BOOK REVIEW: “Value Merchants: Demonstrating and Documenting Superior Value in Business Markets” by James Anderson, Nirmalya Kumar & James Narus (2007)

Value Merchants: Demonstrating and Documenting Superior Value in Business MarketsSalesmen require more gravitas than the power of persuasion and price cuts to make consistent sales to their customers.  In order to sell a product or a service, a company has to take a multidimensional role as a value merchant, rather than a salesman.  In fact, it is this very shift of the role of sellers that outlines what customers are looking for in terms of product or service offerings of the highest value (their perception).

 

Key words

Business, marketing, sales, supply chain, value creation, value capture, customer behavior.

Summary

Customer Value Perceived

It is the customer’s perception of high product value that matters.

This book is an excellent guide to anybody interested in learning how to optimize a company’s offerings to its maximum value in the eyes of the customer consistently.  It is one thing to obtain a sale of a product or service via persuasion and price cuts; it is quite another thing to sell a product or a service that has the best value in the eyes of the customer.  The focus for most companies is to determine prices with respect to what the competition is offering, but the three authors state the importance in providing an offering focused on the customer’s perception of what constitutes a high value product.

Customer Value Perceived

There is a major difference between enhancing the value by cost-cutting and by convincing customers of the worth of the product.

The main emphasis of the book is the way suppliers interact with customers.  Indeed, there is a major difference between enhancing the value of your product by cost-cutting to address procurement costs, the so called “green money,” and by convincing customers of the worth of that product as a whole, “gray money.”  What is outlined here in particular is the definition of what value truly entails within the business market today.  It is considered the total worth of an offering in terms of four benefits to the customer: technical benefits, economic benefits, service benefits, and social benefits.  What it comes down to, however, is not the costs saved or the additional customer service, but it is the difference in value between what the supplier is offering to the customer, and the value of the buyer’s next alternative.  The difference in value is very important to the customers debating the value of the offering; nevertheless, what they also care about is the contrast between the difference in values and the difference in prices.

SiemensCase studies on companies, such as Siemens, provide an interesting picture into the methods these companies have used to sell their offerings of value to their customers.

James Anderson on value creation

Interesting Quotes

A common lament that we hear from these managers is that although they believe their offerings deliver superior value to customers, their businesses have difficulty persuading customers of this. Our book enables general managers, marketing managers, and sales managers to overcome such obstacles and get a better return on the superior value that their market offerings deliver to target customers.

Customer value management is a progressive, practical approach to business markets that, in its essence, has two basic goals:

  1. Deliver superior value to targeted market segments and customer firms
  2. Get an equitable return on the value delivered

Value Merchants

Demonstrating superior value is necessary, but it is no longer enough to become a best-practice company in today’s business markets. Suppliers also must document the cost savings and incremental profits that offerings have delivered to customers.

GE Infrastructure Water & Process Technologies (W&PT), for example, stresses the importance of documenting the results its solutions have provided customers in its brand slogan: “Proof, not Promises.”

Conceptualise Value 

Robert Dolan and Hermann Simon state that “perceived value is the maximum price the customer will pay.”

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:

  • Points of parity – those value elements whose performance or functionality is essentially the same as the counterpart elements of the next-best alternative
  • 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
  • Points of contention – those value elements on which the supplier and its customers disagree about performance or functionality relative to the counterpart elements of the next-best alternative

Formulate Value Propositions

Suppliers vary tremendously in their knowledge of how their offerings deliver value to target customers relative to the next-best alternative offering.

It is fundamental that supplier teams be comprehensive and elemental in listing the offering’s value elements.

Customer value research gives a supplier a tremendous opportunity to learn how changes in its offering would increase the value relative to that of the next-best alternative.

To generate some creative ideas that might substantially improve an offering’s value to customers, consider the set of questions that Professors Chan Kim and Renée Mauborgne offer to promote out-of-the-box thinking.

  1. Reduce: Which value elements should be reduced well below the industry standard?
  2. Raise: Which value elements should be raised significantly above the industry standard?
  3. Eliminate: Which value elements that the industry has taken for granted should be eliminated?
  4. Create: Which new value elements should be created that the industry has never offered?

