Let’s talk value chains.

A value chain is the series of companies that work together to serve customers for a given product.

For example, if you look at the newspaper that lands on your doorstep, the value chains involved in getting it there include not just the newspaper company with all its employees, but the suppliers of newsprint and ink, printers of free standing inserts (FSIs), wire services, syndicates and the writers, photographers, cartoonists and designers who serve them, and companies that deliver all those components from one link in the chain to the next.

Like any chain, it breaks at the weakest link.

Newspapers use many products that are specifically designed and manufactured for the newspaper industry.

From presses and inserters to computer systems designed to oversee myriad editorial and production functions, many of the tools that make modern newspaper operations possible are not commodities but instead are very specialized equipment aimed at solving problems specific to one industry - or even one newspaper.

Price vs. value

Products developed for such a small target market have to earn enough to make their development worthwhile. Without a mass market and subsequent economies of scale, higher prices are required to defray development costs.

Maintaining this balancing act has proven challenging for newspaper vendors, as products that do have a large market become more powerful and thus able to replace niche market solutions.

In the 1990s, for example, Quark Inc.’s QuarkXPress and Adobe Systems Inc.’s Photoshop became robust enough to meet many of the needs formerly provided only by specialized layout and photo editing applications from companies like Atex and Scitex.

The dramatically lower cost of the desktop tools allowed - and required - the newspaper-specific software and hardware companies to focus their resources on where they could uniquely add value.

Yet it also set in place an expectation for “commodity” prices on products.

Selling a $5,000 add-on to a $500 program may make perfect economic sense. That add-on can provide valuable functionality with a niche market feature that the $500 tool still lacks. The disparity in cost, however, ensures that the purchase will be closely scrutinized.

Not just cost

The concept of a value chain implies that the different companies involved should focus on the creation of value - not just the containment of cost.

Too often, a buyer is focused so closely on initial cost that negotiations overlook long term impacts.

As a result, both the vendor and the buyer may agree to a price that does not fully cover the investment needed to deliver and support a product well enough to deliver the value that it could deliver.

For example, if a newspaper prides itself on getting a rock-bottom price for a new computer system but the vendor then struggles to support the system because the contract is not profitable, has anyone really “won”?

Certainly, this situation is not caused entirely by buyers. Everyone in a value chain has the responsibility to look carefully, both upstream and downstream, at the entire system.

It is especially important to understand the costs and benefits that your own products create for your customers. Will a new computer system save the customer time? Will it create a higher quality product? Will it introduce the possibility of new revenue for the newspaper by allowing you to create a new product or sell a product in a new way or to a new type of customer? What is the value of the benefit?

Cost questions

Consider costs as well. If a new system will require specialized support resources, training, or a particular type of installation to work optimally, make that clear as part of the investment case.

Properly verifying a new product’s value often requires examining your customer’s customers and identifying the problems they face.

Anyone selling to a newspaper should have a good understanding of what the newspaper’s readers and advertisers want, because that is ultimately where the value comes from.

Do readers want better color quality? More compelling graphic design? More timely news? Do advertisers need later deadlines, better accuracy, or a whole new way to package their message? If your product adds value to your customer’s customer, then be clear about it. Make sure the value is clearly pointed out and quantified as accurately as possible.

Understanding needs

To do this, it’s essential to understand your customer’s needs. What’s causing your customer headaches right now? What is the size of that problem? Remember to consider lost revenue as well as direct costs. Remember, it doesn’t matter how “cool” a new technology is: If it can’t solve a problem or create an opportunity for your customer, it’s a tough sell.

To solve problems in a value chain requires cooperation and sharing of information. It requires choosing the right partners and treating your customers and suppliers as partners who succeed or fail together.

The greatest advances in optimizing value chains come when both customers and vendors are willing to share specific information about what drives their costs and profits. It is not uncommon for a customer to request product features that drive up its supplier’s costs and never know it.

Conversely, suppliers may be delivering products that cause unnecessary cost to their customers, or miss some easy enhancements, because they lack understanding of their customers’ specific workflow.

This type of openness can only work within a framework of collaboration and trust, rather than competitive bargaining and secrecy.

Anticipating that purchasing a product or service will become an opportunity to squeeze the maximum price concession from your supplier is as short-sighted as overcharging your customer.

It may provide a short-term benefit, but it’s unlikely to lead to long-term success.

Tom Arnold is a partner of Summit Media Partners LLC, consultants to media companies (www.summitmediapartners.com). He has worked extensively with newspapers across America. He can be contacted at tarnold@smpllc.com.