Also by the Authors

JAMES C. ANDERSON AND

JAMES A. NARUS

Business Market Management: Understanding,

Creating, and Delivering Value, 2nd ed.
(Upper Saddle River, NJ: Pearson Prentice Hall, 2004).

NIRMALYA KUMAR

Marketing as Strategy: Understanding the CEO’s

Agenda for Driving Growth and Innovation
(Boston: Harvard Business School Press, 2004).

NIRMALYA KUMAR AND

JAN-BENEDICT E. M. STEENKAMP
Private Label Strategy: How to Meet the Store Brand Challenge
(Boston: Harvard Business School Press, 2007).
 Value Merchants

Demonstrating and Documenting Superior Value in

Business Markets

Nirmalya Kumar

James Anderson

James Narus
Copyright 2007 James C. Anderson, Nirmalya Kumar, and James A. Narus
All rights reserved
Printed in the United States of America
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No part of this publication may be reproduced, stored in, or introduced into

a retrieval system or transmitted, in any form, or by any means (electronic,
mechanical, photocopying, recording, or otherwise), without the prior
permission of the publisher. Requests for permission should be directed to
[email protected], or mailed to Permissions, Harvard
Business School Publishing, 60 Harvard Way, Boston, Massachusetts
02163.

Library of Congress Cataloging-in-Publication Data

Anderson, James C., 1953–
Value merchants: demonstrating and documenting superior value in
business markets / James C. Anderson, Nirmalya Kumar, and James A.
Narus.
p. cm.
ISBN-13: 978-1-4221-0335-7 (hardcover: alk. paper)
9781422131077
1. Industrial marketing. 2. Sales promotion. 3. Purchasing. I. Kumar,
Nirmalya. II. Narus, James A. III. Title.
HF5415.1263.A534 2007
658.8’04—dc22
2007017289

The paper used in this publication meets the minimum requirements of the
American National Standard for Information Sciences—Permanence of
Paper for Printed Library Materials, ANSI Z39.48-1992.
 To my sons Perry and Ross:
so challenging, so worthwhile ...
so much love.
—JCA

To Vijay Mittal—
value merchant and
invaluable friend.
—NK

To Simon and Genevieve Narus,

for a lifetime of support and
encouragement.
—JAN
Table of Contents

Also by the Authors

Title Page
Copyright Page
Dedication
PREFACE
ACKNOWLEDGMENTS
ONE - Value Merchants
TWO - Conceptualize Value
THREE - Formulate Value, Propositions
FOUR - Substantiate Value Propositions
FIVE - Tailor Market Offerings
SIX - Transform the Sales Force into Value Merchants
SEVEN - Profit from Value Provided
EIGHT - Prosper in Business Markets
APPENDIX A - Relating Customer Value and Price
APPENDIX B - PeopleFlo EnviroGear Pump Customer Value Model
NOTES
INDEX
ABOUT THE AUTHORS
PREFACE

WE HAVE WRITTEN this book for general managers, marketing

managers, and sales managers whose businesses serve business markets—
firms, institutions, and governments. 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. Customer managers, increasingly pressed for time and demonstrable
results, appear to focus simply on reducing price. What causes this? A faulty
customer value proposition? A lack of knowledge of how to persuasively
substantiate the superior value of their offerings relative to those offered by
competitors? Salespeople who are unwilling, or unable, to sell value and
instead rely on price concessions to retain or gain business? Each of these
may contribute to frustrating results, when sales may grow but profitability
lags disappointingly behind.
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. We contend
that to prosper in today’s demanding business markets, supplier managers
have to fundamentally reexamine their philosophy of doing business and
how they put it into practice. Suppliers must adopt a philosophy of doing
business based on demonstrated and documented superior value and
implement that philosophy using an approach we call customer value
management. 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

Customer value management relies on customer value assessment to gain

an understanding of customer requirements and preferences and what
fulfilling those are worth in monetary terms. Although firms may be able to
accomplish the first goal without any methodical assessment of customer
value, it is unlikely that they will be able to accomplish the second goal
without it. Simply put, to gain an equitable or fair return on the value their
offerings deliver, suppliers must be able to persuasively demonstrate and
document the superior value they provide customers relative to the next-
best alternative.
In this book we provide readers with a detailed, step-by-step
understanding of customer value management and how to implement it in
their businesses. We begin with how to conceptualize value and go all the
way through to how to profit from the superior value provided. We offer
numerous case examples from businesses in a wide variety of industries and
countries to support our approach and help bring it to life for readers. In
writing this book, we also draw on our experience in working with
companies over the past decade to implement customer value management.
We have seen the significant contribution that customer value management
can make to business performance. Isn’t it time for your business to really
profit from superior customer value?
ACKNOWLEDGMENTS

MANY INDIVIDUALS and organizations have provided support to enable

us to write this book. While we are grateful to them all, we single out some
of them here to explicitly acknowledge their contributions.
We first want to thank the many managers who so graciously took time
out of their busy schedules to talk with us. The best practices that these
managers shared with us made an enormous contribution. In particular, we
would like to especially acknowledge:

Nada El-Zein, Akzo Nobel

Elisa Scarletta and Mark Stoneburner, Applied Industrial
Technologies
Eric Berggren and Stefanie Zucker, Axios Partners
Steve Dehmlow, Composites One
Michael Lanham, Dow Corning
Alice Griffin and Robert Smith, Eastman Chemical
Robb Kristopher and Debra Oler, Grainger
Frank Joop, Intergraph
Joy Chandler and John Stang, Kennametal
Marcel de Nooijer and Eelco van Asch, KLM Cargo
Gene Lowe, Milliken
Bas Beckers and Bert Willemsen, Orange Orca
William Blankemeier, PeopleFlo Manufacturing
Art Helmstetter, Quaker Chemical
 Joe Razum, Rockwell Automation (now Baldor)
Siva Mahasandana and Chantana Sukumanont, Siam City
Cement
Todd Snelgrove, SKF
Eddie L. Smith, Sonoco
Michael Butkovic and Jackie Eckey, Swagelok
Peeyush Gupta and Anand Sen, Tata Steel

We want to thank the Institute for the Study of Business Markets (ISBM),
located at Penn State University, for its financial support of our
management practice research. We especially want to acknowledge Ralph
Oliva, the executive director of ISBM, and Gary Lilien, the research
director of ISBM, for their support of our work.
We also want to express our gratitude to Kirsten Sandberg of Harvard
Business School Press for her support and editorial guidance of the project.
James C. Anderson would like to thank his research associates at the
Kellogg School of Management—Chaitali Bhagdev, Abhinav Gattani, and
Akshaya Gulhati—for their capable assistance in this project. He would
also like to thank his assistant, James Ward, for James’s helpful suggestions
and skillful assistance in constructing the figures and tables.
Nirmalya Kumar gratefully acknowledges the following companies and
individuals who over the years were kind enough to allow him to test his
ideas regarding value in business markets: ACC, Aditya Birla Group
(Kumaramanglam Birla, Santrupt Misra), Akzo Nobel, Alcan, Alfred
McAlpine, AT&T, Bekaert, Bertelsmann Direct Group (Gerd Bührig, Ewald
Walgenbach), BT (Tim Evans, Gavin Patterson), Caterpillar, Chilton,
Continental, Dow Chemical (Carlos Silva Lopes), DuPont, Essel Propack
(Ashok Goel), Goodyear, Ambuja Cements, Hewlett-Packard, Holcim
(Markus Akermann, Paul Hugentobler), Hydro Aluminum, IBM, ICI, ISS,
Jardine Matheson, Jotun, Motorola, Nokia, Norwegian Post, Orkla Group
(Karin Aslaksen, Ole Enger), RPG Enterprises (Pradipto Mohaptra), Sabic,
Shell, Schindler, Tetra Pak, Volvo, WPP Group (Mark Read), and Zensar
Technologies (Ganesh Natarajan). He also thanks his colleagues at London
Business School and the associate director of the Aditya Birla India Center,
Suseela Yesudian-Storfjell.
James A. Narus thanks the following companies and managers for their
assistance with this project: W.R. Grace (Larry Golen), Okuma America
(Seth Machlus), Sonoco (Vicki Arthur, Greg Powell), Timken Corporation
(Brian Berg), and Volvo Trucks (Clay Flynt).

Developed with the support of the Institute for

the Study of Business Markets at Penn State.
ONE

Value Merchants
Doing Business on Demonstrably Superior Value

A SUPPLIER OF integrated circuits (ICs) for correcting power input was

competing for the business of an electronic device manufacturer, which was
projecting a demand of 5 million units for incorporation into its next-
generation device. In the course of the negotiation, the supplier’s
salesperson learned that he was competing against another firm whose price
for the integrated circuits was 10¢ lower per IC—45¢ versus 35¢. The
customer asked the salespeople from both firms to explain the source of the
superior value for their offering relative to the competing offering. This
particular salesperson replied that it was his personal and dedicated
servicing of the account.
Unbeknownst to him, the customer had built a customer value model in
which it had found that his offering, though 10¢ higher in price, was
actually worth 15.9¢ more than the alternative supplier. Further, the
electronics engineer who was leading the development project had
recommended to the purchasing manager supporting the project that he
purchase those ICs, even at the higher price. The salesperson’s personal and
dedicated servicing as a favorable point of difference was worth something
in the model—0.2¢! Unfortunately, the salesperson overlooked the two
elements providing the greatest differential value, apparently unaware of the
magnitude of the differences and what those differences were worth to that
customer. As expected, when push came to shove in the negotiations with
purchasing, the salesperson gave a 10¢ price concession to match the
competitor’s price and “win” the business (perhaps he suspected that his
superior service was not worth the 10¢ difference after all). The result? The
firm lost $500,000 (5 million units at 10¢) of potential profit on a single
transaction!
Talk to seasoned general managers or business unit executives in
business markets, and they will recount a similar story in which:
Their salespeople have a poor understanding of what really creates
value for customers.
Their business makes vague promises of superior value without any
supporting data.
Salespeople frequently play the role of value spendthrifts, giving value
away through price concessions to make the sale, rather than value
merchants., who sell profitable growth by stressing the superior value
of the firm’s offerings.
Despite providing greater value than competitors, their business is
forced to compete as a commodity and therefore does not get a fair
return from its superior value.

The result, as in the case just examined, is that even though the supplier
believed that its products and services had greater value than those of the
next-best alternative, it ended up matching competitor prices. “Leaving
money on the table,” as this supplier did, has a direct and substantial
negative impact on the supplier’s profitability. Why does this happen as
often as it does in business markets?
Purchasing managers in business markets are becoming increasingly
sophisticated in their strategies and tactics. Increasingly held accountable
for reducing costs, purchasing and other customer managers don’t have the
luxury of simply believing suppliers’ claims of cost savings. A relatively
easy and quick way to obtain savings is for purchasing managers to focus
on price and obtain price concessions from suppliers. To enhance their
negotiating power, purchasing managers attempt to convince suppliers that
their offerings are the same as their competitors—that they could be easily
replaced. In the face of such pressure, as the IC example illustrates,
suppliers cave in and match competitor prices. It is a rare commodity in
business markets to find firms that do business based on demonstrably
superior value.
 Senior managers of companies serving business markets—that is, firms,
institutions, or governments—are frustrated that they often are cast as
“commodity” suppliers. Their customers have been effective in demanding
more but have been unwilling to pay for it. As the need to cut costs in
companies continues, the pricing pressure that such customers place on
their suppliers is not likely to abate. Thus, business as usual—or even doing
more of the same with less, which is a common response—will not provide
solutions worth pursuing.

Customer Value Management: A Progressive,

Practical Approach
To combat price concessions and commoditization pressures, firms have to
fundamentally reexamine their philosophy of doing business and how they
put it into practice. Suppliers must adopt a philosophy of doing business
based on demonstrated and documented superior value and implement that
philosophy using an approach we call customer value management.
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

Customer value management relies on customer value assessment to gain

an understanding of customer requirements and preferences and what
fulfilling those are worth in monetary terms. Although firms may be able to
accomplish the first goal without any systematic assessment of customer
value, it is unlikely that they will be able to accomplish the second goal
without it. Simply put, to gain an equitable or fair return on the value their
offerings deliver, suppliers must be able to persuasively demonstrate and
document the superior value they provide customers relative to the next-
best alternative.

“Green” Money Versus “Gray” Money

Senior managers at most firms in business markets have come to realize
that if they can cut the cost of acquired goods and services, such
procurement savings will fall to the bottom line as improved profitability.
Thus, nearly every firm has set goals for purchasing to cut the cost of
acquired goods and services. These goals are typically expressed as total
cost reduction goals and tend to take one of two forms. They may be
expressed as a targeted cost reduction amount, such as reducing the cost of
acquired goods and services by $2 billion over three years (as one oil
company did), or as a yearly percentage reduction, such as reducing costs
by 10 percent, 5 percent, and 5 percent over three consecutive years (as one
automotive manufacturer did). However, the translation of these goals into
purchasing practice often leads to a bias that one purchasing director
captured with the expression “green money versus gray money.” What did
he mean by that?
Green money (the predominant color of U.S. currency) refers to cost
savings for which purchasing managers can readily get credit, whereas gray
money refers to cost savings that are difficult for them to claim. Getting
three bids, picking the lowest one, and then negotiating a further price
reduction is green money. It reflects directly on purchasing’s contribution to
the goal that senior management has set. Acquiring an offering that provides
a lower total cost of ownership but that may have a higher purchase price is
gray money. Because of limited time and measurement capabilities, a
purchasing manager may not be able to document that she has actually
received the cost savings that the supplier assured her firm.
But it doesn’t have to be that way. A manufacturer of controls for
automating manufacturing lines has its salespeople spend time at
prospective customers gathering data on what controls would be required,
what the total cost of them would be (not just purchase price, but all costs,
such as installation and training), and what the payback period would be if
the customer were to purchase them. The salesperson pulls this research
together into a report that demonstrates the potential savings, which he then
provides to the prospective customer. Whose name appears on the cover of
the report? The purchasing manager’s. The supplier salesperson’s name
appears nowhere on the cover of the report. Now, the purchasing manager
can take this report to her senior management and say, “Look, I have been
doing some research in conjunction with this supplier, and this is how we
can save some money.” What has this supplier done? Enabled the
purchasing manager to turn gray money into green money. It also has
provided another benefit: allowing the purchasing manager to leverage her
time, which is in short supply.
Demonstrating and Documenting Superior Value
Increasingly, to get an equitable or fair return, suppliers must be able to
persuasively demonstrate and document the superior value their offerings
deliver to customers. By “demonstrate,” we mean showing prospective
customers convincingly beforehand what cost savings or added value they
can expect from using the supplier’s offering relative to the next-best
alternative. Value case histories are one tool that best-practice suppliers,
such as Nijdra Groep in the Netherlands and Rockwell Automation, use to
accomplish this. Value case histories are written accounts that document the
cost savings or added value that reference customers have received from
using a supplier’s market offering. Another way that best-practice firms,
such as GE Infrastructure Water & Process Technologies and SKF,
demonstrate the value of their offerings to prospective customers is through
customer value assessment tools, which we term value calculators. These
tools are spreadsheet software applications that salespeople or value
specialists conduct on laptops as part of a consultative selling approach to
demonstrate the value that customers likely would receive from their
offerings.
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. Thus, suppliers work with their customers to define
the measures on which they will track the cost savings or incremental profit
produced and then, after a suitable period of time, work with customer
managers to substantiate the results.
Documenting the superior value delivered to customers provides four
powerful benefits to suppliers. First, it enhances the credibility of the value
demonstrations for their offerings because customer managers know that
the supplier is willing to return later to document the value received.
Second, documenting enables customer managers to get credit for the cost
savings and incremental profit produced. Third, documenting enables
suppliers to create value case histories and other materials for use in
marketing communications to persuasively convey to prospective customers
the value they, too, might obtain from the supplier’s offering. Finally, by
comparing the value actually delivered with the value claimed in the
demonstration and regressing these differences on customer descriptors,
documenting enables suppliers to further refine their understanding of how
their offerings deliver the greatest value. This sharpens subsequent efforts to
target customers. We term the tools that suppliers use to document the value
of their offerings value documenters.
For a moment, put yourself in the role of a commercial grower. Two
suppliers are offering you mulch film, which is a thin plastic sheet that
commercial growers place on the ground to hold in moisture, prevent weed
growth, and allow vegetables and melons to be planted closer together. One
supplier comes to you with this proposition: “Trust us. Our mulch film will
lower your cost.” The other supplier, Sonoco, comes to you with this
proposition: “Sonoco just lowered the cost of your mulch film by $16.83
per acre.” And Sonoco offers to show you exactly how it determined that
figure. Which supplier’s value proposition is more persuasive?

How Customer Value Management Leads to Success

Before pursuing a proposed approach that changes the way of doing
business, senior management wants to know why it’s more likely to succeed
than others After all, achieving any enduring change in a business is very
difficult. So what are the unique strengths in an approach that make it worth
pursuing? Customer value management has three unique strengths: superior
conceptualization of value, a progressive approach to assessing value in
practice, and proven concepts and tools for translating knowledge of
customer value into superior business performance.

Superior conceptualization of customer value. To achieve success,

senior managers need a conceptualization of customer value that they and
their managers, salespeople, and business customers can readily grasp and
find reasonable. Despite all the writing and talk about customer value in
business markets, we contend that there has not been a reasoned,
understandable conceptualization. As a result, there is substantial variation
in what is meant by “customer value” in business markets, which has
hindered implementing assessments of it.
 We provide a comprehensive, well-reasoned conceptualization of
customer value in chapter 2. It expresses customer value in the same metric
as we ask customers to make purchase decisions (monetary terms, not
importance ratings). It specifies what is and what is not value (e.g., price).
Finally, our expression of the fundamental value equation especially lends
itself to assessment in practice and reflects how customers decide between
competing offerings.

Progressive approach to assessing value in practice. Approaches to

assessing customer value that are cumbersome in practice or that require
statistics experts will be met with resistance, especially from the sales force
and customers. Total cost of ownership, for example, is hard to argue with
as a concept. The problem is that it proves to be unworkable in practice.
Customers have limited patience in cooperating with suppliers because
customer managers have greater responsibility and increasing demands on
their time. Where once a manager at a particular level might have had
responsibility for $10 million in business, he may now have responsibility
for $50 million. Customers also have a limited willingness to share their
data with suppliers. Each of these facts works against the meticulous, time-
consuming process of gathering data to estimate the total cost or, better still,
total value of ownership in practice. As a result, efforts devolve into
compromising shortcuts—such as filling out forms, guessing, and recycling
opinions—in place of actually gathering data.1
In contrast, each aspect of our approach to assessing customer value has
been developed and refined in working with suppliers across a diverse array
of industries. Our approach to customer value assessment focuses the
supplier’s and customers’ limited resources on the value elements—that is,
the specific ways the offerings reduce customer costs or enable the
customer to earn additional revenue and profit—that matter most and
assessing them in the way that matters most. As we detail in chapters 2 and
3, we take a measurement approach that precisely defines the value
elements, stating the data needed to estimate each one. We emphasize data
gathering and minimize the role perception plays. The guiding principle is
to generate new knowledge, not recycle opinion. Thus, a litmus test for our
approach is this: are the supplier and the customers that participate in the
research more knowledgeable about how the supplier’s offering adds value
or reduces cost in the customer’s business than what they were before the
research? Our approach enables marketing and sales to significantly
contribute to competing on analytics and evidence-based management.2

Proven concepts and tools for achieving superior business

performance. Our work with many clients and more than ten years of
management practice research have enabled us to discover, devise, and
refine concepts and tools that, when implemented with integrity, lead to
superior business performance—like devising customer value propositions
that resonate with target customers; constructing and deploying value-based
sales tools that the sales force is able to use and wants to use; and pursuing
new knowledge with the intent of better understanding what will lead to
superior business performance. We want to make it clear that there is no
trickery, deception, or sleight of hand in customer value management.
Rather, it is fundamental thinking proven in practice to significantly
improve business performance. Throughout this book, and especially in
chapter 8, we provide proof points of how suppliers practicing what we
advocate have achieved superior business performance. We begin with the
experience of Sonoco in the next section.

Enhancing Business Performance with Customer

Value Management
Ultimately, there are three basic sales approaches prevalent in business
markets. First is selling on price. Most firms are, however, not set up to sell
on price because it requires relentless cost cutting, moving production
overseas to low-cost locations, and trading low margins for (hopefully)
higher volume. In this type of commodity business, purchasing managers
tend to dominate customer interactions, and suppliers have little pricing
flexibility. Suppliers can attempt to compete on price, but how many
suppliers in a given market can have the lowest price? Just one. Not willing
to accept this basic fact, suppliers pursue business through price cutting,
often orchestrated by adroit purchasing managers.
To escape this exclusive focus on price, most suppliers pursue a second
approach: they claim that they provide superior value—and deserve to be
compensated appropriately. Unfortunately for the suppliers, most often this
translates into “Trust us, our offerings are worth more.” The claims of
superior value are just that—claims! These value assertions are not
substantiated by any in-depth analysis on the part of the supplier and
therefore cannot be demonstrated nor documented to customers. The result
is that suppliers have little choice but to end up competing on price when
pressed by purchasing managers. As shown in the IC case, this does not
mean that the supplier is not providing superior value; it’s just that the
supplier lacks the ability to prove its claims. Even if the supplier and the
customer agree that the supplier’s offering delivers greater value than the
competitor’s offering, they may have substantially different opinions of
what this greater value is worth in monetary terms to the customer.
This brings us to the third approach, which we recommend and develop
in this book. Customer value management is a datadriven approach to
demonstrating and documenting in monetary terms the superior value that a
supplier’s offerings deliver to customers. Competing on price may work if
the company has the lowest cost in the industry and chooses to pass it along
to customers instead of using this advantage to build differences that are
valuable to target customers. But, for most companies, customer value
management is a more viable way to enhance business performance.
Surprisingly, though, only a few progressive companies follow this
approach. Let’s consider the experience of Sonoco.

Sonoco: Achieving Superior Business Performance

The CEO of Sonoco, Harris DeLoach Jr., and his executive committee have
set an ambitious growth goal for the firm: double-digit, sustainable,
profitable growth every year. DeLoach and the executive committee believe
that adopting the customer value management approach is crucial for
achieving such growth. Thus, DeLoach has championed a distinctive value
propositions (DVPs) program, giving responsibility for its implementation
to Eddie Smith, vice president of strategy and business development and a
member of the executive committee. Smith has established that Sonoco
DVPs must fulfill three criteria:
1. Distinctive—Sonoco’s value proposition must be superior to that of its
competition.
2. Measurable—Sonoco prefers that all value propositions are based on
tangible points of difference that can be quantified in monetary terms.
 3. Sustainable—Sonoco will be able to execute this value proposition for
as long as possible.

Although it’s not on the list, Smith adds the requirement that all Sonoco
value propositions be “translated into the customer’s unique language.” By
that, he means that sales and marketing people must be able to identify
what’s in it for the customer.
The executive team has signaled how critical DVPs are to business unit
performance by making value propositions the first of ten different metrics
on the performance scorecard for which general managers are accountable.
In senior management reviews, business unit general managers present the
value proposition for each of their target market segments and key
customers. Every presented value proposition is scored on the three criteria
for DVPs. The general manager then receives summary feedback on the
value proposition metric (as well as on each of the other nine growth
factors) as follows:
Green—capable of meeting the profitable growth goal
Yellow—prompting significant concerns that need to be addressed
Red—not adequate to meet the profitable growth goal

Not content to rely simply on belief, Sonoco senior management has had
data gathered to understand the relation between business units’ value
propositions and their performance. Sonoco has found that there is a
significant positive relation. Further, it has found that improvement in
DVPs leads to improved business unit performance.
Has Sonoco been able to achieve the overall growth goal that senior
management sought, in part, through its use of customer value management
and DVPs? Sonoco sales increased 14.4 percent from 2003 to 2004, 11.8
percent from 2004 to 2005, and 4.1 percent from 2005 to 2006, for a three-
year average sales growth of 10.1 percent. Perhaps more important,
profitability expressed as earnings before interest and taxes (EBIT)
increased 23.9 percent from 2003 to 2004, 14.6 percent from 2004 to 2005,
and 17.6 percent from 2005 to 2006, for a three-year average growth in
EBIT of 18.7 percent. While superior business performance depends on a
number of factors, Sonoco’s experience provides strong evidence that
customer value management makes a significant contribution.
Promoting a Value-Driven philosophy to Business
Markets
The responsibility for leading a value-based market strategy in business
markets lies at the top of the firm. Senior managers need to convey to the
firm that it generates value through both its core offerings and its
augmenting services and that it expects to receive an equitable return for
those offerings and services. In larger multi-business firms, the senior
management of each business unit—especially the general manager and top
marketing and sales executives—has primary responsibility for customer
value management. We will show that customer value management is more
than a marketing and sales activity, so the general manager must ultimately
own and lead its successful implementation.
While “senior management support” may sound like a cliché, we have
found through both outstanding and terrible experiences while working with
firms to implement customer value management that it is no cliché—it’s
absolutely essential. And such support cannot be simply talk from senior
managers about how important customer value management is. More telling
to everyone in the business is how senior managers choose to spend their
time. Making time in their schedules to attend the launch of customer value
management initiatives, serving as executive sponsors of customer value
projects, monitoring the progress of initiatives, and setting aside a day to
attend business cases for change and to give feedback all send a stronger
message throughout the business that senior management is committed to
implementing a philosophy of doing business based on demonstrated and
documented value to customers.
Sonoco’s corporate culture reinforces to each salesperson the
preeminence of value in the firm’s overall market strategy. From the day
they are hired, sales representatives learn that Sonoco products are typically
higher priced than those of competitors. And they quickly discover that
Sonoco prospers because it provides value to its customers in the form of
technologically superior products and outstanding services. From these
lessons, salespersons readily conclude that if they are to succeed at Sonoco,
they must sell value, not price. Moreover, the Sonoco “value story” is
repeatedly reinforced through such things as annual reports, brochures,
company newsletters, case histories presented at sales meetings, and sales
tools.
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.” What does
this slogan mean? According to W&PT’s Web site, “‘Proof, not Promises’ is
the GE Water Technologies commitment to measure success in terms of the
savings and performance improvements achieved for our customers. ‘Proof,
not Promises’ sets a standard for excellence and accountability that our
customers can count on, providing documented proof that their profitability
goals have been met.”
Similarly signaling its commitment to documenting the results it delivers
to customers, Sweden’s SKF, a global leader in bearings, has given its SKF
Documented Solutions Program this tagline: “Real world savings—and we
can prove it!” Figure 1-1 illustrates SKF’s customer value approach.
Of course, Sonoco, W&PT, SKF, and the other best-practice firms we
will draw on in this book did not just stumble onto customer value
management. Their journeys began years ago with small steps, learning
through experience, and an unwavering, visible commitment by senior
management to see the approach through. We find that despite all the talk
about value in business markets these days, these leaders are in the
minority. In fact, remarkably few suppliers have made any systematic or
methodical effort to understand the value of their offerings to customers.
They talk about value but continue to struggle against commoditization
pressures and succumb repeatedly to customer demands for price
concessions. However, by adopting customer value management as a
philosophy for doing business, suppliers can demonstrate and document the
value of their offerings, helping turn gray money into green money for both
customers and themselves.

Overview of the Book: The Path to Superior Business

Profitability
Our intent in this book is to transform businesses and, especially, their sales
forces into value merchants. Doing business based on demonstrating and
documenting superior value is, indeed, a rare commodity. Yet it doesn’t
have to be so rare. We contend that by adopting the customer value
management approach we present in this book, value merchants can prevail
when they encounter challenges of the type that the IC salesperson faced.
Specifically, readers of our book will learn how to:
Assess customer value in practice
Craft value propositions that resonate with target customers
Achieve spirited implementation for superior profits

FIGURE 1-1 SKF Documented Solutions program advertisement

 Source: Provided courtesy of SKF USA Inc. Used with permission.

By embracing customer value management, readers can employ it in their

own firms to drive superior business performance, just as the best-practice
firms mentioned throughout this book have. We sketch the processes
composing our customer value management approach in figure 1-2. The
figure places the processes in sequence, which also serves as an overview of
our book. We devote a chapter to detailing each of these constituent parts of
customer value management.
Chapter 2 focuses on how to conceptualize value, which is the
fundamental building block of customer value management, and addresses
questions like these: What do we mean specifically by “value” in business
markets? How does one define points of difference, points of parity, and
points of contention vis-à-vis the next-best alternative? What are the three
types of value propositions suppliers use in business markets, and why is a
value proposition with a resonating focus preferred over the other two?

FIGURE 1-2
Customer value management processes

Chapter 3 describes a process for firms to formulate their value

propositions. It begins with analyzing what potential changes in the market
offering customers would value most vis-à-vis the next-best alternative.
This is used to develop a value proposition to aspire to. Then qualitative
research is conducted to refine the value proposition. Finally, value word
equations are developed to capture the points of difference in terms that
customers can readily understand.
Chapter 4 provides a methodology for persuasively substantiating value
propositions to customers. The value word equations are brought to life
with data that is gathered in a customer value assessment. They are then
used to construct value calculators that demonstrate the value to customers.
Finally, value case histories and value documenters help prove to customers
that they did indeed receive the value that the supplier promised them.
Chapter 5 demonstrates how a deep understanding of customer value can
be used to tailor market offerings. Instead of the usual vanilla approach that
provides the same bundle of products and services to all customer firms, a
supplier can offer flexible market offerings. This allows more refined
targeting through various levels of service and enables suppliers to
capitalize on differences between customers.
 Chapter 6 challenges suppliers to transform their sales forces from selling
on price to becoming value merchants. While getting sales compensation
aligned with selling on value and profit is critical, it is not enough.
Businesses must foster value merchants and put a value-selling process and
value-based sales tools in place. They must ensure initial and ongoing
value-selling experiences with customers and instill and invigorate a value
merchant culture.
Chapter 7 is all about how companies can profit from the superior value
they provide customers. Although it is natural to think first of price
premiums, there are also three other means of obtaining a fair return from
customers for value provided in business markets. However, getting a fair
return requires the supplier to manage pricing as if profitability depended
on it! To accomplish this, we provide a value-based approach to pricing at
the strategic, tactical, and transactional levels.
In chapter 8, we take up the challenge of prospering in business markets.
We discuss what customer value management can and cannot do to help
businesses prosper. We provide further evidence of the contribution it can
make to superior business performance and consider how businesses can
get started in implementing customer value management and becoming
value merchants. Finally, we discuss how businesses that are value
merchants can continue to provide superior value and profit from it.
The customer value management approach we present in this book
provides state-of-the-art thinking, supported throughout by best practice
from a variety of businesses, industries, and countries. And it has the benefit
of having been tested in a number of companies over the years.
Implemented with integrity, it can provide that rare commodity that
suppliers seek: superior business performance through demonstrating and
documenting superior value.
TWO

Conceptualize Value
Focusing on What Matters

IN RECENT YEARS, the terms value and value proposition have become
two of the most widely used terms in business markets. While these terms
are fundamental to our customer value management approach, our research
reveals that despite their growing use, there is little specificity or agreement
about (1) what is value, (2) what constitutes a customer value proposition,
and (3) what makes a value proposition persuasive.
Moreover, we find that most value propositions that suppliers construct
and deliver in business markets do not actually convey the superior value
their offerings may provide to customers. Lacking the knowledge to
persuasively substantiate the superior value of their offerings relative to
those offered by competitors, suppliers find that their value propositions are
discounted by customer managers who, increasingly pressed for time and
demonstrable results, focus simply on reducing price.
What is customer value in business markets? Offerings in business
markets can have many value elements. How can identifying the points of
difference, parity, and contention with the next-best alternative help firms
focus on the relative handful that matter the most? What are the three
alternative kinds of value propositions in practice, and which is best for
suppliers to pursue? We answer each of these questions in turn—a solid
grasp of these concepts is vital for moving business customers beyond price
to demonstrated and documented superior value.

Defining Customer Value in Business Markets

What is meant, specifically, by “customer value in business markets”? We
first consider how customer value has been defined by others and then
focus on a superior definition. Next, we introduce the fundamental value
equation to precisely express the relationship between customer value and
price. We finish by discussing the customer’s knowledge of value.

Conceptualizing Customer Value in Business Markets

Various definitions of customer value have been offered by different
authors. Considering them suggests the varying conceptualizations
underlying this concept and the differences in what it means. The
definitions also suggest some of the difficulties in actually assessing
customer value.1
According to Bradley Gale, “Customer value is market-perceived quality
adjusted for the relative price of your product.” Perhaps reflecting their
interest in pricing, Robert Dolan and Hermann Simon state that “perceived
value is the maximum price the customer will pay.” Gerald Smith contends
that “Value = the benefits the customer receives relative to the price paid.”
Finally, Thomas Nagle and Reed Holden state, “In common usage, the term
value refers to the total savings or satisfaction that the customer receives
from the product.”2
So, what is customer value? Adjusted market-perceived quality,
maximum price, benefits relative to price, totals savings, or, even,
satisfaction received? Each of these constituent components takes our
understanding of the concept in a different direction. Given that customers
are happier paying a lower price, there appears to be tension between
customer value as maximum price or satisfaction received. Yet the
individuals providing these definitions do not go into much detail about
what their definition means, nor do they discuss the conceptualizations of
customer value that their definitions suggest.
Another problematic aspect about customer value that has not been
addressed is how disparate constituent elements defining value might be
combined. As an instance of this, consider benefits mentioned in the
preceding definition from Smith. To make this tangible, consider two
benefits for titanium dioxide, which is a pigment that whitens, brightens,
and opacifies (as an ingredient in coatings). Each benefit is an improvement
over a previous industry standard. Dispersability improves by reducing
(from thirty minutes to ten minutes) the time required to reach 7 Hegman
fineness units in a Cowles high-speed disperser. The second benefit, gloss,
improves from 78 to 86 60° gloss units. How, specifically, a customer
manager would combine Hegman fineness units and 60° gloss units is not at
all clear. This example is typical of business markets where benefits—
desirable changes in performance—are expressed in precisely defined
scientific, engineering, and cost-accounting terms.
We find a number of elements in definitions of customer value: benefits,
benefits expressed in monetary terms, costs, costs expressed in monetary
terms, and price. What is lacking is a consideration of the commensurability
of measurement units, which is essential to arrive at a meaning for customer
value. Just as when one learns to combine fractions in school, one must first
find a common denominator, convert the respective numerators to their
units on this common denominator, and then combine them to reach an
answer. So it would appear to be necessary in conceptualizing customer
value, too. Of the five elements just given, however, only three have direct
commensurability: benefits expressed in monetary terms, costs expressed in
monetary terms, and price.

