Value Merchants. Nirmalya Kumar
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levels of service and enables suppliers to capitalize on differences between customers.
Chapter 6 challenges suppliers to transform their sales forces from selling on price to becoming value merchants. While getting sales compensation aligned with selling on value and profit is critical, it is not enough. Businesses must foster value merchants and put a value-selling process and value-based sales tools in place. They must ensure initial and ongoing value-selling experiences with customers and instill and invigorate a value merchant culture.
Chapter 7 is all about how companies can profit from the superior value they provide customers. Although it is natural to think first of price premiums, there are also three other means of obtaining a fair return from customers for value provided in business markets. However, getting a fair return requires the supplier to manage pricing as if profitability depended on it! To accomplish this, we provide a value-based approach to pricing at the strategic, tactical, and transactional levels.
In chapter 8, we take up the challenge of prospering in business markets. We discuss what customer value management can and cannot do to help businesses prosper. We provide further evidence of the contribution it can make to superior business performance and consider how businesses can get started in implementing customer value management and becoming value merchants. Finally, we discuss how businesses that are value merchants can continue to provide superior value and profit from it.
The customer value management approach we present in this book provides state-of-the-art thinking, supported throughout by best practice from a variety of businesses, industries, and countries. And it has the benefit of having been tested in a number of companies over the years. Implemented with integrity, it can provide that rare commodity that suppliers seek: superior business performance through demonstrating and documenting superior value.
TWO
Conceptualize Value
Focusing on What Matters
IN RECENT YEARS, the terms value and value proposition have become two of the most widely used terms in business markets. While these terms are fundamental to our customer value management approach, our research reveals that despite their growing use, there is little specificity or agreement about (1) what is value, (2) what constitutes a customer value proposition, and (3) what makes a value proposition persuasive.
Moreover, we find that most value propositions that suppliers construct and deliver in business markets do not actually convey the superior value their offerings may provide to customers. Lacking the knowledge to persuasively substantiate the superior value of their offerings relative to those offered by competitors, suppliers find that their value propositions are discounted by customer managers who, increasingly pressed for time and demonstrable results, focus simply on reducing price.
What is customer value in business markets? Offerings in business markets can have many value elements. How can identifying the points of difference, parity, and contention with the next-best alternative help firms focus on the relative handful that matter the most? What are the three alternative kinds of value propositions in practice, and which is best for suppliers to pursue? We answer each of these questions in turn—a solid grasp of these concepts is vital for moving business customers beyond price to demonstrated and documented superior value.
Defining Customer Value in Business Markets
What is meant, specifically, by “customer value in business markets”? We first consider how customer value has been defined by others and then focus on a superior definition. Next, we introduce the fundamental value equation to precisely express the relationship between customer value and price. We finish by discussing the customer’s knowledge of value.
Conceptualizing Customer Value in Business Markets
Various definitions of customer value have been offered by different authors. Considering them suggests the varying conceptualizations underlying this concept and the differences in what it means. The definitions also suggest some of the difficulties in actually assessing customer value.1
According to Bradley Gale, “Customer value is market-perceived quality adjusted for the relative price of your product.” Perhaps reflecting their interest in pricing, Robert Dolan and Hermann Simon state that “perceived value is the maximum price the customer will pay.” Gerald Smith contends that “Value = the benefits the customer receives relative to the price paid.” Finally, Thomas Nagle and Reed Holden state, “In common usage, the term value refers to the total savings or satisfaction that the customer receives from the product.”2
So, what is customer value? Adjusted market-perceived quality, maximum price, benefits relative to price, totals savings, or, even, satisfaction received? Each of these constituent components takes our understanding of the concept in a different direction. Given that customers are happier paying a lower price, there appears to be tension between customer value as maximum price or satisfaction received. Yet the individuals providing these definitions do not go into much detail about what their definition means, nor do they discuss the conceptualizations of customer value that their definitions suggest.
Another problematic aspect about customer value that has not been addressed is how disparate constituent elements defining value might be combined. As an instance of this, consider benefits mentioned in the preceding definition from Smith. To make this tangible, consider two benefits for titanium dioxide, which is a pigment that whitens, brightens, and opacifies (as an ingredient in coatings). Each benefit is an improvement over a previous industry standard. Dispersability improves by reducing (from thirty minutes to ten minutes) the time required to reach 7 Hegman fineness units in a Cowles high-speed disperser. The second benefit, gloss, improves from 78 to 86 60° gloss units. How, specifically, a customer manager would combine Hegman fineness units and 60° gloss units is not at all clear. This example is typical of business markets where benefits—desirable changes in performance—are expressed in precisely defined scientific, engineering, and cost-accounting terms.
We find a number of elements in definitions of customer value: benefits, benefits expressed in monetary terms, costs, costs expressed in monetary terms, and price. What is lacking is a consideration of the commensurability of measurement units, which is essential to arrive at a meaning for customer value. Just as when one learns to combine fractions in school, one must first find a common denominator, convert the respective numerators to their units on this common denominator, and then combine them to reach an answer. So it would appear to be necessary in conceptualizing customer value, too. Of the five elements just given, however, only three have direct commensurability: benefits expressed in monetary terms, costs expressed in monetary terms, and price.
Conceptualizing Customer Value to Guide Its Assessment in Practice
With its emphasis on assessing customer value in practice, customer value management requires a conceptualization of customer value that is well reasoned, comprehensive, and easily grasped. We start by defining customer value: “Value in business markets is the worth in monetary terms of the technical, economic, service, and social benefits a customer firm receives in exchange for the price it pays for a market offering.”3 We elaborate next on some aspects of this definition.
First, we express value in monetary terms, such as dollars per unit, euros per liter, or renminbi per hour. Economists may care about “utils,” but we have never met a manager who did!
Second, we can conceptually represent any market offering as a set of economic, technical, service, and social benefits that a customer firm receives. By “benefits,” we mean net benefits, which include any costs a customer incurs in obtaining the desired benefits, except for purchase price.
Third, value is what a customer firm gets in exchange for the price it pays. Raising or lowering the price does not change the set of benefits that an offering delivers to customers, only the willingness of those customers to purchase the offering. Thus, we conceptually view a market offering as having two elemental characteristics: