Marketing for Businesses: Grasping the Value Customers Seek

Defining and Measuring Value in Business Marketing

What exactly constitutes value, and can it be quantified? The true worth of products and services to customers is a question that eludes many suppliers in business markets. Yet, in an era where customers, particularly those driven by cost efficiencies, seek to maximize profits through smart purchasing decisions, understanding the value proposition has never been more crucial.

Consider yourself in the shoes of a commercial grower evaluating mulch film suppliers. One claims superior value without substantiation, while the other offers a tangible cost reduction of $16.83 per acre. Which pitch is more compelling?

Like the grower, many customers comprehend their needs but lack clarity on the value of meeting those needs. For suppliers, this knowledge gap presents an opportunity to articulate the value they offer and guide customers towards informed choices.

A select group of suppliers in business markets leverage customer value models, data-driven representations of their offerings’ monetary worth to customers, to gain competitive edges. These models assess the costs and benefits of market offerings in specific customer contexts, enabling suppliers to quantify value.

Developing customer value models is challenging, but the experiences of successful adopters offer valuable insights. Here are some guidelines for companies seeking to define and measure value for their customers:

Establishing a Shared Definition of Value

Before delving into value modeling, it’s essential to establish a common understanding of value in business markets. In this context, value refers to the monetary worth of technical, economic, service, and social benefits a customer receives in exchange for the price paid for a market offering.

Value is quantified in monetary terms and encompasses net benefits, factoring in all costs incurred by the customer except the purchase price. It’s crucial to differentiate between value and price; while altering price may affect purchasing decisions, it doesn’t change the intrinsic value of the offering. Additionally, value assessments are contextual, considering competitive alternatives even in the absence of direct comparisons. For instance, a customer might opt to produce a product internally rather than purchasing it externally.

Values and Prices, denoted as Value and Price respectively, represent the worth and cost of a supplier’s market offering, while Valuea and Pricea represent those of the next best alternative. The discrepancy between value and price delineates the customer’s motivation to purchase. In essence, this equation signifies that the customer’s inclination to acquire a supplier’s offering must surpass its inclination towards the next best alternative.

Constructing Customer Value Models

Field value assessments, also referred to as value-in-use or cost-in-use studies, stand out as the predominant and, in our view, the most precise approach for constructing customer value models. These assessments necessitate suppliers to gather firsthand data from their customers whenever feasible. However, direct research isn’t always viable. In instances where field value assessments are impractical, valuable insights into value can still be gleaned through methods like direct and indirect survey queries, conjoint analysis, and focus groups. These methods primarily rely on customer perceptions regarding the functionality, performance, and value of a supplier’s offering.

Building a Value Model through Field Value Assessments

Embarking on the journey of constructing a customer value model can be daunting, particularly for suppliers venturing into this territory for the first time. Yet, achieving a thorough comprehension of a market offering’s value in a specific customer context is attainable. The initial step involves assembling an adept value research team comprising individuals with product, field engineering, and marketing expertise, supplemented by two or three innovative sales representatives. Involving sales personnel at the outset is pivotal; they possess intimate knowledge of the customer base, usage patterns, and potential cooperation for value research. Their involvement fosters understanding and support for the approach, enabling effective communication within the sales force.

The subsequent phase entails selecting the appropriate market segment for targeting. Beginning with a segment where the supplier maintains close, collaborative relationships with customers, possesses extensive insights into usage patterns, or deals with relatively straightforward offerings is advisable.

Prior to engaging with customers, the team must meticulously plan the data requirements, benefits for the customer, and be prepared to offer incentives. For instance, offering to bear the resources for data collection at no cost to the customer and guaranteeing to share all findings can serve as compelling incentives. Shared research findings among participating customers in an aggregated or anonymized form often prove irresistible as they facilitate benchmarking. W.W. Grainger, a leading distributor of maintenance, repair, and operating supplies in North America, provided such incentives to the 15 companies involved in its initial model-building endeavor.

Developing a comprehensive list of value elements is paramount. These elements encompass factors influencing the costs and benefits of the offering in the customer’s business, spanning technical, economic, service, and social dimensions. The team should consider the entire lifecycle of the offering, from acquisition and usage to disposal, to capture all potential impacts on the customer’s business. Inclusivity is key; omitting elements, particularly those unfavorable to the supplier’s offering compared to alternatives, undermines the project’s credibility.

