take things to the next – and far more rewarding – level: Integrated Offerings – offerings that combine activities and processes. For example, Uber both hails the ride and then pays for the ride, with a single tool and a single user motion; Square, in contrast, only handles one (the payment). While there is extra work in bringing things together, fundamentally it is where the far richer returns lie. The simple reasoning – when you take on the extra work that customers must otherwise do themselves you give them one great reason to purchase a combined solution; and you are always going to have scale advantage over your customers. The whole is truly greater than the sum of the parts in this case, with the “greater” coming from truly eliminating work (and risk) that customers otherwise bear. It seems that just about every customer today prefers to simplify and to focus on managing ever fewer core competencies. You just need to figure out the sufficiently valuable ones – and allocate the resources to get it done.
As an investor, the return prospect should be extremely compelling. Reasoned integrated offerings provide the trifecta of 1) share gains; 2) margin gains; and 3) enhanced stickiness (the result of customers outsourcing the value-add activities associated with the integration). Few other single initiatives can offer this much multiple expansion opportunity.
So, in our next exercise, let’s up the ante in the front-end discussions and hold the process accountable for determining far greater return potential.
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