Chapter05

Business Business Market Market

ManagementManagement

33rdrd edition edition

Managing Market Managing Market OfferingsOfferings

Chapter 5

Copyright © 2009 Pearson Education Publishing as Prentice Hall

Business Market Management, 3rd edition Chapter 5-2

Section III: Section III: Creating ValueCreating Value



Chapter 5: Managing Market Chapter 5: Managing Market OfferingsOfferings

OverviewOverview

I. Some Conventional Thinking About Market

Offerings

II. Constructing Flexible Market Offerings

III. Value-Based Pricing

IV. Managing Market Offerings Across Borders

V. Summary



Guiding PrinciplesCraftingCraftingMarketMarket

StrategyStrategy

UnderstandingUnderstandingFirmsFirms asas

CustomersCustomers

Marketing Marketing SensingSensing

ManagingManagingMarketMarket

OfferingsOfferings

NewNewOfferingOffering

RealizationRealization

Business Business ChannelChannel

ManagementManagement

GainingGainingNewNew

BusinessBusiness

SustainingSustainingResellerReseller

PartnershipsPartnerships

ManagingManagingCustomersCustomers

Regard Value as the Cornerstone

Accentuate Working Relationships & Business Networks

Focus on Business Market Processes

Stress Doing Business Across Borders

UnderstandingUnderstanding ValueValue

CreatingCreatingValueValue

DeliveringDeliveringValueValue

Business Market ProcessesBusiness Market Processes



OverviewOverview

The business market processes of 1) market

sensing, 2) understanding firms as customers,

and 3) crafting market strategy provide supplier

firms with an understanding of valueunderstanding of value

Firms put this understanding of value to use in

creating value for the market segments and

customer firms that it has decided are of the

greatest value



Managing Market OfferingsManaging Market Offerings

Placing:Placing: products, services, programs, and systems products, services, programs, and systems

together in ways that create the greatest together in ways that create the greatest value for targeted market segments and value for targeted market segments and customer firmscustomer firms

Business’s challenge: construct offerings that uniquely leverage a construct offerings that uniquely leverage a

business’s resources to provide valuebusiness’s resources to provide value



What is Market Offering?What is Market Offering?

Core ProductThe fundamental, functional performance a generic product provides that solves a customer’s basic problem

Minimally Augmented

Product

Adds to the core product the least amount or number of services, programs, or systems considered absolutely essential

Augmented Product

Adds to the core product those services, programs, and systems a supplier offers to meet a broader set of customer requirements and preferences, or to exceed customer expectations

Potential

Product

Encompasses any imaginable product change or service, program, or system a supplier might create to add value or reduce cost in ways that set it apart from others



Create Value for Targeted

Segments in the Home Market

Create Value for Targeted

Segments &Customers inOther Country

Markets

Constructing Flexible Market OfferingsConstructing Flexible Market Offerings

Managing Market Offerings Across BorderManaging Market Offerings Across Border

Adapting Market Offerings Across Borders

Pricing Across Borders

Prepare to Implement Flexible Market Offerings

Formulate Flexible Market Offerings by Market Segments

AssessCustomerValue& SupplierCost

ArticulatePresentMarketOffering

ApplyValue-Based

Pricing



I.I. Some Conventional Thinking Some Conventional Thinking About Market OfferingsAbout Market Offerings



Tunnel Vision of Commodity Tunnel Vision of Commodity MarketsMarkets

If you think you’re in a commodity market, you’re thinking too narrowly about the market you’re in.



Commodity MarketCommodity Market

Commoditization:Commoditization: Convincing suppliers that no differences exists among offeringsBusiness market mangers need to persuasively Business market mangers need to persuasively

demonstrate to customers that demonstrate to customers that their offering is their offering is different in valuable waysdifferent in valuable ways

Commodity Magnet:Commodity Magnet: inexorable pull on

a market towards commoditization



““Marketing Success Through Marketing Success Through Differentiation--of Anything” Differentiation--of Anything”

(Source: (Source: Theodore Levitt)Theodore Levitt)

There is no such things as a commodity

All goods and services are differentiable



Understanding CommoditizationUnderstanding Commoditization

Market offerings contain:

Supplementary services, programs, and Supplementary services, programs, and

systems that enhance the core product/servicesystems that enhance the core product/service

