Value Merchants. Nirmalya Kumar
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We provide a comprehensive, well-reasoned conceptualization of customer value in chapter 2. It expresses customer value in the same metric as we ask customers to make purchase decisions (monetary terms, not importance ratings). It specifies what is and what is not value (e.g., price). Finally, our expression of the fundamental value equation especially lends itself to assessment in practice and reflects how customers decide between competing offerings.
Progressive approach to assessing value in practice. Approaches to assessing customer value that are cumbersome in practice or that require statistics experts will be met with resistance, especially from the sales force and customers. Total cost of ownership, for example, is hard to argue with as a concept. The problem is that it proves to be unworkable in practice. Customers have limited patience in cooperating with suppliers because customer managers have greater responsibility and increasing demands on their time. Where once a manager at a particular level might have had responsibility for $10 million in business, he may now have responsibility for $50 million. Customers also have a limited willingness to share their data with suppliers. Each of these facts works against the meticulous, time-consuming process of gathering data to estimate the total cost or, better still, total value of ownership in practice. As a result, efforts devolve into compromising shortcuts—such as filling out forms, guessing, and recycling opinions—in place of actually gathering data.1
In contrast, each aspect of our approach to assessing customer value has been developed and refined in working with suppliers across a diverse array of industries. Our approach to customer value assessment focuses the supplier’s and customers’ limited resources on the value elements—that is, the specific ways the offerings reduce customer costs or enable the customer to earn additional revenue and profit—that matter most and assessing them in the way that matters most. As we detail in chapters 2 and 3, we take a measurement approach that precisely defines the value elements, stating the data needed to estimate each one. We emphasize data gathering and minimize the role perception plays. The guiding principle is to generate new knowledge, not recycle opinion. Thus, a litmus test for our approach is this: are the supplier and the customers that participate in the research more knowledgeable about how the supplier’s offering adds value or reduces cost in the customer’s business than what they were before the research? Our approach enables marketing and sales to significantly contribute to competing on analytics and evidence-based management.2
Proven concepts and tools for achieving superior business performance. Our work with many clients and more than ten years of management practice research have enabled us to discover, devise, and refine concepts and tools that, when implemented with integrity, lead to superior business performance—like devising customer value propositions that resonate with target customers; constructing and deploying value-based sales tools that the sales force is able to use and wants to use; and pursuing new knowledge with the intent of better understanding what will lead to superior business performance. We want to make it clear that there is no trickery, deception, or sleight of hand in customer value management. Rather, it is fundamental thinking proven in practice to significantly improve business performance. Throughout this book, and especially in chapter 8, we provide proof points of how suppliers practicing what we advocate have achieved superior business performance. We begin with the experience of Sonoco in the next section.
Enhancing Business Performance with Customer Value Management
Ultimately, there are three basic sales approaches prevalent in business markets. First is selling on price. Most firms are, however, not set up to sell on price because it requires relentless cost cutting, moving production overseas to low-cost locations, and trading low margins for (hopefully) higher volume. In this type of commodity business, purchasing managers tend to dominate customer interactions, and suppliers have little pricing flexibility. Suppliers can attempt to compete on price, but how many suppliers in a given market can have the lowest price? Just one. Not willing to accept this basic fact, suppliers pursue business through price cutting, often orchestrated by adroit purchasing managers.
To escape this exclusive focus on price, most suppliers pursue a second approach: they claim that they provide superior value—and deserve to be compensated appropriately. Unfortunately for the suppliers, most often this translates into “Trust us, our offerings are worth more.” The claims of superior value are just that—claims! These value assertions are not substantiated by any in-depth analysis on the part of the supplier and therefore cannot be demonstrated nor documented to customers. The result is that suppliers have little choice but to end up competing on price when pressed by purchasing managers. As shown in the IC case, this does not mean that the supplier is not providing superior value; it’s just that the supplier lacks the ability to prove its claims. Even if the supplier and the customer agree that the supplier’s offering delivers greater value than the competitor’s offering, they may have substantially different opinions of what this greater value is worth in monetary terms to the customer.
This brings us to the third approach, which we recommend and develop in this book. Customer value management is a datadriven approach to demonstrating and documenting in monetary terms the superior value that a supplier’s offerings deliver to customers. Competing on price may work if the company has the lowest cost in the industry and chooses to pass it along to customers instead of using this advantage to build differences that are valuable to target customers. But, for most companies, customer value management is a more viable way to enhance business performance. Surprisingly, though, only a few progressive companies follow this approach. Let’s consider the experience of Sonoco.
Sonoco: Achieving Superior Business Performance
The CEO of Sonoco, Harris DeLoach Jr., and his executive committee have set an ambitious growth goal for the firm: double-digit, sustainable, profitable growth every year. DeLoach and the executive committee believe that adopting the customer value management approach is crucial for achieving such growth. Thus, DeLoach has championed a distinctive value propositions (DVPs) program, giving responsibility for its implementation to Eddie Smith, vice president of strategy and business development and a member of the executive committee. Smith has established that Sonoco DVPs must fulfill three criteria:
1 Distinctive—Sonoco’s value proposition must be superior to that of its competition.
2 Measurable—Sonoco prefers that all value propositions are based on tangible points of difference that can be quantified in monetary terms.
3 Sustainable—Sonoco will be able to execute this value proposition for as long as possible.
Although it’s not on the list, Smith adds the requirement that all Sonoco value propositions be “translated into the customer’s unique language.” By that, he means that sales and marketing people must be able to identify what’s in it for the customer.
The executive team has signaled how critical DVPs are to business unit performance by making value propositions the first of ten different metrics on the performance scorecard for which general managers are accountable. In senior management reviews, business unit general managers present the value proposition for each of their target market segments and key customers. Every presented value proposition is scored on the three criteria for DVPs. The general manager then receives summary feedback on the value proposition metric (as well as on each of the other nine growth factors) as follows:
Green—capable of meeting the profitable growth goal
Yellow—prompting significant concerns that need to be addressed
Red—not adequate to meet the profitable growth goal
Not content to rely simply on belief, Sonoco senior management has had data gathered to understand the relation between business units’ value propositions and their performance. Sonoco has found that there is a significant positive relation. Further, it has found that improvement in DVPs leads to improved business unit performance.
Has Sonoco been able to achieve the overall growth goal that senior management sought, in part, through its use of customer value management and DVPs? Sonoco sales increased 14.4