Value Merchants. Nirmalya Kumar
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companies continues, the pricing pressure that such customers place on their suppliers is not likely to abate. Thus, business as usual—or even doing more of the same with less, which is a common response—will not provide solutions worth pursuing.
Customer Value Management: A Progressive, Practical Approach
To combat price concessions and commoditization pressures, firms have to fundamentally reexamine their philosophy of doing business and how they put it into practice. Suppliers must adopt a philosophy of doing business based on demonstrated and documented superior value and implement that philosophy using an approach we call customer value management. Customer value management is a progressive, practical approach to business markets that, in its essence, has two basic goals:
1 Deliver superior value to targeted market segments and customer firms
2 Get an equitable return on the value delivered
Customer value management relies on customer value assessment to gain an understanding of customer requirements and preferences and what fulfilling those are worth in monetary terms. Although firms may be able to accomplish the first goal without any systematic assessment of customer value, it is unlikely that they will be able to accomplish the second goal without it. Simply put, to gain an equitable or fair return on the value their offerings deliver, suppliers must be able to persuasively demonstrate and document the superior value they provide customers relative to the next-best alternative.
“Green” Money Versus “Gray” Money
Senior managers at most firms in business markets have come to realize that if they can cut the cost of acquired goods and services, such procurement savings will fall to the bottom line as improved profitability. Thus, nearly every firm has set goals for purchasing to cut the cost of acquired goods and services. These goals are typically expressed as total cost reduction goals and tend to take one of two forms. They may be expressed as a targeted cost reduction amount, such as reducing the cost of acquired goods and services by $2 billion over three years (as one oil company did), or as a yearly percentage reduction, such as reducing costs by 10 percent, 5 percent, and 5 percent over three consecutive years (as one automotive manufacturer did). However, the translation of these goals into purchasing practice often leads to a bias that one purchasing director captured with the expression “green money versus gray money.” What did he mean by that?
Green money (the predominant color of U.S. currency) refers to cost savings for which purchasing managers can readily get credit, whereas gray money refers to cost savings that are difficult for them to claim. Getting three bids, picking the lowest one, and then negotiating a further price reduction is green money. It reflects directly on purchasing’s contribution to the goal that senior management has set. Acquiring an offering that provides a lower total cost of ownership but that may have a higher purchase price is gray money. Because of limited time and measurement capabilities, a purchasing manager may not be able to document that she has actually received the cost savings that the supplier assured her firm.
But it doesn’t have to be that way. A manufacturer of controls for automating manufacturing lines has its salespeople spend time at prospective customers gathering data on what controls would be required, what the total cost of them would be (not just purchase price, but all costs, such as installation and training), and what the payback period would be if the customer were to purchase them. The salesperson pulls this research together into a report that demonstrates the potential savings, which he then provides to the prospective customer. Whose name appears on the cover of the report? The purchasing manager’s. The supplier salesperson’s name appears nowhere on the cover of the report. Now, the purchasing manager can take this report to her senior management and say, “Look, I have been doing some research in conjunction with this supplier, and this is how we can save some money.” What has this supplier done? Enabled the purchasing manager to turn gray money into green money. It also has provided another benefit: allowing the purchasing manager to leverage her time, which is in short supply.
Demonstrating and Documenting Superior Value
Increasingly, to get an equitable or fair return, suppliers must be able to persuasively demonstrate and document the superior value their offerings deliver to customers. By “demonstrate,” we mean showing prospective customers convincingly beforehand what cost savings or added value they can expect from using the supplier’s offering relative to the next-best alternative. Value case histories are one tool that best-practice suppliers, such as Nijdra Groep in the Netherlands and Rockwell Automation, use to accomplish this. Value case histories are written accounts that document the cost savings or added value that reference customers have received from using a supplier’s market offering. Another way that best-practice firms, such as GE Infrastructure Water & Process Technologies and SKF, demonstrate the value of their offerings to prospective customers is through customer value assessment tools, which we term value calculators. These tools are spreadsheet software applications that salespeople or value specialists conduct on laptops as part of a consultative selling approach to demonstrate the value that customers likely would receive from their offerings.
Demonstrating superior value is necessary, but it is no longer enough to become a best-practice company in today’s business markets. Suppliers also must document the cost savings and incremental profits that offerings have delivered to customers. Thus, suppliers work with their customers to define the measures on which they will track the cost savings or incremental profit produced and then, after a suitable period of time, work with customer managers to substantiate the results.
Documenting the superior value delivered to customers provides four powerful benefits to suppliers. First, it enhances the credibility of the value demonstrations for their offerings because customer managers know that the supplier is willing to return later to document the value received. Second, documenting enables customer managers to get credit for the cost savings and incremental profit produced. Third, documenting enables suppliers to create value case histories and other materials for use in marketing communications to persuasively convey to prospective customers the value they, too, might obtain from the supplier’s offering. Finally, by comparing the value actually delivered with the value claimed in the demonstration and regressing these differences on customer descriptors, documenting enables suppliers to further refine their understanding of how their offerings deliver the greatest value. This sharpens subsequent efforts to target customers. We term the tools that suppliers use to document the value of their offerings value documenters.
For a moment, put yourself in the role of a commercial grower. Two suppliers are offering you mulch film, which is a thin plastic sheet that commercial growers place on the ground to hold in moisture, prevent weed growth, and allow vegetables and melons to be planted closer together. One supplier comes to you with this proposition: “Trust us. Our mulch film will lower your cost.” The other supplier, Sonoco, comes to you with this proposition: “Sonoco just lowered the cost of your mulch film by $16.83 per acre.” And Sonoco offers to show you exactly how it determined that figure. Which supplier’s value proposition is more persuasive?
How Customer Value Management Leads to Success
Before pursuing a proposed approach that changes the way of doing business, senior management wants to know why it’s more likely to succeed than others After all, achieving any enduring change in a business is very difficult. So what are the unique strengths in an approach that make it worth pursuing? Customer value management has three unique strengths: superior conceptualization of value, a progressive approach to assessing value in practice, and proven concepts and tools for translating knowledge of customer value into superior business performance.
Superior conceptualization of customer value. To achieve success, senior managers need a conceptualization of customer value that they and their managers, salespeople, and business customers can readily grasp and find reasonable. Despite all the writing and talk about customer value in business markets, we contend that there has not been a reasoned, understandable conceptualization. As a result, there is substantial variation in what is meant by “customer value” in business