Provides additional value to customersProvides additional value to customers



Understanding CommoditizationUnderstanding Commoditization

Suppliers should:

Examine the differences between their Examine the differences between their offerings and competitorsofferings and competitors

Consider the service and social benefits of the Consider the service and social benefits of the offeringoffering

Gather data to understand competitors’ pricesGather data to understand competitors’ prices

Validate own market pricingValidate own market pricing

Gain estimates of their share of customer’s Gain estimates of their share of customer’s businessbusiness



Rebuilding DifferentiationRebuilding DifferentiationCreating Knowledge BanksCreating Knowledge Banks

Search for knowledge valuable for customers, but is difficult for them to gainBest practices database

Building Leveraging ExpertiseBuilding Leveraging ExpertiseSearch for problems/nuisances that a number of customers experienceOffer solutions to solve/alleviate problems

Changing the Customer's Frame of ReferenceChanging the Customer's Frame of Reference

Focus customer’s attention to total cost of producttotal cost of product

Building Flexibility into their Market OfferingsBuilding Flexibility into their Market OfferingsCustomers within a segment may be the same in many requirements, but remain different in others



Services as Core Products in Market OfferingsServices as Core Products in Market OfferingsTwo View PointsTwo View Points

Services are fundamentally different1.1. IntangibilityIntangibility

2.2. Inseparability of Inseparability of production and production and consumptionconsumption

3.3. PerishabilityPerishability

4.4. HeterogeneityHeterogeneity

Differences between products and services are a matter of degree, and market offerings fall along a continuum of tangibility



II.II. Constructing Flexible Constructing Flexible Market OfferingsMarket Offerings



Augmenting Services, Programs, and SystemsAugmenting Services, Programs, and Systems

ServicesServices

FulfillmentFulfillment:: Availability, assurance, emergency delivery, installation, training, maintenance, disposal/recycling

TechnicalTechnical::Specification, testing & analysis, troubleshooting, problem-solving, calibration, customer productivity improvement

ProgramsPrograms

EconomicEconomic:: Terms & conditions; deals, discounts, allowances & rebates/bonuses; warranty; guaranteed cost savings

RelationshipRelationship::Advice & consulting, design, process engineering, product & process redesign, analysis of cost & performance, joint market research, co-marketing & co-promotion

SystemsSystems

LinkingLinking:: Order management intranet, automated replenishment & vendor-managed inventory, ERP, CMM

EfficacyEfficacy::Information & design assistance intranet, expert systems, integrated logistics management, assessment management, responsiveness systems



Constructing Flexible Market OfferingsConstructing Flexible Market Offerings

Balancing 3 pervasive, conflicting marketplace

requirements:

1.1. Markets are becoming highly fragmented; customer Markets are becoming highly fragmented; customer

requesting and getting more customized offeringrequesting and getting more customized offering

2.2. Customers uncompromising in demand for lowest Customers uncompromising in demand for lowest

price or lowest total costprice or lowest total cost

3.3. Purchasers take quality as a given and few Purchasers take quality as a given and few

meaningful differences separate competing meaningful differences separate competing

productsproducts



The Concept of Flexible Market The Concept of Flexible Market OfferingsOfferings

Standard Standard Bundles/ Bundles/

Packages:Packages:Designed to meet the needs of the “average customer”

Vanilla:Vanilla: Offered across all segments

Naked Naked Solutions:Solutions:

Bare minimum of products or services that all segment members uniformly value

Options:Options:Offered separately for those segment members that value them

Mass Mass Customization:Customization:

Capability to offer individually specified products or services on a large scale: Elicitation, Flexibility, LogisticsElicitation, Flexibility, Logistics



Flexible Market OfferingFlexible Market Offering

Composed of a few well-chosen naked solutionswell-chosen naked solutions

each wrapped with well-chosen optionseach wrapped with well-chosen options

supplier makes choices prior to offering them to supplier makes choices prior to offering them to

customercustomer

Akin to modularity and commonality in product

design



Articulate the Present Market Offering Articulate the Present Market Offering for Each Market Segmentfor Each Market Segment

Take stock of how firm is doing business by

detailing current market offerings for each

segment

Supplier managers can gain at least three

different insights from this process:true breadth of the market offeringtrue breadth of the market offering

the arbitrary nature of chargesthe arbitrary nature of charges

lack of variation across segmentslack of variation across segments



Baxter Healthcare Market offerings to Two Segments: Transactional and Strategic Hospital Customers Segment

