value sellers

Certified

Companies that sell products and services toother businesses (B2B) operate in anextremely competitive environment. Purchas-

ing managers are increasingly held accountable forreducing costs, so they don’t have the luxury ofsimply believing suppliers’ claims of cost savings. A relatively easy and quick way for these managersto obtain savings is to focus on price and obtainprice concessions from suppliers. Consequently, toenhance negotiating power, purchasing managersattempt to convince suppliers that their offeringsare the same as their competitors’ – that they couldbe easily replaced.

Given this atmosphere, many business marketersbelieve they can sell their products only by deeplydiscounting them; however, this is not true.Suppliers can use three approaches to sell theirproducts and services in the business marketplace.

● The first approach is to sell on the basis of price.The only way to sustain this strategy is to slashcosts to the bone and to try to trade highervolume (if attainable) for lower margins. Thisoften becomes a dangerous balancing act thatmost firms cannot sustain.

● The second approach is to claim exceptionalvalue to realize higher prices. Unfortunately,salespeople often cannot substantiate theseclaims in any meaningful way. Therefore, thisapproach seldom works. Purchasing managers aretoo sophisticated to fall for a “trust us, we haveadditional value” appeal.

● The third option is a customer value managementapproach. We think this is the best approach. Itcalls for using verifiable data to demonstrate anddocument the firm’s product or service value inmonetary terms.

For a moment, put yourself in the role of acommercial grower. Two suppliers are offering youmulch film, a thin plastic sheet placed on theground to hold in moisture, prevent weed growthand allow vegetables to be planted closer together.Supplier A comes to you with this proposition:“Trust us. Our mulch film will lower your costs.”

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Some companies think thatoffering deep discounts tobuyers is the only way to selltheir products in businessmarkets. James Anderson,Nirmalya Kumar and JamesNarus propose a better way.

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Supplier B comes to you with this proposition:“We just lowered the cost of your mulch film by$16.83 per acre.” Supplier B also offers to showyou exactly how it determined that figure. Whichsupplier’s value proposition is more persuasive?

Demonstrate and document valueUnfortunately, most companies can’t sell using acustomer value management approach because theyhave made no effort to understand the value theyprovide their customers in financial terms. Companiesshould show prospective customers what costsavings or added value they can expect from usingthe supplier’s offering relative to the next-bestalternative. The best way to demonstrate this valueto prospective customers is through customer valueassessment tools, which we term value calculators.

These tools are spreadsheet software applicationsthat salespeople or value specialists conduct onlaptops as part of a consultative selling approach todemonstrate the value that customers likely wouldreceive from their offerings.

Demonstrating superior value is necessary, but itis no longer enough to become a best-practicecompany in today’s business markets. Suppliersalso must document the cost savings andincremental profits their offerings have delivered tocustomers. Thus, suppliers must work with theircustomers to define the measures by which they willtrack the cost savings or incremental profitproduced and then, after a suitable period of time,work with customer managers to substantiate theresults. Value case histories are one tool that best-practice suppliers, such as Nijdra Groep in theNetherlands and Rockwell Automation, use toaccomplish this. Value case histories are writtenaccounts that document the cost savings or addedvalue that customers have received from using asupplier’s market offering.

Documenting the superior value delivered tocustomers provides four powerful benefits tosuppliers. First, it enhances the credibility of thevalue demonstrations for their offerings, becausecustomer managers know that the supplier is willingto return later to document the value received.Second, documenting enables customer managersto get credit for the cost savings and incremental

profit produced. Third, documenting enablessuppliers to create value case histories and othermarketing communications materials to persuadeprospective customers of the value they, too, mightobtain from the supplier’s offering. Finally, bycomparing the value actually delivered with thevalue claimed in the demonstration and regressingthese differences on customer descriptors,documenting enables suppliers to further refinetheir understanding of how their offerings deliverthe greatest value. This sharpens subsequent effortsto target customers.

Conceptualizing customer valueWith its emphasis on assessing customer value inpractice, customer value management requires aconceptualization of value that is well reasoned,

comprehensive and easily grasped. We start bydefining customer value: “Value in business marketsis the worth in monetary terms of the technical,economic, service, and social benefits a customerfirm receives in exchange for the price it pays for amarket offering.” Initially, we express value inmonetary terms, such as dollars per unit, euros perliter, or renminbi per hour. Economists may beinterested in “utils”, but we have never met amanager who was! After doing this, we canconceptually represent any market offering as a setof technical, economic, service, and social benefitsthat a customer firm receives. By “benefits”, wemean net benefits, which include any costs acustomer incurs in obtaining the desired benefitsexcept for purchase price.

Then we focus on value; this is what a customerfirm receives in exchange for the price it pays.Raising or lowering the price does not change the setof benefits that an offering delivers to customers,only the willingness of those customers to purchasethe offering. Thus, we conceptually view a marketoffering as having two elemental characteristics: itsvalue and its price. Finally, we contend that customervalue in business markets is a comparative conceptin which customers assess the value of a givenmarket offering relative to what they regard as thenext-best alternative to it.

