irk e t   0®*☆RESEAR
C u sto m er Value                 Propositions             in Business M arkets                  by JAMES C. ANDERSON, JA...
C u s to m er Value   Propositions   in B u s i n e s s   Markets   Take the case of a company that makes integrated cir­ ...
C u s to m er Value   Propositions   in   Business     Markets Which Alternative Conveys Value to Custom ers?S uppliers us...
C u s to m er Value   Propositions   in B u s i n e s s   Markets    Favorable points of difference. The second type of   ...
C u s to m er Value   Propositions   in   Business   Marketsfor one of its product lines. Sonoco believedthat the customer...
C u s to m er Value   Propositions   in B u s i n e s s   Marketscustomer value research to gain the insights to construct...
C u s to m er Value   Propositions     in   Business    Marketsprospective customer for these two weeks, in which each    ...
C u s to m er Value   Propositions   in B u s i n e s s   Marketsexecution and documented results of each project the     ...
C u s to m er Value   Propositions   in   Business   Markets             Best-practice suppliers recognize that constructi...
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  1. 1. irk e t 0®*☆RESEAR
  2. 2. C u sto m er Value Propositions in Business M arkets by JAMES C. ANDERSON, JAMES A. NARUS, AND WOUTER VAN ROSSUM U n d e r p re s s u re to k e e p c o s ts d o w n , c u s to m e r s m a y o n ly lo o k a t price and n o t listen to y o u r s a le s pitch. H elp th e m u n d e r s ta n d - a n d b e lie ve in - t h e s u p e rio r v a lu e o f y o u r o ffe rin g s . “CUSTOMER VALUE PROPOSITION” has become one of the most widely used terms in business markets in recent years. Yet our management-practice research reveals that there is no agreement as to what constitutes a customer value proposition-or what makes one persuasive. More­ over, we find that most value propositions make claims of savings and benefits to the customer w ithout backing them up. An offering may actually provide superior value-b ut if the supplier doesn’t demonstrate and docu­ ment that claim , a customer manager w ill likely dismissPETER HOEY it as marketing puffery. Customer managers, increasingly held accountable for reducing costs, don’t have the luxury of sim ply believing suppliers’ assertions. M A RCH 2 0 0 6 91
  3. 3. C u s to m er Value Propositions in B u s i n e s s Markets Take the case of a company that makes integrated cir­ We conducted managem ent-practice research overcuits (ICs). It hoped to supply 5 m illion units to an elec­ the past two years in Europe and the United States to un­tronic device manufacturer for its next-generation prod­ derstand what constitutes a customer value propositionuct. In the course of negotiations, the supplier’s salesperson and what makes one persuasive to customers. One strik­learned that he was competing against a company whose ing discovery is that it is exceptionally difficult to find ex­price was 10 cents lower per unit. The customer asked amples of value propositions that resonate w ith custom­each salesperson why his company’s offering was supe­ ers. Here, drawing on the best practices of a handful ofrior. This salesperson based his value proposition on the suppliers in business markets, we present a systematic ap­service that he, personally, would provide. proach for developing value propositions that are mean­ Unbeknownst to the salesperson, the customer had built ingful to target customers and that focus suppliers’ effortsa customer value model, which found that the company’s on creating superior value.offering, though 10 cents higher in price per IC, was actu­ally worth 15.9 cents more. The electronics engineer whowas leading the development project had recommended Three Kinds of Valuethat the purchasing manager buy those ICs, even at the Propositionshigher price. The service was, indeed, worth something in We have classified the ways that suppliers use the termthe m odel-but just 0.2 cents! Unfortunately,the salesper­ “value proposition”into three types: all benefits, favorableson had overlooked the two elements of his company’s IC points of difference, and resonating focus. (See the ex­offering that were most valuable to the customer, evi­ hibit “W hich Alternative Conveys Value to Customers?”)dently unaware how much they were worth to that cus­ All benefits. Our research indicates that most manag­tomer and, objectively, how superior they made his com­ ers, when asked to construct a customer value proposi­pany’s offering to that of the competitor. Not surprisingly, tion, sim ply list all the benefits they believe that their Customer managers, increasingly held accountable for reducing costs, dont have the luxury of simply believing suppliers assertions.when push came to shove, perhaps suspecting that his offering might deliver to target customers. The more theyservice was not worth the difference in price, the salesper­ can think of, the better. This approach requires the leastson offered a 10-cent price concession to w in the busi­ knowledge about customers and competitors and, thus,ness-consequently leaving at least a half m illion dollars the least amount of work to construct. However, its rela­on the table. tive sim plicity has a m ajor potential drawback: benefit Some managers view the customer value proposition assertion. Managers may claim advantages for featuresas a form of spin their marketing departments develop that actually provide no benefit to target customers.for advertising and prom otional copy. This shortsighted Such was the case w ith a company that sold high-view neglects the very