Marketing Offering Element Transactional Customer Strategic Customer

Product returns Standard Standard

Technical assistance Standard Standard

Single point-of-contact Not offered Standard

Future disease incidence forecast Not offered Option

Price deals Standard Standard

Corporate customer bonus Not offered Standard

Executive perspectives Not offered Standard

Consolidated purchase report summary Not offered Standard

ACCESS Program Not offered Option

Baxter Corporate Consulting Not offered Option

ASAP order entry system Standard Standard

COMDISCO Technology Assessment Not offered Standard

Value Link stockless inventory program Option Option

COMDISCO asset management system Option Option

Pro

gra

ms

Ser

vice

sS

yste

ms



Assess Customer Value and Supplier CostAssess Customer Value and Supplier Cost Measuring Customer Value

Cost-in-Use Studies: document Cost-in-Use Studies: document incremental cost savingsincremental cost savings

Coming to Grips with Service CostsABC Techniques (activity-based-costing)ABC Techniques (activity-based-costing)Time EquationsTime Equations

The Payoff from Value AssessmentIdentify & eliminate value drainsIdentify & eliminate value drainsCVM process (Customer Value Management)CVM process (Customer Value Management)



Formulate Flexible Market Offerings Formulate Flexible Market Offerings by Market Segmentby Market Segment

Strategic alternatives for each service

element:

Do not market the serviceDo not market the service

Market it as standard—no chargeMarket it as standard—no charge

Market it as an option with a chargeMarket it as an option with a charge



Flexible Market Offering Strategy MatrixFlexible Market Offering Strategy Matrix

Service Element DeploymentService Element

Status Do Not MarketMarket as

“Standard” Market as “Option”

Existing “standard” service

Prune from standard offering

Retain in standard offering

Recast as surcharge option

Existing “optional” service

Discontinue optionEnhance standard offering

Retain as value-added option

New service Keep on shelfAugment standard offering

Introduce as value-added option



Reevaluating Existing Standard ServicesReevaluating Existing Standard Services

Keep the standard offering as “naked” as

possible

Only services, programs, and systems that

all firms within a segment highly value

should be standard



Reevaluating Existing Standard ServicesReevaluating Existing Standard Services

Prune or recast services Look for seldom used servicesLook for seldom used services

Surcharge options for infrequently performed Surcharge options for infrequently performed

services (training, installation, retrofitting)services (training, installation, retrofitting)

Recast services as valued-added optionsRecast services as valued-added options

Customers pay in full or in part for options with Customers pay in full or in part for options with

“bonus dollars” “bonus dollars”



Reexamining Optional ServicesReexamining Optional Services

Reexamine existing optional services to

determine whether they should be:

1.1. discontinued,discontinued,

2.2. used to enhance the standard offering, orused to enhance the standard offering, or

3.3. continued as an optioncontinued as an option



Building Flexibility with New ServicesBuilding Flexibility with New Services

Sources of new services:Focus on cost structures and strategic priorities Focus on cost structures and strategic priorities

of key customersof key customers• Innovate new servicesInnovate new services to assist customers in

lowering their costs or improving performance

• EnhanceEnhance standardstandard offeringsofferings with new services

• AddAdd newnew servicesservices to standard offering to thwart or stymie competitors

• Offer new elements separately as “value-addedvalue-added” optionsoptions



Pricing ImplicationsPricing Implications

Pricing is based on the supplier’s strategy

for each market segment

Customers may value certain standard services; but Customers may value certain standard services; but

only affordable to supplier if it has all of the only affordable to supplier if it has all of the

customers’ businesscustomers’ business

Offering services separately provides flexibility to both Offering services separately provides flexibility to both

the customer and the supplierthe customer and the supplier



Implement Flexible MarketingImplement Flexible Marketing Option Menu

Transparent to the Transparent to the customercustomer

List of all optional List of all optional elementselements

Tailored PackageKeeps the flexible Keeps the flexible

market offering market offering opaque to customersopaque to customers

• Salesperson develops a list of specifications and crafts an offering based on a menu of options known only to the salesperson