This is no small point. There always is analternative. It might be:

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Unfortunately, most companies can’t sell using a customervalue management approach because they have made noeffort to understand the value they provide their customersin financial terms.

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● A market offering from a competitor usingcomparable, or alternative, technology to fulfil the customer’s requirements and preferences:this is the most frequently encountered situationin business markets.

● The customer’s decision to source an item from an outside supplier or to make the itemitself: an example is a company that decides to outsource a part of its IT operations to anIndian supplier.

● The status quo (not doing anything): companiesdeciding whether to expand their facilities or to purchase management consulting services are examples.

● The most recent offering from the same supplier:a challenge that Microsoft faced, for example,was persuading its customers to upgrade from itsWindows NT/2000 Server to its Windows Server2003 when many of them were still satisfied withthe performance of the NT/2000 server

Points of difference, parity and contention

The essence of our conceptualization of value canbe shown in the following equation:

What really matters is not the value of eachoffering but the difference in value between the two offerings relative to the difference in their

prices. While the market offering of a supplier maydeliver cost savings or incremental revenue andprofit to customers in a number of ways, so, too,may the next-best alternative. Thus, althoughofferings in business markets may have manytechnical, 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 threepossibilities:

Points of parity – those value elements whoseperformance or functionality is essentially the same as the counterpart elements of the next-bestalternative

Points of difference – those value elements onwhich either the supplier’s market offering issuperior to those of the next-best alternative or thenext-best alternative’s market offering is superior tothe supplier’s

Points of contention – those value elements onwhich the supplier and its customers disagree about performance or functionality relative to thecounterpart elements of the next-best alternative.

Points of contention arise in two ways: thesupplier regards a value element as a point ofdifference in its favour while the customer regardsthat element as a point of parity relative to the next-best alternative; or, the supplier regards avalue element as a point of parity while thecustomer regards it as a point of difference infavour of the next-best alternative. Points ofcontention are not problems; they can providemotivation for the supplier and its customers towork together to gather data to resolve thedifferences in perception.

Value word equationsCentral to customer value management is theexpression in monetary terms of the worth of thebenefits that a customer firm receives from asupplier’s offering. Doing this in practice is not easyand takes time, money, persistence and some

creativity. Yet businesses must tackle thischallenging task if they wish to become valuemerchants. As examples, consider the following:

● An economic benefit, such as providingconsolidated monthly invoices instead ofinvoicing the customer after each purchase, must be translated into processing costsavings over the year for the customer.

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Central to customer value management is the expressionin monetary terms of the worth of the benefits that acustomer firm receives from a supplier’s offering.

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(Valuef - Valuea) > (Pricef - Pricea)

where:

Valuef = Value of the focal firm’s market offering

Pricef = Price of the focal firm’s market offering

Valuea = Value of the next best alternative’s market offering

Pricea = Price of the next best alternative’s market offering

● A technical advantage, such as greater gloss froma diamond-like coating applied to plastic injectionmoulds that results in fewer machine jams andfaster operations, must be translated intoadditional revenue and profit that the customerwould generate from greater uptime and fastercycle time.

● A unique service, such as a chemical supplier’scollection of used drums from the customer’ssite, must be translated into the customer’s costsavings from not having to dispose of usedcontainers in an environmentally safe way.

● A social benefit, such as Caterpillar’s strong brandname, must be translated into the higher resale ortrade-in prices that Caterpillar equipmentreceives versus Komatsu, reducing its life-cyclecost to customers.

Value word equations are a tool that enables asupplier to demonstrate and document points ofdifference and points of contention for its offeringrelative to the next-best alternative so that customermanagers can easily grasp them, understand precisely

how the supplier is assessing them, and be persuadedby the results. Value word equations provide amethodical way of convincingly demonstrating anddocumenting superior value in monetary terms.

A value word equation expresses precisely inwords and simple mathematical operators (e.g., +,÷) how to assess the differences in functionality orperformance between a supplier’s offering and thenext-best alternative on a value element and how toconvert those differences into monetary terms. Anequation is constructed for each point of difference(and point of contention). The value element,expressed as either cost savings or incrementalprofit, is on the left side of the equal sign, and thecomponents defining the differences in functionalityor performance and what they are worth are on theright side. Accompanying each word equation are theassumptions that the supplier is making about thevalue element and how its monetary value is assessed.

Value word equations counter the rampantproblem of unfounded value claims, when suppliersargue that their offerings deliver cost savings oradded value relative to the next-best alternative butcan provide little or no specifics of exactly whythat’s the case. With each retelling, the value claims

from these unverifiable stories tend to grow largerand larger, taking on the character of fishing stories.