Conceptualizing Customer Value to Guide Its

Assessment in Practice
With its emphasis on assessing customer value in practice, customer value
management requires a conceptualization of customer value that is well
reasoned, comprehensive, and easily grasped. We start by defining customer
value: “Value in business markets is the worth in monetary terms of the
technical, economic, service, and social benefits a customer firm receives in
exchange for the price it pays for a market offering.”3 We elaborate next on
some aspects of this definition.
First, we express value in monetary terms, such as dollars per unit, euros
per liter, or renminbi per hour. Economists may care about “utils,” but we
have never met a manager who did!
Second, we can conceptually represent any market offering as a set of
economic, technical, service, and social benefits that a customer firm
receives. By “benefits,” we mean net benefits, which include any costs a
customer incurs in obtaining the desired benefits, except for purchase price.
Third, value is what a customer firm gets in exchange for the price it
pays. Raising or lowering the price does not change the set of benefits that
an offering delivers to customers, only the willingness of those customers to
purchase the offering. Thus, we conceptually view a market offering as
having two elemental characteristics: its value and its price. That we do not
include 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 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

FIGURE 2-1
Grainger advertisement: Acquisition cost transcends price

Source: W. W. Grainger, Inc. Used with permission.

 Points of contention arise in two ways: the supplier regards a value
element as a point of difference in its favor, while the customer regards that
element as a point of parity relative to the next-best alternative; or the
supplier regards a value element as a point of parity, while the customer
regards it as a point of difference in favor of the next-best alternative.
Without getting too philosophical, we do not believe that there are
multiple realities. We believe that there is only one reality but that the
supplier and customer can have different perceptions of it. Far from being
negative, points of contention provide motivation for the supplier and its
customers to work together to gather data to resolve the differences in
perception.6

The Three Kinds of Customer Value Propositions

Points of parity, points of difference, and points of contention are the inputs
for developing the supplier firm’s value proposition to the customer. When
supplier managers use the term “customer value proposition,” what specific
meaning do they have in mind, and is this the same meaning that others
have for this term? We have found in our research that there is considerable
variation in what managers mean in their usage of “customer value
proposition.”7
From our research we can classify the substantially different ways
managers use customer value proposition into three basic alternatives. We
provide these alternatives in table 2-1 and organize our exposition of them
to address four fundamental questions that distinguish the alternatives from
one another:

TABLE 2-1
Value propositions in business markets: Which alternative conveys value?
 Source: Reprinted by permission of Harvard Business Review. “Customer Value Propositions in
Business Markets,” by James C. Anderson, James A. Narus, and Wouter van Rossum, March 2006. ©
2006 by the Harvard Business School Publishing Corporation; all rights reserved.

1. What does the value proposition consist of?

2. What customer question is the supplier attempting to answer with the
value proposition?
3. What is required for a supplier to construct the value proposition and
for the sales force to deliver it?
4. What is a potential pitfall of the value proposition?

A// Benefits
The all-benefits customer value proposition is the meaning that supplier
managers most frequently attach to the term. Why? It requires the least
detailed knowledge about customers and competitors and, thus, is the
easiest for supplier managers to construct and deliver. They simply list all
the potential benefits they believe that their offering might deliver to
targeted customers. The more they can think of, the better.
Yet simply listing all the benefits has the potential pitfall of benefit
assertion: claiming distinctions for the offering that actually have no benefit
to target customers. Consider the following example: a value-added reseller
of gas chromatographs was accustomed to selling high-performance
instruments to R&D laboratories in large companies, universities, and
government agencies in Belgium, the Netherlands, and Luxembourg. One
feature of a particular chromatograph, a patented injection system, enabled
R&D lab customers to maintain sample integrity by avoiding high-
temperature vaporization, eliminating the risk of thermal degradation,
enhancing test discrimination, and permitting the use of volatile solvents.
Seeking growth, the firm began to market the most basic model of this
chromatograph to a new market (application) segment for the firm: contract
laboratories.
In initial meetings with prospective contract lab customers, the firm’s
salespeople touted the injection system feature and its benefit of
maintaining sample integrity. The prospects scoffed at this, stating that they
were doing routine testing of soil and water samples for environmental
regulation compliance, for which maintaining sample integrity was not a
concern, and that room-temperature sample injection served their
requirements adequately. The supplier was taken aback and forced to
rethink its value proposition.
Another pitfall of the all-benefits proposition is that many, if not most, of
the benefits may be points of parity with the next-best alternative,
diminishing the effect of the few actual points of difference. An
international engineering consulting firm was bidding for a light-rail
project, and on the last chart of its presentation to the prospective municipal
client, it listed the ten reasons why the municipality should award it the
project. The other two finalist firms, though, could make most of the same
claims because they were points of parity. Put yourself, for a moment, in the
place of the prospective client. Suppose each firm, at the end of its
presentation, gives ten reasons why you ought to award it the project. The
lists are almost the same. How do you resolve the impasse? By asking each
of the firms to “sharpen their pencils” and give a final best price. You then
award the project to the firm that gives the largest price concession. Any
distinctiveness that does exist between firms has been overshadowed by the
greater overlapping sameness.

Favorable Points of Difference

The second customer value proposition, favorable points of difference,
explicitly recognizes there is an alternative open to the customer. The recent
experience of a leading industrial gas supplier underscores this distinction.
It received a request for proposal from a customer for a major piece of
business stating that the two or three suppliers that could demonstrate the
most persuasive value propositions in their proposals would be invited to
visit the supplier and to discuss and refine their proposals. After the
meeting, the customer would select a supplier for this business.
As this example illustrates, “Why should our firm purchase your offering
instead of your competitor’s?” is a more pertinent question than “Why
should our firm purchase your offering?” Why? Because the former
question focuses supplier managers on differentiating their offering from
the next-best alternative, which requires more detailed knowledge of it. A
characteristic that the favorable-points-of-difference proposition shares with
the all-benefits proposition, though, is that more is regarded as better, so
supplier managers strive to list as many favorable points of difference as
they can.
Knowing that an offering element is a point of difference relative to the
next-best alternative does not, however, convey what the value of this
difference is to target customers. Further, a supplier’s market offering may
have several points of difference relative to the next-best alternative, which
complicates understanding which of them delivers the greatest value to
target customers. Without a detailed understanding of the customer’s
requirements and preferences, and what it is worth to fulfill them, suppliers
may stress points of difference that deliver relatively little value to the
target customer. Each of these can lead to the potential pitfall of value
presumption : assuming that favorable points of difference must be valuable
for the customer. Our opening anecdote in chapter 1 about the IC supplier
that unnecessarily discounted its price nicely illustrates the likely outcome
when supplier salespeople stress favorable points of difference that actually
have little value for the customer.

Resonating Focus
Although we contend that a favorable-points-of-difference proposition is
preferable to an all-benefits proposition, we further contend that the third
customer value proposition alternative, resonating focus, is the most
preferred. We will go even further: the resonating-focus value proposition
should be the gold standard for judging customer value propositions.
In a business world where customer managers are taking on greater
responsibility and are increasingly pressed for time, to be successful,
suppliers must deliver customer value propositions that are simple, yet
powerfully captivating. They do this by making their offerings superior on
the few elements whose functionality or performance matter most to target
customers, by demonstrating and documenting the value of this superior
performance, and by communicating it to customer managers in a way that
conveys that the supplier understands the customers’ business concerns and
priorities. The resonating-focus customer value proposition consists of the
one or two points of difference, and perhaps a point of parity, that deliver
the greatest value to target customers.
This proposition differs from the favorable-points-of-difference
proposition in two significant respects. First, more is not better. Although a
supplier’s offering may possess other favorable points of difference relative
to the next-best alternative, the resonating-focus proposition steadfastly
concentrates on the one or two points of difference that deliver, and whose
improvement will continue to deliver, the greatest value to target customers.
To better leverage limited resources, a supplier might even cede to the next-
best alternative previous favorable points of difference that customers value
the least, so that the supplier can concentrate its resources on improving the
one or two points of difference customers value most.
Second, the resonating-focus proposition may contain a point of parity.
This occurs either when the point of parity is required for target customers
even to consider the supplier’s offering or when a point of contention,
where the next-best alternative was thought to be superior but research
reveals it is not, is resolved in the supplier’s favor.
To give practical meaning to the resonating-focus value proposition, let’s
consider a few examples. Sonoco approached a large European customer, a
maker of consumer packaged goods, about redesigning the packaging for
one of its product lines. Sonoco believed that the customer would profit
from updated packaging, and by proposing the initiative itself, the company
reinforced its reputation as an innovator. Although the redesigned
packaging provided six favorable points of difference relative to the next-
best alternative, Sonoco chose to emphasize one point of parity and two
points of difference in its resonating-focus value proposition.
Sonoco’s value proposition to the customer was that the redesigned
packaging would have the same price as the present packaging but deliver
significantly greater manufacturing efficiency in the customer’s fill lines
through higher-speed closing and provide a distinctive look that consumers
would find more appealing than the present packaging.
Sonoco chose to include a point of parity in its value proposition because,
in this case, the customer would not even consider a packaging redesign if
the price were to increase. The first point of difference in the value
proposition delivered cost savings to the customer, allowing it to move from
a seven-day, three-shift production schedule during peak times to a two-
shift, five-day operation. The second point of difference in the value
proposition delivered an advantage at the consumer level, helping the
customer incrementally grow its revenues and profits. In persuading the
customer to change to the redesigned packaging, Sonoco did not neglect to
mention the other favorable points of difference. Rather, it chose to place
much greater emphasis on the one point of parity and the two points of
difference that mattered most to the customer, thereby delivering a value
proposition with resonating focus.
Stressing as a point of parity what customers mistakenly presume to be a
point of difference favoring a competitor’s offering can be an essential part
of constructing a customer value proposition that has a resonating focus.
Take the case of Intergraph, a provider of engineering software to
engineering, procurement, and constructions firms—such as Fluor and
Bechtel, which design, construct, and deliver process plants for their
petrochemical, pharmaceutical, and power industry customers. One
software product that Intergraph offers in its SmartPlant Engineering
Solution is SmartPlant P&ID, which enables customers to define the flow
processes (i.e., through valves, pumps, and piping) within plants they are
designing and to generate piping and instrumentation diagrams (P&ID).
Intergraph’s resonating-focus value proposition for SmartPlant P&ID
consists of one point of parity followed by three points of difference:
Using SmartPlant, customers can create the P&ID graphics (i.e.,
drawings or reports) as fast, if not faster, than the next-best alternative.
 SmartPlant P&ID checks all the customer’s upstream and downstream
data related to plant assets and procedures—using universally accepted
engineering practices, companyspecific rules, and project- or process-
specific rules—at each stage of the design process so that the customer
avoids costly mistakes, such as reiterating the design or, worse,
ordering the wrong equipment.
SmartPlant is integrated with upstream and downstream tasks, such as
process simulation and instrumentation design, thus requiring no
reentry of data (and possible errors).
With SmartPlant, the customer is able to link remote offices to execute
the project and then merge the pieces into a single deliverable database
to hand to its customer, the facility owner.

Intergraph has found it necessary to include the point of parity in its

value proposition because some prospective customers wrongly presume
that SmartPlant’s drafting and graphic drawing performance is not as good
as that of the next-best alternative. This presumption sometimes occurs
because the next-best alternative is built on a computer-aided-design
platform, whereas SmartPlant is built on a relational database platform. To
counter this misperception, Intergraph has gathered data at reference
customers to substantiate that this point of contention is actually a point of
parity.
Resonating-focus value propositions have the potential pitfall of
requiring customer value research. We find that customer value research is
something that most suppliers, despite all the talk about customer value,
have not actually done in a systematic way. Customer value research is not
easy; it requires time, effort, persistence, and some creativity. Yet, as the
experience of a leading resin supplier amply illustrates in chapter 4, not
doing customer value research may actually be a greater pitfall.

Customer Value Propositions and Superior Business

Performance
Constructing value propositions that resonate with target customers and
substantiating them with customer value research enables suppliers to
achieve superior business performance. Let us provide a proof point for
this. Consider the results for Intergraph. It has posted revenue growth of 35
percent per year versus 10-12 percent for its industry. And, with today’s
emphasis on profitable growth, Intergraph has a profit margin of 26 percent
versus 14-16 percent for the industry.
Some managers, though, simply view value propositions as something
that the marketing folks do as a basis for creating business marketing
communications such as advertising or signage for trade show booths. We
believe that this view is shortsighted and neglects the potential contribution
of value propositions to superior business performance. Properly
constructed, customer value propositions force companies to rigorously
focus on their target customer’s requirements and preferences and what it is
worth in monetary terms to fulfill them. By involving managers from all the
relevant functional areas in the process, at least to some extent, the creation
and assessment of value propositions provide a means of forging shared
understanding of what the supplier is seeking to accomplish in the
marketplace.
Viewed in this way, the value proposition statement can serve as a
guiding beacon and touchstone for the agreed-on market strategy and,
especially, as the answer to this question: “What do we want to
accomplish?” It puts into sharper focus which firms the supplier regards as
the relatively important customers, what the supplier wants to emphasize
about its market offering, and what promise the supplier is making to
customers about the value they will receive. Everyone in the supplier’s
workforce needs to have a good grasp on these issues.
Yet not everyone in the firm may want the greater direction and focus
that value proposition statements provide. For example, some may want to
avoid value proposition statements, or to write only vague ones, because
they are afraid that customers might find out that the supplier does not
consider them the targets for an offering. These suppliers would rather have
the customers, and their own sales force, believe that all customers are
equally good prospects for an offering! This not only dilutes the sales
force’s efforts and diminishes its motivation but can have further negative
consequences when customers purchase an offering that was not designed
to meet their requirements.
The resonating-focus value proposition for a market offering serves as
the cornerstone for brand building in business markets. Although a number
of points of difference and points of contention may have positive value
estimates, we counsel suppliers to highlight in their resonating-focus value
propositions the one or two that have the most value to target customer
firms. Brand building for a market offering would then include devoting
resources to significantly improve functionality or performance on those
elements, demonstrating and documenting success in such improvements
with customer value management, and persuasively communicating this
progress to target customers.
Over time, customer value propositions can function as a reference
standard in making decisions about contemplated changes in the market
offering. Are the changes congruent and reinforcing, or will they subtly
shift the character of the market offering? Either may be desirable, but by
actively managing change, firms can avoid blurring their positioning in the
marketplace. Thus, for example, the general manager of a business unit
should be able to rely on a value proposition to guide decisions among
conflicting tugs and pulls within the organization on how to further develop
a market offering. In doing so, she focuses scarce resources on making the
offering outstanding on the few elements that targeted customers value most
and would be willing to reward the supplier for providing.
THREE

Formulate Value, Propositions

Identifying Potentially Valuable Points of Difference

IN THE PREVIOUS chapter, we emphasized that, to attain superior

business performance, it is crucial for suppliers to develop a resonating-
focus value proposition. In this chapter we describe a process for firms in
business markets to formulate such a proposition. The process begins with
the supplier hypothesizing present and potential points of difference to
study that it believes are, or would be, valuable to target customers. The
supplier may then conduct qualitative research to further refine the potential
value proposition. Finally, it constructs value word equations to precisely
express each point of difference and point of contention that it will estimate
in the subsequent customer value research.

Hypothesize Present and Potential Valuable Points of

Difference
Suppliers vary tremendously in their knowledge of how their offerings
deliver value to target customers relative to the next-best-alternative
offering. While some suppliers may have rigorously thought through this,
most suppliers have only a sketchy and piecemeal understanding of their
offering’s value relative to the next-best alternative. So, to ascertain what
the likely valuable points of difference are, a supplier most often begins by
gathering what it knows about its offering relative to the next-best
alternative for the target market. The outcome of this may be that the
supplier identifies a few likely favorable points of difference (as well as any
points of difference favoring the next-best alternative). Or the supplier may
conclude that there are no discernable points of difference and that its
offering is pretty much a commodity relative to the next-best alternative. In
either case, because of the tremendous opportunity to learn in the customer
value research, we advise suppliers to identify some prospective valuable
points of difference to study. These may be changes in the market offering
that the supplier already is planning to make in the near future (e.g.,
introducing a product enhancement or a new supplementary service).
Alternatively, these may be prospective changes that the supplier could
make in a reasonable period of time with reasonable investment if they were
found to be sufficiently valuable to target customers.

Ascertain Present Points of Difference That Are Likely

Valuable
To ascertain the present points of difference that are likely valuable to target
customers, a supplier team (consisting of individuals from various
functional areas who are knowledgeable about the offering and target
customers) lists the value elements of the offering for the target market,
decides which offering customers would regard as the next-best alternative,
and evaluates its offering relative to that next-best alternative.

List the value elements. Offerings in business markets can have many
value elements. Thus, it is best to list them quickly after the team selects the
target market segment of interest. (Keep in mind that customer value
proposition is a segment-specific notion.) Supplier teams tend to find this
task easier when they first list out the value elements for the core product or
service and then list the value elements for the augmenting services,
programs, and systems that their company provides with its core product or
service. Alternatively, the team could proceed by listing the value elements,
in turn, that capture the technical, economic, service, and social benefits
target customers receive from the offering, but teams tend to have more
difficulty doing this.
It is fundamental that supplier teams be comprehensive and elemental in
listing the offering’s value elements. Leaving out elements, particularly
ones that are unfavorable relative to the next-best alternative, compromises
the effort and undermines its credibility with customers that detect the
missing elements. By being as elemental as possible, the supplier firm is
able to more accurately gauge the differences in functionality and
performance its offering provides. For example, “provision of technical
service” is simply too broad to enable a supplier to understand specifically
how this element reduces customer costs or to compare its service’s
performance on this element to the next-best alternative. “Testing of
customer samples” may be one constituent element of “provision of
technical service,” while “on-site equipment calibration” may be another.
Furthermore, in subsequent customer value research, customer managers
may find it easier to answer broadly stated questions, such as the cost of an
hour of downtime in the customer’s plant. However, their answers often
will leave out effects on the customer’s business processes (e.g.,
maintenance costs, disposal costs), producing less-valid estimates of worth.

Decide on the next-best alternative. Once the list of value elements is

generated, the supplier next considers what would be the next-best
alternative in the minds of target customers. Most often, this is the offering
of the firm that most customers consider to be the supplier’s principal
competitor. However, as noted in the previous chapter, the next-best
alternative may be the firm’s own previous offering.
Usually, it is best to select one next-best alternative against which the
firm’s offering will be evaluated. However, on rare occasions, firms may
choose to study two. This may be the case when the next-best alternative
varies across country markets. For example, a supplier of medical
diagnostic instruments may select one competitor’s instrument as the next-
best alternative in all the country markets of Europe, with the exception of
Germany, where customers may regard a domestic competitor’s instrument
as the next-best alternative. In this instance, the firm would revisit its list of
value elements, now making comparisons with this second alternative in
mind.

Compare the firm’s offering with the next-best alternative. While firms
may be doing many wonderful things for their customers, the reality in most
business markets is that so, too, are the competitors supplying the next-best
alternative. So, to focus the subsequent customer value research and to
make it more manageable, we’ve rearranged the fundamental value
equation from chapter 2:

(Valuef- Pricef) > (Valuea - Pricea) (Eq. 3-1)

(Valuef-Valuea) > (Pricef- Pricea) (Eq. 3-2)
Δ Valuef, a > (Pricef — Pricea) (Eq. 3-3)

where:

Valuef = Value of the focal firm’s market offering (Offeringf)

Pricef = Price of the focal firm’s market offering (Ofiferingf)

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

(Offeringa)

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

(Offeringa)

Δ denotes the difference in value between Offeringf and

Offeringa

Thus, what really matters is not the value of each offering but the
difference in value between the two offerings relative to the difference in
their prices. Revisiting the list with this next-best alternative in mind, the
team decides whether its offering’s functionality or performance on each
value element is comparable (i.e., a point of parity) or different (i.e., a point
of difference) from that of the next-best alternative. We encourage teams to
be candid in their appraisals.
Being elemental in the process also helps illuminate differences that
would otherwise be lost. If you consider “technical service” as an element,
well, almost every firm offers technical service; it is hardly a differentiator.
If you are being elemental, you can ask several questions with respect to
technical service to tease out the differences: How quickly does the firm
answer a customer query compared to its competitor? What percentage of
the time is the problem resolved with a single phone call? What percentage
of the time is the problem resolved to the customer’s satisfaction within one
day?
If the team is honest with itself, it will pare down a lengthy list to only a
handful of value elements that are differences between offerings. Most of
these differences will be in favor of the team’s offering, yet some will be
differences favoring the next-best alternative. Teams typically believe that
they have more favorable points of difference than they actually do. They
tend to correctly identify the points of difference that receive positive
estimates in the subsequent customer value research, but often one or more
of these hypothesized points of difference turn out to be points of parity.
The team later shares its thinking about points of parity and points of
difference with those customers it invites to participate in the customer
value research. In doing so, the team then surfaces the points of contention
—the points of parity and points of difference on which it and the
customers disagree.

Identify Prospective Changes to Create Superior Value

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. It is a chance to generate new knowledge for itself and
the customers that participate in the research about which potential near-
term changes in the offering would deliver the greatest incremental value.
This provides terrific guidance to the supplier on how to allocate its scarce
resources in ways that target customers would value most.
Yet suppliers frequently struggle to identify what potential changes
would be worthwhile to study. The changes in the offering that they readily
think of tend to be uninspired straight-line extensions of what they are
currently doing. While this kind of thinking can surface some worthwhile
changes, we encourage suppliers to stretch a little more and to include one
or two potential changes that exhibit more creativity—something that many
suppliers in business markets find challenging to do!
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.
Specifically, supplier managers, salespeople, and field technical
representatives should be asked to answer the following four questions with
respect to the present offering or the existing value proposition.
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?1

As an example of reducing value elements, Medco, the pharmacy

benefits management company, works on behalf of its corporate customers
and health maintenance organizations to conduct studies on the efficacy of
different drugs and their generic equivalents. These studies enable Medco to
select, on behalf of its customers, which drugs will be on its preapproved
lists. These preapproved lists reduce the number of choices of drugs that a
physician can prescribe, recommending lower-cost generic equivalents
instead.
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.
As an example of eliminating value elements, Dell chose not to offer the
traditional benefits associated with purchasing computers from retail outlets
to its small corporate customers, which were willing to forgo these benefits
for lower prices.
 Bloomberg, the financial information supplier, provides a noteworthy
example of creating value elements. To create value for its customers, its
terminals were designed with two flat-panel monitors so that traders could
work with multiple windows simultaneously. In addition, its keyboards
were developed with dedicated keys for the more familiar financial
concepts and integrated analytical capability, which enable traders to
analyze information with the press of a button.2

Conduct Qualitative Research to Refine the Value

Proposition
To this point, the thinking and decisions of the team members draw on their
collective experience, which should be extensive, but still represent an
internal company view of the marketplace. Suppliers may find it comforting
and worthwhile to get some customer feedback before proceeding with the
more rigorous customer value assessment, which we detail in the next
chapter. Some quick, relatively inexpensive qualitative research can provide
a check that companies have not “fallen in love” with certain performance
parameters that they are expert in and have distinct capability in advancing
but that may no longer deliver the incremental value the supplier wants to
believe. There are two recommended qualitative approaches in business
markets: focus groups and visiting customers.

Conduct Focus Groups

Focus groups are sessions in which a moderator exposes participants to
potential product offerings or concepts and asks for their perceptions and
reactions. Participants typically are knowledgeable individuals within
customer firms that are targets for the studied market offering, although a
supplier firm also may be interested in the reactions of industry consultants
or pundits. The moderator might ask the participants to make rough trade-
offs on which prospective changes they would find most valuable. In doing
so, the analyst generates insights into what changes in the offering might be
most valuable, potential subsegments, and opportunities for differentiation
—in other words, grist for constructing potential resonating-focus value
propositions.
Whenever possible, we advocate conducting these focus groups during a
customer industry event, such as a convention or trade show. This facilitates
getting customers to participate, because they will be attending the event
anyway, and lowers the cost of getting a diverse group of customers
together. We prefer to use the term business roundtable discussion in place
of focus group because the former sounds more interesting and inviting to
prospective participants. It also better describes what we seek: an open
exchange between participants of how changes in supplier offerings would
better fulfill customers’ requirements and preferences.

Spend a Day in the Life of the Customer

A litmus test for customer value management is determining whether new
knowledge of how to add value and reduce cost has been generated. In
other words, have both the supplier and the customers that participate in the
customer value research each gained a better understanding of how the
supplier’s offering can add value or reduce cost in the customers’ business?
Although focus groups are good at getting customer reaction to specific
potential offerings, they require the supplier to already know what those
sources of value might be. When the supplier is seeking to discover new
potential sources of value, the “day in the life of the customer” (DLC)
approach is preferred.3
Axios Partners is a management consulting firm that focuses on customer
value management and assists its clients in conducting DLC studies to
generate insights into potential sources of customer value.4 In DLC research
Axios stresses the active participation of managers from various functions
at the supplier as well as at the customer. Each function views the world
differently, and that divergence of perspective increases the likelihood that
new knowledge and understanding will emerge from the research. Axios
also finds that on-site observation is superior for finding new value or cost
savings of which the customer is unaware. This research is more than just
looking for frustrations that the customer can already articulate: the supplier
team and the participating customer managers search for things that have
been accepted as a given or never previously recognized as an opportunity
to improve the way business is done. Consider two recent Axios client
experiences with DLC research.
A supplier was exploring how to improve the design process for
subsystems that industrial engineers at its customers—all original
equipment manufacturers—used. The supplier had been publishing a parts
catalog on CD-ROM for years, yet customer engineers reported that they
never used it even though it was more up-to-date than the paper catalog.
The engineers would say that they preferred the paper catalog, but they
couldn’t articulate why. While on a customer visit, the supplier research
team had a design engineer go to his desk and walk through how he found a
part for a new product. On his bookshelf he had not only the current catalog
but also the previous two years of catalogs. They were filled with Post-it
Notes and handwritten comments about specific parts. The CD-ROM didn’t
offer the engineer and his colleagues the ability to keep track of their
personal experiences with the products. Based on this new knowledge, the
supplier designed an online catalog in which users could save their personal
comments about specific products for later review or reuse. This seemingly
minor capability helped engineers better select the part for the application in
less time. As a result, there was a significant increase in new customer
products that specified the supplier’s parts.
IKOR is an industry-leading provider of power management and
conversion solutions for the computing marketplace. It recently conducted
DLC research with workstation and server manufacturers to evaluate the
opportunity for its innovative, recently patented technology. During these
visits, which delved into various aspects of designing power for new
systems’ architectures, the IKOR research team discovered significant
power-related problems with electronic systems integration that had largely
been ignored. The silver box (SB) in workstations and servers is the unit
that handles the initial AC-to-DC power conversion, and it contains its own
internal fans to dissipate the significant amount of heat it generates. The
team discovered that the SB design of the leading vendor was five years
behind the technology needed to keep pace with even existing systems and
was a limiting technology that forced trade-offs, such as those between
footprint and noise (smaller boxes meant more-powerful fans running
harder to manage heat dissipation). This insight led IKOR to enter this
business with a totally redesigned SB that has increased efficiency,
decreased heat loss, and increased airflow, allowing for slower fans and less
noise without affecting the processor’s performance. This innovative SB
design is opening up a new world of configuration options for IKOR
customers, enabling them to push the boundaries of systems design, with
power no longer the accepted or expected limiting factor.
Construct Value Word Equations
Central to customer value management is expressing in monetary terms the
worth of the technical, economic, service, and social benefits that a
customer firm receives from a supplier’s offering. Doing this in practice is
not easy and takes time, money, persistence, and some creativity. Yet
businesses must tackle this challenging task if they wish to become value
merchants. As examples, consider the following:
An economic benefit such as providing consolidated monthly invoices
instead of invoicing the customer after each purchase must be
translated into processing costs savings over the year for the customer.
A technical benefit such as easier release from a diamondlike coating
applied to plastic injection molds that results in fewer machine jams
and faster operations must be translated into additional revenue and
profit that the customer would generate from greater uptime and faster
cycle time.
A unique service such as a chemical supplier collecting used drums
from the customer’s site must be translated into the customer’s cost
savings from not having to dispose of used containers in an
environmentally safe way.
A social benefit such as Caterpillar’s strong brand name must be
translated into the higher resale or trade-in prices that Caterpillar
equipment receives versus Komatsu, reducing its life-cycle cost to
customers.

Unfortunately, most firms in business markets feel more comfortable

presenting features and benefits to customers rather than the worth of those
benefits to the customer in monetary terms. And, in any case, they are
unsure about how to translate the differential benefits that their firm’s
offering has over the next-best alternative into monetary terms.
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 so that customer managers can easily
grasp them, understand precisely how the supplier is assessing them, and be
persuaded by the results. Value word equations provide a methodical way of
convincingly demonstrating and documenting superior value in monetary
terms.
 A value word equation expresses precisely in words and simple
mathematical operators (e.g., +, ÷) how to assess the differences in
functionality or performance between a supplier’s offering and the next-best
alternative on a value element and how to convert those differences into
monetary terms. One is constructed for each point of difference (and point
of contention). The value element, expressed as either cost savings or
incremental profit, is on the left side of the equal sign, and the components
defining the differences in functionality or performance and what they are
worth are on the right side. Accompanying each word equation are the
assumptions that the supplier is making about the value element and how its
monetary value is assessed.
Value word equations counter two rampant problems in business markets.
The first is value claims—that is, when suppliers argue that their offerings
deliver cost savings or added value relative to the next-best alternative but
can provide little or no specifics of exactly how this occurs. With each
retelling, the value claims from these unverifiable stories tend to grow
larger and larger, taking on the character of “fishing tales.”
The second rampant problem is “spreadsheet mania”: the construction of
overly complicated, difficult-to-understand spreadsheets by technically
minded individuals who want to show off their Excel skills. The result is
densely packed, number-laden spreadsheets with minimal to nonexistent
explanations of what the numbers mean. When questioned about the content
of these spreadsheets, even their creators sometimes have difficulty
reconstructing the numbers’ meaning.
In contrast to this, firms such as Intergraph and Rockwell Automation use
value word equations to make it clear and easily understandable to
customers how their offerings will lower costs or add value relative to the
next-best alternative, what data needs to be gathered, and how this data will
be combined to provide value estimates. Intergraph uses a laptop tool to
enable its sales representatives to do this. Frank Joop, who is responsible
for business development for Intergraph’s SmartPlant Engineering Solution,
believes that his prospective customers, who are nearly all engineers (as he
is), want to see the equations that define precisely how cost savings will
occur. In our research interview, he observed, “As an engineer, I want to see
the formula... How do you get to this number?”5
 Accompanying each word equation are the assumptions that the team is
making about the value element and how its monetary value is assessed. In
all customer value research, some assumptions will be needed to complete
the analysis. The assumptions might be about the functionality or
performance the market offering actually provides in the customer’s
specific setting, particularly for aspects that are extraordinarily difficult or
costly to measure. Alternatively, assumptions might be made in assigning
worth in monetary terms to measured differences in the performance that an
offering provides in the customer’s setting.
It is crucial that the supplier be explicit in the assumptions it makes.
When a customer firm catches the supplier in one or more implicit
assumptions, particularly ones that are dubious, it can have a devastating
effect on the credibility of the whole analysis. In contrast, when all
assumptions are made explicit, customer management can simply disagree
with them. When this happens, the astute supplier invites customer
managers to share the rationales underlying their alternative assumptions.
Depending on how plausible their rationales seem, the supplier can either
adopt the alternative assumptions for the analysis or suggest that the
supplier and customer engage in some joint research to mutually discover
the most appropriate assumptions for the customer’s specific setting.
The data for the value word equations is most often collected from the
customer’s business operations by supplier and customer managers working
together, but at times, data may come from outside sources, such as industry
association studies. In presentations of the results, each word equation is
presented first. Then the data is substituted in each equation to calculate the
estimate. These results are then collected in a value summary, which we
refer to as the customer value model.

Value Word Equations at Rockwell Automation

Consider a value word equation that Rockwell Automation used to calculate
the cost savings from reduced power usage that a customer would gain by
using a Rockwell pump solution instead of a competitor’s comparable
offering:

Power reduction
 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

The term k W spent represents the amount of electrical power consumed

and is defined by the equation: kW spent = unit horsepower • 0.746 • 1/unit
efficiency. Unit horsepower and unit efficiency are industry-standard
product specifications that the manufacturer prominently displays on the
side of the motor solution, and 0.746 is a standard electrical-engineering
conversion factor that translates horsepower into units of electricity.
Although the meaning of this value word equation may seem obscure, it
reflects the heavy usage of industry-specific jargon that suppliers and
customers in business markets rely on to communicate precisely and
efficiently about functionality and performance.