Branding Market OfferingsBranding Market Offerings

Promised value delivered to targeted customers

Means of differentiating this value from other market offeringsmake intangible benefits tangiblemake intangible benefits tangible

build differentiation in near-commodity marketsbuild differentiation in near-commodity markets

achieve identity and preference with customers’ achieve identity and preference with customers’ customerscustomers

differentiate market offerings with same or similar differentiate market offerings with same or similar core product but augmented with services, programs, core product but augmented with services, programs, and systemsand systems



BrandingBranding

Ingredient Branding Strategy

Applicable when the customers’ customer Applicable when the customers’ customer

who is receiving the significant value are who is receiving the significant value are

consumersconsumers

Brand-building focused primary on customers’ Brand-building focused primary on customers’

customerscustomers

• Example: Intel Inside®



Brand BuildingBrand Building

Use brand building initiatives to reinforce the

distinctive characterdistinctive character of each brand and the

value it delivers to its target customers

Acer’s ability to sustain multiple brands in Acer’s ability to sustain multiple brands in

global marketsglobal markets



Anticipate Implementation ProblemsAnticipate Implementation Problems

Minimize implementation problems

by:

Understanding customer requirementsUnderstanding customer requirements

Shaping customer expectations Shaping customer expectations

Manage service and pricing

expectations

Be relentless in communicating the

value storyvalue story to customers



Breaking Away from the PackBreaking Away from the Pack

Guarantee outcomes based on service

24-Hour Shipment Guarantee24-Hour Shipment Guarantee

Guaranteed Cost Savings ProgramGuaranteed Cost Savings Program

Turn discussions to services and away from priceTurn discussions to services and away from price

Going against industry standard can be first step

toward industry paradigm shift and rule changes

Be disciplined, operating within the imposed

structures of the flexible market offerings



III.III. Value-Based PricingValue-Based Pricing



Value-Based PricingValue-Based Pricing“In most firms prices are determined by

intuition,

opinions,

rules of thumb,

outright dogma,

top management’s higher wisdom,

or internal power fights.”--Hermann Simon--Hermann Simon



Value-Based PricingValue-Based Pricing

PricingPricing

StrategyStrategy

Focuses on where within this range to position the market offering and how to shift the range itself and the supplier’s relative position within it

PricingPricing

TacticsTacticsFocus on shifting the supplier’s position within the existing price range and are often transitory in nature

Transaction Transaction PricePrice

Focuses on realizing the greatest net price for each individual order



Traditional Pricing ApproachesTraditional Pricing Approaches

Cost-PlusCost-Plus PricingPricing:: Knowledge of own costs plus a percentage

Cost:Cost: cost of goods, cost of goods, variable costs, and full variable costs, and full costscosts

Plus:Plus: supplier’s target supplier’s target profitprofit

Competitive-BasedCompetitive-Based Pricing: Pricing: Set price in relation to competition’s prices Supplier managers Supplier managers

essentially give control of essentially give control of their marketing strategy to their marketing strategy to competitorscompetitors

Supplier with largest Supplier with largest market share usually market share usually provides price leadershipprovides price leadership


Business Market Management, 3rd edition Chapter 5-42 Business Market Management, 3rd edition 42

An Approach to Value-Based PricingAn Approach to Value-Based Pricing

Value-Based Pricing:Value-Based Pricing: Price should be set in relation to a market offering’s value

Fundamental Value Equation:Fundamental Value Equation:

(Valuef – Price

f ) >> (Value

a – Price

a)


Business Market Management, 3rd edition Chapter 5-43 -43

Value-Based Pricing ModelValue-Based Pricing Model

(Valuef – Price

f ) >> (Value

a – Price

a )

(Valuef – Value

a) >> (Price

f – Price

a )

∆∆Valuef,a

>> (Pricef – Price

a )

Pricef << Price

a + ∆∆Value

f,a



Value-Based Pricing FrameworkValue-Based Pricing Framework

Cost f,a

Price a

Value a

Value f

Profit forProfit for

Offering Offering aa

Customer Customer

Incentive (Incentive (ĮĮ))

To PurchaseTo Purchase

Offering Offering aa

IncrementalIncremental

ValueValue

(∆ Value (∆ Value f,af,a

) )