By identifying a broad spectrum of elements, the team can accurately assess the functional and performance disparities between its offering and the next best alternative. While broad categories may be easier to pinpoint, they risk overlooking crucial cost elements, leading to less valid estimates of worth. For instance, a bottle breakage in a filling line not only causes downtime but also incurs costs in scrap, disposal, maintenance labor, and cleaning chemicals, many of which are buried within various plant-overhead accounts.

Often, the value research team faces the challenge of balancing reliance on a customer’s perceptions of relevant elements and firsthand observations of how the supplier’s offering impacts the customer. In many cases, the customer’s management lacks a comprehensive understanding of all the value elements associated with a particular offering. Recognizing this, Alcoa Aerospace implemented a program where salespeople underwent training in field-value-assessment methods. Subsequently, they were tasked with meticulously mapping out all the steps a customer undertook in acquiring, utilizing, and disposing of an Alcoa offering. This initiative not only provided salespeople with a reason to engage customers but also incentivized customers by promising enhanced insights into their own businesses.

Alcoa’s initiative yielded significant benefits. At the culmination of a two-month period, salespeople convened to share their findings, facilitating mutual learning and idea exchange regarding various customer situations and potential sales opportunities. Customers, in turn, gained awareness of cost and benefit elements previously overlooked, enabling them to incorporate these insights into their assessments of suppliers’ proposals.

Data Collection

Armed with a comprehensive list of value elements, the subsequent step involves acquiring initial estimates for each element and determining their monetary worth. Suppliers may find it beneficial to immerse a team member within a key functional area of the customer’s organization for a brief period to gain firsthand insights into operations and potential pain points. However, customers may not be aware of possessing the data or information sought by the supplier, believing it to be nonexistent. In such cases, diligent inquiry or focus groups comprising representatives from various functional areas can help uncover valuable data.

Additionally, the value research team must explore alternative sources of information. Independent industry consultants or knowledgeable personnel within the supplier company can offer initial estimates. For instance, Qualcomm drew on research studies conducted by the American Trucking Association to provide ranges for certain elements in its value model. When a supplier’s service mitigates customer risk, actuarial consultants may be consulted to estimate potential costs.

Assigning monetary estimates to value elements may pose challenges, particularly with social elements like peace of mind. In such cases, suppliers often include these elements in their analysis as “value placeholders,” leaving room for qualitative discussion with customers.

Assumptions and Transparency

In any field value assessment, certain assumptions are inevitable to complete the analysis. These may pertain to the functionality or performance of the market offering in the customer’s specific setting or the monetary value of perceived differences. It’s imperative for suppliers to be transparent about these assumptions. Lack of clarity regarding the rationale behind value assignments can undermine the supplier’s credibility. Encouraging customer input and collaboration fosters mutual understanding and ensures a credible, mutually acceptable solution.

Validate the Model and Understand Variance in Estimates

Following the construction of the initial value model, it’s imperative for the supplier to validate it by conducting additional assessments with other customers or potential customers within the market segment. This process allows the supplier to refine its value estimates and gain a deeper understanding of how the value of its market offering varies across different customer applications, capabilities, and usage scenarios.

Moreover, as the supplier carries out further value assessments, it will develop a better grasp of when firsthand data is necessary and when it can rely on customers’ perceptions. When soliciting perceptions, it’s essential to recognize that individuals are typically more adept at making comparative judgments (such as more or less valuable) than absolute judgments (it’s worth X). Thus, the supplier should provide the initial estimate and prompt informants to evaluate whether that element is more or less valuable to them than the estimate.

Create Value-Based Sales Tools

Suppliers can leverage value models not only to inform their decision-making but also to develop persuasive sales tools. One common tool is a value case history, which documents the cost savings or added value a customer receives from using the supplier’s market offering. For instance, Sonoco Products Company’s protective packaging division tracks the savings its customers achieve from implementing total packaging solutions. These solutions, which encompass stronger, lighter, and more compact packaging systems, yield savings from reduced product damage, packaging, shipping, and storage costs. Sonoco creates case studies illustrating these savings, which its salespeople utilize when pitching to prospects, effectively demonstrating the potential benefits.

