Value Merchants. Nirmalya Kumar
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price as part of customer value is a critical distinction between our conceptualization and many others. To us, having price as a part of value adds considerable confusion. If we were to include price, we could significantly improve the value of our offering simply by cutting price dramatically, which goes against what most suppliers have in mind when they think of improving the value of their offerings to customers. It also goes against the fundamental concept of exchange in markets, where customers exchange money (i.e., price) with suppliers for offerings that the customers value.4
Finally, we contend that customer value in business markets is a comparative concept in which customers assess the value of a given market offering relative to what they regard as the next-best alternative to it. There always is an alternative. It might be:
1 A market offering from a competitor using comparable, or alternative, technology to fulfill the customer’s requirements and preferences. This is the most frequently encountered situation in business markets.
2 The customer’s decision to source an item from an outside supplier or to make the item itself. An example is a company that decides to outsource a part of its IT operations to an Indian supplier.
3 The status quo (i.e., not doing anything). Companies deciding whether to expand their facilities or purchasing management consulting services are examples.
4 The most recent offering from the same supplier. A challenge that Microsoft had, for example, was persuading its customers to upgrade from its Windows NT/2000 Server to its Windows XP Server when many of them still were satisfied with the performance of NT/2000 Server.
The Fundamental Value Equation
We can capture the essence of the concepts in our definition of value in a fundamental value equation:
(Valuef — Pricef) > (Valuea - Pricea) (Eq. 2-1)
In this equation, Valuef and Pricef are the value and price of a particular firm’s market offering, and Valuea and Pricea are the value and price of the next-best-alternative market offering. In this fundamental value equation, we subtract price from value, relating them to one another in a difference formulation. We demonstrate the superiority of this formulation over a ratio formulation to interested readers in appendix A.
We do not specify a particular perspective in our definition of value, such as the customer firm’s point of view, because we regard value in business markets as a construct, similar to market share. Because it is a construct, in practice, we can only estimate value, just as we can only estimate market share. For example, the supplier may overestimate the value of a given market offering to a customer, while the customer may underestimate the value. The supplier may have a significantly different perception than the customer of the technical, economic, service, and social benefits that the customer firm actually receives from a market offering or of what specific benefits are actually worth in monetary terms to the customer.
Value changes occur in two fundamental ways. First, a market offering could provide the same functionality or performance while its cost to the customer changes. Remember, price is not considered in this cost. Thus, the technical, service, and social benefits remain constant while the economic benefits change. For example, one product has higher value than another product because it has lower conversion costs and has the same performance specifications.
Second, value changes whenever the functionality or performance provided changes while cost remains the same (again, price is not a part of this cost). For example, a redesigned component part now provides longer usage until failure for the customer’s customers, yet its acquisition and conversion costs to the customer remain the same.
Even if functionality or performance of a product is lowered, it may still meet, or even exceed, a customer’s specified minimum requirement. More is better for some, but not all, customer requirements. Exceeding minimum requirements continues to deliver benefits to the customer, even though the customer deems a lesser level to be acceptable. For example, lowering the melting point of a plastic resin beyond a specified temperature requirement continues to lower the customer’s energy costs and to reduce the time it takes to convert the resin into a molded plastic part.
In our definition value is the expression in monetary terms of what the customer firm receives in exchange for the price it pays for a market offering. Because make-versus-buy decisions are possible in business markets, the value provided must exceed the price paid. This difference between value and price is the customer incentive to purchase. Remember, in this concept of value in business markets, raising or lowering the price of an offering does not change the value that offering provides to a customer firm. Rather, it changes the customer’s incentive to purchase that offering.
Having an accurate assessment of value provides a solid foundation for suppliers to create and deliver value to targeted market segments and customers. And recognizing that the value of a given market offering can vary by segment and by customer characteristics is vital. Suppliers practicing customer value management strive to both understand and capitalize on such variations.
The Customer’s Knowledge of Value
In acquiring products and services, customer managers must decide which suppliers’ market offerings will fulfill a set of requirements and preferences. When more than one supplier’s market offering successfully fulfills these, customer managers then must decide which supplier’s offering will deliver the greatest value to their firm. In many instances customer managers make this decision intuitively, simply choosing the offering that they feel is best (or, alternatively, that has the lowest price). Little or no effort is given to specifically defining what each manager means by “value” and how it might be estimated in monetary terms. As an example, customer managers may feel that it is not worthwhile to conduct a formal value assessment to acquire repositionable sticky notes and instead simply purchase 3M Post-it Notes, even if the price for them is slightly higher than lesser-known or generic brands.
In other instances, though, customer managers consider it worthwhile to conduct a formal assessment, or value analysis, to make a better informed decision. Progressive suppliers may assist customer managers in these assessments or even provide their own assessments of how their offerings deliver superior customer value. Customer value management focuses on these latter instances, where conceptualizing what exactly is meant by “value” and how to estimate it in practice are of principal interest.5
Customer firms often do not have an accurate understanding of what suppliers’ market offerings actually are worth to them. Certainly, customers may understand their own requirements, but they do not necessarily know what fulfilling these requirements is worth to them, how differing ways of meeting these requirements affect their costs, or what changes in these requirements would be worth to them. As an example, Grainger tells its customers that acquisition costs often exceed the price of an item, particularly in the case of maintenance, repair, and operating supplies. We present a Grainger advertisement in figure 2-1 that illustrates this persuasively.
Points of Difference, Parity, and Contention
While the market offering of a supplier may deliver cost savings or incremental revenue and profit to customers in a number of ways, so, too, may the next-best alternative. Thus, although offerings in business markets may have many technical, economic, service, or social benefits that deliver value to customers, the paramount, overriding distinction to understand is this: how do these value elements compare to those of the next-best alternative? There are three possibilities:
1 Points of parity—those value elements whose performance or functionality is essentially the same as the counterpart elements of the next-best alternative
2 Points of difference—those value elements on which either the supplier’s market offering is superior to those of the next-best alternative or the next-best alternative’s market offering is superior to the supplier’s
3 Points