Rs./Unit

0



Pricing StrategiesPricing Strategies

Penetrating Pricing Penetrating Pricing

Strategy:Strategy: overall

profit earned by selling a

larger number of units at

a lower profit per unit

SkimmingSkimming PricingPricing

Strategy:Strategy: overall

profits earned by selling

fewer units at a higher

profit per unit

Pricing strategy can only be understood within the context of the business unit’s market

strategy for each segment



Pricing StrategyPricing Strategy

Factor supporting pursuit of a pricing strategy:

Market sizeMarket size

Forecasted growthForecasted growth

Significance of any learning effectsSignificance of any learning effects

• Experience curve

• Market knowledge

Anticipated reaction by present or potential competitorsAnticipated reaction by present or potential competitors

How persuasively demonstrable the value proposition isHow persuasively demonstrable the value proposition is



IV.IV. Managing Market Offerings Managing Market Offerings Across BordersAcross Borders



Adapting Market Offerings Across Adapting Market Offerings Across BordersBorders

Firms progress through 3 phases:Firms progress through 3 phases:

Phase I:Phase I: Initial foreign market entryInitial foreign market entry

Phase II:Phase II: Local or national market expansionLocal or national market expansion

Phase III:Phase III: Global rationalizationGlobal rationalization



Phase IPhase I

Market offering varies little from home market

Attention centered on pinpointing the closest

match““60% of U.S. companies60% of U.S. companies

that do business in only one foreignthat do business in only one foreigncountry country do business in Canada.”do business in Canada.”

--Pankaj Ghemawat--Pankaj Ghemawat



Phase IIPhase II

Attempt to broaden base in each

country market by gaining greater market

penetration

Tailor market offerings to the unique, local

market requirements

Emphasis shifts from export of strategy to

development on a country-by-country basis



Phase IIIPhase III

Global RationalizationManaging market offerings across Managing market offerings across

borders becomes paramountborders becomes paramount

Think global, act localThink global, act local

Transnational capabilities:Transnational capabilities:

• manage across national boundaries

• retain local flexibility while achieving global

integration



Providing Transnational Market OfferingsProviding Transnational Market Offerings

AdaptationAdaptation

AggregationAggregation ArbitrationArbitration

AAAAAA TriangleTriangle



Making a Global Strategy WorkMaking a Global Strategy Work

Excel in one or two of the A’s

Evaluate which country markets are most significant and interesting

Lead Country Model:Lead Country Model: product carefully tailored to the dominant and distinct needs of individual national markets

Face to customer must remain local

Goal:Goal: regarded as a local company in every regarded as a local company in every country market it participatescountry market it participates



Pricing in Local MarketsPrice relative to local competitorsPrice relative to local competitorsIncremental value of market offering Incremental value of market offering

varies across its country marketsvaries across its country marketsPerceived superior value relative to local Perceived superior value relative to local

market offering is a critical factor in initial market offering is a critical factor in initial foreign entryforeign entry

Dumping:Dumping: accepting a lower price than in the accepting a lower price than in the home markethome market

Pricing Across BordersPricing Across Borders



Harmonizing Pricing Across Borders:Customers that operate across borders Customers that operate across borders

increasingly expect increasingly expect unified pricingunified pricing

Cross-border arbitrage forces supplier to confront Cross-border arbitrage forces supplier to confront

widelywidely varyingvarying pricesprices across countries across countries

Pricing Bandwidth:Pricing Bandwidth: pricing within each country market pricing within each country market

is within a agreed-upon rangeis within a agreed-upon range

Web-based Web-based electronicelectronic commercecommerce may compel supplier may compel supplier

to move to a single priceto move to a single price

FluctuatingFluctuating currencycurrency exchange rates add complexity exchange rates add complexity

Pricing Across BordersPricing Across Borders



IV. SummaryIV. Summary



SummarySummary Managing market offerings is the process of putting products, services, programs,

and system together to create the greatest value for targeted segments and

customers

Business market managers need to rethink and have a true understanding of the

extent of commoditization

Market offerings are changing and are moving closer to the center of the tangibility

continuum

Flexible market offerings provide naked solutions consisting of offering elements that

all segment members highly value

Business market managers should pursue value-based pricing, selecting a price for

the feasible range defined by what the customer is willing to pay

How market offerings are adapted across borders depends on their firm’s stage of

international market development

Flexible market offerings prove useful in constructing transnational offerings



All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any

means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the

United States of America.

Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice HallPublishing as Prentice Hall

Chapter05

Business

Transcript of Chapter05