Customer managers in a series of businessroundtable discussions we conducted in Europe andthe United States related to us that prospectivesuppliers increasingly deliver to them what hasbecome almost a generic value proposition: “We cansave you money!” But, as one participant inRotterdam wryly observed, with all the claims abouthow much money suppliers were saving him, it wasa wonder that his firm had any costs left at all! Toassess the validity of these claims, though, he saidthat he would follow up a prospective supplier’sstatement with a series of questions to probewhether the supplier had the people, process, toolsand experience to substantiate its claims. He saidthat, based on their answers, most of the supplierswere telling fairy tales.

In contrast to this, firms such as Intergraph andRockwell Automation use value word equations tomake clear and easily understandable to customershow their offerings will lower costs or add value

relative to the next-best alternative, what dataneeds to be gathered and how this data will becombined to provide value estimates.

Value word equations at RockwellAutomationConsider a value word equation that RockwellAutomation used to calculate the cost savings fromreduced power usage that a customer would gain byusing a Rockwell pump solution instead of acompetitor’s comparable offering:

The term “kW spent” represents the amount ofelectrical power consumed in terms of unithorsepower and unit efficiency. Unit horsepower

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Value word equations are a tool that enables a supplier to demonstrate and document points of difference and points of contention for its offering relative to the next-best alternative.

Cost savings =

[kW spent * number of operating hours per year

* $ per kW hour * number of years system

solution in operation]Competitor solution

– [kW spent * number of operating hours per year

* $ per kW hour * number of years system

solution in operation]Rockwell Solution

and unit efficiency are industry-standard productspecifications that the manufacturer prominentlydisplays on the side of the motor solution.

Although the meaning of this value word equationmay seem obscure, it reflects the heavy usage ofindustry-specific jargon that suppliers andcustomers in business markets rely on tocommunicate precisely and efficiently aboutfunctionality and performance.

The data for value word equations are most oftencollected from the customer’s business operationsby supplier and customer managers workingtogether; but, at times, data may come from outsidesources, such as industry association studies. Inpresentations of the results, each word equation ispresented first. Then the data is substituted in eachequation to calculate the estimate. These resultsare then collected in a value summary, which werefer to as the customer value model.

Best-practice companies in business markets thathave adopted customer value management workwith customers to develop the parameters of theresearch, as well as the particulars. Customer valueresearch involves three phases: securing customersupport, collecting data (not relying on customerattitudes or perceptions) and analyzing the data andcreating a customer value model.

Becoming a value merchantA value merchant recognizes the supplier’s owncosts and the market offering’s value to thecustomer and works to obtain a fair return for boththe supplier firm and the customer firm. The valuemerchant stands in stark contrast to the all-too-common value spendthrift who squanders thesuperior value of the supplier’s market offerings,getting little in return.

In managing their sales force, firms too often makethe mistake of rewarding revenue or volume while

hoping for profitability. In fact, many companiesemphasize volume over revenue, regardless of howthey calculate their salespersons’ pay cheques.Salespeople understand this and work accordingly.Indeed, this is a primary reason why so much pricediscounting takes place in the B2B marketplace.

To transform the sales force into value merchants,suppliers must have compensation plans thatseamlessly reward value-selling behaviours andprofitable outcomes. The company’s emphasis incompensation plans must change from volume tototal gross margin. However, transformingsalespeople from value spendthrifts into valuemerchants involves more than just compensatingthem on the basis of profitability.

Firms must focus on value-selling skills in salestraining and role playing, use sales councils andsimilar internal groups to promote value selling anddevelop a company culture that recognizes andhonours value merchants. Along this line, somecompanies now rate specially trained salespeople as“certified value sellers” and compensate themaccordingly. Companies should ensure thatsalespeople use value case histories in the field andthat they keep these histories up-to-date. Finally,marketing materials should tout value selling atevery opportunity.

Selling provable value makes profits. If a firm isdelivering superior value that can be demonstratedand documented, it will be rewarded by itscustomers. So, get out of the commodity business.Be a value merchant instead – selling on the basisof proven superior value. ■

ResourcesJames C. Anderson, Nirmalya Kumar and James A.Narus, Value Merchants: Demonstrating andDocumenting Superior Value in Business Markets,Harvard Business School Press, 2007.

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James C. Anderson (jc-anderson@kellogg.northwestern.edu) is Professor of Marketing and Professor ofBehavioral Science in Management at the Kellogg School of Management, Northwestern University.

Nirmalya Kumar (nkumar@london.edu) is Professor of Marketing at London Business School.

James A. Narus (Jim.Narus@mba.wfu.edu) is Professor of Business Marketing at the Babcock GraduateSchool of Management, Wake Forest University.

London Business School Regent’s ParkLondon NW1 4SAUnited KingdomTel +44 (0)20 7000 7000Fax +44 (0)20 7000 7001www.london.eduA Graduate School of the University of London