Value Word Equations at a Commercial Roofer

In some business markets—such as commercial roofing, management
consulting, or commercial insurance—it is more difficult for customers to
split their business between two or more suppliers. While business
customers in these markets may consider the alternative offerings of
competing suppliers, they tend to select a single supplier for their business.
Thus, it is difficult to make actual comparisons of the performance of one
supplier’s offering with another supplier’s offering when only one supplier
will actually get the business. In these kinds of situations, the next-best
alternative may be the expectations of the customers, based on their own
past experiences or on the experiences of consultants they hire to advise
them. Nonetheless, it is still worthwhile to construct value word equations,
but in this case, they should capture the supplier’s actual performance
versus expected performance.
As an example, consider a recent experience of ours working with
commercial roofing contractors. A commercial roofing contractor was
competing with others for reroofing juice-processing plants in Florida. This
contractor, which we will call ComRoof, was successful and won the
business at a plant that was part of a large consumer products firm. As is
increasingly common these days, this firm outsources the planning, design,
and supervision of the major maintenance and reconstruction of its plants to
an engineering consulting firm. This engineering consulting firm, which we
will call Con, had established estimates, based on its experience, on the
number of days it would take to complete the tasks in reroofing a juice-
processing plant.
The old roofing and the insulation under it needed to be removed before
the new insulation and roofing could be installed. While the old materials
were being replaced, the plant would have elevated refrigeration costs to
maintain the cool interior temperature, which is critical in juice processing.
Through superior project management and on-site job supervision,
ComRoof was able to complete this reroofing project considerably faster
than Con had estimated. The following value word equation captures what
fewer days of elevated refrigeration costs are worth:

Elevated refrigeration

cost savings =

(Estimated elevated dayscon -Actual elevated

daysComRoof) • elevated refrigeration electricity cost
per day

Where:
 Elevated refrigeration
electricity cost per day =

Electricity cost per day for cooling during reroofing -

Electricity cost per day for cooling before removing
old roof

This case also affords us a chance to see how it is so important to be

comprehensive and elemental. Might there also be other cost savings, under
certain conditions, such as the frequent case when the new insulation and
roofing have a higher R-factor (a measure of thermal resistance) than the
previous insulation and roofing? We would capture the worth of this with
the following value word equation:

Earlier higher R-factor

refrigeration cost savings =

(Electricity cost for cooling per dayold roof—Electricity

cost for cooling per daynew roof) •Number of days
reroofing completed ahead of estimate

ComRoof senior management, which had not previously thought about

the superior value of their reroofing process in such a methodical way,
agreed that it could readily obtain the data needed to estimate these value
word equations. Armed with this knowledge, it would be in a much better
position to demonstrate and document the value of its superior performance
to present and prospective juice-processing plant customers.
 For another example of using value word equations, see the PeopleFlo
EnviroGear Pump customer value model in appendix B.
FOUR

Substantiate Value Propositions

Demonstrating and Documenting Superior Value

CUSTOMER MANAGERS in a series of business roundtable discussions

we conducted in Europe and the United States related to us that prospective
suppliers increasingly deliver to them what has become almost a generic
value proposition: “We can save you money!” But, as one participant in
Rotterdam wryly observed, with all the claims about how much money
suppliers were saving him, it was a wonder that his firm had any costs left
at all! To assess the validity of these claims, though, he said that he would
follow up a prospective supplier’s statement with a series of questions to
probe whether the supplier had the people, process, tools, and experience to
substantiate its claims. He recounted that based on their answers, most of
the suppliers were telling fairy tales.
Simply put, to make customer value propositions persuasive, suppliers
must be able to demonstrate and document them. Value word equations,
which we discussed in the last chapter, provide a methodical way of
precisely expressing differences between the supplier’s offering and the
next-best alternative and how those differences translate into monetary
terms. These value word equations are brought alive, though, by gathering
data in customer value research. Drawing on the insights gained in the
customer value research for the customer value proposition, the supplier
goes on to tailor market offerings to deliver superior value, which we will
discuss in the next chapter. The supplier also creates tools to persuasively
demonstrate and document that superior value, thus enabling it to
substantiate its value proposition to target customers.
Conduct Customer Value Research
The supplier decides on the offering and the target market segments it will
study in each customer value research project. The goal of this research is to
generate new knowledge of how the offering adds value or reduces costs for
customers relative to the next-best alternative. A related goal is to gain new
knowledge of how this superior value varies across customers. This enables
the supplier to better pinpoint the kinds of customers to target. Thus, in
designing each research project, the supplier further segments, or
subsegments, the market based on descriptors that it hypothesizes would
lead customers to receive more value or less value from its offering relative
to the next-best alternative. Most often, to keep the projects manageable,
two segments or subsegments are selected for study, which provides a
contrast for the supplier to test its hypothesis.1
The composition of each customer value research team will vary,
depending on the nature of the project, but often includes someone who
most often spends time at the customer solving problems (e.g., a field
technical rep or field applications engineer); someone from the product
marketing or development functional area; and two or three progressive
salespersons. Having salespersons involved at the start is crucial. They
provide needed expertise on the customer and its use of the offering, and
they have knowledge of and relationships with customers that would be
willing to cooperate in customer value research. Being part of a customer
value management initiative from the outset also builds support for the
approach with those salespeople, who then can persuasively relate their
experiences to others in the sales force. Having these salespeople as internal
champions is critical for transforming the sales force into value merchants,
as we discuss in chapter 6.
Each team should have a leader selected by senior management before
the start of the project. The team leader should be someone with superior
project management and interpersonal skills. We recommend that the
manager with primary responsibility for implementing the business case for
change not be the team leader. For example, although the product manager
for a new offering who has to decide which market segment to enter
initially will be a significant contributor to the team, it is preferable to give
a more objective manager the primary responsibility for the project
management and process aspects of the team’s work.
Customer value assessments are an intensive analytical effort, which may
require up to a half-time commitment by the project leader. Other team
members will spend varying amounts of time on the project, with a quarter-
time commitment being typical. This time commitment fluctuates, though,
with team members spending several days a week on the project at some
points (e.g., field visits to customers participating in the research to gather
data) but virtually no time on it at other points.
For customer value research projects to succeed, the active support of
senior management is crucial. Most often, a senior manager acts as a
sponsor for each team. This should be decided before the start of the
projects. As we mentioned in chapter 1, while senior managers should
communicate to the teams the importance of the pilot program to the
business, they make a more visible statement through how they spend their
own time. Making the commitment to attend at least the opening morning
of the customer value workshop, to monitor the progress of teams, and to
attend the presentation day for the business cases sends a strong signal to
the teams.
The customer value research proceeds in three phases: gaining initial
customer cooperation, gathering the data, and analyzing the data. It
concludes with constructing a business case for change, which charts out
the customer value proposition that the business wants to realize with target
customers. We finish this explanation of customer value research with a
real-world case study.

Gain the Customer ’s Cooperation

Before contacting any present or prospective customers to participate in the
research, the team has some tasks to perform. First, it must decide on the
present or prospective customers that it wants to participate. Although the
number of research participants will depend on the market, typically the
team seeks to include six to eight customers from each segment.
The team next thinks through why the customers should cooperate in the
research. We have found that a useful device for this is a “gives & gets”
analysis. “Gives” capture the specific investments and resources that each
firm is expected to contribute to the research, such as managers’ time and
data. “Gets” capture the specific gains that each firm expects to receive,
such as research findings and cost-savings recommendations. We illustrate
this analysis conceptually in figure 4-1.
The challenge for the team is to understand and evaluate the gives and
gets from its firm’s perspective and from the perspectives of the customer
firms participating in the research. For example, does what the supplier
perceives that it is giving correspond to what the customer perceives that it
is getting, or is there some discrepancy? Moreover, team members need to
discover gives that they can provide that would have more value to the
customer than that customer’s perception of its cost of the gives that it is
being asked to provide to the supplier. In our experience customers
cooperate in customer value research for one or more of four basic reasons:
a low-cost resource to better understand their business, an opportunity to
benchmark, earlier access to some new product or service, or get a
meaningfully lower price. The team should decide on several increasing
levels of incentives that it could offer customers, successively if needed, to
gain their participation in the research.

FIGURE 4-1
“Gives & Gets” analysis
 The team next contacts the salesperson responsible for each customer,
explains the purpose of research, and gains the salesperson’s support. The
salesperson provides names and contact information for customer managers
to invite to the initial meeting, where those managers will learn the purpose
of the research and be asked to cooperate. Depending on company protocol,
the salesperson responsible for each customer may accompany the team
members to the initial meeting. (It must be stressed, though, that this
meeting is not a sales call.) And at least two team members should visit
each customer whenever possible.

Gather Data
In the initial meeting, the team members explain the purpose of the research
and what the customer can expect to gain from participating. Team
members relate the list of value elements and which ones they regard as
points of parity and points of difference. They can check for
comprehensiveness by asking the customer managers whether any value
element has been inadvertently left out that might be a point of difference.
The team members then share the initial value word equations for the
hypothesized points of difference.
If team members have been honest with themselves, the customers will
largely agree with them. Inevitably, though, customers will disagree with
the team’s assessment on some value elements. For example, the customer
might regard a point of parity as a point of difference favoring the next-best
alternative. These disagreements determine the value elements that are
points of contention. Such disagreements should not be regarded as
problems because they provide further motivation to the customers to
participate in research and gather data to resolve the points of contention.
Revisiting the points of difference and points of contention, the team
members discuss what sources of data the customer presently generates, or
would be able to generate, to provide an estimate of each point of difference
and point of contention. They discuss timing and resource requirements for
data collection. Finally, they discuss what sources of data outside the
customer firm (e.g., industry association studies) might be worthwhile to
pursue.
 In doing the research, wherever possible, the team prefers to gather data
rather than rely simply on customer perception. If the customer volunteers
to generate or collect the data, the team should inquire into the method that
will be used. How reliable will the measurement be? That is, how consistent
will the measurements be over time, or are there variations that need to be
considered? What assumptions are being made? Whenever possible, team
members should offer to work with the customer to generate or gather the
data. Depending on the situation, a second visit to the customer likely will
be needed to do this.
The team needs to be creative, using other sources when desirable or
necessary. Independent industry consultants or knowledgeable personnel
within the supplier firm can be sources of initial estimates. In some
instances retired customer personnel may be a resource. When the provision
of a service element mitigates a risk the customer could otherwise
encounter, supplier firms sometimes employ actuarial consultants to
estimate the cost of that risk. Qualcomm drew on American Trucking
Association research studies to provide ranges for some of the elements in
its value model for its OmniTRACS mobile communication system.
Finally, the team members consider value placeholders, which are value
elements that the supplier believes are worth something to customers but
either are too difficult to obtain data for or are social elements. In such
cases the team will have to rely on customer perception: What qualitatively
is each value element worth, and how might proxy estimates be obtained?
When there is no other source than customer perception, framing the worth
of the element in the customer’s mind to establish a reference point is
critical.

Analyze the Data

When the data has been gathered, the team analyzes it to estimate what each
point of difference or point of contention is worth in monetary terms. It also
calculates the mean and the variance (or standard deviation) for each. It
then conducts comparisons between the two studied segments to understand
how the estimate for each value element varies across the two. The team
next summarizes these results in the customer value model. The team
should be certain to list any assumptions made in assigning monetary
amounts to each element.
To gain a deeper understanding of the results, the team performs
sensitivity analyses, using the information on the variances related to each
element. It considers what characteristics might drive the variation in value
and whether that variation warrants a new segmentation approach. It
identifies which customers are the most attractive prospects.
The team finally considers the value placeholders. What insights can be
provided? How should the value placeholders be used in light of the
customer value assessment? Although Qualcomm assigns no monetary
amounts to less tangible elements, it still includes them in its analysis as
value placeholders. In this way, Qualcomm conveys that it believes those
elements are worth something to the customer and leaves open the
possibility that some specific amount might be ascertained in the future.

Construct a Business Case for Change

Based on the knowledge of value that the team has gained from its research,
what does it recommend that the business do differently? What is the
customer value proposition that will resonate with targeted customers? The
business case for change should address:
1. What specific actions does the team recommend based on its customer
value research?
2. What resources would be needed to accomplish the recommended
changes in doing business?
3. What are the specific concerns in implementing the business case?
4. What milestones can be specified to chart the progress in
accomplishing the change?
5. What would be the incremental profitability if the business case for
change were approved?

Think of the business case for change as specifying what the business
needs to do differently to enable it to realize a resonating-focus customer
value proposition. This list may include developing the core product or
service to strengthen its performance or provisioning new supplementary
services valued by target customers. The business case for change may also
specify upgrades in the sales force’s capability—for example, to do the
consultative selling required to understand customer requirements and
preferences and to tailor the market offering to deliver superior value.
The team leaders present their business cases to senior managers who
have served as project sponsors and to the top management of the business
unit. Each business case should be viewed as a prospective commitment: if
senior management provides the requested resources, the business will
deliver the specified results, especially the estimated incremental
profitability. After all, it does the business no good to make changes to
deliver superior value if it does not get a fair return for doing so.

Transform a Weak Value Proposition into Resonating

Focus
A leading supplier of resins to coatings producers for architectural
applications—that is, paint for buildings—recognized that its customers
were coming under pressure to reduce volatile organic compounds (VOCs)
from coatings to comply with increasingly strict environmental regulations.
(Resins are the backbone of a coating, composing 30-60 percent of a
coating by volume.) Producers were pursuing either new formulations of
coatings that significantly reduced solvents (the source of VOC emissions)
or water-borne systems that contained minimal or no solvents—although
both solutions resulted in a sacrifice in product performance.2
This resin supplier responded with a new type of resin that would enable
its coatings customers to remain compliant with stricter environmental
standards while retaining most of the desirable performance characteristics
of solvent-based paints, albeit at a higher price. This resin supplier offered
what it later came to realize was a linear, or single-dimensional, value
proposition: “The new resin provides coatings producers with VOC
compliance while retaining the performance of similar noncompliant resins
at a somewhat higher price.” In their initial discussions with targeted
coatings customers that were testing the resin product, the resin supplier
was surprised and disappointed at the tepid reaction it received, particularly
from commercial managers at the customers. They were not enthusiastic
about the sales prospects for higher-priced coatings containing the new
resin with commercial painting contractors, the primary target market, and
they indicated that they would not move to the new resin until regulation
mandated it. The value proposition for the new resin was not persuasive,
and potential for the new resin appeared limited, at best.
Taken aback by this, the resin supplier decided to broaden its focus and
do customer value research to better understand the requirements and
preferences of its customers’ customers—commercial painting contractors
—and how the performance of its resin would affect their total cost of doing
business. The requirements and preferences of the commercial painting
contractors’ customers—building owners—were even studied. The resin
supplier used a series of combined focus groups and field tests with
painting contractors to gather data on three types of coatings: traditional
solvent-based coatings, the advanced solvent-based coating that would be
VOC compliant, and a water-borne coating. The performance on primary
customer requirements—such as coverage, dry time, and durability—was
studied. Customers were asked to make performance trade-offs and indicate
their willingness to pay for coatings that deliver enhanced performance. The
resin supplier also joined a commercial painting contractor industry
association, took courses on how contractors are taught to estimate jobs,
and learned to use the job estimation software painting contractors use in
order to better understand the value proposition of the new product.
Several insights emerged from this customer value research. Only 15
percent of a painting contractor’s costs are the coatings; labor is by far the
largest cost component. This information indicated that if a coating
provided greater painter productivity, an increased selling price might be
accepted by contractors. Contractors value coatings that provide superior
coverage (so that more can be applied with each stroke, thereby reducing
the coats required for the same coverage) and have a faster dry time (four
hours or less versus eight hours or more for conventional solvent-based
paints) so that two coats can be applied during a single eight-hour shift.
The resin supplier was pleasantly surprised to discover that in addition to
being VOC compliant, its new resin possessed properties that delivered
superior value to its customers’ customers, and with some minor tweaking,
the new resin could deliver still more value. The new resin enabled a higher
film build with a coating, providing better hiding power and coverage, and
could provide a drying time that allowed recoating in less than four hours.
The resin supplier retooled its value proposition from a single dimension—
VOC compliance—to a resonating-focus value proposition in which VOC
compliance was a relatively minor part. The new value proposition was this:
“The new resin enables coatings producers to make architectural coatings
providing higher film build and the ability to put on two coats within a
single shift, thus increasing painter productivity while also being VOC
compliant.” Coatings customers enthusiastically accepted this value
proposition, and the resin supplier was able to get a 40 percent price
premium for its new offering over the traditional resin product.

Demonstrate Customer Value Through Value

Calculators
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. These tools are spreadsheet software applications
that salespeople or value specialists use on laptop computers, as part of a
consultative selling approach, to demonstrate the value that customers
likely would receive from the offerings.
Orange Orca B.V. is a management consulting firm, based in the
Netherlands, that is committed to change management and measurable
improvement of performance for its clients.3 As part of this, it assists its
clients in building value calculators to demonstrate the superior value of
their offerings to target customers. To understand what value calculators
look like, see figure 4-2, which presents an example of a summary screen—
that is, a customer value model—and a screen corresponding to one of the
points of difference for a client’s new polymer (note: InnoPackaging and
European Petrochemical Company are pseudonyms). Using this calculator,
the client’s salespersons were able to demonstrate the superior value the
polymer delivered at similar customer firms and consequently gained more
business at a higher price per ton for their company’s Transplast polymer.
A recent experience from Rockwell Automation exemplifies how value
calculators can provide supplier salespeople with a competitive edge.4 A
condiment producer hastily summoned a Rockwell Automation sales
representative, Jeff Policicchio, to participate in a “continuous improvement
conference” at one of its major plant sites. Facing considerable pressure
from Wal-Mart to lower condiment prices, the producer decided to invite its
incumbent suppliers as well as competing suppliers to a meeting designed
to find ways to dramatically reduce its operating costs. Along with
competing supplier sales reps, Policicchio was given full access to the plant
and its personnel for one full day.
From discussions with plant personnel, Policicchio quickly learned that a
major and recurring problem stemmed from lost production and downtime
attributable to poorly performing pumps on thirty-two huge condiment
storage tanks. Using Rockwell’s TCO Toolbox, an interactive laptop
software program (TCO stands for “total cost of ownership”), Policicchio
generated a list of probing questions designed to gather data associated with
pump usage. Through extensive interviews with the plant engineer,
maintenance manager, and purchasing manager, Policicchio gathered
relevant cost and usage data and entered it into his laptop’s TCO Toolbox
program. Based on an assessment of data, he was then able to construct a
“pump solution,” or what the trade calls a “screw-drive,” composed of a
Reliance Electric XE motor, a Dodge Quantis gear reducer, and a Reliance
Electric variablefrequency drive.

FIGURE 4-2
Transplast value calculator: Summary screen
 Transplast value calculator: Screen for calculating first value element

Source: Orange Orca B.V Used with permission.

The next day Policicchio and his competitors were called back to the
plant and given one hour to prepare a solution proposal and present it to
plant management. Again, Policicchio used his TCO Toolbox program to
generate a value assessment report, craft a value proposition, and prepare a
set of slides for his presentation. Following the presentations, Policicchio
learned that he was the only one to use a value assessment tool to
demonstrate tangible cost savings attributable to his proposed solution.
Everyone else made fuzzy promises about possible benefits. Stated simply,
Policicchio’s value proposition was “Through this Rockwell Automation
pump solution, your company will save at least $16,268 per pump (on up to
thirty-two pumps) relative to our best competitor’s solution through the
elimination of most downtime, reduced administrative costs associated with
procurement, and lower spending on repair parts.”
Plant managers were so impressed with Policicchio’s value proposition
that they immediately purchased one pump solution for a trial examination.
After a trial period, they audited its performance and discovered it to be
even better than predicted. Based on these findings, they placed orders for
the remaining pumps. These will be installed as the existing pumps wear
out.
Demonstrate Customer Value Through Comparative
Tests
When necessary, best-practice suppliers go to extraordinary lengths to
demonstrate the comparative value of their offerings relative to the next-
best alternative’s. These suppliers realize that prospective customers find
comparative tests powerfully persuasive. Rather than shy away from
making explicit comparisons, such suppliers recognize that customers are
going to make such evaluations anyway, so these suppliers take the
initiative themselves. Consider the recent experiences of Akzo Nobel and
Thales Nederland.
The polymer chemical unit of Akzo Nobel recently conducted a two-
week pilot on a production reactor at a prospective customer to gather data
firsthand on the performance of its high-purity metal organics (HPMO)
offering relative to the next-best alternative in producing compound
semiconductor wafers. Akzo Nobel paid this prospective customer for two
weeks of time at its production reactor, where each day served as a separate
trial because of daily considerations such as output and maintenance.
Instead of hand-waving about the scaling of its Epiproof HPMO offering
from an R&D reactor to a production reactor and making assumptions about
the cost savings, Akzo Nobel now has real data from an actual production
machine and tangible evidence that the wafer produced is as good as or
better than the one the customer currently grows using the next-best
alternative.
To let its prospective customers’ customers (i.e., the firms making the
wafers into compound semiconductors) verify this data for themselves,
Akzo Nobel brought wafers it had produced to them for testing. Akzo Nobel
combines this point of parity with two points of difference—significantly
lower energy costs and maintenance costs—to provide a value proposition
with a resonating focus.
Thales Nederland, on the other hand, is a leading contractor in providing
defense electronics and radar systems to governments for their navies. At
times, it will arrange comparative field tests to demonstrate the superior
value of its offering relative to the next-best alternative. The Royal Dutch
Navy, which is a well-equipped and provisioned client of Thales, serves as a
reference customer and cooperatively stages these comparative tests.
Document Actual Customer Value Provided
Demonstrating superior value is necessary, but it is no longer enough in
today’s business world. Suppliers also must document the cost savings and
incremental profits that offerings actually have delivered to customers.
Thus, suppliers work with customers to define the measures on which they
will track the cost savings or incremental profit produced and then, after a
suitable period of time, work with customer managers to document the
actual results.
These tools, which we term value documenters, are used to further refine
suppliers’ customer value models, to create value case histories, to enable
customer managers to get credit for the cost savings and incremental profit
produced, and to enhance the credibility of the value demonstrations
(because customer managers know that the supplier is willing to return later
to document the actual value received). Value documenters are
straightforward extensions of value calculators, such as the one in figure 4-
2, with the addition of a “Realized value” column next to the
“Demonstrated value” column (i.e., the Customer company column in the
figure) to provide comparisons between the demonstrated value estimates
and the actual value delivered.
Value case histories are another tool that suppliers doing business based
on value, such as Nijdra Groep in the Netherlands and Applied Industrial
Technologies, use. As mentioned earlier, value case histories are written
accounts that document the cost savings or added value that reference
customers have received from using a supplier’s market offering.

Quaker Chemical Documents Actual Cost Savings

Quaker Chemical believes so much in the necessity of documenting actual
cost savings that it has made that idea a part of its value proposition. Its
Web site notes: “To us, ‘value proposition’ defines a sales offer that
includes our advantaged products, the application of our process and
technology knowledge, and demonstration in hard currency of the value of
our recommendations. We’ve been compiling case after case to prove the
value of our approach.”
 A hot mill operation was looking for improvements in the surface quality
of the sheet steel it produced and the operating life of its equipment, as well
as savings in electrical power and increases in productivity. Quaker
proposed and implemented an entirely new roll-bite lubrication system,
including the application equipment, the control equipment, the lubricant,
and a weekly maintenance contract. The total cost to the customer was less
than $350,000 per year. This system generated documented savings of more
than $1.5 million in the first year alone, proving the value of the Quaker
approach.
A major producer of automotive steel wanted to reduce costs and
improve product quality in its pickling and cold rolling operations. Because
Quaker understood the processes so well, it saw a way to reduce
consumption of process chemicals, water, and waste treatment chemicals.
Quaker proposed a solution management program providing around-the-
clock coverage by an on-site team of Quaker solution technicians and a
program manager. The price the customer paid for a three-year contract was
$1.2 million, while the total documented operational savings for the same
period were $3.8 million.
Just as Quaker does, when we say “documented,” we mean that customer
managers are willing to sign off on the cost savings or added revenue and
profit that doing business with the supplier has produced. It is not just the
supplier itself claiming it provided savings or added value, it is the
customers confirming them. What a tremendous way to substantiate a value
proposition!

Demonstrating and Documenting Value Benefits

Grainger and Its Customers
Pharma Labs (a disguised name) is a rapidly growing pharmaceutical
manufacturer. At one of its largest plants—a facility with 380 employees—
purchasing managers were questioning whether to outsource their
procurement of maintenance, repair, and operating (MRO) supplies and
their inventory management processes. During a routine sales call, the
Grainger account manager learned of the managers’ concerns and arranged
a half-day meeting with the vice president of operations, the purchasing
manager, and the maintenance manager at that facility. He asked two
Grainger Consulting Services (GCS) managers to attend this meeting,
thinking that GCS might be of assistance.
Following the meeting, GCS proposed that it perform what it calls a
“baseline assessment,” which documents the total costs of MRO supplies
management, and then, following that assessment, that it offer Pharma
managers some strategic recommendations about how they could improve
their operations. GCS told Pharma Labs that the assessment and the strategy
development would take six to twelve weeks to complete and would cost
$45,000. Pharma management agreed to the proposal.
To begin, GCS put together a case team, which consisted of a consulting
manager, a consultant, and a business analyst. Pharma Labs formed a
steering committee and a project team. The steering committee was
composed of the relevant department heads—such as maintenance,
purchasing, manufacturing, inventory management, management
information systems, and finance—and was responsible for project
oversight and strategy development. The project team had members from
each of the departments on the steering committee and was responsible for
working with the GCS case team.
Generally, GCS looks for the elements of its customer value models in
four primary areas: processes (from how the need for items is identified to
how invoices are paid); products (product price, usage factors, brand
standardization, and application); inventory (on-hand value and carrying
costs); and suppliers (performance, consolidation, and value-adding
services provided). In each area GCS defines value and cost-saving
elements (such as freight and courier charges and the cost of overtime);
specifies the measures for the elements (such as procurement cost per
purchase order, number of suppliers, and inventory accuracy); collects the
data and analyzes it; and specifies measures for monitoring performance. At
Pharma Labs, the measures for monitoring performance included supply
expenditures, number of suppliers, and transaction volume.
In a baseline assessment, GCS uses process mapping and activity-based
costing to build customer value models, drawing on proprietary databases
that the company has built from its findings in past engagements. At
Pharma Labs, GCS applied its activity-based costing approach to identify
procurement costs across all typical functional areas—purchasing,
maintenance, receiving, and accounts payable. These identified costs were
generally in line with costs tracked in the GCS databases.
In any analysis GCS attempts to use the customer’s electronic data
whenever possible (the team usually attempts to get one year’s worth of
data). Early on, the case team makes a site visit to examine that data and to
assess how accurate and complete it is. In the case of Pharma Labs, GCS
analyzed two years of purchasing and accounts payable data, as well as six
months of procurement card data. The data provided GCS and Pharma Labs
with insights about the potential for consolidating the number of products
Pharma Labs purchased regularly from various suppliers. It also suggested
how Pharma Labs might consolidate its purchases in return for lower prices
and greater value-adding services from its remaining suppliers.
At Pharma Labs, as in most GCS engagements, the case team also had to
do an invoice analysis—actually inspecting past invoices to gather usable
data—to validate the electronic data and to provide additional line-item
product detail when available. The level of detail that the customer has is
usually not adequate. Its system may contain only aggregated purchase-
order information, showing only how much was paid in total. Complicating
the task further, invoices themselves often have incomplete item
descriptions that make it difficult to determine exactly what was purchased.
The GCS team also found from its inventory analysis that Pharma Labs
had no records of the amount of inventory on hand or how it was used.
Inventory levels were extremely high—the team later found that Pharma
Labs had more than $1 million of slow-moving inventory—but no actual
system was in place to track and manage the items.
The GCS case team supplemented its analyses by interviewing the
Pharma project team members. In these interviews GCS shared its
preliminary findings, tried to uncover anything that it might have
overlooked, and learned what the Pharma managers themselves perceived
to be potential areas of improvement. The interviews were, in fact, fruitful,
alerting GCS and Pharma managers to at least one significant finding in the
procurement area: Pharma lab technicians played an unusually large role in
the procurement process, handling some routine purchasing, maintaining
detailed handwritten logs of all transactions, receiving the items into
inventory, and managing that inventory. The GCS value model showed that
Pharma Labs was spending 30 percent of its procurement costs—or the
equivalent of nearly three full-time positions—on lab technicians who could
be redeployed from this purchasing function to more value-adding activities
in their intended function. Pharma Labs eventually signed a supply
agreement with another company, which, in return, put one of its people on
site to manage this procurement process.
After GCS completes a baseline assessment, it then tries to specify
improvements that the customer can make in six to twelve months. It also
works with the customer to formulate changes in the strategy for MRO
supplies management.
GCS identified at least $327,000 in total cost savings on the $6.1 million
Pharma Labs was spending yearly on MRO supplies, including the costs of
acquiring and managing them. These projected cost savings came about
through the consolidation of suppliers and product-spending reductions
($165,000), inventory reductions ($72,000), and process improvements
($90,000). For example, GCS recommended that Pharma Labs dramatically
consolidate its MRO supplies purchases. Pharma Labs agreed and initiated
a national account agreement with Grainger. In return, Grainger provided
Pharma Labs with an on-site representative to manage the purchase and
inventory processes at the company. This allowed a Pharma maintenance
technician who had been spending 100 percent of his time purchasing MRO
supplies to return to performing value-adding maintenance activities.
What were the ultimate results of Grainger’s work with Pharma Labs? At
the end of the first year GCS and Pharma Labs started working together,
they jointly conducted an audit of achieved cost savings, which were found
to be $387,000 during the first six months after implementing the proposed
changes. What’s more, for the whole year, Grainger sales to Pharma Labs
increased sevenfold—from $50,000 to $350,000. The next year, sales nearly
doubled—to $650,000. Clearly, a better understating of value created
substantial benefits for each company.5
FIVE

Tailor Market Offerings

Creating Naked Solutions with Options

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. It is true that the steel plates, letters of credit, or chemicals that
they provide may be nearly, or exactly, the same as other suppliers’. Yet the
market offerings that customers purchase from these suppliers are typically
much more than simply the core product or service. And these suppliers
have not investigated in any methodical way, such as through the customer
value research we advocate, how their market offerings are different from
competitors’, what such differences are worth to customers, or what
changes they might make in the offerings that at least some customers
would find valuable.1
While the core products (or core services) of alternative suppliers may be
essentially interchangeable, these market offerings contain many
supplementary services, programs, and systems that enhance the value of
the core product and provide additional value to customers. Such
augmenting services, programs, and systems play an increasingly prominent
role in setting suppliers apart from one another in business markets (see
“Examples of Augmenting Services, Programs, and Systems”). For ease of
exposition, we will refer to them as “supplementary services,” or simply
“services.” So, before suppliers conclude that they are in a commodity
business, they need to carefully examine the differences between their
offerings’ supplementary services and their competitors’ to obtain estimates
of the value that customers receive from such services.
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.
In this chapter we discuss tailoring market offerings as the process of
differentially putting products, services, programs, and systems together in
ways that create the greatest value for targeted market segments and
customer firms. It is a strategy that enables suppliers to act more like value
merchants, providing managed variation in their market offerings that
customers are willing to pay for. Tailoring market offerings requires
offering naked solutions with options, refining targeting, and becoming
more flexible in offerings.

Offer Naked Solutions with Options

Senior managers responsible for business markets must start with the
realization that no matter how finely they segment a market, some residual
variation in the product and service requirements of segment members will
remain. That is, even though customers within a segment may be essentially
the same in many of their requirements and preferences, they remain
different in others. Suppliers can choose to ignore this residual or remaining
variation with increasingly difficult consequences, or they can choose to
take advantage of it by building flexibility into their market offerings.

Examples of Augmenting Services, Programs, and Systems

Services
 Fulfillment: availability assurance, emergency
delivery, installation, training, maintenance,
disposal/recycling
Technical: specification, testing and analysis,
troubleshooting, problem solving, calibration,
customer productivity improvement

Programs

Economic: terms and conditions; deals, discounts,

allowances, and rebates/bonuses; warranty; guaranteed
cost savings
Relationship: advice and consulting, design, process
engineering, product and process redesign, analysis of
cost and performance, joint marketing research,
comarketing and copromotion

Systems

Linking: order management intranet, automated

replenishment and vendor-managed inventory,
enterprise resource planning, computerized
maintenance management

Efficacy: information and design assistance intranet,

expert systems, integrated logistics management, asset
management, responsiveness systems
 Flexible market offerings consist of naked solutions, with options, for
each market segment. A naked solution is the bare minimum of products
and services that all customers in a market segment value. Naked solutions
provide the supplier with a highly price-competitive alternative for those
customers that simply want the minimum at the lowest price. The supplier
puts together a set of well-chosen options for each naked solution, which
are product enhancements and services that some, but not all, customers in
the segment value. These options are offered separately for those customers
that do value them and are willing to compensate the supplier for providing
them.
In the past, suppliers either ignored or were unable to deal with variation
between customers, choosing instead to provide standard bundles or
packages of products and services designed to meet the needs of the
average customer within each segment. Even worse, in many instances,
suppliers have provided essentially the same vanilla offering across all
segments. Thus, in business markets, a number of suppliers segment the
market and then proceed to provide much the same, if not exactly the same,
offerings to each segment. As the marketing manager for a large chemical
company said to us, “For 90 percent of our customers, we offer the identical
mix of support services. ”2
As a result, some customers feel that they are forced to pay for services
they do not require, while others do not get the depth of services they
require, even if they are willing to pay extra. Having a standard bundled
offer for all customers also results in many customers subsidizing a few of
the customers. For example, an analysis of customer profitability at one
supplier demonstrated that the most profitable 20 percent of customers were
responsible for 225 percent of the firm’s profits; the next 70 percent of
customers were responsible for 0 percent of profits; and the last 10 percent
of customers were generating negative 125 percent of the firm’s profits!
Why was this occurring?3
The most profitable customers were those that had less leverage in
negotiating price and used relatively little of the supplier’s “free”
supplementary services. Because the price paid by these customers was
relatively high and the cost to serve them was relatively low, they were
highly profitable for the supplier. On the other hand, those customers with
whom the supplier lost money were the large-volume customers that had
squeezed a low price and consumed a large proportion of the supplier’s
supplementary services. When this kind of customer cross-subsidization
occurs, sooner or later, someone becomes aware of it and targets the highly
profitable customers. If these customers are successfully poached, the first
supplier is left with large money-losing customers and finally forced to
confront this implicit inequity.
Naked solutions end the bad practice of forcing customers that do not
value and do not use the supplementary services to subsidize those
customers that do value them and consume a disproportionate amount. It
also enables the supplier to offer greater amounts or higher levels of
services to those customers that require them and are willing to compensate
a supplier for providing. While suppliers often develop different versions of
their core product or service for different customer segments, the strategy of
varying supplementary services both across and within customer segments
is still relatively rare.