NetJets, a firm offering fractional ownership of corporate jets, furnishes an example of raising value elements. Compared to first-class travel on commercial airlines, NetJets allows executives to choose from five thousand different airports for point-to-point travel. Since most of these are small regional airports, a busy executive can fly from, and land at, a more easily accessible airport than would often be the case for commercial airlines.

Substantiate Value Propositions

Suppliers need to convince prospective customers beforehand what cost savings or added value they can expect from using the supplier’s offering relative to the next-best alternative. Firms practicing a value-based approach to business markets, such as GE Infrastructure Water & Process Technologies and SKF, demonstrate the value of their offerings in advance through value calculators.

Tailor Market Offerings

Many suppliers in business markets conclude that they’re in a commodity business. We contend that this conclusion is most often misleading because it is myopic and premature. These suppliers think too narrowly about the core product or service they provide to business customers.

Unfortunately, a common strategy in business markets is for suppliers to bundle supplementary services with their core products. As a result, customers tend to receive these services for free, often with virtually no limits on consumption, if they purchase the company’s core product. No real analysis is done to understand (1) the value of these services for customers, (2) how they may be valuable for some customers but not for others, and (3) how they may be a source of differentiation.

Greif Inc., which manufactures fiber and plastic drums, routinely conducts what it calls “cost-in-use studies” to document the incremental cost savings, and thus the superior value, that a customer gains by using Greif products and services rather than a competitor’s.

As a noteworthy case in tailoring market offerings, consider Dow Corning. In 2000, it was serving its customers with seven thousand different products that were bundled with all kinds of supplementary services. Despite a leading 40 percent worldwide market share in silicones, Dow Corning was facing a number of low-cost competitors that were undercutting its prices.

Transform the Sales Force into Value Merchants

A value merchant recognizes the supplier’s own costs and the market offering’s value to the customer and works to obtain a fair return for both the supplier firm and the customer firm.

The foundation of Applied’s selling efforts is its Documented Value Added (DVA) program. It requires every salesperson to record all their efforts to provide value for individual customers on a proprietary software package, which they access through Applied’s intranet. Once they have provided the value, they must write up and record a DVA report.

Profit from Value Provided

Some value merchant businesses have become so accurate in these predictions that they are willing to make their price premiums contingent on performance, payable after documenting savings to customers.

 TataSteel is a leading supplier in India. Through its customer value management (CVM) process, it strives to find and eliminate value drains and leaks in doing business with its strategic customers.

Quaker Chemical’s fundamental strategy is to create a relationship with its customers that allows for the execution of projects that result in added value and benefit for both the company itself and the customer.

Value-based pricing strategy

The first alternative is sometimes called a penetration pricing strategy because the firm intends to make its overall profit through selling a larger number of units at a lower profit per unit. The second alternative is sometimes called a skimming pricing strategy because the firm intends to make its overall profits through selling fewer units at a higher profit per unit.

The fundamental consideration that we want to emphasize, though, is that pricing strategy can only be understood within the context of the business unit’s market strategy for each segment.

Prosper in Business Markets

Customer value management is an enabler, not a substitute, for technical prowess. Insights into changing market offerings to improve their value, for example, are of little use if a business and its suppliers lack the technical capability to create and produce the offering customers would value.

To gain a chance of adoption in a business, the customer value research projects have to generate success stories. These persuasively recount the significant gains in knowledge and profitability that have resulted from the projects.

Quaker Chemical’s unique solutions typically entail three- to five-year contracts for bundles of products and services that Quaker personnel deliver on-site. In a typical year, over 20 percent of Quaker’s personnel work on-site at customer plants.

Other Book Reviews

Value Merchants

NY Journal of Books: “This book is intended for marketing and sales people in large firms who sell to other large firms. The amount of work involved with researching, calculating, and demonstrating the unique value you bring your customers may cost you thousands or tens of thousands of dollars.”

Book Review: “Value Merchants” by Anderson, Kumar and Narus

Detect and Harness Value: “The book makes the case for the use of and demonstrates how to create “value calculators” to document cost savings and incremental profit gains delivered to customers by purchasing the suppliers products and services, which they call “Customer Value Management Process”.

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