real contribution of value propo­ performance gas chromatographs to R&D laboratories insitions to superior business performance. Properly con­ large companies, universities, and government agenciesstructed, they force companies to rigorously focus on in the Benelux countries. One feature of a particular chro­what their offerings are really worth to their customers. matograph allowed R&D lab customers to m aintain aOnce companies become disciplined about understand­ high degree of sample integrity. Seeking growth, the com­ing customers, they can make sm arter choices about pany began to market the most basic model of this chro­where to allocate scarce company resources in developing matograph to a new segment: commercial laboratories.new offerings. In in itia l meetings w ith prospective customers, the firm ’sJames C. Anderson is the William L. Ford Distinguished Professor of Marketing and Wholesale Distribution at Northwest­ern’s Kellogg School of Management in Evanston, Illinois; the Irwin Gross Distinguished ISBM Research Fellow at the Insti­tutefo r the Study of Business Markets in University Park, Pennsylvania; and a visiting research professor at the School of Busi­ness, Public Administration, and Technology at the University of Twente, the Netherlands. James A. Narus is a professor ofbusiness marketing at the Babcock Graduate School of Management at Wake Forest University in Charlotte, North Carolina. Wouter van Rossum is a professor of commercial and strategic management at the School of Business, Public Administra­tion, and Technology at the University of Twente.92 HARVARD BUSINESS REVIEW
  4. 4. C u s to m er Value Propositions in Business Markets Which Alternative Conveys Value to Custom ers?S uppliers use the term "value p ropo sition” three different ways. Most m anagers sim ply list all the benefits they believe that theiroffering m ight deliver to target custo m e rs.T h e more they can th ink of, the better. Some m anagers do recognize that the custom erhas an alternative, but they often make the mistake o f assum ing that favorable points o f difference m ust be valuable for the cus­tomer. Best-practice sup p lie rs base th e ir value proposition on the few elem ents that m atter most to target custom ers, dem onstratethe value o f this su p e rio r perform ance, and com m unicate it in a way that conveys a sophisticated u nderstand ing o f the custom ersbusiness priorities. VALUE PRO PO SITIO N : ALL BENEFITS FAVORABLE POINTS RESONATING FOCUS OF D IFFE R E N C E Consists of: All benefits custom ers All favorable points of The one or two points of dif­ receive from a m arket difference a m arket offering ference (and, perhaps, a point offering has relative to the next best of parity) whose improve­ alternative ment w ill deliver the great­ est value to the custom er for the foreseeable future Answers the custom er "W hy should our firm "W hy should our firm pur­ "W hat is most w o rthw hile question: purchase y o u r o ffering ?” chase y o u r offering instead for our firm to keep in mind o f yo u r com p etito rs?” about y o u r offering ?” Requires: Know ledge o f own m arket Know ledge o f own Know ledge o f how own offering m arket offering and next m arket offering delivers best alternative su p e rio r value to custom ers, com pared w ith next best alternative Has the potential pitfall: Benefit assertion V alue presum ption Requires custom er value researchsalespeople touted the benefits of m aintaining sample in ­ bidding for a light-rail project. The last chart of the com­tegrity. Their prospects scoffed at this benefit assertion, pany’s presentation listed ten reasons why the m unicipal­stating that they routinely tested soil and water samples, ity should award the project to the firm . But the chartfor which m aintaining sample integrity was not a con­ had little persuasive power because the other two final­cern. The supplier was taken aback and forced to rethink ists could make most of the same claims.its value proposition. Put yourself, for a moment, in the place of the prospec­ Another pitfall of the all benefits value proposition is tive client. Suppose each firm , at the end o f its presen­that many, even most, of the benefits may be points of tation, gives ten reasons why you ought to award it theparity w ith those of the next best alternative, diluting project, and the lists from all the firms are almost thethe effect of the few genuine points of difference. Manag­ same. If each firm is saying essentially the same thing,ers need to clearly identify in their customer value propo­ how do you make a choice? You ask each of the firms tositions w hich elements are points of parity and w hich give a final, best price, and then you award the projectare points of difference. (See the exhibit “The Building to the firm that gives the largest price concession. AnyBlocks of a Successful Customer Value Proposition") For distinctions that do exist have been overshadowed byexample, an international engineering consultancy was the firm s’ greater sameness.M A RCH 20 0 6 93