Refine Targeting
Progressive suppliers in business markets practice finer-grained market
segmentation to better understand how customer requirements and
preferences, and thus the value of the market offering, vary. They find that
conventional bases of segmentation, such as industry and customer size,
may be a useful start but do not provide enough insight for making targeting
decisions. So they further segment the market using progressive bases—
such as application, customer capabilities, usage situations, and customer
contribution to profitability—and then refine and pinpoint those segments
and even subsegments that are of the greatest interest to target.
Flexible market offerings then allow suppliers to capitalize on any
remaining variation within target segments by letting customers further
tailor the offering to their own requirements and preferences. In doing so,
customers select the way of doing business that is most valuable to them
while being profitable to the supplier, the ultimate goal of targeting. Figure
5-1 conveys the recent flexible market offerings of KLM Cargo, a business
unit of KLM Royal Dutch Airlines. By providing a base level of service and
optional higher levels for its market offerings, KLM Cargo enables
customers to tailor their service level to their own performance
requirements. In doing so, the company has been able to obtain a larger
share of customers’ business.4
Progressive suppliers recognize that within targeted market segments,
there are likely subsegments of customers that have different preferences in
the way they want to do business with a supplier. Probably the most
common is the distinction between customers that prefer to do business on a
transactional basis versus a collaborative basis.

Differentiating Transactional from Collaborative

Customers
Transactional customers purposely share their business among several
suppliers in an attempt to gain further price concessions and prefer to
maintain an arm’s-length relationship with vendors. In contrast,
collaborative customers are willing to reduce the number of suppliers they
do business with to gain demonstrable cost savings or added value. They
are also willing to consider changing how they do business with their
remaining suppliers in exchange for cost savings.
A progressive supplier recognizes customers’ different relationship
preferences and responds with flexible market offerings. As an illustration,
consider the service portion of Baxter Healthcare Corporation’s market
offering to two segments of interest: transactional hospital customers that
do business with Baxter on an order-by-order basis and strategic customers,
which are hospitals that have committed to a closer relationship with Baxter
(see table 5-1 ). Baxter constructed these offerings to provide ordinary and
extraordinary levels of service, programs, and systems that reinforce its
commitment to fulfilling strategic customers’ requirements and to
enhancing their medical services and financial performance. Even programs
that are optional and charged for separately, such as Baxter Corporate
Consulting, reflect this commitment because they provide value or savings
that far exceed their cost to the strategic customer.5

FIGURE 5-1
The flexible market offering of KLM Cargo
 Source: KLM Cargo. Used with permission.

TABLE 5-1
Baxter Healthcare’s market offerings to two segments: Transactional
and strategic hospital customers

MARK ET O F F ERING
S EG MENT
E LE MEN T

Transactional Strategic
Services customer customer

Product returns standard standard

Technical assistance standard standard

Single point of contact not offered standard

Future disease incidence not offered option

forecast

Programs

Price deals standard standard

Corporate customer bonus not offered standard

(financial incentive)

Executive perspectives not offered standard

Consolidated purchasing report not offered standard

summary

Access program not offered option

Baxter Corporate Consulting not offered option

Systems

ASAP order-entry system standard standard

Comdisco technology not offered standard

 assessment

ValueLink stockless inventory option option

program

Comdisco asset management option option

system

-
Source: James C. Anderson and James A. Narus, Business Market Management, 2nd ed., © 2004,
186. Reprinted by permission of Pearson Education, Inc., Upper Saddle River, NJ.

Bringing Discipline to Supplementary Services

Businesses that have market offerings as well articulated and well managed
as Baxter’s are rare. More often, managers’ understanding of the services,
programs, and systems that their business offers within and across market
segments is piecemeal, uneven, and inaccurate. For this reason, managers
from all functional areas that interact with the customers in some way
should take part in a structured process to determine the market offerings
presently provided to each segment. These managers should meet as a
group, and a facilitator should systematically take them through the various
kinds of services, programs, and systems a business might offer, such as
those listed in the box “Examples of Augmenting Services, Programs, and
Systems.” For each one, the managers should be asked, “Are you doing
something like this?” As a follow-up question, the facilitator should ask,
“Are you doing this sometimes for some customers?”
In most cases, a systematic examination of the supplementary services
reveals that firms are inconsistent about what they offer as standard at the
package price and what they market as an option, for which customers pay
separately. Senior managers are surprised at the extent of unmanaged
variation or ad hoc deviations (from the agreed-on strategies and tactics)
their firms provide. All too often, suppliers find that their sales forces give
away service options for free at the end of the year to meet sales quotas. In
doing so, they cloud customer expectations of what services are standard
and what are optional. Suppliers may also discover that certain customers
are adept in circumventing charges, perhaps through knowing whom to call
for a favor or special treatment.6

Understanding the Value and Costs of Supplementary

Services
Before supplier managers can formulate flexible market offerings for each
segment, they need to estimate the value of each service and the cost to
provide it. This knowledge would seem fundamental. However, few
businesses have undertaken any formal value or cost assessments. So how
do leading-edge firms measure the value of their augmenting services?
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. To add credibility to
the results, one of Greif’s technical service managers works with customer
managers to complete the research. In addition to examining manufacturing,
team members undertake a series of process flow analyses in which they
diagram the customer’s business operations and estimate its current costs.
From these estimates, Greif managers brainstorm system solutions for the
customer. For example, they might envision a complete materials handling
system, including just-in-time deliveries and drum recycling. Then Greif
gives the customer a variety of service alternatives along with estimates of
cost savings. In this way, customers can make informed purchase decisions
based on the worth of system solutions proposed to them.
How do progressive companies understand the service costs associated
with their market offerings? To eliminate the problems associated with
fuzzy services and the tendency of sales reps to bury costs, a manufacturer
of food additives and seasonings revamped its service delivery and planning
systems. For starters, the company more precisely defined its services and
the levels at which it offered each one. Its sales force, which was composed
of highly trained technical representatives, was required to handle all minor
services, such as basic problem solving. Charges for such services account
for a portion of the total yearly budget allotted to each sales representative.
All major services, such as detailed technical problem solving, were
offered on a project basis and delivered by technical experts from
departments such as customer service. Either the customer directly paid for
the project, which was preferred, or a charge was placed against the allotted
discretionary budget of its sales representative. At the beginning of every
year, managers at the manufacturer constructed a plan for each major
customer account that defined financial and volume targets and specified
the levels of services the manufacturer would provide. At the end of the
year, the managers reviewed these plans, examined service costs and
account profitability, and recommended changes in the level of account
services for the next year.
Suppliers have difficulty in activity-based costing of shared resources,
which tend to characterize the provision of services, programs, and systems.
Yet significant progress is being made in activity-based costing for these
kinds of applications. Robert Kaplan and Steven Anderson have introduced
time equations, which enable activity-based costing models to reflect how
order and activity characteristics cause variation in processing times. A time
equation expresses in simple words and mathematical operators the minutes
to perform an activity and how those minutes are affected by variations in
the activity, such as providing differing levels of service. Consider an
example that Kaplan and Anderson provide to capture the variation in
minutes required to package a chemical for shipment to a customer,
depending on the requirement for special packaging or mode of
transportation:

Packaging
time = 0.5 + 6.5 [if special packaging is required] + 2.0

[if shipping is by air]

 This time estimate in minutes is then multiplied by the cost per minute of
supplying that capacity to provide a cost estimate for order packaging. This
time equation tool for simplifying activity-based costing is strikingly
compatible with the value word equation tool presented in chapter 3.
Together, they provide suppliers with methodical, yet practical means of
precisely expressing and estimating the value and the cost of providing
supplementary services.7

Become More Flexible in Offerings

When formulating flexible market offerings for different segments,
suppliers can choose from three strategic alternatives for deploying each
service element: do not market the service, market it as standard (with no
charge), or market it as an option (with a charge). Each service itself has
one of three statuses: the service is a new one (meaning that it has not been
previously marketed by the supplier, although it may have been offered by a
competitor), it is an existing standard service, or it is an existing optional
service.
We cross service status with service element deployment to provide nine
unique combinations. A useful way to organize these nine resulting
strategies is a flexible market offering strategy matrix, which we show in
figure 5-2. This matrix can provide a systematic picture of the nature and
balance of a supplier’s market offering. It also can promote further inquiry
and strategy development, as when, for example, managers find that one or
more cells are empty.

Reevaluate Existing Standard Services

Because the overriding philosophy is to keep the standard offering as naked
as possible, only those service, program, and system elements that all firms
within a segment highly value should be standard. The first place to put this
philosophy into practice is by reevaluating the existing standard services.
By discontinuing, or pruning, some of these and recasting others as options,
supplier managers retain the subset of services that will serve as the base of
an updated standard offering. Prune here is used in the horticultural sense,
trimming a tree or shrub to improve its vitality, rather than in the dried-
plum sense, which is used to improve vitality in quite a different way!
 FIGURE 5-2
Flexible market offering strategy matrix for services, programs, and
systems

Source: James C. Anderson and James A. Narus, Business Market Management, 2nd ed., © 2004,
191. Reprinted by permission of Pearson Education, Inc., Upper Saddle River, NJ.

Prune from the standard offering. Suppliers are often far more reluctant
to discontinue existing services than they are to add services. Nonetheless,
managers need to scrutinize existing elements for pruning candidates. One
source is those services that most segment members rarely use. The
customers that still value the service are so few that it is not worthwhile for
the supplier to continue to offer it. In the interest of these customers,
though, the supplier can sometimes outsource the service or suggest another
firm that provides it.
Following detailed investigations, a chemical manufacturer learned, to its
chagrin, that while each of its 186 services continued to incur annual fixed
costs, many had not been used in the past year. Its managers responded by
pruning a large number of them. Many customers didn’t even realize the
services were discontinued.

Retain in the standard offering. A supplier sometimes retains services in

the standard offering even if they are not ones that are highly valued by all
firms in a segment. The success of certain services, in terms of their value
or cost, depends on their widespread usage by customers. Web-based order
placement, Web-based tracking systems, and logistics management systems
are examples.
Service elements that a supplier cannot readily differentiate from those of
competitors are candidates for including in the standard offering. Such
elements are often regarded as standard in industry market offerings and
make up a substantial part of the naked offering. The challenge in offering
these parity services is to have customers perceive their value as not being
significantly less than competitors’ comparable services but at the same
time to manage their costs below those of the competition. Why? Because
customers typically do not place much value on these services, they do not
factor into customers’ decisions about changing suppliers as long as they
are minimally acceptable.

Recast as a surcharge option. Supplier managers report that recasting a

standard service as a surcharge option is the most difficult of the nine
strategies to implement. Customers may react angrily when told they must
now pay for something they had expected to get for free. It is even more
difficult when competitors continue to market the service for free as part of
a standard offering. Nowhere is this more of a problem than in industries
characterized by high levels of fixed costs, such as commodity industrial
chemicals and fully integrated steel mills. In such industries managers
hesitate to implement any scheme that may result in reduced sales volume
because it may jeopardize their ability to reach profitable capacity-
utilization levels. As a result, they routinely add services to retain volume
and rarely drop any.
Infrequently performed services that deliver value at specific points in
time—such as training, installation, and retrofitting—are perhaps the best
candidates for redeploying as surcharge options. By marketing these
services as value-added options, suppliers retain the business of customers
that still derive value from them and are willing to pay for them. Often this
provides a real test for services that customers claim have no value for them
(or are said to be the same as those obtainable for free from other suppliers)
but that suppliers believe are worth something to them. Depending on the
market response, suppliers can either continue these services as value-added
options or discontinue them.
 Leading supplier firms use a variety of approaches to recast services as
value-added options. To make the overhaul of its standard service package
more palatable to its customers, one specialty chemical company
implemented a variation of this strategy. Along with specialty organic
chemicals, the company offers a variety of services including laboratory
support, field consulting, on-site testing, and educational seminars—all of
which are costly. Realizing that its customers value and use these services
differently, the company offers customers a variety of levels for each
service. If a customer purchases a minimum amount of products each year,
it receives basic levels of services along with the standard offering. If that
same customer wants to receive a higher level of service, it can either
increase its annual purchases to a prespecified amount or pay extra. Thus,
some level of each service is available with every standard offering.
Customers that place greater value on the service have the option to buy
more.
As a prelude to making some previously standard services value-added
options, a large computer company began listing a charge for the provided
services, which was then subtracted with the notation “Do not pay this.” An
accompanying letter explained that the company was pleased to have been
able to provide the field service and stated what it estimated this service
was worth to the customer, using market-based rates for independent
industry consultants. Why would a supplier employ this tactic, which we
call a pseudo-invoice? Such an approach enabled the company to establish
the value of its services in the minds of customers and opened the
possibility for charging for those services in the future. Thus, a sharp
distinction can be drawn between offering an element separately, even as an
invoice reduction “no charge,” and simply burying it within the standard
package.
Another alternative is to have the customer pay, in full or in part, for
whatever options it values with “bonus dollars” earned from doing business
with the supplier. Strategic customers accrued “Baxter dollars” based on the
amount of and growth in their purchases from Baxter Healthcare, which
they then applied to any of a number of optional services, programs, and
systems. In this way, strategic hospital customers used a common resource,
Baxter dollars, to tailor the company’s market offering to their own
individual requirements.
Reexamine Optional Services
Next, supplier managers should reexamine existing optional services to
determine whether they should be discontinued, used to enhance the
standard offering, or continued as options. As was the case with
reevaluating the standard package, evaluating and constructing options
menus should begin with a deliberate attempt to prune existing optional
services. Optional services that were once good sources of revenue for the
supplier but are no longer used enough to justify their fully allocated costs
are pruning candidates. Similarly, services whose cost has outstripped
customers’ willingness to pay for them (due to changes in technology, the
expertise required, or insurance risk) are also candidates. For example,
because of insurance risk, most manufacturers are unwilling to provide
transportation for drums of solvents, even for an additional delivery fee. As
was the case with pruning standard services, suppliers sometimes can help
customers that still need these services by outsourcing them from other
firms.
At times, suppliers may fold into standard offerings services that they
have marketed as options. And if the core product of the market offering is
regarded as a commodity, suppliers can enhance the standard offering as a
means of differentiating themselves from competitors. But be warned: many
suppliers think that customers do business on the basis of which supplier
has the best or most extensive set of services, which is not necessarily true
because customers within a segment will vary in how they value these
services. Such suppliers are often driven to offer more elements in their
standard offering than necessary.
Instead, suppliers should consider trimming the standard offering to the
naked solution, offering a set of options and letting customers pay, in full or
in part, for whatever options they value with bonus dollars. The more
customers consolidate their purchases with the supplier, the more bonus
dollars they earn and the more services they can purchase. Not only does
this allow customers to tailor the supplier’s market offering to their own
particular requirements, but it reinforces that they do not have to pay for
services they do not want. To underscore the value of the services it offers,
a supplier can promise to give customers cash for any unused bonus dollars
at the end of the agreement, as Baxter Healthcare did.

Build Flexibility with New Services

What are the sources of new services? Some suppliers rely on their own
strengths and capabilities to identify new services to offer. Another source is
focusing on the cost structures and strategic imperatives of targeted
customers. What new services can the supplier innovate that will assist
these customers in their own initiatives to lower costs or improve
performance?
Because they have not been offered in the past, new services do not carry
the baggage of customer expectations about how a supplier should provide
them (i.e., whether or not those services should carry a fee). Thus, new
services provide the best means to build flexibility into market offerings.
While suppliers should try to preserve new services as stand-alone options,
at times those companies may elect not to offer them or use them to
enhance the standard offering.

Keep it on the shelf. Suppliers may decide not to offer a new element
because of a variety of issues. It may be that customers have not yet
recognized an element’s value, the cost of providing it is still too high, or
the present element it would replace is still deemed adequate. Akzo Nobel
Industrial Coatings (ANIC) provides an example. It anticipated greater
environmental concerns about current painting technologies and invested
substantial time and resources in the technological development of a
process for water-borne paint application.
ANIC consulted with its customers on changing to this more
environmentally benign technology. Unfortunately, although many
customers were interested to learn that ANIC possessed this capability, no
one was willing to pay extra for it. ANIC managers believed that customers
would not value the process until environmental protection laws required a
significant reduction in solvent emissions. As a result, they decided to keep
the technology on the shelf until customer value increased.
 Augment the standard offering. Suppliers sometimes enhance standard
offerings with new services. When suppliers segment the market by
relationships, managers look for new elements that will sustain and
invigorate collaborative relationships. One way is to add new services that
anticipate and are responsive to customers’ changing requirements. Okuma,
a Japanese builder of computer numerical control machine tools, provides
an example. In one year, it introduced a twenty-four-hour parts shipment
guarantee, and in the next, it began to sell a guaranteed trade-in program.
Okuma management believed that in addition to being responsive to a
changing marketplace, the practice forced its distributors and employees to
be more efficient—now they had to learn how to ship parts anywhere in the
United States in twenty-four hours. It also gave the sales force something
new and interesting to discuss during sales presentations.
Shrewd suppliers also add new services to standard offerings to stymie
competitors. The industrial division of Baxter Scientific Products (BSP), for
example, deliberately seeks out new services that customers value and that
BSP can perform better or offer more inexpensively than the competition.8
By bundling such new services in with the standard offering, BSP forces
competitors to choose from a series of unpleasant alternatives. If
competitors decline to offer the service altogether, BSP can tout its unique
service to customers as an extra benefit of doing business with the
company. If competitors attempt to match BSP and offer the service, they
will incur both added costs and time delays associated with learning how to
deliver the new service.
New elements that also are likely candidates for inclusion in the standard
offering are those for which (1) most of the costs are incurred in their initial
development or deployment; (2) continuing costs vary relatively little over
the number of customers actually using the element; or (3) usage of the
element in some way reduces the supplier’s own costs.

Introduce as a value-added option. Offering new elements separately

provides value-added options for customers that seek them and allows
suppliers to readily gauge interest in new services, programs, and systems.
For example, although R.R. Donnelley’s traditional business has focused on
printing, binding, film preparation, and prepress work, its management
believes that future growth and profits will come from innovative services,
such as database management, consulting and training, dimensional and
talking ads, direct marketing, layout systems, and mapping services. To test
their viability in the marketplace, Donnelley has offered these services as
value-added options.

Break Away from the Pack

In our management practice research, a number of managers wistfully
expressed a desire for change but were concerned about what competitors
would do. These managers believed their competitors were looking to
improve profitability too but that they wouldn’t match a move to make
more flexible market offerings. In addition, these managers had timing and
discipline concerns. Before taking up these last two concerns, though, we
consider breaking away as a means of countering competitors’ dubious
parity claims.
One way to break away from the pack (which also works for services
included in the standard offering) is to guarantee outcomes based on the
service. The larger and more complicated the list of services a firm markets,
the more likely it is that competitors will claim, “We can do that.” When
this occurs, savvy marketers respond by transforming service claims into
guarantees. For instance, when Okuma’s competitors began to promise
rapid delivery, Okuma announced its twenty-four-hour shipment guarantee.
If a customer orders a part and it is not shipped in twenty-four hours, the
customer gets the part for free. Greif Inc. takes the guarantee one step
further, introducing a guaranteed cost-savings program. If a customer
requests that it be given a 5 percent price cut, the division guarantees to find
at least a 5 percent cost savings. This is formalized into a written contract. If
the customer doesn’t realize the 5 percent savings, Greif agrees to pay the
difference. If more than 5 percent of savings is found, the customer gets to
keep it all. To date, Greif has had no problem delivering as guaranteed.
Furthermore, managers find that it’s a great way to turn discussions away
from price.
Knowing when to break away and become more flexible in market
offerings is difficult. Is there an advantage to being the first, or is it better to
be a rapid follower? To be an industry paradigm breaker, the first supplier
must have tough resolve and be willing to take the heat. An intermediate
strategy is to pilot-test flexible market offerings in one of two ways: either
(1) add two new services but offer them as options or (2) pick two services
from the present industry standard package and unbundle them, making
them surcharge options. Going against industry practice is the first step
toward an industry paradigm shift.
Many companies refrain from implementing flexible market offerings
because they fear they will lose certain customers by requiring them to pay
extra for optional services. Instead, managers might adopt the philosophy of
firms that have implemented flexible market offerings and found that, while
they lost some accounts, they have gained new business because their
market offerings now more closely meet customer requirements at
reasonable prices. Other suppliers that have implemented flexible market
offerings have found that they now get a better return on their resources by
focusing them on the segments and customers that value those resources.
Timing is always a concern. ANIC initiated its customer contribution to
profitability approach in Europe about ten years ago. Because revamping
service offerings and pricing them to get an equitable return on the value
provided was not only new to the industry but internally controversial,
ANIC decided to implement it first in the Netherlands and Germany,
“home” markets where ANIC was strongest. It then rolled out the approach
to northern Europe. Southern Europe, the last to be converted, proved to be
the most difficult market to bring around because its sales forces anticipated
decreases in their commission incomes and resisted the change. Although
ANIC lost some customers after reducing its offering of free services,
overall, its perseverance resulted in stable sales volume at significantly
better profitability.
A final, paramount consideration to succeed in what we have
recommended is this: suppliers must have the discipline to operate within
the imposed structures of flexible market offerings. Maintaining this
discipline requires developing a difficult-to-acquire customer skill: adroitly
saying no to some customers. Flexible market offerings provide customers
with managed options from which they can choose, but suppliers must be
willing to say no to those that want full-service offerings at no-frills prices.
 Without this skill, flexible market offerings devolve to business as usual
—that is, giving services away. Practiced deftly, it builds a reputation for
the supplier within the industry as being firm, consistent, and fair. Isn’t it
time to break away from the pack?

Tailoring Market Offerings: Dow Corning and

Xiameter
As a noteworthy case in tailoring market offerings, consider Dow Corning.9
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.
Rather than try to match competitors’ prices and lose the price premium
across its entire volume, Dow Corning decided to fight back. And it all
began with research to assess what customers truly value.
A careful study of customers uncovered the following four customer
segments:
1. Customers seeking to innovate—customers inventing state-of-the-art
products, creating advanced technologies, or developing new markets.
Innovation-focused customers were committed to being first to market
with new applications and revolutionary products. They sought
advances, even breakthroughs, in the creation of technical or market
positions that did not exist.
2. Customers seeking a productivity increase—customers seeking off-
the-shelf products with proven performance. They needed help with
improving the acquisition, use, and disposal of products. From order
tracking and materials handling to processing assistance and
troubleshooting, they wanted dependable supply, minimal downtime,
and turnkey solutions around the world.
3. Customers seeking to reduce total cost—customers seeking supply
chain optimization for cost reduction or customer service
improvement. Other areas of support included vendor-managed
inventory, custom packaging, cost-in-use studies, and supply chain
analysis.
4. Customers seeking to better prices—customers in mature industries
that wanted materials and services at the best price they could get.
 They bought mature products in large quantities and did not require
service but instead sought quality, reliability, and low prices to make
them more cost effective.

The customer research led to the insight that the last segment did not
value the supplementary services that Dow Corning offered. However, since
the supplementary services were bundled with the product and those costs
had to be recovered, the naked solution was too expensive for the last
segment. Understandably, this segment refused to pay for the services it did
not value and pressured for lower prices. But lowering prices for this
segment without changing the fundamental market offer was problematic
because then the customers from the other three segments, which truly
valued the supplementary services, would also demand the same lower
prices. The need for tailored market offerings was obvious.
In 2002, to serve this low-price-seeking segment, Dow Corning launched
a wholly owned subsidiary called Xiameter. Xiameter realized it needed to
cut its prices by 15-20 percent, which was very significant in the business
markets it was serving. This could only be done profitably, though, if the
costs to serve the customer were also reduced by a proportionate amount.
Furthermore, it had to be launched in such a manner that it did not simply
cannibalize existing sales in the other three segments. The result? Xiameter
was targeted to “price-driven convenience buyers of mature silicone-based
products that spend over $50,000/p.a. [per year] on silicone materials.” To
be both cost efficient and attractive only to price buyers, the market offering
and value proposition were defined in the following manner:
Instead of Dow Corning’s fast-delivery promise, Xiameter promises a
shipping date seven to twenty days from the date of order. This allows
Xiameter to slot orders when there is spare capacity at Dow Corning.
Xiameter offers no technical service. This means Xiameter does not
have to invest in an expensive service capability.
Xiameter provides no order-size flexibility for the customer.
Depending on the product, customers must order fulltruck, tank, or
pallet loads. This enables Xiameter to run efficient logistics.
Customers can enter their own orders on Xiameter’s Web site, but if
they wish to send the order by e-mail or phone, there is a $250 charge
per order. This reduces customer interface costs.
 The shipping date, once set, may not be changed unless the customer is
willing to pay a 5 percent surcharge. A rush order incurs a 10 percent
penalty, while the order cancellation fee is 5 percent. All of this makes
production planning more predictable.
The credit terms are very tight—thirty days net, 18 percent. This
reduces the working capital required.
The product variety available is limited to 350 mature products in
contrast to the 7,000 products available through Dow Corning. This
limits cannibalization and focuses on those products where Dow
Corning faces price competition from low-cost players.
Product returns are accepted only if the goods are damaged.
The worldwide pricing is available in only six major currencies so that
the currency risk and exchange is limited.

To emphasize what is the same, Xiameter provides certificates of

chemical equivalency for customers to demonstrate that its newly branded
products are equivalent to the Dow Corning products. Thus, the core
product is an exact commodity. It is the supplementary services that vary.
The results for Xiameter have been excellent. The cannibalization in the
first year after launch was half of what the company had projected. While
its prices are 15-20 percent lower, by having a Web-only model, it has
eliminated several cost factors—like technical service, a sales force, and
inventory costs—and optimized other costs, like logistics and production. In
addition, the working capital requirements are low because the accounts
receivable are low and inventory is minimal. Taken together, these cost
savings yield an attractive return on assets. Furthermore, by using the spare
capacity of the Dow Corning production lines, Xiameter also makes Dow
Corning operations more efficient.
Since its launch, Xiameter has significantly contributed to Dow
Corning’s increase in sales—from $2.4 billion in 2001 to $3.9 billion in
2005. During the same period, Dow Corning went from a loss of $28
million to a profit of $500 million—quite a turnaround. In addition to this
vastly improved financial performance, the dual-brand strategy of Dow
Corning and Xiameter has helped customers more clearly see the value that
Dow Corning brings with its market offering. Customers observe the
contrasting value propositions and offerings for each brand, resulting in
their making more-informed decisions on how they want to purchase. Thus,
tailoring Dow Corning’s market offerings to be responsive to customers
with varying requirements and preferences certainly has paid off for the
company and its customers.
SIX

Transform the Sales Force into Value

Merchants
Selling on Value, Not Price

GIVING VALUE AWAY takes no particular skill. However, it is the

responsibility of marketing and, especially, sales to get a fair return on the
value delivered to customers. For most firms in business markets, the sales
force is a substantial cost. And suppliers can’t justify paying for a sales
force that only sells on price. Unfortunately, too often salespeople do
exactly that—they become the customer’s advocate for price cuts rather
than the supplier’s advocate for the value provided.
In this chapter we begin by contrasting value merchants with value
spendthrifts. We contend that while compensating salespeople on
profitability is necessary, it is not sufficient to transform the sales force into
value merchants. We then consider what suppliers must do to foster value
merchants. We end with a case study on how Milliken transformed its sales
force into value merchants.

Value Merchants Versus Value Spendthrifts

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 value merchant stands in stark
contrast to the all-too-common value spendthrift, who squanders the
superior value of the supplier’s market offerings, getting little in return. In
“Are Your Salespeople Value Merchants or Value Spendthrifts?” we provide
a series of paired statements that contrast value spendthrifts and value
merchants . By candidly picking the statement in each pair that best
describes your salespeople, you can construct a profile of them that
indicates the extent to which they are value merchants or value spendthrifts.

Are Your Salespeople Value Merchants or Value Spendthrifts?

From each of the following pairs of descriptive statements,

decide which one best describes your sales force. Then put
together the profile of your sales force from the statements
selected.
Our salespeople:
1. Routinely trade more business for lower prices—or
routinely gain more business at the same price.
2. Make unsupported claims about superior value to
customers—or demonstrate and document claims about
superior value in monetary terms to customers.
3. Focus on the revenue/volume component of their
compensation plan—or on the gross margin/profitability
component of their compensation plan.
4. Give price concessions without changes in the market
offering—or give price concessions only in exchange for
cost-saving reductions in the market offering.

Certainly, compensation significantly contributes to whether salespeople

act as value merchants or value spendthrifts. Yet many suppliers have
difficulty resolving what they want when constructing their sales
compensation plans. A classic management practice article is entitled “On
the Folly of Rewarding A, While Hoping for B.”1 In our context this refers
to the folly of rewarding revenue or volume while hoping for profitability.
To transform the sales force into value merchants, suppliers must have
compensation plans that seamlessly reward value-selling behaviors and
profitable outcomes. For value calculators and value documenters to
become the preferred way to sell, salespeople have to see how using these
tools will make successful selling easier or will make them more money.
Compensating the sales force based on profitability of accounts brings
together doing business based on demonstrated and documented superior
value and getting a fair return on the value delivered.

5. Complain that our prices are too high—or complain that

our proof of superior value is lacking.
6. Give services away for free to close a deal—or strategically
employ services to generate additional business.
7. Prefer to give quick price concessions to close deals and go
on to other business—or are willing to hang tough in the
negotiations to gain better profitability out of each deal.
8. Believe management pursues a capacity-driven strategy—
or believe management pursues a value-driven strategy.
9. Sell primarily on price comparisons with competitors—or
sell primarily on customer cost-of-ownership comparisons
with competitors.
10. Tell us customers are only interested in price—or tell us
customer insights to improve the value of our offerings.

Many firms have a profitability component to their sales compensation

plan. Unfortunately, often the weighting of this component relative to the
revenue or volume component is insufficient to sway salesperson
preference away from pursuing revenue or volume. This relative weighting
may reflect management’s own mixed feelings about what the business
should pursue, particularly in businesses with costly capacity that
management wants to fully utilize. Yet, when management is able to resolve
its conflicting feelings to make profitability count significantly more than
volume or revenue, the effect on salespeople’s behavior can be profound.
As one manager at a chemical company remarked to us when his firm made
a change to having gross margin weighted 60 percent in its incentive
compensation: “It was like giving an instant blood transfusion to our sales
force!” Before, when an offering’s price was 6¢ per pound higher than the
next-best alternative, the salesperson typically submitted a competitive
price request seeking a price concession. Now, the manager related,
salespeople would instead put together a presentation to the customer
justifying why their offering was worth the 6¢ price differential.
Yet, undeniably, some businesses pursue a strategy that depends on
substantial volume. The challenge is to make that volume profitable.
Consider the noteworthy example of Composites One, a leading reseller of
composite materials and equipment for customers that manufacture
fiberglass and reinforced plastics for marine, defense, and transportation
uses. Composites One’s sales compensation plan consists of a good base
salary plus substantial incentive compensation, which can range from 50
percent to over 100 percent of the salesperson’s base salary. The incentive
compensation is based on the total gross margin dollars that each
salesperson earns in his or her territory. Expenses that the salesperson can
directly control and an allocation for any bad debt occurring from the
salesperson’s customers then are subtracted from the total gross margin
dollars to yield the adjusted total gross margin dollars. The percentage of
these adjusted total gross margin dollars that become the salesperson’s
incentive compensation vary from 8 percent to 10 percent, depending on the
size of territory and number of customer accounts. With this sales
compensation plan, Composites One management makes it clear to
salespeople that while volume is important, total gross margin dollars are
paramount.
To ensure that salespeople practice value-selling skills, suppliers may
have a behavioral component as well as a profitable outcome component in
their sales compensation plans. After all, even well-learned skills, if not
practiced regularly, begin to decline. As time goes on without practice, this
leads to a downward spiral in the salesperson’s perception of his or her
capability and a growing reluctance to use value-based sales tools. Thus, it
is critical that salespeople demonstrate that they regularly use their value-
based sales tools with customers and that they continue to build their
proficiency and comfort with such tools.
At SKF, 50 percent of salespeople’s incentive compensation is based on
individual targets, such as the Documented Solutions Program (DSP)
activities completed, sales growth in their territories, and the introduction of
specific products. (DSP is a tool to demonstrate and document value created
for customers.) The remaining 50 percent is based on total value added,
which is defined as net profitability after subtracting the cost of capital, and
is calculated based on the geographic area, business unit, and division
performance. SKF, interestingly, uses the number of activities a salesperson
quantifies in monetary terms using the DSP tool as its measure for
compensation. It believes that the number is more important than the actual
monetary amounts because it wants its salespeople to make the DSP tool a
part of their daily activity.
Rockwell Automation sales engineers have a compensation plan
consisting of a base salary plus an incentive. As part of the performance
review, each sales engineer is required to perform a specified number of
total-cost-of-ownership (TCO) assessments using the TCO Toolbox, an
interactive laptop software program for demonstrating and documenting
value. The TCO cases that result from these analyses are used to
demonstrate increased depth of knowledge about the customers and the
TCO analysis, both of which are also requirements to earn the incentive
compensation.