Value assessment can also become a service that suppliers offer as part of a consultative selling approach. For example, suppliers may develop spreadsheet software applications that salespeople use on-site to evaluate the potential value of the offering to a specific customer.

Putting an Understanding of Value to Use

Suppliers can utilize their understanding of value to enhance performance and gain competitive advantage in various ways. Firstly, they can tailor supplementary services, programs, and systems in current market offerings or guide the development of new offerings based on value insights. Secondly, by integrating value understanding into marketing efforts, suppliers can attract new customers. Finally, sustaining customer relationships is facilitated by documenting superior value delivery over time and exploring opportunities to enhance these relationships further.

Managing Market Offerings

Successful management of flexible market offerings hinges on understanding the value each component creates and its associated cost. Suppliers must identify and eliminate value drains—services that cost more to provide than they are worth to customers and lack strategic significance. Identifying these drains, such as unused analytic monitoring services, through field value assessment combined with activity-based costing analysis can lead to better resource allocation and increased profitability.

Guiding Development of New or Improved Products and Services

Value models play a crucial role in guiding the development of new offerings, especially when introducing new technology to the market. By understanding the value that enhancements provide to customers across different applications and usage scenarios, suppliers can prioritize improvements effectively. For example, chemical pigment suppliers used conjoint analysis to assess potential changes in technical and commercial attributes, uncovering insights like the high value customers placed on improved dispersibility.

Gaining Customers

Understanding how market offerings deliver value enables suppliers to craft persuasive value propositions. Greif Brothers Corporation, for instance, markets complete packaging systems instead of competing solely on price-per-container basis. By developing a value model that comprehensively assesses total costs, Greif can demonstrate how its systems significantly reduce a customer’s total packaging costs, thus attracting and retaining customers effectively.

Greif has discovered that while customers, both existing and potential, can easily assign monetary values to certain elements, others pose a greater challenge. For those elusive elements, Greif conducts a more in-depth analysis. Take, for instance, the value of environmental stewardship. To gauge this aspect’s worth, Greif assesses the percentage of its customers’ end users located in landfill-restricted areas, where container disposal costs are elevated. Greif’s service, which includes container retrieval, not only eliminates these costs but also protects customers from potential fines by the Environmental Protection Agency due to improper disposal. While such analyses may not capture all aspects of environmental stewardship’s value, like enhancing a customer’s reputation, they do quantify its worth in monetary terms.

Using the value model, Greif formulates multiple total-cost-based packaging solutions. These are then presented comprehensively by Greif’s strategic account manager and a team of experts to the senior managers of prospective customers, discussing the merits and prices of each solution.

Sustaining Customer Relationships

Trust and commitment are fundamental to successful working relationships. To demonstrate these qualities to customers, forward-thinking suppliers periodically provide evidence of their achievements. For example, Greif’s sales managers offer quarterly reviews documenting actual cost savings. Another example is Applied Industrial Technologies (AIT), a major distributor of specialty replacement bearings and power transmission components. AIT introduced a value proposition in 1990 focused on improving productivity for its customers rather than merely offering low-priced parts. Through value assessment, AIT collaborates with customers to save costs in areas such as maintenance and inventory. These documented value-added savings form the basis of AIT’s partnership efforts.

Understanding Value: How W.W. Grainger and Its Customers Benefit

W.W. Grainger, a distributor of maintenance, repair, and operating (MRO) supplies, has recognized the benefits of measuring and monitoring value for its customers. The company has even established Grainger Consulting Services to help customers understand the total cost of MRO supplies management.

By comprehending value in business markets and transacting based on delivered value, suppliers ensure an equitable return for their efforts. Customer value management involves delivering superior value and receiving a fair return, both of which hinge on value assessment. For instance, W.W. Grainger not only sells based on price but also provides additional value through consulting services, highlighting the importance of understanding and delivering value in business transactions.

In conclusion, while selling solely on price might seem mundane, understanding and delivering superior value is the essence of profitable business interactions. Assessing and comprehending value in business markets is the foundation for achieving both profitability and fulfillment.