Salespeople Who Are Able to Sell Value and Want To

How have we equipped our salespeople to be able to sell value? Why
should our salespeople want to sell value? To prosper in business markets,
the general manager and senior sales executive for each business should
pose and be able to persuasively answer each of those questions. Yet we
repeatedly find that those questions go unanswered, which undermines
profitable sales growth. Without convincing answers, should senior
management really expect value merchants?
Some managers mistakenly believe that the right sales compensation plan
—perhaps revved up periodically with a promotion or contest—is all that is
needed. We contend that suppliers must also manage two other contributors
to get their salespeople to want to sell value: they must provide meaningful
initial and ongoing field experience in selling value, and they also must
begin and sustain a culture that celebrates value merchants.
Yet wanting to sell value without the ability to sell it will also not
succeed. Some managers mistakenly believe that a value-selling sales
training course, with salespeople taking turns role playing the customer,
will impart whatever knowledge and skill their salespeople will need to sell
value. We contend that being able to sell value depends on a pilot-tested
process and value-based sales tools that salespeople are committed to using.
Initial and ongoing field experience in selling value not only underpins
wanting to sell value; it also underpins being able to sell value.

Fostering Value Merchants

Although many businesses have launched value-selling initiatives, most
find that the results have fallen short of their expectations. Getting
salespeople to change is not easy; they tend to be skeptical of new
initiatives. In our management practice research, we have found very few
businesses that excel at each necessary facet of fostering value merchants.
In this section we draw on the collective experience of businesses that are
grappling with and have achieved some success in transforming their
salespeople into value merchants. We suggest a framework for transforming
the sales force into value merchants, supported by examples from these
businesses.

Put a Value-Selling Process and Value-Based Sales

Tools in place
Convincing salespeople to stop doing business based on price and to start
doing business based on demonstrated and documented superior value
depends on involving them actively and early in the process. Using a couple
of the more progressive salespeople as members of the teams that are
carrying out customer value research projects is essential. These salespeople
contribute to conceptualizing the points of parity and points of difference,
constructing the value word equations, and then gathering the data at
customer sites. Because of these seasoned salespeople’s contributions each
step of the way, the resulting value calculators and value documenters are
not viewed as a top-management-driven “black box” when the salespeople
receive them. Rather, some of their peers are champions who have helped
create the tools, who believe in the customer value management approach,
and who take the lead in explaining to the rest of the salespeople why they
ought to use the tools. The same goes for establishing and pilot testing the
value-selling process.
Sales councils, which are internal advisory groups of salespeople who are
respected by their peers, can play a significant role in gaining sales force
commitment and support. Rockwell Automation actively involves its sales
councils in the design and provisioning of its sales tools and systems. In
addition to its TCO Toolbox, the company also has a reporting system that
requires salespeople to provide information on the number of calls they
have made, customer managers they have approached, sales presentations
they have led, TCO analyses they have conducted, and orders they have
obtained. Because of the sales councils’ early involvement and input, they
were willing to take the lead in explaining the benefits of the reporting
system to the rest of the sales force and showed why complying would be
worthwhile. The sales councils also provided recommendations to their
peers on how and when to use the TCO Toolbox. The sales councils’ early
participation gave, in essence, Rockwell’s sales engineers a stake in the
success of the system and tool.2

Value-selling process. A more insightful and skillful salesperson

intuitively follows a methodical process to investigate customer
requirements and preferences, puts together and proposes responsive market
offerings, demonstrates that they are superior to those of the competition,
negotiates a fair price in return, and then makes sure that the business
delivers on what the salesperson has promised the customer. The purpose of
putting a value-selling process in place is to make this tacit knowledge
explicit and complete so that even less insightful and less skillful
salespeople can follow it consistently to produce superior results. As an
example of a value-selling process, let’s consider that of Kennametal.
Kennametal is a leading global supplier of tooling, engineered
components, and advanced materials that are consumed in its customers’
production processes. The importance of selling value stems, in part, from
what Kennametal sells. At the typical customer, the cost of tooling
represents only 2-4 percent of the total production costs. Thus, the value of
Kennametal products and services for a given customer is not in cutting its
“spend” on tooling but rather in using the tooling to drive productivity and
thereby attack the other 96-98 percent of the company’s production costs. In
fact, Kennametal sales representatives could not get time with the customer
plant management if Kennametal’s value proposition was to cut cost on the
2-4 percent of tooling spend. It just wouldn’t be important enough to justify
the plant leadership’s time. However, when the value proposition involves
leveraging the tooling spend to cut double-digit percentages out of the total
manufacturing cost, sales representatives are better able to gain the attention
of higher management levels at the customer’s operation.
Kennametal finds that having a global value-selling process in place
provides a consistent, reliable, and repeatable process for continuously
improving the way it does business with its customers. This process also
provides a means for sharing enterprisewide best practices for achieving
greater customer loyalty and increased sales. The process consists of six
steps:
1. Target customers
2. Discover needs
3. Develop a customer-specific value proposition
4. Build a detailed sales plan
5. Execute relentlessly
6. Listen and modify

The six steps are arrayed in a circle to convey that the Kennametal
process is a continuing relationship. At the center of this circle is
“Aggressive mindset: Refuse to lose and 100 percent share” to emphasize
that Kennametal seeks 100 percent share of its targeted customers’ purchase
requirements and that, implemented properly, the company will not lose to
its competitors.

Value-based sales tools. As we have discussed in chapter 4, management

must equip its salespeople with tools that enable them to persuasively
demonstrate and document the superior value of its market offerings to
target customers and, in doing so, enable them to influence customer
manager perceptions of what makes a fair return. We have emphasized
value calculators and value case histories as sales tools. Yet, whatever form
these tools take, they must provide evidence to customers about the superior
value of the supplier’s offering that those customers find persuasive. This
evidence should be based on facts or data and should accurately reflect the
customer’s business. Wherever and whenever possible, this evidence should
be expressed in monetary terms.
 A great way to persuade prospective customers to try a supplier’s
offering is to share with them the experiences that other customers have had
with that offering. Whether the reference customer in a value case history is
named or disguised, prospective customers find the comments attributed to
it credible, much more so than if the supplier itself made those statements.
And knowledge of customer value is a reusable resource. So value
merchants who generate knowledge of customer value by documenting it
for their customers recognize that they and their peers can recast it for use
as value case histories.
Getronics, an Amsterdam-based provider of information and
communications technology solutions and services (with annual sales of
over €4.1 billion), makes use of its value case histories by furnishing its
sales representatives with a DVD set entitled Plain Talk. Practical
Solutions. The two-pack set contains a series of professionally produced
videos with descriptions of the company and its solutions, two
presentations, and numerous case studies from major clients. When visiting
a prospect, the sales rep can either mute the audio and give the presentation
him- or herself or leave the DVD set with the client to view at a more
convenient time.
While value case histories are extremely effective, it is challenging, as
with any database, to keep them fresh, updated, and vital. As a result, a one-
time effort to set them up is not enough. Rather, sales forces have to be
motivated to use, update, and refine the value case histories database. This
is what best-practice companies, such as GE Infrastructure Water & Process
Technologies (W&PT), excel at doing. A pioneer in substantiating value
propositions over the past decade, W&PT documents the actual results its
solutions have provided to customers through its value generation planning
(VGP) process and tools, which enable its field personnel to work with
customers to understand their businesses and then plan, execute, and
document projects that have the highest value impact for them. An online
tracking tool allows W&PT and customer managers to easily monitor the
execution and documented results of each project W&PT undertakes. Since
it began using VGP in 1992, W&PT has documented more than a thousand
case histories, accounting for $1.3 billion in customer cost savings, 24
billion gallons of water conserved, 5.5 million tons of waste eliminated, and
4.8 million tons of air emissions removed.
 In addition to snapshot value-based sales tools, experienced value
merchants employ a complementary value-accumulation tool that
documents the value provided to a customer over time. Such a tool arms
salespeople with a proactive response when customers ask, “What have you
done lately?” This question often arises in account reviews. Astute suppliers
create this tool, train salespersons in its use, and compensate them for
taking the time to keep score on the value created in the relationship, which
would otherwise be forgotten.
Even the most fantastic value-based sales tools, though, will receive little
use if salespeople do not feel competent or comfortable with them. Such
tools also will receive little use if salespeople do not believe that these tools
will help them earn more money or make their selling efforts easier. That is
why astute management makes certain that salespeople’s initial experience
using the tools with customers generates success and that they continue to
use the tools.

Ensure Initial and Ongoing Value-Selling Experiences

with Customers
Most salespeople’s first exposure to using value-based sales tools to
become value merchants occurs at a sales meeting, where they learn about
the process and tools that their business has designed. Hopefully, this
message comes from respected peers of theirs who have actively
participated in the development and pilot testing of the process and tools.
The next step will be sales training, when salespeople learn more about the
process and attempt to use the tools. Their skill and comfort levels, though,
come from using the tools in the field. This skill and comfort grow as they
have to use these tools regularly and, when needed, can call on support
from customer value specialists.
For such training to be meaningful, it must begin by providing a
compelling reason to sell on value. SKF has found that providing its
salespeople, who are accustomed to technical selling, with success stories
of value selling as well as examples of failure with technical selling gets the
attention of training participants. For example, the manager leading the
training will share a case in which the SKF salesperson did a great job of
technical selling yet lost the business on price. He then asks the training
participants why this happened and how SKF could prevent such outcomes.
Success stories share actual SKF cases that reinforce three outcomes of
using the DSP tool: (1) salespeople are able to sell more products; (2) it
dramatically increases the close rate, up to 50-60 percent; and (3) it get the
salesperson away from a price discussion, with customer managers often
using the DSP reports internally to justify their capital requests.
Salespeople typically gain their initial experience with value-based sales
tools through role-playing exercises during the training. One salesperson
plays the customer while the other is the salesperson, and then they reverse
roles. For this to be meaningful, though, the roles have to be realistic and
representative of actual customer experiences. SKF makes certain that the
customer roles are written from real customer cases. After the role playing,
participants are debriefed on how they did, talking through what went well
and what did not.

Provide initial success in selling value to customers. Even though

considerable effort may be put into making the role-playing exercise
realistic, it is not the same as using the value-based sales tools with
customers in the field. Because of this difference, suppliers that are serious
about transforming their sales forces into value merchants follow up the
sales training with in-the-field practice, where the salesperson receives
hands-on coaching and support. This coaching and support may be provided
by customer value specialists or by experienced sales managers.
SKF has its “area value champions” work one-on-one with its
salespeople, spending a week driving around with them, conducting joint
sales calls. Over the course of the week, the two use the DSP tool in
customer visits, with the salesperson increasingly taking the lead during the
calls. In doing so, the salesperson gains confidence and comfort in his or
her ability to use the DSP tool through firsthand field experience. There is
also ample chance, while driving around and during the social time in the
evenings, for the area value champion and salesperson to build a
relationship, making the salesperson feel comfortable calling the area value
champion with any DSP questions or concerns that he or she may have.
Intergraph has put together resumes for its software offerings for
engineering, procurement, and construction (EPC) firms and for plant
owner-operators; these brochures describe the applications and benefits of
the software, supported by a mix of named and disguised value case
histories. Intergraph management wants its salespeople to use these resumes
as value-based sales tools to demonstrate to EPC firms how they can make
money by using the software and to demonstrate to plant owner-operators
the cost savings they will realize in twelve months or less. The salespeople
are trained on the value propositions and how to relate them to prospective
customers.
To help salespeople understand how to persuasively convey the value
proposition and to sell using the resume tools, though, Frank Joop,
Intergraph’s executive director of global business development, will do joint
sales calls with them. A recent example illustrates how such support
generated success for a salesperson. The Middle East is one of Intergraphs’s
target markets for growth, and an influential prospective customer there was
Aramco Services Company. Joop worked with the local salesperson on the
presentation for Aramco, showing him how to position on the value of the
offering rather than on selling the technology itself. They then made the
presentation jointly, during which Joop modeled the desired statements
about the value proposition and responses to questions for the salesperson.
Working together, they closed this business and got Aramco to serve as a
reference customer. This led to more business in the region with Sabic. Joop
believes that working alongside the salesperson to make the presentation
and close the business is the best way to persuade him or her to sell on
value and use the value-based sales tools that Intergraph has developed.

Maintain comfort with selling value to customers. As we mentioned

earlier, to ensure that salespeople continue to practice value-selling skills,
suppliers may have a behavioral component as well as a profitable outcome
component to their sales compensation plans. This compensation becomes
part of the motivation for salespeople to demonstrate that they regularly use
their value-based sales tools with customers and continue to build their
proficiency and comfort with the tools. SKF and Rockwell Automation,
among others, do this. We emphasize, though, that this behavioral
component is only part of a salesperson’s motivation.
 Apart from this performance review and reward requirement, Rockwell’s
sales engineers want to continue to use the TCO Toolbox because they are
convinced that it actually reduces the time to make a sale. As a couple of
Rockwell sales engineers explained:

To us, the advantage of using TCO Toolbox is that it takes less

time in the long run. It is true that it takes time to learn how to
conduct a TCO analysis. It also takes time to collect the data
and to input it into a model, particularly when the customer
doesn’t have it readily available or is reluctant to give it to us.
Using a good TCO tool takes overall less time to close a sale
than with the standard “feature and benefit” selling. In fact, the
traditional approach has a significantly longer sales cycle. For
example, it might take three or four sales calls spread out over
several months to gain a sale. The TCO analysis takes a shorter
[amount of] time. It also allows us to show where the cost
savings originate. We gain credibility from it. Finally, once
customers see numbers from TCO Toolbox, and what insights it
can provide, they become willing to share more data.3

Suppliers that make value-based sales tools an integral part of their

salespeople’s everyday selling activities not only keep their value merchants
from becoming value spendthrifts but continue to strengthen the sales
force’s value-selling capability. Applied Industrial Technologies, a leading
reseller of bearings and other industrial supplies, furnishes an illustrative
example. 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. The
DVA report summarizes what the salesperson did for the customer and
estimates the cost savings that Applied has provided. The salesperson then
presents the reports to customers at the end of the year. It’s important to
note that customer managers must sign off on the reports, acknowledging
that the value Applied claims to have provided has, in fact, been provided.
Since its inception, the DVA program has documented the provision of over
$1 billion in savings for Applied customers!
Applied’s salespeople use DVA as an integral part of their everyday
selling activities in a number of ways. They use DVA reports to build
customer loyalty and gain future sales. DVA enables the salesperson to say
things like this: “Last year you purchased $200,000 worth of MRO items
from us. By doing so, you gained over $85,000 in documented cost savings
from Applied.” Applied’s salespeople report that this not only takes the
sting out of a 3-4 percent price increase, but it also enables them to gain the
sale even when a competitor undercuts them on a price quote. Applied’s
salespeople also know that their customers’ purchasing managers have to
meet incentive goals. By providing documentation to these purchasing
managers, Applied’s salespeople help them effectively show their own
managers that they have met their firm’s cost reduction goals. Applied’s
salespeople help them earn their incentives.
The DVA reports also assist the Applied salesperson in targeting and
acquiring new customers. The salesperson can sort DVA reports by
customer firm, location, and industry. He or she can evaluate DVA reports
across all the locations and divisions of a specific customer company and
determine whether they can be replicated at that customer’s other sites. This
enables the salesperson to visit management at those sites and say, “We are
doing X for your company at these other locations. Here’s a DVA report that
documents how much we saved them. We can do the same thing for you.”
The salesperson can also aggregate the reports across industries and assess
patterns. He or she can then go to a prospective customer in that industry
and offer to provide the same savings.
As this example from Applied amply illustrates, documenting the actual
value provided to customers enables customer managers and the supplier to
get credit for the superior value of its offerings. While this is worthwhile in
itself, businesses that are value merchants make other use of this
knowledge. By tracking the value that various customers are receiving from
the company’s offerings and performing some basic analyses, value
merchants such as Applied gain a more fine-grained understanding of how
the value of its offerings varies in terms of application, customer
capabilities, and usage situation. Salespeople then leverage these insights to
identify and prioritize prospects. Time is a scarce resource for salespeople,
and they appreciate results-driven guidance that enables them to get the best
return for themselves and for the firm. And sales force management can use
the updated database to refine and extend the segmentation scheme used.
When salespeople can see how their collective efforts to demonstrate and
document superior value make their subsequent selling tasks easier and
more productive, they want to use their value-based sales tools even more.
Finally, suppliers intent on transforming their salespeople into value
merchants often develop a small number of value specialists, such as SKF’s
area value champions, to not only help the sales force understand the logic
of customer value management and build its competence in the process and
tools but to act as consultants who perform extraordinary customer value
assessments. Most often, Rockwell Automation’s sales engineers conduct
TCO analyses that are limited in scope, focusing on the areas of most
interest or concern to the customer to demonstrate Rockwell’s points of
difference in those areas. These analyses really do not drill down into all the
costs and steps in the customer’s entire production process; they focus on
all the key activities of a particular application. If the customer requires or
asks for a more extensive TCO analysis, the sales engineer calls in a TCO
consultant from Rockwell’s internal consulting group. When consultants
come in to do the extensive, detailed TCO analysis, they charge a fee,
which is either paid by the customer or jointly charged to Rockwell’s sales
and product marketing.

Instill and Invigorate a Value Merchant Culture

Businesses that want their salespeople to act as value merchants instill and
invigorate a value merchant culture. Just as salespeople can be thought of as
value merchants, so too can the businesses for which they work. These
businesses adopt a philosophy of doing business based on demonstrating
and documenting superior value to target customers. They bring this
philosophy and culture to life through the processes and tools that we have
been discussing. Yet senior management must take a broader view of
persuasively conveying this value merchant mind-set and culture to
everyone working in the business and to the customers. Salespeople’s titles
and designations, marketing communications, and what the business
chooses to celebrate are each areas to express and invigorate a value
merchant culture.
 Emphasize a value merchant culture in salesperson titles. A
salesperson’s title has a subtle, yet profound effect on how the individual
thinks about him- or herself. It also communicates to customers the way a
business thinks about itself and its salespeople. Some progressive suppliers
have recognized this and use it to instill and invigorate a value merchant
culture. Consider the cases of Grainger and PeopleFlo Manufacturing.
After researching a number of potential value drivers, Grainger
concluded that it was uniquely positioned to assist its customers in better
managing their unplanned and infrequent purchases of maintenance, repair,
and operating (MRO) supplies, which can account for a disproportionate
amount of the typical customer’s purchasing budget. The company,
therefore, built a value proposition, which it terms the “Grainger value
advantage,” that assists customers in aggregating and consolidating
infrequent and unplanned orders of MRO items, thus significantly reducing
their total costs for MRO supplies. By serving as a one-stop shop for
customers’ unplanned MRO items, Grainger eliminates the need for its
customers to hold excess inventory of rarely used items. Grainger further
helps customer productivity by reducing the process cost of procuring hard-
to-find products. It then designed a value-selling process and value-based
sales tools to enable its sales force to deliver and substantiate this value
proposition with customers. As part of this, it created the designation
“certified value seller” to provide distinctive status and prestige to
salespeople who demonstrate competence.
To become a certified value seller, a salesperson first attends the four-day
Grainger value advantage boot camp, in which they learn and practice
value-selling skills. Two weeks after the course, each salesperson must
return with a polished value proposition for one of his or her customers,
which the salesperson presents to a panel of sales managers. The
salesperson must demonstrate that he or she is knowledgeable about
Grainger’s value proposition, is able to relate it to a customer’s business
issues to construct a compelling value proposition, and can put together
evidence to support that value proposition. The sales managers throw out
objections and challenge aspects of the value proposition, which the
salesperson must handle. If the sales managers judge that the salesperson
passes, he or she is certified as a value seller. If not, the salesperson must
repeat the boot camp. By making this process rigorous, Grainger
management signals that the firm intends to become a value merchant and
that it means something to be a certified value seller.
PeopleFlo Manufacturing has committed itself, since its inception, to
doing business based on demonstrating and documenting the superior value
of its pumps to customers and getting a fair return. Its customers, which
include some of the largest and most well-respected names in the process
industry, are determined to reduce pump costs. They value a systematic
approach to problem solving and a fact-based approach to evaluating life-
cycle costs of pump alternatives. One visible sign of senior management’s
commitment to a value merchant philosophy and culture at PeopleFlo is the
title of its salespeople: customer value manager. This title conveys what
customers can expect from PeopleFlo’s salespeople, which is to work
consultatively with the customers to help them calculate the value, or
operating cost savings, of PeopleFlo pump systems relative to the next-best
alternative; justify a capital investment or maintenance expense; or share
the ROI results with their colleagues.

Tout superior value in marketing communications. Businesses that act

as value merchants tout the superior value of their offerings in marketing
communications. Emphasizing how the firm delivers superior value frames
customer expectations about doing business with the supplier, and it lays
the foundation for subsequent sales calls. These marketing communications
might be promotional pieces, advertisements, or articles written by supplier
personnel. Applied Industrial Technologies, for example, used a series of
case histories in advertisements appearing in industry publications to
reinforce and make its value proposition tangible: “Award-winning service
through documented value-added savings.”
When the delivery of superior value to customers is highly technical,
businesses acting as value merchants communicate this superior value in
academic forums. The high-purity metal organics (HPMO) business of
Akzo Nobel recently innovated a patented redesign of the cylinder for
delivering its chemicals. The global sales and marketing manager presented
papers on this new system at technical conferences and published articles
on it in the top academic journals, such as the IEEE Journal of Crystal
Growth. Prospective customers became aware of what Akzo Nobel was
doing through these conference presentations and articles, which the
company subsequently posted on its Web site, and called Akzo Nobel’s
salespeople.
Suppliers also can publish articles in industry publications to give
customers greater knowledge of how they incur costs in their operations. In
these articles supplier experts can draw on customer value research to
specify cost drivers and the equations for customers to calculate previously
not-well-understood costs. Sonoco’s industrial products division has
designed innovative winder tubes that enable superior string-up and transfer
of fibers in fiber plants. In an article published in the International Fiber
Journal, two Sonoco authors provided a summary table with waste
categories, word equations, and a representative case example, which we
present in table 6-1.

Recognize and reward extraordinary value merchants. Contests are one

means of emphasizing and celebrating a value merchant culture. Setting the
rules for the contest, determining who in the business is eligible to compete,
and deciding how to celebrate, recognize, and reward top performers gives
management the chance to build and invigorate a value merchant culture
throughout the business. In designing these contests, management should
build on past success but strive each time to do something creative that adds
a spark to the proceedings as well as further advances the business’s value
merchant culture.

TABLE 6-1
Sonoco’s string-up/transfer efficiency cost matrix

Wa st e
Cal cu lat i on Examp l e
ca t eg ory

Yarn waste Divide the string-up time by 60 to (12/60) ×

change to hours, and multiply that (1.35×60) =
 number by the cost per pound and $16.20
the throughput per hour.

Labor cost Divide the string-up time by 60 to (12/60) x (2 x

change to hours, and multiply that $22.00) =
number by the number of operators $8.80
and the labor cost per hour.

Opportunity Divide the string-up time by 60 to (12/60) x

cost (additional change to hours, and multiply that ($1.35x60)
production) number by the cost per pound and $16.20
the throughput per hour.

Material cost Multiply the number of tubes per 4 x $1.00 =

winder by the cost per tube. $4.00

Waste fiber cost Multiply the fiber waste value per (.15 × 12) -
(or revenue) pound by the amount of pounds (12 × .02)
generated during each downtime, =-$1.56
and subtract all costs associated
with its disposal.

Total cost per Add up all the above. $43.64

failure

Cost of failure Multiply the total cost per failure $43.64 x 32 =

per day by the number of failures per day. $1,396.48

TOTAL Multiply the cost of failure per day $1,396.48 x

ANNUAL COST by the number of production days 350 =
per year. $488,768
Source: Adapted from “Sonoco: Calculating the Costs of Yarn String-UP and Transfer Failures,”
International Fiber Journal, October 2005. Used with permission.

Coinciding with the implementation of its Grainger value advantage

market strategy in 2005, Grainger sponsored the Grainger value advantage
contest for its entire sales force. At each district level, around ten local
salespeople competed against one another to present the best value
proposition. There were four criteria for judging the best value proposition:
1. How well did the salesperson persuasively communicate the Grainger
value advantage story?
2. How well did the salesperson tailor the value proposition to the
customer’s business issues?
3. How compelling was the salesperson’s proposed solution?
4. How well was the salesperson able to handle questions and objections
on the value proposition?

Winners at the district level then competed at the regional level. In turn,
the regional winner competed at the national level. Four national winners
were then invited to present their value propositions at Grainger’s national
sales and service meeting in Orlando in March 2006. There, they had to get
up onstage in front of over three thousand sales and service personnel and
present their value propositions to a panel of sales and marketing managers.
The panelists challenged each salesperson on his or her value proposition.
As the presentations began, Grainger’s president, James Ryan, appeared
unexpectedly and joined the panel. The crowd went wild. Ryan assumed the
role of the customer and challenged every value proposition. He grilled
each presenter, asking tough questions. The contest served to recognize and
reward Grainger’s extraordinarily skilled salespersons. Three of the four
presenters subsequently were promoted.
When a business uses resellers to reach the market, how can it convey a
value merchant mind-set to its resellers’ salespeople? Swagelok—a supplier
of advanced and innovative fluid system products, services, and solutions to
a wide range of global industries—provides an instructive case. Swagelok
trains its resellers’ salespeople on value selling, making use of its value
impact program (VIP) reports, which document the actual savings that the
customer has received from Swagelok offerings. Salespeople prepare VIP
reports for each of their key accounts and “customers of impact” and
provide those reports to both customers and Swagelok. Through this,
knowledge of how Swagelok’s offerings deliver superior value to customers
is updated and expanded.
To promote a value merchant mind-set among its resellers, Swagelok
complements its reseller compensation with recognition, in the form of
Swagelok’s annual sales activity contest. All Swagelok resellers—both in
the United States and in other countries—participate. One of the chief
categories in the contest is the average number of VIP reports per
salesperson. On its intranet, Swagelok has created a leader board (like in a
golf tournament). Leading resellers in each region are reported per category
as well as their point totals.
At a special awards dinner during its annual global sales meeting,
Swagelok senior management presents gold, silver, and bronze awards and
plaques of recognition to the top three reseller businesses in terms of
average number of VIP reports per salesperson. Note that the awards
recognize the reseller business and its salespeople for being extraordinary
value merchants. Interestingly, no monetary award is presented—just
recognition. However, this recognition is coveted by Swagelok resellers and
promotes healthy and friendly competition among them. Reportedly, one
reseller senior manager who recently received the gold award told
Swagelok’s vice president of marketing: “This award is worth more than
$10,000 to me!”
Composites One invigorates and celebrates a value merchant culture
among its business units and salespeople with the annual Margin Builder
Award Contest. It has thirty distribution centers throughout the United
States, each of which is a profit center with salespeople. Distribution
centers (DCs) as well as salespeople compete in this contest because DC
workers can affect gross margin dollars, too. Customer service personnel
located at a DC, for example, review orders and remind customers to
purchase items that they may have neglected to order. “Margin builder
scores” are the sum of the percentage increase in total gross margin dollars
and the percentage increase in gross margin (expressed as a percentage).
Each month during the year, everyone working at Composites One receives
the Margin Builder News, which recounts recent accomplishments of
salespeople and DCs in margin building and lists the top ten DCs and top
ten sales representatives, with their margin builder scores (July 2006’s
headline was “Margin Builder Race Set Off Fireworks of Its Own!”). At the
end of the year, everyone receives the final results, recognizing the winning
DCs and sales representatives (the final headline of 2006 was “Victory!”).
One DC is the annual Margin Builder Award Contest winner, and there is
also a regional winner in each of the other three regions. Everyone working
at the overall winning DC receives a $100 gift certificate. The overall
winner and three regional winner DCs each receive an engraved plaque to
display and have lunch brought in for everyone twice per month for the
entire year.
The sales representative who is the annual Margin Builder Award Contest
grand prize winner receives an all-expenses-paid trip for two to a location
of his or her choice. The sales representatives that finish second and third
each receive gift certificates. Perhaps more desired, though, is the social
recognition that they receive. The three winning sales representatives are
invited, with their significant others, to a special presentation event at
corporate headquarters, where they receive an engraved plaque and are
made lifelong members of the president’s club. Members of the president’s
club each receive a very nice, subtle blue sports jacket. At each national
sales meeting, there is one event or reception where the members of the
president’s club (present and past winners) wear these sports jackets and are
recognized by their peers and Composites One management.

How Milliken Transformed Its Sales Force into Value

Merchants
As an outstanding case study in transforming field salespeople into value
merchants, consider Milliken, one of the largest privately held textile,
carpet, and chemical manufacturers in the world. In 1999, like many U.S.
manufacturing firms, Milliken found some market segments under
intensifying price pressure as imports increased and supply chains gradually
shifted toward low-wage countries. Customer satisfaction had declined, and
a significant amount of the company’s sales revenue was threatened. In
addition, some of Milliken’s older product offerings had become more and
more vulnerable due to limited intellectual property protection.
Milliken’s management recognized that competing with the low-cost
competitors only on price would be difficult, given that Milliken did not
always have the lowest structural cost position in the market. Therefore, the
company needed to find new ways to create superior value beyond its
products or run the risk of sales and profit erosion due to low-cost
competition. To accomplish this, Milliken began a customer value
engineering (CVE) initiative, which was launched in the performance
products division. This CVE initiative was driven by a cross-functional
team composed of the division president, business development manager,
division director of strategy and marketing, three market managers, and the
product market management improvement leader. The market managers
were instrumental in incorporating sales force insights from their respective
markets. Together, they conducted a sales and market manager survey,
which showed that “operational excellence” and “innovation” were most
valuable to Milliken’s customers. Building on this insight, the CVE team
began to develop a detailed value calculator tool, which identified potential
favorable points of difference and quantified their financial value (monetary
cost savings or revenue gained) from the customer’s perspective. The value
calculator tool evaluated Milliken along six performance areas: product
consistency, product convenience, product customization, service
consistency, service convenience, and service customization. Each
dimension was further broken down into key performance facets.
Based on these research findings, the CVE team launched a campaign
called “Working Together, Winning Together,” which highlighted three
primary benefits for customers: continuous improvement/operational
excellence, innovation and new product leadership, and world-class service.
The team members developed an accompanying value-selling and delivery
process. They put together a value presentation tool to assist the sales force
with developing creative solutions that add value while generating higher
margin dollars per customer.
A noteworthy success from this campaign comes from Milliken’s work
with a large consumer products company, which needed to reduce its total
costs in its core business. Milliken’s relationship with the company was
new but growing. The customer came to Milliken looking for new
technology for a specific textile product. Milliken assembled a cross-
functional team, which worked with the customer on developing new
technology options to help it reduce its total costs. Out of numerous
identified opportunities for improvement, Milliken and the customer jointly
developed, tested, and validated several solutions to penetrate the
customer’s target market. By setting up tangible customer metrics—such as
total processing costs, cost of defects, and unpacking costs—they were able
to evaluate the various solutions. Results were impressive. The customer
achieved cumulative savings of $7 million within three years (greater than 7
percent of total cost savings) and improved quality (from 2.4 percent off
quality to 0.8 percent). The customer was so satisfied with Milliken that it
chose to purchase 100 percent of its products from the company.
By providing its salespeople with CVE tools, Milliken has been able to
empower them to develop innovative value propositions to suit customers’
unique business requirements. The sales force is extensively trained on the
value-selling process in four areas: investigating customer requirements and
preferences, demonstrating value, negotiating terms and conditions, and
driving results. Salespeople are evaluated and rewarded based on their
businesses’ margin dollar growth, which guards them against the temptation
of price cuts and short-term spikes in volume. Further, they have personal
incentives for CVE participation as well as mandated biannual CVE
reviews with the president of the division. The sales managers also
periodically meet with customers to review business performance. All these
systems and processes instill a sense of ownership for customer value
management in the sales force.
The CVE team is actively promoting the value-based marketing
philosophy within the company. Most salespeople have seen the value of
CVE and embrace it. However, some salespeople who have been in the
company for over twenty-five years have moved slowly, saying that they
know their customers and what will work. In terms of adoption, one-third of
salespeople use CVE all the time, one-third use it for their more significant
customers, and the remaining one-third do so only when they have to
present to upper management. The CVE team recognizes this and is
introducing several initiatives to create visibility for CVE in the division
and the company. An intranet site showcasing CVE best practices and
success stories provides salespeople with an incentive to adopt and deliver
on the value-based approach. Presentations at division meetings and peer
feedback serve as powerful mechanisms for knowledge sharing and
learning within the organization. Success stories are documented and
repeatedly reinforced in sales and division meetings. These various
initiatives have generated significant momentum for CVE across the
organization. Milliken plans to roll it out to thirty-four of its top fifty
customers in the performance products division. These top fifty customers
account for two-thirds of revenue and 135 percent of division growth.
Communicating its superior value to customers has become critical for
Milliken to retain and grow its existing customers as well as defend and
maintain its price premiums. In a span of five years, Milliken has registered
record revenue growth, largely driven by share gain versus competitors, and
a significant increase in operating profits. By empowering the sales force to
become value merchants, Milliken has not only etched a powerful position
for itself in the marketplace but also fundamentally transformed itself from
a traditional engineering company to a truly customer-focused company.
SEVEN

Profit from Value Provided

Earning an Equitable Return

THROUGHOUT THIS BOOK, we have argued that suppliers must deliver

superior value to their target customers compared to the next-best
alternative. Yet, as challenging as this is for them to do consistently, most
find it still more challenging to get an equitable or fair return on the value
they provide. Understanding, creating, and delivering superior value often
requires larger investments and greater resources from the supplier. And
even when this is not the case, providing superior value compared to the
next-best alternative means that it is reasonable for a supplier to expect
something more in return from the customers it serves.
In today’s competitive business markets, though, profiting from superior
value does not happen as a natural consequence of providing it. Suppliers
must invest in developing the mind-set, the processes, and the systems that
will enable them to earn an equitable return. Thus, suppliers that are value
merchants are mindful of and stress both aspects of success in business
markets—delivering superior value compared to the next-best alternative
and obtaining an equitable return for the value provided.
Suppliers must first understand and then exploit the different ways in
which to obtain a fair return from customers. They also should manage
pricing as if profitability depended on it. After we consider each of these
points, we present the instructive case of how Siam City Cement profited
from providing superior value.

Obtain a Fair Return on Superior Value

The first thought most supplier managers have about how they can profit
from superior value is by asking for, and getting, a price premium vis-a-vis
the next-best alternative. When first considered, this does seem fair. If the
supplier provides value to the customer beyond the next-best alternative, it
should be able to command a higher price. And, indeed, obtaining a price
premium for the firm’s products or services compared to its competitors is
an obvious way to profit from the value provided.
Unfortunately, in many hypercompetitive business markets, getting a
price premium is rather difficult. Thus, it is critical for suppliers to
understand and exploit all the potential means for getting a fair return. We
can understand the possibilities by decomposing customer contribution to
profitability, as depicted in figure 7-1. Customer contribution to profitability
has two fundamental components: willingness to pay and cost to serve. A
supplier can attempt to improve a customer’s willingness to pay for its
market offerings, or it can attempt to lower the cost to serve that customer.
Each of these fundamental components can be further partitioned into
two constituent elements or potential sources of incremental profit.
“Willingness to pay” can be divided into “price premiums” and a “more
profitable mix of business.” The latter element refers to those situations in
which certain offerings in the set purchased by the customer substantially
increase that customer’s profitability to the supplier. “Cost to serve” can be
broken down into “greater share of the customer’s business” and
“eliminating value drains and leaks.” Greater share of the customer’s
business refers to the share of the customer’s purchase requirements for
market offerings like those that the supplier is presently providing, whereas
mix of business refers to a supplier’s share of the customer’s total purchase
requirements for all product offerings that the supplier would be able to,
and would prefer to, supply. Value drains are services, programs, and
systems that cost the supplier more to provide than they are worth to
customers and that have no strategic significance. Value leaks are those
customer activities and practices that increase the cost of doing business for
the customer and/or the supplier and that yield no offsetting greater cost
savings or value to either.

FIGURE 7-1
 Getting a fair return on superior value provided to customers

We encourage you to think about which of these your business pursues to

gain profit from superior value. As we discuss each of these means of
getting a fair return, consider whether your firm has adequately explored
and exploited it. Our intent is to convey how suppliers have successfully
pursued each of these to improve customer contribution to profitability and,
by extension, how you might also.

Gaining a Price Premium

When a supplier’s offering delivers demonstrably superior value to that of
the next-best alternative, seeking a price premium over the price of the
next-best alternative should be its initial approach. This is especially the
case when the source of this superior value is patent-protected intellectual
property. Seeking and gaining a price premium establishes a reference point
in the minds of customers of what the supplier believes is a fair exchange. It
also encourages competitors that will try to emulate the supplier to also
seek a price premium for their offerings.

Sonoco gains a price premium for its Sonotube forms. Sonoco’s

industrial products division has sold Sonotube concrete forms for years.
These forms, made of paper and fiber, are used in light commercial and
residential applications. Concrete is poured into them, and after the concrete
cures, the tube material is stripped off. Over the years, the product’s
differentiation faded to the point that Sonoco was making 70 percent of its
Sonotube forms under private label for distributors and only 30 percent
under its own brand. One problem with the original Sonotube was its lack
of resistance to water. Inclement weather prohibited the use of the
paper/fiber concrete forms. Through research it conducted, Sonoco
uncovered that some customers required water resistance. And Sonoco was
able to innovate and create a water-resistant form, which it branded as
“Sonotube forms with RainGuard technology.”
Sonotube with RainGuard technology significantly reduces the risk of
blowouts—that is, when a generic fiber form fails after becoming saturated
by water or rain. The pH of concrete is very high, which, with water,
deteriorates the adhesive holding the tube together. Sonoco has done
calculations on the cost of a blowout to demonstrate the cost savings to
concrete contractors. The company’s salespeople have worksheets—a
value-based sales tool—that they can use to quantify the costs of a blowout
to a contractor. They stress that such analyses must be based on facts.
This new, improved product has been a resounding success. Sonotube
with RainGuard technology has received up to a 20 percent price premium
over competing generic forms and about a 5 percent price premium over
previous Sonotube forms, and the company has seen a 16 percent increase
in sales. Sonoco also was able to use this new technology to reconnect users
with the Sonotube brand and its distinct value versus generic, and often
inferior-performing, private-label forms. Sonoco was able to halt the slow
deterioration of the Sonotube brand, which was being used generically to
describe fiber concrete column forms, and to stop producing the private-
label forms and convert all of this business back to the branded Sonotube
with RainGuard technology product.

SKF links price premiums to product performance. As suppliers gain

experience in documenting the actual value provided to customers, they
become knowledgeable about how their offerings deliver superior value to
customers and even how the actual value delivered varies across different
kinds of customers. Because of this extensive and detailed knowledge, they
become confident in predicting the cost savings and added value that
prospective customers will likely receive. 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.
 SKF leverages the knowledge it gains from its Documented Solution
Program tool to secure performance-based contracts with customers. These
contracts are structured as risk-sharing, gainsharing agreements for which
SKF offers an integrated maintenance service package. The company is
paid for documented results in meeting mutually defined key performance
indexes. SKF even offers flexibility on how it is paid. The customer may
pay only a portion of the fee up front, with the remaining portion paid as
performance targets are met. Alternatively, the customer may pay by
awarding SKF a larger share of its business over time. We reproduce a
recent SKF ad in figure 7-2 that touts the company’s willingness to share
risk, not just profit, with customers.

Improving the Mix of Customer Business

A supplier can also profit from receiving a better (i.e., more profitable) mix
of business from the customer. The same amount of dollar sales to a
customer may have very different profit implications based on the mix of
products and services sold or on the customer locations served. It is well
known that having a customer source higher-margin products or services
helps improve the supplier’s profitability. In fact, most cross-selling
programs are based on this approach. Yet most suppliers have not
methodically thought this through or pursued a well-defined strategy over
time to profitably grow their mix of business. In contrast, consider the
refreshing example of Keppel Seghers’s better technology group.

Seghers pursues a more profitable mix of business. Seghers is a

Belgium-based design, engineering, fabrication, and maintenance company
that serves the petrochemical, power generation, food-processing, and water
treatments industries worldwide.1 Because it must leverage limited
resources, Seghers has devised and honed a growth strategy that pivots on
the progressive expansion of its relationship with its customers to gain the
most profitable mix of those customers’ business. This strategy capitalizes
on increasing customer demands for one-stop shopping for industrial
services and on a trend toward outsourcing plant maintenance, and it
features a sequence of four business development steps.
 In pursuing initial business with targeted accounts, Seghers focuses on
providing one special service or activity for which it has a distinctive
capability, such as bolt tensioning, on-site machining, or valve repair and
overhaul. Seghers makes a concerted effort to furnish outstanding service
during the initial encounter to build customer confidence in its capabilities.

FIGURE 7-2
SKF Reliability Systems advertisement: Sharing risk, not just savings

Source: Provided courtesy of SKF USA Inc. Used with permission.

 It then builds on this experience to propose a second level of service that
it could profitably provide—ongoing plant maintenance. Again, it is
important to note that Seghers does not pursue all maintenance business
within a plant or refinery. Instead, it pursues just those services for which it
has distinctive capabilities and that would yield significant profits. And
when the customer insists on a total maintenance solution, Seghers
selectively partners with another contractor that provides the required
complementary services. Seghers’s senior management finds ongoing
maintenance service to be a golden opportunity to gain in-depth knowledge
of a customer’s requirements. In fact, Seghers’s technicians are trained to
spot and report on any service opportunities.
Major equipment overhaul serves as the third step in Seghers’s account
growth strategy. For example, overhauling heat exchangers is a complicated
and difficult operation for a customer’s maintenance staff to perform, yet it
is a rather profitable service for Seghers. Such an overhaul may take several
days to complete and may involve a team of Seghers’s technicians and
costly machining equipment and instrumentation.
When the customer becomes fully confident in the company’s
capabilities, Seghers’s sales managers pursue the fourth level of desired
business—total shutdown service. Seghers provides two forms: planned and
emergency shutdown. Total shutdown service is its most elaborate one. It
includes piping repair and replacement, valve and pump overhaul, vessel
overhaul and replacement, and control system maintenance. The work is
expensive and may require an entire refinery to shut down for a week or
more. For Seghers, this turns out to be demanding and yet much more
profitable work.

Sonoco finds profitable new business with present customers . Supplier

salespeople can dramatically improve the profitability of a customer
account by finding profitable business for other units of their firm. While
every supplier would like this to happen, few have made any concerted
effort in programs and incentives to methodically accomplish it. What
would such an effort look like?
Sonoco has a growth readiness program, which has a goal of double-digit
profitable, sustainable growth each year. To lead and monitor the progress
of this program, Sonoco has created a growth council, which is composed
of the heads of the commercial organizations for each of the Sonoco
business units (twelve in total). A recent initiative the growth council
sponsored was the Universal Sonoco Night (USN) program. This initiative
was aimed at motivating greater selling across Sonoco business units. Each
USN lasted an afternoon, an evening, and the following morning. Eddie
Smith, corporate vice president of strategy and business development, and
other members of the growth council attended six USNs, which were held
in each geographic region of the United States. Ninety percent of Sonoco
salespeople attended a USN. At night, there was a trade fair, where
representatives from each of the business units provided salespeople with
basic knowledge of their business unit and sufficient information about their
products.
Each salesperson also received a “blueprint,” which was a document that
detailed a process on how to identify a customer’s need for other Sonoco
products and, when a potential opportunity emerged, on how to forward the
gathered information to the designated point person at the appropriate
business unit. This point person served as the primary contact and evaluated
the information to determine whether to send in a product expert along with
the salesperson to begin the cross-selling or solution-selling process. During
the USNs, Sonoco senior management addressed a potential salesperson
concern: “Why should I put my relationship with the customer at risk to
leverage other potential Sonoco business?” Smith stressed that leveraging
the Sonoco portfolio of products to provide solutions deepens the
relationship with the customer, so rather than creating risk, it strengthens
customer relations.
The growth council also provided an enticing financial incentive. If a
salesperson went through a joint selling process with the product expert and
was successful, he or she would earn 1 percent of the first twelve months of
sales revenue for the realized opportunity—up to 50 percent of his or her
annual incentive plan. An interesting aspect was that a salesperson could
close an unlimited number of such opportunities, earning up to 50 percent
of his or her annual incentive plan from each realized opportunity. These
across-division incentive awards were in addition to any earnings from the
salesperson’s regular incentive plan and were not subject to any division
pool limitations. Finally, if a salesperson was able to close the sale for
another business unit without the assistance of a product expert in that unit
(e.g., if an adhesives salesperson closed business for selling paperboard), he
or she would earn 2 percent of the first twelve months of sales revenue—
again, up to 50 percent of the annual target bonus from the incentive plan.
Early results suggest that this initiative will be a great success.

Building the share of Customer Business

Improving the mix of business makes the most of the customer’s
willingness to pay by selling it other offerings that it’s not as price sensitive
about and that have better margins than what it is presently purchasing from
the supplier. In contrast, building the share of the customer’s business
focuses on the cost to serve the customer by fulfilling a greater proportion
of its requirements, thereby reducing the total cost per unit supplied. A
supplier must gain an estimate of the percentage of each customer’s total
purchase requirements for each market offering that the supplier provides.
Although most firms in business markets have some estimate of their
market share, much fewer have estimates of their share of each customer’s
business in the markets they serve. Yet the share of the customer’s business
is a better diagnostic because it pinpoints customer accounts that perceive
the supplier’s offering as superior to those of competitors and suggests
sources of differentiation.
Suppose that a supplier has a 20 percent market share. It is unlikely that
each customer in the market is purchasing 20 percent of its requirements
from the supplier. Rather, some customers purchase nothing from the
supplier, and others purchase more than 20 percent of their requirements
from the supplier. What differentiates large-share customers from minor-
share customers, and what sources of differentiation are possible if the
customer were to give the supplier 100 percent share?
When the customer has multiple locations, further insight comes from
understanding how the supplier’s business is spread across locations. Thus,
if a customer has ten plants in its manufacturing network, what percentage
of each plant’s purchase requirements does each of the supplier’s offerings
account for? A supplier may find that the percentage of a given offering
varies dramatically across customer locations, from being the single source
to supplying nothing at all. The cost to serve a customer and the customer’s
own total cost of ownership can vary significantly, depending on how the
same amount of supplier business is spread across locations.
Multiple single sourcing is a concept that enables customers and
suppliers to reap the benefits of single source arrangements while
minimizing the potential drawbacks. Under a multiple single sourcing
arrangement, each plant in a customer’s manufacturing network is single
sourced, yet the customer maintains at least two suppliers across the
network. For example, a customer with ten manufacturing plants would
have one single-source supplier at six of its plants and another single-source
supplier at the other four plants, with each supplier serving as the backup to
the other. As part of the arrangement, the customer might require each
supplier to share process or product improvements with the other. The
customer could then keep track of the improvements each supplier
contributed and use that as a criterion for awarding future business.
Gaining a deep understanding of customers’ requirements and
preferences takes time and other resources. It is worthwhile only when the
supplier receives a large share of their business. Yet best-practice suppliers
pursue single sourcing for the business that is strategically right for them.
Consider the experiences of Seghers and Milliken.

Seghers gains the targeted share of a customer’s business. Seghers

relies on account profitability analysis to guide its efforts at building shares
of customers’ business. It’s important to note that the company avoids
pursuing large sales revenue of marginally profitable business in favor of
becoming a focused single-source provider of a customer’s purchase
requirements. A focused single-source provider attempts to attain 100
percent of a customer’s business in targeted offering categories while not
pursuing other categories that it could supply to that customer.
For example, one of Seghers’s key accounts built a plant next to an
existing plant on the same property. While most competitors have pursued
service opportunities in the newer plant while shunning the older plant,
Seghers has done the reverse. Why? Because the older plant has a far
greater need for profitable maintenance services, and, knowing the older
equipment well, Seghers has a distinctive capability to maintain it.
 At the same time, Seghers’s profit analyses have shown that the newer
plant only requires low-margin services. Why? In part because it contains
new state-of-the art equipment, which does not require a lot of maintenance
and overhaul work. Worse still, there are a number of competitors that are
capable of maintaining this equipment and lack the discipline to refrain
from chasing low-price business. Through diligent efforts, Seghers has
gained 100 percent of the business in the older plant while leaving the
relatively unattractive business at the newer plant for competitors to battle
over.

Milliken, grows its share of a customer’s business. In 2005, a large

automotive supplier, to whom Milliken offered seating products, was losing
market share and experiencing quality and delivery issues. Armed with
Milliken’s value calculator tool, the sales manager was able to creatively
develop multiple solutions to help the automotive supplier reengineer its
product, reduce its inventory, and achieve on-time delivery. Milliken
initiated a joint team composed of key members of both organizations to
better understand and prioritize the most important needs and to ensure
shared accountability in value creation and capture.
The team developed a string of solutions. It developed detailed customer
metrics, such as days of inventory held and on-time delivery, and monitored
progress monthly to achieve results. These clear and transparent metrics
also enabled the joint team to resolve conflicts. In five years, the solution
reduced the customer’s inventory by 66 percent and achieved five years of
100 percent on-time delivery. The customer’s market share increased by 10
percent, and its total cost of ownership was reduced by more than 15
percent. The customer has been extremely satisfied with Milliken’s new
supply chain process. In return for the superior value Milliken has delivered
to this customer, it has made Milliken its single-source supplier.

Eliminating Value Drains and Leaks

Identifying and eliminating value drains and leaks are a promising means
for value merchants to improve their own, as well as their customers’,
profitability. These changes in how the supplier and customer do business
can provide cost savings to each, or one may incur incremental cost while
the other gains greater offsetting cost savings. In the latter case, most
suppliers and customers are willing to share the net cost savings as an
incentive to change, so that each firm is better off. Success at identifying
and eliminating value drains and leaks promotes greater cooperation
between a supplier and customer. Customer value assessment and activity-
based costing analysis are the “Aha!” tools to detect value drains and leaks.

Eastman Chemical, identities and eliminates a value drain. Eastman

Chemical—a leading producer of chemicals, plastics, and fibers—provides
a notable example of identifying and eliminating a value drain. It was
supplying an organic chemical intermediate to a leading pigment producer
and was having difficulty getting to a price at which the customer would be
happy to do business. The Eastman salesperson, who had been trained in
selling value and doing customer-process mapping, proposed studying the
customer’s production process to discover potential cost savings. This
investigation revealed a value drain. Eastman, in the final step of its
production process, was eliminating moisture from this product, which was
the traditional way of providing it to customers. The salesperson discovered
that the first step in the customer’s process was to add moisture back into
the product!
When apprised of this value drain, Eastman changed its process to
eliminate this step. The company was able to achieve efficiency increases in
production as a result, creating a model that allowed other customers with
similar process steps to be converted later. Eastman was able to improve its
profitability while passing a portion of the savings on to the customer in the
form of a smaller price increase.

Tata Steel identifies and eliminates value drains and leaks. Tata Steel 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. Since the launch of CVM, there has
been a significant drop in costs across the value chain between Tata and
these customers and a significant increase in business for Tata from these
customers.
 The relationship between these customers and Tata has undergone a
notable change, from being adversarial to being mutually reinforcing.
Often, once the relationship is cemented through the CVM process, the
customer also begins to contribute ideas on potential value drains and leaks.
This is a magical moment in the relationship. When this happens, an
enlightened senior manager from the customer firm might ask, “Why is Tata
losing money while trying to help us? Let us find ways that Tata can help us
save money and at the same time make money for itself.”
In a value drain example from the tubes business, Tata supplied steel
tubes to a boiler manufacturer located a thousand miles away. The tubes,
after manufacturing, were specially oiled to avoid rusting en route to the
customer’s plant. Bizarre as it may seem, the customer first cleaned the
oiled surfaces and then treated them to pick up rust in its plant! As the CVM
assessment revealed, a little bit of rust on the tubes was desirable to create
enough friction between the tube and the bobbin drum while making coil-
type boilers. Eliminating the oiling process at Tata and the subsequent
cleaning process at the customer’s end was a win-win solution for both
firms. This has resulted in $30 to $40 of savings per metric ton for the
customer while lowering Tata’s costs by eliminating the oiling step in its
process.
In a value leak example, Tata shipped large tonnages of steel bars in
straight and fixed lengths of twelve meters to construction firms purchasing
steel reinforcing bars. The customer wanted differential lengths of ten
meters or eleven meters, but the fixedlength offering from Tata created a
12-16 percent loss for the customer. The relationship was an arm’s-length
transactional relationship. The CVM process revealed the value leaks to the
Tata sales manager and the customer representative. The two firms decided
that it was more appropriate to roll and cut customized lengths at the Tata
factory and then ship the bars in ready-to-use lengths to the customer. Tata
and its customer conducted an assessment of the extra costs that Tata would
incur to make customized lengths at its mill and the cost savings in
conversion and wastage that the customer would receive from customized
lengths. The two firms then were able to arrive at a price premium for
customized lengths that more than covered Tata’s incremental costs while
providing the greater portion of the cost savings to the customer. Tata finds
that passing along the greater proportion of the identified cost savings
delights the customer while still giving Tata a “good enough” incremental
margin over its additional costs.
In 2002, before the start of CVM, the top sixteen customers accounted
for just 15 percent of Tata’s revenue in one of its business lines. In 2005, the
revenue share from these sixteen customers had increased to 35 percent.
The marked improvement in share was due to the higher share of business
that these customers gave to Tata by diverting business from other suppliers
and engaging Tata in developing new products, and due to the increase in
these customers’ overall requirements as a result of Tata’s own growth in
India. The end result is that Tata is more often supplying these customers
higher-end and more-customized products that differentiate it from
competitors while also providing a higher level of profitability.

Quaker Chemical identifies and eliminates value leaks. 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. A prominent way
in which Quaker accomplishes this is through its chemical management
program. A Quaker employee works at the customer’s manufacturing
facility and performs all the activities related to the chemical processes. By
having Quaker personnel on-site, the customer gains added value in the
areas of productivity, product quality, and reduced chemical usage and
waste. A recent Quaker experience at a major steel company illustrates how
it works to identify and eliminate value leaks.
The customer’s five-stand rolling mill was accumulating $134,000 in
total costs per year for product that did not meet specification, along with
other quality problems in producing sheet steel. Trusting in Quaker’s
expertise, the customer proposed a collaborative approach to address this
problem. Quaker’s first step in the effort was creating customer awareness
of both total process cost and the most recent advances in steel rolling.
Quaker did this by sharing its knowledge on improved test methods,
educating the customer on advanced principles of steel rolling from various
research programs, and establishing a baseline total cost for the current cold
rolling oil. The next step was to propose an upgrade in the quality of the
cold rolling lubricants used to process the steel. The proposed upgrade was
expected to solve the customer’s problems of rust and pinholes in uncoated
products—a value leak. It also was expected to improve other aspects of the
rolling process, including productivity and cost reduction. Due to these
expected improvements, the two companies modified their contract to
determine how they would share in the anticipated results.
The revised contract provided for the steel company to pay Quaker on the
basis of tons of steel produced. The steel company would receive 80 percent
of the benefits produced, and Quaker would receive the other 20 percent.
The contract also stipulated that the steel company would retain any value
realized from the increase in the steel coil production rate. The fact that the
contract covered a five-year span was unique to that customer but was
necessary for both companies to commit the resources needed to improve
performance over an extended period of time.
Over those five years, the upgrade project achieved almost 3 million
“hard” dollars in quantifiable value, well in excess of the original
expectations. In addition, a comparable amount of “soft” dollar value was
created in key cost areas, including improvements in quality, process
performance and utilization, labor requirements and maintenance, and mill
cleanliness. These improvements included increasing throughput capacity
by 2 percent, improving lubrication, reducing consumption of rolling oil
lubricants by 35 percent, and eliminating the production of nonprime
product (due to pinholes in uncoated products and rust problems). Iron
particle generation during rolling also was reduced, resulting in reduced oil
consumption without operational changes, thereby eliminating another
value leak.
Despite a 35 percent decrease in the sale of rolling oil products, Quaker
maintained its revenue at the original level. Why? Because Quaker was
compensated on the tons of steel produced, rather than on the traditional
method of product sales per gallon. Quaker actually received a 75 percent
increase in the unit price for its rolling oil because the amount used by the
customer was lower. This increase compensated Quaker for higher raw
material costs and the amount of staff time and effort invested to achieve
the process improvements. In addition to covering the increased costs, the
payment terms provided Quaker with a 10 percent increase in gross margin.
Thus, working together to identify and eliminate value leaks significantly
improved profitability for Quaker and its customer.
Manage Pricing as if Profitability Depended on It
How do suppliers in business markets decide on a specific price for their
market offerings? According to Hermann Simon, an expert on pricing, “In
most firms prices are determined by intuition, opinions, rules of thumb,
outright dogma, top management’s higher wisdom, or internal power fights.
”2 That quotation accurately captures our experience in business markets.
Even though superior pricing capability has a significant impact on
profitability, strangely enough, few suppliers in business markets attempt to
systematically build and leverage their pricing capability.3
Although suppliers in business markets often base their prices simply on
their own costs or the prices of competitors’ offerings, value-based pricing
is an alternative worth considering. Further, pricing consideration ought to
take place at the strategic level, at the tactical level, and at the transactional
level. Each of these can have a significant effect on profitability.

Value-Based Pricing
Our philosophy is that price should be set in relation to a market offering’s
value, which is called value-based pricing. Underpinning pricing is the
fundamental value equation that we presented in chapter 2:

(Valuef — Pricef) > (Valuea — Pricea) (Eq. 7-1 )

In that equation, Valuef and Pricef are the value and price of the firm’s
market offering (Offeringf), and Valuea and Pricea are the value and price of
the next-best alternative (Offeringa). In practice, a rearrangement of this
equation better captures how customer firm managers decide between
offerings:

∆Valuef,a > (Pricef — Pricea) (Eq. 7-2)

 Often, value analyses or value assessments are performed on a
comparative basis, where the differences in performance and total cost are
ascertained for two market offerings of interest. These differences then are
expressed in monetary terms and summed to obtain ∆Valuef,a. Equation 7-2
also represents a natural way that customer managers decide between two
offerings, answering this question: “What is the difference in the worth of
the two offerings to my firm, and how does this compare to the difference
in their prices?”
However, Valuef, Valuea, and Pricea indicate nothing about a specific
price that the firm should choose for Offeringsf. We rearrange equation 7-2
to isolate Pricef on the left side of the equation:

Pricef < Pricea + ∆Valuef,a (Eq. 7-3)

Given that Pricea is known, which after some investigation is usually the
case, equation 7-3 then defines the feasible range of prices the firm could
charge and still maintain the inequality. Equation 7-3 also reveals an
insight: that when ∆Valuef,a is either zero (the definition of a commodity) or
unknown and therefore regarded as though it were zero, selling discussions
with customers will be focused primarily on price. So we can see that
competition-based pricing is actually a special case of value-based pricing,
when either of these two situations are the case.

Pricing Strategy
Let us consider figure 7-3 to better understand value-based pricing strategy.
Because value is expressed as the worth in monetary terms, we provide a
value continuum expressed in Swiss francs per unit. For simplicity (but
without loss of generality), we assume the cost of Offeringf and Offeringa
are the same. The difference between Pricea and Costa defines the profit for
Offeringa. The difference between Valuea and Pricea represents the
customer incentive to purchase Offeringa. Note that in business markets, the
value provided will likely exceed the price; otherwise, the customer won’t
be interested in the offering.

FIGURE 7-3
Value-based pricing strategy

Now, the difference between Valuef and Valuea represents the incremental
value Offeringf provides over Offeringa. What part of this incremental value
to retain as profit and what part to share with the customer as an incentive
to purchase is a strategic decision. The business must decide on its market
strategy for the market segment. That is, what does the business want to
accomplish? “Sell more,” by the way, is not a sufficiently well-developed
market strategy. Wanting customers to change from purchasing an inkind,
upgraded offering to purchasing the next-generation offering, for example,
might represent a market strategy.
Having decided on the market strategy, the business then chooses a
marketing strategy to accomplish the market strategy, one element of which
is the pricing strategy. Pricing strategy 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. It’s significant to note that by sharing
part of this incremental value with the customer, in essence, a supplier
creates value for the customer.
Suppose we set Pricef at Valuea. In this case, we would be giving all the
incremental value to the customer as incentive to purchase Offeringf, with
the relatively small remainder as the firm’s profit. Contrast this with the
alternative in which we set Pricef relatively close to Valuef, so that we are
giving only enough of the incremental value as customer incentive to
purchase to maintain the inequality of equation 7-1.
 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.
A number of factors can support pursuing penetration strategy versus
skimming strategy, such as the market size and forecasted growth,
anticipated learning effects (e.g., experience curve or market knowledge),
anticipated reactions by present or potential competitors, and how
persuasively demonstrable the value proposition is. 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.
Furthermore, underlying the choice of a pricing strategy is the
recognition that prospective customers vary in the value they place on a
supplier’s market offering and that this value may change over time. So,
although we conceptually represent Valuef and Valuea as point estimates in
equation 7-1 and figure 7-3, when we broaden our consideration from a
single prospective customer firm to a market segment, these points become
mean estimates of value distributions for all prospective customers in that
segment.
As we move Pricef closer to Valuea, customer incentive to purchase
Offeringf over Offeringa passes the purchase threshold for a larger
proportion of the distribution of prospective customers. That is, a greater
number of those customers whose value for Offeringf is less than the mean
Valuef will still have the inequality of equation 7-1 satisfied (using the
individual Valuef for their own firms).

Pricing Tactics
In contrast to pricing strategy, pricing tactics focus on shifting the supplier’s
position within the existing price range and may be transitory in nature.
Typically, to gain the order, firms offer various discounts, rebates,
reductions, and allowances to customers during the final negotiations.
 For example, the supplier might use the pricing tactic of an initial-use
discount, which appears as a price reduction on the invoice. It is an
additional inducement for change or compensation for perceived or actual
switching costs that the customer will incur. The initial-use discount has the
advantage of establishing in the customer’s mind what the supplier believes
is the equitable price for the value of the offering—one that the customer
should expect to pay on subsequent purchase occasions. Trade-in
allowances, another form of initial-use discounts, are credits a customer
firm receives from a new supplier in exchange for that customer’s used
equipment or unused supplies.
Suppliers also commonly use a number of other pricing tactics. Early
payment discounts allow customers to deduct a percentage from the invoice
for paying within a specified number of days. Volume discounts provide
lower unit prices in return for largerquantity orders. Freight allowances are
invoice reductions that compensate customers for transportation and
delivery charges. Rebates or bonuses cover a variety of schemes in which
suppliers provide money or additional products and services at no charge as
a reward based on the amount of business a customer has done with the
supplier during some time period.
Instead of price concessions, firms can also offer customers inducements
with respect to the terms and conditions. These include such things as when
and where deliveries are to be made, the nature of payment schedules, and
the particulars of return policies, warranties, and installation procedures.
For example, extended dating—when the customer gets an unusually long
period to pay for its purchase—serves as another pricing tactic.
Suppliers gain a reputation of being firm, consistent, and fair when they
show discipline with respect to the use of price rebates and service
concessions as price tactics. We advocate that suppliers only offer price
discounts that are tied to those customer actions that benefit the supplier in
some way. Without this connection, price discounts or other concessions
simply amount to giving value away. For example, customers might receive
freight allowances on full truckloads of orders placed by certain deadlines.
These requirements enable a supplier to lower its logistics and delivery
costs. Customers not ordering full truckloads or not meeting the deadlines
should not receive the freight allowances, and suppliers must not waver in
implementing this policy.
Pricing Transactions
Finally, transaction pricing focuses on realizing the greatest net price for
each individual order. While discipline in pricing needs to be enforced at
the strategic level, the tactical level, and the transaction level, it is
especially important at the transaction level, where many pricing strategies
go awry. So a business’s management should monitor transaction pricing,
which focuses on realizing the greatest net price for each individual order.
Managers learn from transaction prices the extent to which the firm’s
pricing strategies and tactics have been consistently applied. To underscore
the significance of managing transaction pricing, consider this: it has been
contended that a 1 percent improvement in price, assuming no volume loss,
increases a supplier firm’s operating profits by 11 percent.4
The challenge of implementing the pricing strategy and tactics are better
understood when companies examine what percentage of their transactions
follows their pricing guidelines. First, senior managers are interviewed to
determine the business unit’s pricing strategy and tactics. Then a random
sample of recent invoices is audited to determine what percentage conforms
to what the managers said and what percentage does not. For example, at
one division of a large multinational firm, it was found that 67 percent of
the invoices were nonconforming.
What were the consequences? First, the division had six managers who,
instead of doing what they were supposed to do, spent most of their time
deciding whether to accept “out of policy” pricing requests from the field
sales force. Second, invoice accuracy began to suffer because the “special”
pricing granted sometimes was not adequately communicated to the
accounts receivable personnel. This led to an increased incidence of invoice
reconciliation and the costs and customer frustration that go along with it.
Finally, this lack of discipline created an impression in the market that there
was always a better price to be had—if customers adamantly demanded
price reductions or knew whom to call in the division. Thus, the frequency
of calls coming into senior management instead of the sales force increased,
invariably leading to price concessions.
 To monitor transaction prices, suppliers can apply three concepts. First,
managers construct a pocket-price waterfall, which refers to all terms,
discounts, rebates, incentives, and bonuses that a customer firm receives for
a given transaction. Managers then subtract these waterfall elements from
the list price to produce a pocket price, which refers to the revenue a
supplier firm actually realizes from that transaction. Finally, for some
relevant time period, managers construct a pocket-price band, which is the
distribution of all pocket prices the supplier has realized from its customers
for the offering. The width and shape of the distribution convey pricing
consistency.
Further analysis will reveal such things as which customer segments
receive the greatest discounts, customers’ willingness to pay, and how
appropriately field salespersons are exercising their pricing authority.
Management can use the information on the pocket-price band and
waterfall to improve its firm’s profitability.
For starters, supplier managers drive sales and marketing efforts off the
“tails” of the pocket-price band. They target customers at the high end of
the band for more collaborative relationships. Specifically, they try to
increase purchases within this desirable segment by offering these
customers additional value-added services. Some suppliers devise and
implement customer loyalty programs, in which the suppliers share an
additional portion of the value of each transaction with targeted customers
to sustain and build relationships with them. Year-end rebates or bonuses
tied to purchases or growth in purchases are examples.
At the same time, managers try to get pocket prices at the low end of the
band back under control by making relationships more transactional. For
example, one company capped price exception discounts for customers at 5
percent and granted them only after managers completed specific volume
and margin impact evaluations.5
As a final step, business market managers strive to reengineer the pocket-
price waterfall. They do so by examining each pricing element’s
significance to individual customers and its impact on their own firm’s
profitability. In some cases, they might restructure the manner in which they
present a price element to customers. For instance, managers might shift
funds from a price element that customers no longer value, such as a co-op
advertising allowance, to one that is becoming increasingly important, such
as a year-end rebate.

Siam City Cement Prices Insee Tong for Value

How do firms in business markets practice value-based pricing? Let us
consider Siam City Cement, which is Holcim’s subsidiary in Thailand.
Holcim, based in Switzerland, is one of the world’s largest cement
companies.6
Siam City Cement found that the regular multipurpose cement available
in Thailand was not optimal for some applications, like plastering. Because
of its hardness, multipurpose cement led to poor finishes on walls. Often,
cracks also developed, which had to be later repaired and reworked at
considerable cost. In response, Siam City Cement developed a special
masonry cement called Insee Tong. It provided a better finish, smoother
surface, and fewer cracks—all of which was valued by general contractors
and property developers. It provided high workability, faster application,
and less skin irritation for the mason, and it reduced carbon dioxide
emissions and resulted in less energy consumption. While these three
influencers—general contractors and developers, masons, and the
environment—were important, it was the contractors who made the
decision on which cement to use.
For the contractor, Insee Tong masonry cement would deliver a 29
percent savings over multipurpose cement. These savings could be
documented as arising from three sources. First, because Insee Tong did not
require an additional mixer and covered 10 percent more area, it led to
material savings of 2.4 percent. Second, faster application led to 2.2 percent
cost savings. And, third, less repair work resulted in 24.4 percent savings.
Given that the price of the multipurpose cement alternative was 90 Thai
baht ( ) per 40 kilo bag, the question was what to price Insee Tong at. The
skimming price strategy would have been to set the price slightly less than
the 29 percent premium of the multipurpose cement, which would be 116.
At this price, the customer would have been largely indifferent about
whether it purchased Insee Tong or the alternative, though Insee Tong
would still deliver some additional benefits, such as less skin irritation and a
smoother surface.
 The penetration price strategy would have been to set the price closer to
90, at which point all the incremental value would be surrendered to the
contractor. Given that the cost of producing Insee Tong was lower than
multipurpose cement, the company decided to be relatively aggressive and
adopt more of a penetration price strategy. The price was set at a 10 percent
price premium to multipurpose cement— 99. At that price, contractors
pocketed almost 20 percent in cost savings, which was a powerful selling
point in helping convert them.
To highlight the premium price positioning, the product was uniquely
packaged in a plastic sheet to enhance its look and increase convenience in
transportation. Furthermore, the advertising strategy employed a new
approach to selling cement in Thailand. Instead of the exclusive focus on
functional benefits, the advertising implied the emotional benefits. For
Insee Tong, neither strength nor durability were emphasized; instead the
focus was on the smoothness of the plastered wall surface. It was the first
time the word nian, which in Thai means “smooth,” was communicated in
an advertising campaign for cement. An analogy was made between talcum
powder and cement powder, using an image of a woman applying cement
powder to her leg.
An important element was ensuring that Siam City Cement’s personnel
clearly understood the Insee Tong business and appreciated the value the
product delivered. The entire management team, sales personnel, and
technical support staff had to attend Insee Tong training classes. They were
required to plaster a wall with Insee Tong and a competitor’s multipurpose
cement so that they would have the confidence to tell the story of how their
product was superior to competitors’ traditional cement.
The marketing program to introduce Insee Tong had to reinforce the
value story in an extremely price-conscious market. Customers had to be
convinced to move from the traditional thinking in terms of price per kilo
and price per bag to the new value approach of thinking in terms of cost per
square meter. And they had to experience the cost savings from Insee Tong
to change eighty years of the established industry practice of using
multipurpose cement for plastering. To achieve this, Siam City Cement
presented fifteen metric tons of Insee Tong, at an initial-use discount of 100
percent (i.e., at no charge), to a leading real estate development company
for plastering one of its luxury projects under construction. This allowed the
developer to calculate all the cost savings in its own setting. This developer
subsequently became the first customer of Insee Tong and served as a
reference customer for other developers. As the most demanding developers
adopted Insee Tong, a list of reference projects for each target market was
compiled to be used for prospects. During this initial phase of focusing on
premium projects, the strategy was to create a “pull” effect—that is, getting
developers to specify use of Insee Tong with general contractors.
Siam City Cement also took steps to ensure that resellers’ pricing on
Insee Tong transactions conformed to the set pricing strategy and tactics.
The company first introduced the product by giving it only to those resellers
that would sell it as a premium product. This tactic was to show potential
resellers that the company was serious about the premium price and the
additional channel margin. Early on, though, one reseller did deviate from
this pricing, selling Insee Tong at a lower price to meet that of a
competitor’s product. Siam City Cement held firm and cut the supply of
Insee Tong to the reseller. The reseller was upset, but the supplier resumed
deliveries a month later only after the reseller agreed to sell the product at
the premium price point and accept the higher margin per bag.
During the first six months after the introduction of Insee Tong, Siam
City Cement’s salespeople regularly visited the housing development
projects in their provinces to check on how the product was performing and
on what wholesale prices the contractors were paying. This gave the
company information on how Insee Tong was actually performing on-site
and on whether its resellers were maintaining prices at the agreed premium.
It took corrective action quickly against any resellers that gave prices lower
than 99. It also learned that some resellers that understood the higher value
of Insee Tong were able to sell it at a slightly higher price point. It rewarded
those resellers with gold chains once they hit the target volume at the higher
prices!
Insee Tong was introduced in March 2003. In 2003, the total volume of
Insee Tong sold was 170,000 tons—despite the fact that two competitors
introduced masonry cement at lower prices that same year. In 2004, the
masonry cement market grew to 550,000 tons, with Insee Tong holding a 50
percent market share. In 2005 and 2006, the masonry cement market
continued to grow to 630,000 and 730,000 tons respectively, while Insee
Tong continued to hold on to almost a 50 percent market share. During that
two-year period, the price of masonry cement eroded as competitors used
price as a competitive tool to win market share. However, Insee Tong still
maintained its price premium over multipurpose cement as well as over
competitors’ masonry cement.
EIGHT

Prosper in Business Markets

Being a Value Merchant

EXPERIENCED general managers, vice presidents of marketing, and vice

presidents of sales know just how difficult it is to prosper in today’s
business markets. And, when businesses are able to achieve superior sales
growth and superior profitability relative to their industry peers, sustaining
such success over time is extraordinarily difficult. We contend that
customer value management can make a significant difference in a
business’s chances of prospering in business markets. We depict our
customer value management processes again in figure 8-1.
In this concluding chapter, we provide evidence of the contribution that
customer value management can make to superior business performance.
We then consider how businesses can get started in implementing customer
value management. We finish by discussing how businesses can continue to
provide superior value and profit from it.

FIGURE 8-1
Customer value management processes
Achieving Superior Business Performance
Customer value management contributes to superior business performance
in two distinct ways. First, it is a methodical approach for gaining insights
into changes in market offerings that target customers would value. Second,
through demonstrating and documenting the superior value that the market
offerings do deliver, customer value management enables suppliers to gain
a better return on that superior value. Yet it is not a panacea, nor does
outstanding customer value management alone ensure superior business
performance.
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.
Similarly, customer value management is an enabler, not a substitute, for
implementation prowess. Discovering what services customers would be
willing to pay extra for, for example, is of little use if a business is not able
to deliver them consistently or when customers need them.
Evidence about the contribution of customer value management to
superior business performance comes from two successively broader kinds
of measures. First, there are specific market results for a business unit, such
as its share of a customer’s business, the profitability of that business,
market share, and financial performance of the market segment. Second,
there are company performance measures, such as growth in sales and
percentage gross margin.

Business Unit Market Results

Evidence about superior business performance that comes from business
unit market results can be more informative. Why? First, if a business is
part of a very large firm, other units may not be practicing customer value
management. So results from the specific business provide the most direct
evidence of success. Second, some firms are privately held, so they do not
report company performance measures that publicly traded firms must
report.
Table 8-1 lists the market results provided as proof points at various
places in previous chapters. We can add to this evidence the results for
Composites One, which is privately held. Composites One has increased
total gross margin dollars as a percentage of sales from 13 percent to 16
percent, which is outstanding in comparison to its industry peers in both
absolute amount and overall growth. Further, Akzo Nobel’s High Purity
Metal Organics business has achieved revenue growth of 35 percent,
compared to 15 percent for the industry, while maintaining its price
premium.

Company Performance Measures

Providing evidence of the contribution of customer value management to
company performance measures is even more difficult. To begin with, many
of our examples have come from businesses that are part of large,
multibusiness corporations. As a result, the financial accounting
information that is available from

TABLE 8-1
Evidence of superior business performance: Market results reported in
previous chapters

B u si n ess Mark et resu lt Ch ap t er

Intergraph Revenue grew 35% per year versus 10- 2

12% for the industry, and the company
 earned a profit margin of 26% versus
14-16% for the industry.

A leading resin The company received a 40% price 4

supplier premium for its new resin over the
traditional resin product.

Orange Orca’s The client’s salespeople began to close 4

polymer client more business at a higher price per ton
for the new Transplast polymer.

Rockwell The salesperson finalized a customer’s 4

Automation order for 32 screw-drive pump
solutions.

Grainger The firm saw a sevenfold increase in 4

sales to Pharma Labs in one year (from
$50,000 to $350,000) and then nearly
doubled sales during the next year (to
$650,000).

Akzo Nobel The company initially lost some 5

Industrial customers, but it stabilized its sales
Coatings volume while earning significantly
better profitability.

Dow Corning Xiameter contributed significantly to 5

and Xiameter an increase in Dow Corning sales
(from $2.4 billion in 2001 to $3.9
billion in 2005) and to an increase in
profitability (from a $28 million loss in
2001 to a $500 million profit in 2005).

SKF Salespeople were able to sell more 6

products and increase the close rate
dramatically, up to 50-60%.
Intergraph Intergraph won new business with 6
Aramco, an influential firm in the
Middle East, which led to new
business with Sabic, another major
firm in the region.

Milliken In the span of five years, Milliken 6

registered record revenue growth and a
significant increase in profits.

Sonoco’s Sonotube forms with RainGuard 7

industrial technology received up to a 20% price
products premium over generic products and a
division 5% price premium over previous
Sonotube forms, garnering the
company a 16% increase in sales.

Seghers Seghers won 100% of a customer’s 7

business at its profitable older plant
and left unattractive business at its new
plant for competitors.

Milliken In return for significant cost 7

performance reductions, a customer made Milliken
products its single-source supplier. Millikin then
division gained from the customer’s increase in
market share.

Eastman The firm improved its profitability by 7

Chemical eliminating an identified value drain
and passed a portion of the savings on
to the customer.

Tata Steel Tata lowered its costs by eliminating a 7

step in a process in one case and
gained a price premium for customized
 lengths that more than covered its
incremental costs in another case.

Quaker The company received a 75% increase 7

Chemical in the unit price of a product and a
10% increase in gross margin.

Siam City Despite competitors’ price cuts, Insee 7

Cement Tong held a 50% market share in a
growing market at premium prices.

company financial statements is far too general to meaningfully derive

specific performance insights. Moreover, financial accounting information,
while useful for reporting purposes, contains many items that do not fall
under the responsibility of marketing or sales (e.g., leasing arrangements,
depreciation schedules, acquisitions and mergers, taxation). As a result,
bottom-line numbers often do not accurately reflect the contributions of
initiatives such as customer value management. Ideally, we could draw on
managerial accounting information from the business unit or even from the
market offering by customer segment levels to more accurately gauge the
contribution of customer value management to superior business
performance. Because of its proprietary nature, though, businesses
understandably are unwilling to share this information with outsiders.
Thus, we can offer only limited evidence of the contribution of customer
value management for company performance measures. Companies that are
relatively small or that are more focused in their scope provide the best
sources of evidence. We also try to provide this evidence in the context of
comparisons with industry peers.1
Applied Industrial Technologies increased its sales in 2005 by 13.2
percent versus 10.1 percent for its industry, while its gross margin was 29.2
percent compared with 25.5 percent for the industry. Grainger provides
further evidence of sales growth and profitability. During the five years
from 2001 to 2005, Grainger’s annual growth rate for sales was 2.1 percent
versus an industry average of 0.6 percent. Its gross margin in 2005 was 39.1
percent in comparison with 23.1 percent for the industry.
 Kennametal had sales growth of 16.9 percent in 2005 versus 8.4 percent
for its industry. Its gross margin in 2005 was 34.2 percent compared with
24.8 percent for its industry. Quaker Chemical had sales growth of 5.8
percent in 2005 compared with an industry average of 3.8 percent. Its gross
margin in 2005 was 40.8 percent versus an industry average of 39.7 percent.
Tata Steel had sales growth of 43.8 percent in 2005 versus 39.8 percent
for the industry. Its gross margin in 2005 was 39.6 percent compared with
the industry average of 23.8 percent.
Finally, we have previously provided evidence of customer value
management’s contribution to company performance for two companies:
Sonoco and Intergraph. As we related in chapter 1, Sonoco has been able to
achieve the overall growth goal that senior management set, in part, through
its use of customer value management and distinctive value propositions. It
has averaged double-digit growth in sales (10.1 percent) and in profitability
(18.7 percent) over the past three years. As we relate in chapter 2 and in
table 8-1, Intergraph has revenue growth of 35 percent per year compared to
10-12 percent for its industry, while it has a profit margin of 26 percent
compared with 14-16 percent for its industry.

Getting Started with Customer Value Management

Even recommending change in businesses is difficult. Skepticism abounds.
Although we have provided examples of businesses that practice customer
value management in a wide variety of industries and countries, most
managers in business markets remain convinced of two so-called facts.
First, their business is not like any other business. And, second, they have it
more difficult in their business than does any other business!2
As all experienced managers can understand, achieving enduring change
in any business is extremely difficult. And it takes longer than anyone
would like it to. But can a business change its culture from A to Z in one
step? Specifically, can businesses that act as value spendthrifts suddenly
become value merchants? In our experience, businesses cannot jump from
A to Z in one step; in fact, they cannot even jump from A to B! Most often,
they must move from A to A’, and maybe even A”, before they get to B. But
the good news is that once they are able to move to B, they begin to pick up
momentum, going from B to E, to K, and then to Z. How can businesses
make this initial change and then speed up the pace to more quickly become
value merchants?
No matter how successful customer value management has been
elsewhere, some initial success in the business is necessary to counteract
skepticism and convince managers that it has potential for their business.
After that initial success, management must build on it.

Generating Initial Success

To demonstrate the viability of customer value management for their
business, we counsel the general manager, and senior marketing and sales
executives to engage in a customer value management pilot program.
Businesses often make the mistake, though, of pursuing only a single
project as a pilot program. This severely limits their learning as well as their
chance for success. Instead, for a broader experience and greater
understanding of customer value management and its potential, businesses
should engage in a pilot program in which they tackle three to five business
issues.
A customer value research project is defined for each issue, determining
the scope of the project, the definition of success, and the composition of
the team that will carry out the customer value research to address the issue.
Engaging in three to five projects provides a basis for comparison and
learning from the observed variation in project implementation and
outcomes, helping participants understand why customer value
management worked significantly better in some projects than in others.
Customer value management requires time and money, from which
senior management seeks significant returns in incremental profitability,
knowledge and skill acquisition, and the cultural change necessary to
becoming a value merchant. The scope of each project needs to be
sufficiently defined so that the customer value research can be conducted
over a three- or four-month period. It is unwise to overwhelm teams with
projects that demand more time than is reasonably available or to schedule
projects that last more than six months. When the nature of the business
issue is sufficiently broad or complicated, it is better to conceptualize it as a
series of phases, each of which will take six months to complete.
 Senior management must define at the outset what its expectations of
success are for each project. A business case for change that results in $1
million of incremental profitability within twelve months is commonly
defined as the principal goal of a project. This represents a relatively quick
and attractive financial return on the resources that a business commits to
each pilot project, while also reaping the knowledge and skills necessary to
practice customer value management. It also ensures that the projects are
addressing business issues of sufficient magnitude yet can be accomplished
within the established time frame.
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. While learning what customers value is an important project
outcome, to effect cultural change, the projects must lead to greater
profitability—that is how businesses ultimately keep score. The business
cases for change, which we discussed in chapter 4, detail the learning that
has occurred and the subsequent changes that the business should make to
gain incremental profit.
To have the best chance of generating success stories, senior management
should take care in selecting the projects and making certain that team
leaders and members have sufficient time to carry them out. All too often,
senior management accepts what product managers or others who are
proposing projects tell them without challenging how this is known or what
data there is to support the claims. To hear most product managers tell it,
their offerings have so many features that are different from competitors’
offerings that customers want! Senior management should select those
projects where there is evidence that the offerings have points of difference
that will be valuable to target customers. The goals of each project then
become to provide specific estimates of the value in monetary terms of
these points of difference and to learn how these estimates vary across two
segments of interest.
As we mentioned in chapter 4, the team leader may spend up to half of
his or her time on the project, and team members may invest up to a quarter
of their time. With everyone being so pressed for time anyway nowadays, it
would seem obvious that teams’ nonproject workloads should be lightened
during the projects. Yet, as we have seen repeatedly, senior management
neglects to take this issue seriously, which leads to even more stressed and
overworked teams. The deleterious effects on the project outcomes and the
teams’ enthusiasm for customer value management are predictable.
Customer value management has been most successful in those cases in
which senior management has recognized the commitment necessary and
taken steps to free up ample time for team leaders and members to do the
work.
When senior management finds the business cases that the teams present
to be persuasive and approves them, an implementation phase begins that
we call value realization. The purpose of this phase is to ensure that the
business delivers on the superior value estimated in the customer value
research and on the incremental profitability detailed in the business case
for change. This value realization phase is crucial; businesses that neglect to
support it do not generate the success that they might otherwise have had.
A number of critical activities take place during value realization. The
teams may need to gather additional data to refine or to extend the customer
value models they presented to senior management. Further work likely will
be needed on the action plans, particularly those that address
implementation issues raised by senior managers. Value-based sales tools
need to be created, or refined, if initial versions have been constructed in
the business-case-for-change phase. Training needs to be devised to give the
sales force practical experience using those tools, and supporting changes in
performance review and compensation may be needed. (We discussed each
of these in chapter 6.) A method of feedback should be put in place to audit
the value that customers have actually experienced relative to what was
promised them. This should be linked to the documentation of value we
stressed in chapter 4. Finally, a system for tracking the incremental
profitability realized should be put in place.
A final piece of advice for having the best chance of generating success
with the pilot projects is to implement the customer value management
process with integrity. What is the difference between good cooks and bad
cooks? Good cooks always follow a recipe precisely the first time to see the
results. Only then do good cooks improvise and make changes to the recipe
to improve the results to suit their tastes. They then have a basis of
comparison with their initial results. In contrast, bad cooks do not follow
the recipe precisely the first time, instead improvising or taking shortcuts
from the start. When the results do not turn out well, bad cooks have to ask
themselves whether the results were due to the recipe or to the
improvisations and shortcuts.
Our point here is that, at least in the pilot program, teams should follow
the recipe closely, as we have laid it out in detail in chapter 4. After gaining
good results, businesses may make changes in the process to adapt it to
their specific setting and requirements. We have constructed every step in
the process based on our experience with companies over the years that
have implemented customer value management. We have found that
shortcuts and improvisations during the process most often lead to
diminished or compromised project outcomes.3

Building on Initial Success

After the initial round of projects in the pilot program has been completed,
the team leaders, team sponsors, and others in senior management should
contrast the projects that have been judged most successful with those that
have been least successful. What can be learned? Do the most successful
projects provide persuasive evidence of the potential for customer value
management in the business? What are the shortcomings of the least
successful projects, and what steps can the business take to minimize or
eliminate them in the future?
Management should have value case histories created for the projects that
it judges to have been most successful. These should be publicized in
internal publications and placed prominently on the business’s employee
intranet. There should be recognition of the accomplishment of the teams
generating these success stories. At the same time, variations in the value
case histories and other learning gained from the successful projects (as
well as learning gained from the less successful projects) can be translated
into training materials that the business can use in the next round of
customer value projects. These materials also can be used to expose a
broader audience in the business to customer value management and what it
might do for the business. Although some workers can relate to and learn
from examples from outside their own business, others have more difficulty
with this abstraction and strongly prefer examples generated from their own
business.
 Building on its initial success, the business typically will begin a second
round of customer value research projects. This round might include a more
speculative project or two than what was tackled in the pilot program. More
speculative projects enable the business to extend its understanding of what
customer value management can contribute.
Management will want to begin to develop experts in customer value
management, so it may appoint the team leaders from the most successful
projects in the pilot program to be either team leaders or team sponsors (if
they have been promoted) for projects in the second round. Finally,
management will want to begin to make customer value management a part
of doing business. As an example, management may start requiring
customer value research as part of its new product development (NPD)
process. So, during NPD project reviews, senior management would expect
the NPD teams to provide the points of difference for the new offering, the
value word equations for each point, and value estimates from data gathered
with target customers. As another example, product managers would be
expected to provide the same kinds of support for any changes they
recommend in the supplementary services, programs, and systems that
augment the core product or service in offerings.

Continuing to Provide Superior Value

Customers have short memories for what suppliers have done for them
while they have long memories for what they have done for suppliers.
When a supplier achieves success through customer value management, its
competitors will not stand idly by; they will respond by improving their
offerings’ value. Therefore, companies adopting customer value
management must put in place systems to ensure that the value promised is
actually provided (e.g., value documenters) and that this continues to be the
case. They also must keep track of the cost savings and added value
delivered over time and regularly apprise customers of this. They must
further leverage their learning about how they have delivered superior value
in particular customer markets by applying it to other markets. Finally, they
must methodically work to find new or next-generation customer value
propositions to pursue.

Making Use of Documented Actual Value Provided

Through the process of documenting the actual value provided to
customers, a supplier puts itself in a favorable position to discover further
ways to add value or reduce customer costs. We call this “planned
serendipity,” because if supplier personnel working at the customer keep
their eyes and ears open, they will notice chance occurrences that suggest
potential ways of doing business better. Identifying value drains and value
leaks, which we discussed in chapter 7, are good examples of such
opportunities. Astute suppliers encourage and incentivize their technical
service and sales representatives to notice and report customer incidents,
utterances, or other observations that might suggest new ways of profitably
serving customers.
Apart from this, by systematically keeping track of what has been done
for each customer over time, in advance of the next contract negotiation, the
supplier can frame what it has provided and what that is worth as a
percentage of price paid. After all, the most common tactic by a competing
supplier trying to win the business (back) is to offer price concessions. In
such situations value merchants work to discover how close they must come
to this competing supplier’s lower price and still retain the business.
Framing value delivered as a percentage of price paid enables a supplier to
help the customer (and itself) better answer this question: what is being the
incumbent worth? Is it being within 5 percent or 7 percent?
Why? Even after value assessments account for any specific, identifiable
risks in using the outside supplier’s product or service, the customer is still
reluctant to change. Thus, to displace the incumbent offering, some
additional portion of the value or a lower price must be given, a tactic that
we call incentive to change. Without this incentive, purchasing managers
are generally unwilling to recommend changing from the incumbent to
another offering—even though they may threaten to.
Best-practice suppliers recognize that constructing and substantiating
resonating-focus value propositions is not a one-time undertaking, so they
invest in continually improving the capability of their people to identify
what the next value propositions ought to be. SKF uses an innovative
approach to gain and retain customers with superior value. In each contract
period, SKF proposes a relatively near-term initiative, with a smaller but
quicker economic return, along with a longer-term initiative, which has a
potentially higher payoff. In the near-term initiative, the customer will
realize the savings in, say, six months. The near-term payoff, although
smaller, gets customer momentum and interest going in a positive direction,
providing some tangible evidence to customer management that this
approach is worthwhile, and sustaining interest and effort for the longer-
term initiative with a higher payoff. Then, shortly before the contract
renewal, SKF lets the customer get a glimpse of what it might do in the next
contract period, again proposing a pair of initiatives: one shorter term and
the other longer term with a higher payoff.
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. In addition to providing service, personnel
meticulously collect data on customer costs and benefits attributable to
Quaker offerings. As part of its chemical management offering, Quaker has
created a system, ChemTRAQ, that monitors the provision of its value-
adding services and documents the resulting cost savings. Quaker personnel
summarize these quantified cost savings and benefits as a scorecard or
“delivered value proposition” in formal case studies, which they present on
a monthly and annual basis to customer managers. The beauty of Quaker’s
value proposition design and refinement process is that it provides the tools
(i.e., ChemTRAQ) and documentation (i.e., scorecards and case studies)
that make it easy to track the company’s performance and execute these
agreements.

Leveraging Learning from Other Served Markets

Astute suppliers recognize that they can make use of learning from
customer industries that they are serving to provide next-generation
customer value propositions in other target markets. Although some
adaptation may be required, the basic concepts about delivering superior
value that have been successfully implemented in particular customer
markets can have tremendous application in others. The challenge is to pull
together the success stories from each of the markets served, provide a
forum for sharing, and reward individuals for making successful
adaptations. Quaker Chemical does a remarkable job in this.
 Underscoring the contribution of value propositions to its business
strategy, Quaker conducts a value proposition training program each year
for its chemical program managers, who work on-site with customers and
have responsibility for formulating and executing customer value
propositions. These managers first review case studies from a variety of
industries served by Quaker in which their counterparts have executed
savings projects and quantified the monetary savings produced. Competing
in teams, the managers then participate in a simulation in which they
interview colleagues posing as customer managers to gather the information
needed to devise a proposal for a customer value proposition. The team that
is judged to have the best proposal earns bragging rights, which are highly
valued in Quaker’s competitive culture. The training program, Quaker
believes, helps sharpen the skills of chemical program managers to identify
savings projects when they return to the customers they are serving.
As the final part of the value proposition training program, Quaker stages
an annual real-world contest in which the chemical program managers have
ninety days to submit a proposal for a savings project that they plan to
present to their customers. The director of chemical management judges
these proposals and provides feedback. If he deems the proposed project to
be viable, he awards the manager a gift certificate. Implementing these
projects goes toward fulfilling Quaker’s guaranteed annual savings
commitments to customers of, on average, $5 million to $6 million a year.

Uncovering New Value Propositions to Pursue

Best-practice suppliers put in place a process for finding potential new
value propositions to pursue and for shepherding them through a systematic
evaluation. These ideas might be for new products, which are fed into an
NPD process. Alternatively, these ideas might be for valuable new
supplementary services, which are developed and provisioned.

GE Infrastructure Water & process Technology finds new value

propositions. GE Infrastructure Water & Process Technologies’ recent
development of a new service offering for refinery customers illustrates
how its general manager allocates limited resources to initiatives that will
generate the greatest incremental value for customers and that those
customers would be willing to reward the business for providing. The single
largest cost for refiners is the oil that they refine. The most expensive oil
per barrel is “sweet” crude, which has a low sulfur content. Crude oil with a
higher sulfur content has a cheaper price per barrel, but during the refining
process, the sulfur in it produces more acid, which is highly corrosive and
thus destructive to equipment. Refiners could run their operations with
crude that has higher sulfur content and a cheaper purchase price, but they
hesitate to do that because of the potential damage it would do to the heat
exchangers and other process equipment, which are expensive.
Furthermore, refiners’ biggest worry is reliability; an unexpected shutdown
due to excessive corrosion in the refining equipment would be extremely
costly.
Based on its detailed and comprehensive understanding of refinery
processes and how refineries make money, GE Infrastructure Water &
Process Technologies (W&PT) had a creative idea: if the business could
develop a service that would allow refiners to use blends of crude with
higher sulfur content, it could increase those refiners’ profitability. The field
rep submitted a new product introduction request to the hydrocarbon
industry marketing lead for further study. (Field reps or anyone else in the
organization submit new product introduction requests whenever they have
an inventive idea for a customer solution that they believe would have a
large value impact.)
Industry marketing leads, who have extensive industry expertise, perform
scoping studies to understand the potential applicability of the proposed
new products to deliver significant value to segment customers. They create
a business case for the proposed new product, which are “racked and
stacked” for W&PT’s senior management team to review. The team
approved this initiative out of a large number of potential initiatives
competing for limited resources, and that led to the development of
W&PT’s Predator service.
Predator begins with an algorithm for refiners to blend different grades of
crude and then predicts what would happen during the refining process. A
detection system is part of the Predator service offering; its sensors are
placed in key equipment to monitor the acidity levels, and then injectors
feed corrosion inhibitors into the system. Although the customer purchases
the algorithm, predictive model, sensors, and corrosion inhibitor chemical
from W&PT, these incremental costs are far outweighed by the lower costs
of purchasing cheaper crude. In fact, these price savings amount to five to
ten times the price paid for the Predator service. Using its value generation
planning process and tools, W&PT demonstrates what the potential savings
to the refinery customers would be using Predator and then documents the
actual savings produced relative to the incremental costs, thus realizing a
compelling value proposition.

Value merchants find new ways to deliver superior value. One of the
savviest value merchants we ever met was elected president of his industry
association. In his president’s address at this organization’s annual meeting,
he related to the audience what he was doing in his business to deliver
superior value to customers. One of his competitors, somewhat
flabbergasted, came up to him afterward and asked him whether he was
worried about revealing what he was doing in front of all his competitors.
“No,” this gentleman responded, “by the time that your businesses are able
to do what my business is doing now, we will be on to other things.”
In relating this story to us, this gentleman told us that he had done this
purposefully because it was better to have smart competitors than dumb
competitors. He knew that if he could get his competitors to compete on
value rather than simply on price, his industry as a whole would be better
off. He also knew that true value merchants never stop finding new ways to
deliver superior value to customers.
APPENDIX A

Relating Customer Value and Price

HOW DO CUSTOMER value and price relate to one another?1 To motivate
this discussion, put yourself in the role of a customer manager, and consider
the following scenario, which could apply to the acquisition of an electronic
component. Then decide which product you would recommend that your
firm purchase.

Your firm needs to make a decision about which of two

alternative products to purchase: one offered by Supplier M and
one offered by Supplier P. Based on two value analyses
conducted by your firm, the value for Supplier M’s product is
found to be €4, and the value of Supplier P’s product is found to
be €6. The price of Supplier M’s product is €I, and the price of
Supplier P’s product is €2.

Which supplier’s product did you recommend: M’s or P’s? Taking two
alternative perspectives would lead to different decisions. Under a ratio
comparison, you would recommend Supplier M’s product over Supplier
P’s:

(Eq. A-1 )
 (Eq. A-1a)

Such a ratio comparison has been stated as the way in which customer
value and price would be related to one another. As Gerald Smith asserts:
“This almost always involves two dimensions of value: what the customer
gives up (money, time, effort, opportunity cost). Most marketers combine
these two dimensions in ratio form: Value = the benefits the customer
receives relative to the price paid.” Notice the overlooked
commensurability issue in Smith’s statements as well as his inclusion to our
conceptualization.2
Under a difference comparison, you would make the opposite decision,
recommending Supplier P’s product over Supplier M’s:

(Eq. A-2)

(Eq. A-2a)

Although Smith is probably correct that most marketers—at least

marketing academics—embrace a ratio comparison, this thinking is
misguided in two significant respects.
First, qualitative research with customer managers suggests that
individuals are much better difference processors than ratio processors.
Although we have chosen the monetary amounts in our scenario to facilitate
comprehension of the differences between the two kinds of comparisons,
division remains a more difficult mathematical operation than subtraction.
Pick four numbers—a, b, c, and d—and try it for yourself, seeing how easy
it is for you to divide a by b and c by d versus subtracting b from a and d
from c.
Second, and more critical, difference comparisons are the way that
businesses keep score on how they are doing. Simply put, they subtract the
total cost of doing business from the revenue produced by doing business to
determine the profit. While the ratio comparison for the scenario we
presented leads to a decision to purchase Supplier M’s product, would a
customer firm indeed be better off by purchasing Supplier M’s product
versus Supplier P’s product? Consider a situation in which the customer has
a purchase requirement of a million units. Even though Supplier P’s product
has a higher purchase price than Supplier M’s product (€1), this is more
than offset by the superior value that Supplier P’s product delivers (€2).
Thus, a customer firm would have €1 million of incremental profit by
purchasing its requirement from Supplier P instead of Supplier M.
In many cases, the values and prices for two competing offerings are
such that the same decision would be made under either a ratio or a
difference comparison. Nevertheless, as the scenario amply conveys, there
are cases in which they would lead to different decisions. The overarching
point is that most researchers, authors, and managers have not sufficiently
thought through how customer value and price are related to one another
nor provided rationales to support their assertions. The difference
formulation in the fundamental value equation also enables us to focus on
the value elements that matter (see chapters 3 and 4).
APPENDIX B

PeopleFlo EnviroGear Pump Customer

Value Model
PEOPLEFLO Manufacturing has designed a new generation of
hermetically sealed rotary pumps, which do not have dynamic shaft seals
and therefore eliminate problems that shaft seal leakage causes. As a result,
PeopleFlo’s EnviroGear pumps not only satisfy customer requirements and
preferences to reduce maintenance costs, but they also eliminate a source of
environmental pollution at an affordable price. The target markets are
producers of paints, resins, inks, and adhesives.1
Viking’s dynamically sealed gear pumps would be considered the next-
best alternative. When the PeopleFlo pumps and the Viking pumps are
compared, four points of difference emerge: unplanned maintenance
savings, planned maintenance savings, pump replacement savings, and
leakage cleanup savings. A customer value model is built from value word
equations for each of these points of difference, which can be estimated
with usage data gathered at customers.
The value word equation and assumptions for unplanned maintenance
savings are:
 Assumptions:
1. Purchase price is a conservative estimate of acquisition cost.
2. Worker time saved can be productively redeployed to either
preventative or predictive maintenance activities.
3. Worker time includes diagnosis, parts adjustment/ replacement, and
cleanup.

The value word equation and assumptions for planned maintenance

savings are:

Assumptions:
1. Purchase price is a conservative estimate of acquisition cost.
2. Worker time saved can be productively redeployed to either other
preventative maintenance or predictive maintenance activities.
 The value work equation and assumptions for pump replacement savings
are:

Where:

Assumptions:
1. Purchase price is a conservative estimate of acquisition cost.
2. Worker time saved can be productively redeployed to either
preventative or predictive maintenance activities.

The value word equation and assumptions for leakage cleanup savings
are:
 Assumptions: same as for planned maintenance savings.
The differential pump price word equation and accompanying
assumption are:

Assumption: the PeopleFlo pump’s expected lifetime is based on

accelerated-use tests.
Finally, as in any customer value model, there are value placeholders,
which hold the place for value that is yet to be determined. With
EnviroGear pumps compared to Viking pumps, there are two:
1. EnviroGear pumps provide environmental stewardship through
reduced fugitive emissions, reduced worker exposure, and potential
reduced disposal of hazardous materials.
2. EnviroGear pumps eliminate or significantly reduce the hassle of
unplanned maintenance and leakage cleanups (i.e., a social benefit).
NOTES
Chapter I
1 Lisa M. Ellram, “Total Cost of Ownership: An Analysis Approach for
Purchasing,” International Journal of Physical Distribution & Logistics 25,
no. 8 (1995): 4-23; and Marc Wouters, James C. Anderson, and Finn
Wynstra, “The Adoption of Total Cost of Ownership for Sourcing
Decisions: A Structural Equations Analysis,” Accounting, Organizations
and Society 30 (2005): 167-191.

2 Two articles that have advocated this kind of approach are: Thomas H.
Davenport, “Competing on Analytics,” Harvard Business Review, January
2006, 98-107; and Jeffrey Pfeffer and Robert I. Sutton, “Evidence-Based
Management,” Harvard Business Review, January 2006, 62-74.
Chapter 2
1 This section is adapted from James C. Anderson, “From Understanding
to Managing Customer Value in Business Markets,” in Rethinking
Marketing: Developing a New Understanding of Markets, ed. H.
Håkansson, D. Harrison, and A. Waluszewski (London: John Wiley, 2004),
137-159. © 2004. Copyright John Wiley & Sons Limited. Reproduced with
permission.

2 Bradley T. Gale, Managing Customer Value (New York: Free Press,

1994), xiv (emphasis in original); Robert J. Dolan and Hermann Simon,
Power Pricing: How Managing Pricing Transforms the Bottom Line (New
York: Free Press, 1996), 9; Gerald E. Smith, “Segmenting B2B Markets
with Economic Value Analysis,” Marketing Management, March 2002, 36;
and Thomas T. Nagle and Reed K. Holden, The Strategy and Tactics of
Pricing, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2002), 74
(emphasis in original).

3 James C. Anderson and James A. Narus, Business Market Management:

Understanding, Creating, and Delivering Value, 2nd ed. (Upper Saddle
River, NJ: Pearson Prentice Hall, 2004), 6 (emphasis in original).

4 For a recent example of where price is considered a part of customer

value, see David D. Swaddling and Charles Miller, “From Understanding to
Action,” Marketing Management, July-August 2004, 31-35.

5 Lawrence D. Miles, Techniques of Value Analysis, 3rd ed. (Washington,

DC: Lawrence D. Miles Value Foundation, 1989).

6 For more on points of parity and points of difference in a brandbuilding

context, see Kevin Keller, Brian Sternthal, and Alice Tybout, “Three
Questions You Need to Ask About Your Brand,” Harvard Business Review,
September 2002, 80-86.

7 James C. Anderson, James A. Narus, and Wouter van Rossum,

“Customer Value Propositions in Business Markets,” Harvard Business
Review , March 2006, 90-99.
Chapter 3
1 W Chan Kim and Renée Mauborgne, “Value Innovation: The Strategic
Logic of High Growth,” Harvard Business Review, January-February 1997,
102–112; and W Chan Kim and Renée Mauborgne, “Creating New Market
Space,” Harvard Business Review, January-February 1999, 83-93.

2 The Medco example is from V. Kasturi Rangan, Transforming Your Go-

to-Market Strategy: The Three Disciplines of Channel Management
(Boston: Harvard Business School Press, 2006). The NetJets and
Bloomberg examples are from W. Chan Kim and Renée Mauborgne, Blue
Ocean Strategy: How to Create Uncontested Market Space and Make the
Competition Irrelevant (Boston: Harvard Business School Press, 2005). The
Dell example is from Nirmalya Kumar, Marketing as Strategy:
Understanding the CEO’s Agenda for Driving Growth and Innovation
(Boston: Harvard Business School Press, 2004).

3 Francis J. Gouillart and Frederick D. Sturdivant, “Spend a Day in the

Life of Your Customers,” Harvard Business Review, January-February
1994, 116-125.

4 Axios Partners LLC is a strategic partner of James C. Anderson LLC in

implementing customer value management at client firms.

5 Frank Joop of Intergraph, interview by authors, March 2, 2005.

Chapter 4
1 Most often, the supplier focuses the research projects on the market
segments (or subsegments) in which it believes its offering provides value
that’s superior to the next-best alternative, with the intent of strengthening
its offering’s value still further. The research project might focus, though,
on market segments (or subsegments) in which the supplier believes its
offering presently provides less value than the next-best alternative. In these
situations the intent of the project is to assess potential ways that the
supplier could strengthen the value of its offering, making it superior in
value to the next-best alternative. Finally, on occasion, the supplier might
focus a research project on market segments (or subsegments) in which it
presently does not have an offering, to assess what a potential offering
would have to be to provide value that’s superior to the leading offering in
that segment.

2 James C. Anderson, James A. Narus, and Wouter van Rossum,

“Customer Value Propositions in Business Markets,” Harvard Business
Review, March 2006, 90-99.

3 Orange Orca B.V. is a strategic partner of James C. Anderson LLC in

implementing customer value management at client firms.

4 To learn more about the TCO Toolbox, go to www.tcotoolbox.com.

Balder Electric has acquired this division from Rockwell.

5 Adapted and updated from James C. Anderson and James A. Narus,

“Business Marketing: Understand What Customers Value,” Harvard
Business Review, November-December 1998, 53-65.
Chapter 5
1 James C. Anderson and James A. Narus, “Capturing the Value of
Supplementary Services,” Harvard Business Review, January-February
1995, 75-83; and James C. Anderson and James A. Narus, Business Market
Management: Understanding, Creating, and Delivering Value, 2nd ed.
(Upper Saddle River, NJ: Pearson Prentice Hall, 2004), chapter 5.

2 Anderson and Narus, Business Market Management, 187.

3 Robin Cooper and Robert S. Kaplan, “Profit Priorities from Activity-

Based Costing,” Harvard Business Review, May-June 1991, 130-135.

4 James C. Anderson and James A. Narus, “Selectively Pursuing More of

Your Customer’s Business,” MIT Sloan Management Review, Spring 2003,
42-49.

5 Baxter International Inc., based in the United States, has split into two
separate entities. Baxter Healthcare Corporation in this example and the
following ones became Allegiance Corporation in 1996. Allegiance
Corporation merged with Cardinal Health Inc. in February 1999 and is now
known as Allegiance Corporation, a Cardinal Health company.

6 Michael V. Marn and Robert L. Rosiello, “Managing Price, Gaining

Profit,” Harvard Business Review, September-October 1992, 84-94.

7 Robert S. Kaplan and Steven R. Anderson, “Time-Driven Activity-Based

Costing,” Harvard Business Review, November 2004, 131-138. The time
equation example comes from p. 135.

8 The corporate ownership of this business has changed. The business is

now known as VWR Scientific Products.

9 Nirmalya Kumar, “Strategies to Fight Low-Cost Rivals,” Harvard

Business Review, December 2006, 104-112.
Chapter 6
1 Steven Kerr, “On the Folly of Rewarding A, While Hoping for B,”
Academy of Management Executive, February 1995, 7-16.

2 For more on involving salespeople early to gain their commitment, see

Thomas A. Stewart, “Leading Change from the Top Line,” Harvard
Business Review, July-August 2006, 90-97.

3 Adrian Soghigian, Chris Spees, and Bruce Walters of Rockwell

Automation, interview by authors, May 18, 2006.
Chapter 7
1 James C. Anderson and James A. Narus, “Selectively Pursuing More of
Your Customer’s Business,” MIT Sloan Management Review, Spring 2003,
42-49.

2 Hermann Simon, “Pricing Opportunities—and How to Exploit Them,”

Sloan Management Review, Winter 1992, 55-65.

3 Shantanu Dutta et al., “Pricing as a Strategic Capability,” MIT Sloan

Management Review, Spring 2002, 61-66.

4 Michael V. Marn and Robert L. Rosiello, “Managing Price, Gaining

Profit,” Harvard Business Review, September-October 1992, 84-94.

5 Louise O’Brien and Charles Jones, “Do Rewards Really Create

Loyalty?” Harvard Business Review, May-June 1995, 75-82.

6 Chantana Sukumanont and Siva Mahasandana of Siam City Cement,

interview by authors, January 29, 2007.
Chapter 8
1 The source for this company performance evidence is Thomson One
Banker, http://origin-banker.thomsonib.com.

2 Beliefs about these two “facts” remain in multidivisional or multisector

firms when customer value management has been successfully
implemented elsewhere in the company. Many managers, upon learning that
customer value management already has been successful elsewhere in their
own firm, have commented to us, “Oh, those businesses have it easy! We
have it more difficult here.”

3 Gabriel Szulanski and Sidney Winter, “Getting It Right the Second

Time,” Harvard Business Review, January 2002, 62-69.

Appendix A
1 This appendix is adapted from James C. Anderson, “From
Understanding to Managing Customer Value in Business Markets,” in
Rethinking Marketing: Developing a New Understanding of Markets, ed. H.
Håkansson, D. Harrison, and A. Waluszewski (London: John Wiley, 2004),
137-159. © 2004. Copyright John Wiley & Sons Limited. Reproduced with
permission.

2 Gerald E. Smith, “Segmenting B2B Markets with Economic Analysis,”

Marketing Management, March 2002, 36.

Appendix B
1 James Anderson is an investor in and member of the Board of Directors
of PeopleFlo Manufacturing.
INDEX

Note: page numbers followed by f indicate figures; page numbers followed

by t indicate tables; page numbers followed by n and a number (such as
191n1) indicate material in endnotes.
account profitability
account profitability analysis
across-division incentive awards
action plans
activity-based costing
Akzo Nobel
business unit market results for
marketing communications
Akzo Nobel Industrial Coatings (ANIC)
all-benefits proposition
Allegiance Corporation
analyses
of account profitability
data analysis
“gives & gets” analysis
sensitivity analyses
of supplementary services
value analysis
Anderson, James C.
Anderson, Steven R.
ANIC (Akzo Nobel Industrial Coatings)
Applied Industrial Technologies
DVA program of
marketing communications
market results for
Aramco Services Company
assumptions, in value word equations
augmenting services, programs, and
systems. See supplementary services
Axios Partners LLC

Baldor Electric
Baxter Healthcare Corporation
Baxter International Inc.
Baxter Scientific Products (BSP)
behavioral component of sales compensation
benefit assertion
benefits
all-benefits proposition
economic benefit
as measurement of value
mutual, in customer relationships
perception of
social benefits
benefits received
best practices, sharing
best-practice suppliers
Bloomberg L.P.
“bonus dollars,”
BSP (Baxter Scientific Products)
bundled supplementary services
business. See also business markets; business units
building share of. See share of business, building
mix of
multi-business firms
business case for change
business markets
customer value in. See value in business markets
exchange in, value and
growth of, market share and
problems in, value word equations and
prospering in
specific results for
subsegmentation of
success in
business performance. See superior business performance
business roundtable discussions
business units
market results for
multiple locations
profitable new business with
value-driven philosophy and

Cardinal Health Inc.

case studies, formal
Caterpillar, Inc.
“certified value sellers,”
change
business case for change
enduring, difficulty of making
incentive to change
in market offerings
potential, identifying
value changes
ChemTRAQ
coaching, in value selling
collaborative customers
collaborative relationships
comfort with value selling
commensurability of measurement units
company performance measures
comparative tests of superior value
comparative value assessment
compensation plans
behavioral component to
incentive compensation
profitability and
transformation of
competition-based pricing
competitors
advantage over, with augmented services
low-cost competitors
price competition
components of value proposition
Composites One
business unit market results for
compensation plan
sales contest
consultative selling approach
Cooper, Robin
core products or services
corporate culture
cost(s)
activity-based costing
fixed costs
management of, in supplementary services
reducing customer interface costs
of supplementary services
switching costs
cost assessment
“cost-in-use studies,”
cost reduction goals
cost savings
demonstrating, in value-selling process
documenting
identification of cost-saving elements
cost to serve customer
creativity in identifying potential changes
credibility of value word equations
cross-functional teams, in CVE initiative
cross-organizational teams
cross-selling programs
customer(s)
cost to serve
cross-subsidization
knowledge of value
obtaining cooperation in
 customer value research
perception of benefit
relationship preferences
relative importance of, to supplier
saying no to
sharing incremental value with
specific, targeting
“strategic customers,”
transactional vs. collaborative
value analysis by
willingness to pay
customer contribution to profitability
customer incentives
customer loyalty, building
customer needs/requirements
DVPs and
favorable-points-of-difference propositions and
gaining understanding of
minimum requirements
need for supplier focus on
in supplementary services
customer-process mapping
customer relationships
arm’s length (transactional)
collaborative, in pocket-price band
expansion of
greater cooperation
mutual benefit in
mutually reinforcing
relationship programs
customer satisfaction
customer segments
customer value concept. See also value in business markets
defining, in business markets
kinds of customer value propositions
knowledge of value and
not understood by sales force
points of parity, difference, and contention
progressive approach to assessing
relating to price
superior business performance and
customer value engineering (CVE) initiative
customer value management
assessing value in practice
building on initial success in
business performance and
business unit market results and
company performance measures
conceptualization of customer value
demonstrating and documenting value
 fallacies about
finding new value propositions
formal case studies in
generating initial success in
getting started in
goals of
“green” money vs. “gray” money
“path to profitability,”
processes
prosperity in business markets and
proven concepts and tools
providing superior value in
success stories in
unique strengths of
value-driven philosophy and
“customer value managers,”
customer value model
data analysis for
data for value word equations in
example of: PeopleFlo Manufacturing
customer value propositions
all-benefits proposition
conducting research and
defining
favorable points of difference
formulating. See formulation of value proposition
new, finding
resonating-focus proposition
sales training in
service offerings
substantiating. See substantiation of value proposition
superior business performance and
transforming into resonating focus
customer value research
conducting, in formulating value proposition
constructing business case for change
creating resonating focus
data analysis in
data gathering in
defining for business issues
DLC approach
focus groups
gaining customer cooperation in
resonating-focus value proposition and
in tailoring market offerings
customer value research team
data gathering by
example: Grainger Consulting Services
sales force on
supported by senior management
 time commitments by
CVE (customer value engineering) initiative
CVM (customer value management) process

data analysis
in customer value research
regarding supplementary services
in transaction pricing
data gathering
in customer value research
for DVPs
to substantiate value proposition
in transaction pricing
for value word equations
Davenport, Thomas H.
“day in the life of the customer” (DLC) approach
Dell Computer Corporation
DeLoach, Harris, Jr.
demonstration of superior value
product superiority
through comparative tests
difference comparison
differential price
discipline
distinctiveness, of DVPs
distinctive value propositions (DVPs)
distribution center sales contests
DLC (“day in the life of the customer”) approach
documentation of superior value
actual value provided
gaining price premium and
documentation of value proposition
example: Quaker Chemical
example: W.W. Grainger, Inc.
using value-based sales tools
Documented Solutions Program (DSP) tool
Documented Value Added (DVA) program
Dolan, Robert J.
Dow Corning
business unit market results
tailoring market offerings
DSP (Documented Solutions Program) tool
dual-brand strategy
Dutta, Shantanu
DVA (Documented Value Added) program
DVPs (distinctive value propositions)

early payment discounts

earnings before interest and taxes (EBIT)
Eastman Chemical
business unit market results
 eliminating value drain
economic benefit
economic programs
efficacy systems
eliminating value elements
Ellram, Lisa M.
equitable return on value
building share of business
eliminating value drains and leaks
example: Siam City Cement
fair return on superior value
gaining price premium
improving mix of business
management of pricing
evidence-based management
extended dating

favorable-points-of-difference value proposition

customer advantage in
resonating-focus value proposition compared
feedback, in value assessment
flexible market offerings
becoming more flexible
example: Dow Corning and Xiameter
naked solutions with options
refined targeting
focused single-source providers
focus groups
formulation of value proposition
conducting qualitative research
constructing value word equations
identifying points of difference
freight allowances
fulfillment services
functionality
fundamental value equation
in comparing with next-best alternative
difference comparison of
ratio comparison of
use in formulating pricing strategy
in value-based pricing

Gale, Bradley T.
GCS (Grainger Consulting Services)
GE Infrastructure Water & Process Technologies (W&PT)
new service offerings
“Proof, not Promises,”
value-based sales tools
generic value proposition
Getronics
“gives & gets” analysis
global value-selling process
Gouillart, Francis J.
Grainger Consulting Services (GCS)
“gray” money
“green” money
Greif Inc.
growth council (Sonoco)
growth readiness program
guarantees

“hard” and “soft” dollars

Holcim Ltd.
Holden, Reed K.

IKOR
implementation prowess
improvisations, inadvisable
incentive compensation
incentive to change
incremental profitability
incremental profits, documenting
incremental value, sharing
inducements to customer
industry associations
in customer value research
publications of
studies by
industry paradigm shift
industry-specific jargon
initial-use discount
innovative designs, DLC research for
Insee Tong
installation services
integrity in customer value management
Intergraph Corporation
business unit market results
customer value propositions
sales training
internal publications, success stories in
International Fiber Journal
in-the-field practice in value selling
intuitive decision to purchase
inventory, customer value in
invoice analysis

James C. Anderson LLC

Jones, Charles
Joop, Frank

Kaplan, Robert S.
Keller, Kevin
Kennametal, Inc.
business unit market results
value-selling process
Keppel Seghers
building share of business
business unit market results
improving mix of business
Kerr, Steven
Kim, W. Chan
KLM Cargo
KLM Royal Dutch Airlines
Komatsu
Kumar, Nirmalya

large-share customers
leveraged learning
linking systems, supplementary
low-cost competitors, fighting

Mahasandana, Siva
make-versus-buy decisions
Margin Builder Award Contest
Margin Builder News
marketing communications
documenting superior value in
highlighting pricing strategy
marketing strategy, to accomplish market strategy
market offerings
contemplated changes in
strengthening value of
tailored. See flexible market offerings
tailoring
market-perceived quality
market segmentation
market strategy and
in refined customer targeting
value-based pricing and
market strategy, for market segment
Marn, Michael V
Mauborgne, Renée
Medco Health Solutions, Inc.
metrics (measurement)
benefits as measure
company performance measures
of customer value
detailed and transparent
documenting actual value provided
measurability of DVPs
monetary. See monetary measurement of value
performance monitoring
performance scorecard
 profitability tracking
Microsoft Corporation
Miles, Lawrence D.
milestones
Miller, Charles
Milliken & Company
business unit market results
CVE initiative
share of customer’s business
minimum requirements
minor-share customers
mix of business
example: Keppel Seghers
example: Sonoco
improving
monetary measurement of value
commensurability of units
in customer value management projects
in customer value research
in “hard” and “soft” dollars
value word equations
multi-business firms
multiple single sourcing

Nagle, Thomas T.
“naked solutions”
difficulty of implementing
options with
Narus, James A.
new offerings
new product development (NPD)
customer value research in
uncovering value proposition
new services, addition of
augmenting standard offering with
shelving temporarily
as value-added option
next-best alternative
customer presumptions about
determining
differentiating offering from
in fundamental value equation
points of parity with
price premium compared to
value elements relative to
value in relation to
Nijdra Groep
NPD (new product development)

O’Brien, Louise
Okuma
one-stop shopping for services
on-site observation
“On the Folly of Rewarding A, While Hoping for B” (Kerr)
optional services and programs
with “naked solutions,”
offered to different segments
providing value or savings
pruning
standard services recast as
Orange Orca B.V.
business unit market results
use of value calculators
“out of policy” pricing requests
outsourcing

paradigm shift, industrywide

patent-protected intellectual property
penetration pricing strategy
PeopleFlo Manufacturing
customer value model of
salesperson titles
perception of benefit
performance-based contracts
performance measures
performance monitoring
performance scorecard
Pfeffer, Jeffrey
phased customer value management programs
pilot programs
pitfalls of value proposition
planned maintenance savings, value word equations for
“planned serendipity,”
pocket price(s)
pocket-price band
pocket-price waterfall
points of contention
data gathering and
surfacing
in value word equations
points of difference
comparison with next-best alternative
data gathering and
determining next-best alternative
favorable-points-of-difference value proposition
identifying, in formulating value proposition
identifying changes to create superior value
listing value elements
in resonating-focus value proposition
in value word equations
points of parity
 data gathering and
with next-best alternative
in resonating-focus value proposition
Policicchio, Jeff
Predator service (W&PT)
price
customers seeking to lower
customer value as
differential price
leverage in negotiating
relating to customer value
selling on price
price competition
profitability and
selling on price
price concessions
price-driven buyers
price premium on superior value
building share of business and
for customized products
highlighting
next-best alternative compared to
performance-based contracts
reference customers in pricing strategy
for technological innovation
pricing management
strategy
tactics
transaction pricing
value-based pricing
pricing strategy
discipline in
penetration strategy
price concessions
reference customers in
skimming strategy
value-based pricing
pricing tactics
product(s)
core products or services
customized
demonstration of superiority
new product development
variety of, cost and
product marketing/development personnel
product replacement savings
product resumes
product returns
profitability
of customer value management projects
 distinctive capabilities and
documenting profits
incremental, calculating
method of compensation and
“path to profitability,”
price competition and
supplementary services and
profitability of accounts
pruning services
optional service
standard services
pseudo-invoice
“pull” effect
purchasing managers

Quaker Chemical
business unit market results
ChemTRAQ tool
eliminating value leaks
value documenters
value proposition training
Qualcomm
qualitative research

R.R. Donnelley
raising value elements
Rangan, V. Kasturi
ratio comparison
rebates and bonuses
recognition and reward
on margin dollar growth
sales contests
for success stories
reducing value elements
reference customers
refined targeting
analysis of supplementary services in
transactional vs. collaborative customers
value and costs of supplementary services in
relationship programs
reporting systems for sales force
requirements for value proposition
resellers
resonating-focus value proposition
importance of
near- and longer-term initiatives
transforming weak value proposition into
retention of standard services
reward. See recognition and reward
risk sharing
Rockwell Automation
 business unit market results
sales councils
sales training
use of TCO Toolbox
use of value word equations
role-playing exercises
Rosiello, Robert L.
Ryan, James

Sabic (Saudi Basic Industries Corp.)

sales approaches
basic kinds of
consultative
value-selling process
sales contests
sales councils
sales force
compensation plans
cooperation with customer value research
corporate culture and
on customer value research team
equipping to sell value
example of transformation: Milliken
growth readiness program for
process and tools for
proven concepts and tools for
relative value of customer and
salesperson titles
services performed by
transformation of
understanding of customer value
value merchant culture of
value merchants vs. value spendthrifts
value-selling experiences
salesperson titles
sales training
for customer value management projects
demonstrating product superiority
role playing exercises in
success stories in
in use of TCO Toolbox
“value advantage boot camp,”
in value propositions
on value-selling process
Saudi Basic Industries Corp. (Sabic)
Seghers
selling
certified value sellers
consultative
dual-brand strategy and
 resellers
terms and conditions of sale
value selling
selling on price
senior management
active support of customer value research team
active support of sales force
approval of initiatives
role in value merchant culture
value-driven philosophy and
sensitivity analyses
service(s)
core products and services
discontinued, outsourcing
new, addition of
offered in value propositions
one-stop shopping for
standard, reevaluating
surcharges for service levels
technical, declining to offer
unique, in value word equations
service claims
service levels
share of business, building
example: Keppel Seghers
example: Milliken
example: Tata Steel
premium pricing and
Siam City Cement
business unit market results
value-based pricing
Simon, Hermann
single sourcing
site visits
SKF USA Inc.
business unit market results
customer value management by
DSP tool
linking price premium to performance
resonating-focus value propositions
sales compensation
sales training
“value champions,”
skimming pricing strategy
Smith, Eddie
Smith, Gerald E.
social benefits
“soft” and “hard” dollars
Soghigian, Adrian
Sonoco Products Company
 business unit market results
customer value management by
gaining price premium
improving profitability of customer accounts
marketing communications
resonating-focus value proposition
Spees, Chris
spreadsheet applications
“spreadsheet mania,”
standard services, reevaluating
prune from offering
recast as surcharge option
retain in offering
Sternthal, Brian
Stewart, Thomas A.
“strategic customers,”
strategy for flexible offerings
new services
reevaluate standard services
reexamine optional services
Sturdivant, Frederick D.
subsegmentation of market
substantiation of value proposition
by conducting customer value research
data gathering in
documenting actual value
through comparative tests
by using value calculators
value word equations
success
expectations of, defining
generating initial success
relative, evaluation of
in value selling, aiding
success in business markets
success stories
Sukumanont, Chantana
superior business performance
achieving
company performance measures
customer value management and
customer value propositions and
linking price premium to
monitoring
performance scorecard
providing superior value and
superior value
capturing, in value word equations
claiming
continuing to provide
 demonstrating
documenting
emphasizing in marketing communications
fair return on
new ways of delivering
supplementary services
analysis of
bundled
customer value research on
enhancing value of core product
examples of
integrated service packages
offered to different segments
technical services
for transactional vs. collaborative customers
uncovering new value propositions in
value and costs of
value elements for
suppliers
benefits of documenting superior value
differentiating among
importance of customer to
perception of benefit by
profitability of, price competition and
relations with customers
surcharge options
sustainability of DVPs
Sutton, Robert I.
Swaddling, David D.
Swagelok Company
Szulanski, Gabriel

targeting specific customers

customer value research and
refined targeting
Tata Steel
business unit market results
eliminating value drains and leaks
TCO (total-cost-of-ownership) assessments
TCO Toolbox (software)
as example of value calculator
training in use of
team leaders
team training
technical prowess
technical services
technological innovation
next-best-alternative and
price premium for
value-based pricing and
terms and conditions of sale
testing
sales skills
to substantiate value proposition
Thales Nederland
Thomson One Banker
time commitments
time equations
timing of flexible market offerings
total cost of ownership
calculating with TCO Toolbox
in value assessment
total-cost-of-ownership (TCO) assessments
total gross margin dollars
total savings, customer value as
trade-in allowances
training programs, surcharge for
transactional customers
transaction pricing
Tybout, Alice

unique services
Universal Sonoco Night (USN) program
unplanned maintenance savings
unsupported value claims
USN (Universal Sonoco Night) program

validity of claims, assessing. See substantiation of value proposition

value
conceptualization of
customer knowledge of
defining
superior, profiting from
value-accumulation tools
value-added options
customer segmentation and
supplementary services as
“value advantage boot camp,”
value analysis
value assertions
value assessment
baseline, in value documentation
comparative
DLC approach to
feedback in
progressive approach to
of supplementary services
TCO assessments
value-based pricing
example: Siam City Cement
fundamental value equation in
 in pricing strategy
pricing tactics and
transaction pricing
value-based sales tools
for customer value management projects
DVA program
product resumes
sales force contribution to developing
value case history. See value case histories
value presentation tool
worksheets as
value calculators
building share of business with
in consultative sales approach
value case histories
in customer value management projects
in documenting superior value
presented on DVD
as value-based sales tool
“value champions,”
value changes
value claims, as “fishing tales,”
value documenters
example: Quaker Chemical
example: W.W Grainger, Inc.
use of
value drains and leaks
eliminating
example: Tata Steel
value drain example: Eastman Chemical
value leak example: Quaker Chemical
value elements
in assessing value
creating or eliminating
in determining points of difference
identification of
relative to next-best-alternative
in value word equations
value impact program (VIP) reports
value in business markets
conceptualizing
customer’s knowledge of value and
fundamental value equation and
guiding assessment with
value leaks. See value drains and leaks
value merchant culture
in marketing communications
recognition and reward
in salesperson titles
value merchants
value placeholders
value presumption
value propositions. See customer value propositions
value realization
value-selling experiences
maintaining comfort with
providing initial success
value-selling process
example of
global
sales training on
value specialists
value spendthrifts
value word equations
for cleanup savings
constructing
differential price equation
examples of
for planned maintenance savings
for product replacement savings
in substantiating value proposition
time equations compatible with
for unplanned maintenance savings
van Rossum, Wouter
Viking Pump, Inc.
VIP (value impact program) reports
volume discounts
volume strategy
VWR Scientific Products

W.W. Grainger, Inc.

business unit market results
“certified value sellers,”
documentation of value proposition
sales contest
Walters, Bruce
weak value proposition
Winter, Sidney
worksheets, as value-based sales tools
Wouters, Marc
W&PT. See GE Infrastructure Water & Process Technologies
Wynstra, Finn

Xiameter
business unit market results
market offering

year-end rebates
ABOUT THE AUTHORS

JAMES C. ANDERSON is the William L. Ford Distinguished Professor of

Marketing and Wholesale Distribution and Professor of Behavioral Science
in Management at the Kellogg School of Management, Northwestern
University. He is also the Irwin Gross Distinguished ISBM Research Fellow
at the Institute for the Study of Business Markets, located at Penn State
University, and a visiting research professor at the School of Business,
Public Administration, and Technology at the University of Twente, in the
Netherlands.
Professor Anderson’s research interests are constructing persuasive value
propositions in business markets and measurement approaches for
demonstrating and documenting the value of market offerings. Among the
more than forty journal articles he has written, five have appeared in
Harvard Business Review, including “Business Marketing: Understand
What Customers Value” and “Customer Value Propositions in Business
Markets.” He also has coauthored the book Business Market Management:
Understanding, Creating, and Delivering Value, now in its second edition,
published by Pearson Prentice Hall.
James Anderson also is the principal of James C. Anderson LLC, an
international management consulting firm focusing on implementing
customer value management at client firms. He has consulted and provided
seminars for a large number of companies in North America, South
America, Europe, Asia, and Australia, such as American Express, Arcadis,
bioMérieux, Exxon Mobil, Femsa Empaque, GE, International Paper,
Johnson & Johnson, Microsoft, Orkla Group, PPG Industries, and 3M.

NIRMALYA KUMAR is Professor of Marketing, Faculty Director for

Executive Education, Director of the Centre for Marketing, and Codirector
of the Aditya Birla India Centre at London Business School. He has
previously taught at Harvard Business School, IMD (Switzerland), and
Northwestern University.
Professor Kumar received his PhD from the Kellogg School of
Management at Northwestern University. He has worked with more than
fifty Fortune 500 companies in fifty different countries as a coach, seminar
leader, and speaker on strategy and marketing. He has served on the board
of directors of ACC, Bata India, BP Ergo, Defaqto, Gujarat Ambuja
Cements, and Zensar Technologies.
A prolific writer, he is the author of Global Marketing as well as two
other books published by Harvard Business School Press: Marketing as
Strategy: Understanding the CEO’s Agenda for Driviing Growth and
Innovation and Private Label Strategy: How to Meet the Store Brand
Challenge (with Jan-Benedict E. M. Steenkamp). He has written more than
forty cases and published four articles in Harvard Business Review—most
recently “Strategies to Fight Low-Cost Rivals.” Other of his academic
papers have appeared in leading journals and received over a thousand
citations. He has been the winner of several teaching honors over the years.

JAMES A. NARUS is Professor of Business Marketing at the Babcock

Graduate School of Management, Wake Forest University, and a
Distinguished Research Fellow at the Institute for the Study of Business
Markets at Penn State University. He has also taught in executive
development programs at Northwestern University, Penn State University,
the University of Texas at Austin, and Texas A&M University, as well as in
international management seminars at the Universidad Torcuato Di Tella
(Argentina), the Copenhagen Business School (Denmark), Bordeaux School
of Management (France), University College Dublin (Ireland), and Twente
University (the Netherlands).
Professor Narus has written numerous articles on business market
management topics. These articles have appeared in Harvard Business
Review, MIT Sloan Management Review, California Management Review,
and the Journal of Marketing, among other journals. Along with Professor
James C. Anderson, Professor Narus is coauthor of Business Market
Management: Understanding, Creating, and Delivering Customer Value.
 Professor Narus has provided executive training seminars on
management and consulting expertise for numerous corporations. Before
his academic career, he worked as a market research analyst and fellow in
the corporate marketing research division of DuPont.