  5. 5. C u s to m er Value Propositions in B u s i n e s s Markets Favorable points of difference. The second type of of difference that deliver, and whose improvement w illvalue proposition explicitly recognizes that the customer continue to deliver, the greatest value to target customers.has an alternative. The recent experience of a leading in ­ To better leverage lim ited resources, a supplier mightdustrial gas supplier illustrates this perspective. A cus­ even cede to the next best alternative the favorable pointstomer sent the company a request for proposal stating of difference that customers value least, so that the sup­that the two or three suppliers that could demonstrate plier can concentrate its resources on im proving the onethe most persuasive value propositions would be invited or two points of difference customers value most. Second,to visit the customer to discuss and refine their proposals. the resonating focus proposition may contain a point ofAfter this meeting, the customer would select a sole sup­ parity. This occurs either when the point of parity is re­p lie r for this business. As this example shows, “W hy quired for target customers even to consider the supplier’sshould our firm purchase your offering instead of your offering or when a supplier wants to counter customers’competitor’s?” is a more pertinent question than “Why mistaken perceptions that a particular value element isshould our firm purchase your offering?” The first ques­ a point of difference in favor of a competitor’s offering.tion focuses suppliers on differentiating their offerings This latter case arises when customers believe that thefrom the next best alternative, a process that requires de­ competitor’s offering is superior but the supplier believestailed knowledge of that alternative, whether it be buying its offerings are comparable -custom er value research pro­a competitor’s offering or solving the customer’s problem vides em pirical support for the supplier’s assertion.in a different way. To give practical meaning to resonating focus, con­ Knowing that an element of an offering is a point of sider the following example. Sonoco, a global packagingdifference relative to the next best alternative does not, supplier headquartered in H artsville, South Carolina,however, convey the value of this difference to target cus­ approached a large European customer, a maker of con­tomers. Furthermore, a product or service may have sev­ sumer packaged goods, about redesigning the packagingeral points of difference, complicating the supplier’s un­derstanding of w hich ones deliver the greatest value.W ithout a detailed understanding of the customer’s re­ The Building Blocks of a Successfulquirements and preferences, and what it is worth to fu lfillthem, suppliers may stress points of difference that de­ Customer Value Propositionliver relatively little value to the target customer. Each ofthese can lead to the pitfall of value presumption: assum­ A su p p lie rs offering may have m any technical, econom ic,ing that favorable points of difference must be valuable service, or social benefits that de liver value to c u s to m e rs -for the customer. Our opening anecdote about the IC sup­ but in all probability, so do co m p etito rs offerings. Thus,plier that unnecessarily discounted its price exemplifies the essential question is, "H o w do these value elem entsthis pitfall. com pare w ith those o f the next best a lte rn a tive ?” W eve Resonating focus. Although the favorable points of found that its useful to sort value elem ents into three types.difference value proposition is preferable to an all bene­fits proposition for companies crafting a consumer valueproposition, the resonating focus value proposition P oin ts o f p a rity are e le m e n ts w ith e sse n tia lly the sam eshould be the gold standard. This approach acknowl­ p e rfo rm a n ce or fu n c tio n a lity as those o f the next bestedges that the managers who make purchase decisions alternative.have major, ever-increasing levels of responsibility andoften are pressed for time. They want to do business with Points o f difference are elem ents that make the sup p lie rssuppliers that fully grasp critical issues in their business o ffe rin g e ith e r s u p e rio r or in fe rio r to the next bestand deliver a customer value proposition that’s simple alternative.yet pow erfully captivating. Suppliers can provide such acustomer value proposition by making their offerings su­ Points o f contention are elem ents about w hich the sup p lie rperior on the few elements that matter most to target and its cu sto m e rs d isag re e re g a rd in g how th e ir per­customers, demonstrating and documenting the value form ance or fu n ctio n a lity com pares w ith those o f the nextof this superior performance, and communicating it in away that conveys a sophisticated understanding of the best alternative. Either the su p p lie r regards a value elem entcustomer’s business priorities. as a p o in t o f d ifference in its favor, w h ile the custom er This type of proposition differs from favorable points regards that elem ent as a point o f parity w ith the next bestof difference in two significant respects. First, more is not alternative, or the su p p lie r regards a value elem ent as abetter. Although a supplier’s offering may possess several p oint o f parity, w h ile the custom er regards it as a point offavorable points of difference, the resonating focus propo­ difference in favor o f the next best alternative.sition steadfastly concentrates on the one or two points94 HARVARD BUSINESS REVIEW
  6. 6. C u s to m er Value Propositions in Business Marketsfor one of its product lines. Sonoco believedthat the customer would profit from updatedpackaging, and, by proposing the initiative it­self, Sonoco reinforced its reputation as an in­novator. Although the redesigned packagingprovided six favorable points of difference rela­tive to the next best alternative, Sonoco choseto emphasize one point of parity and twopoints of difference in what it called its distinc­tive value proposition (DVP). The value propo­sition was that the redesigned packagingwould deliver significantly greater manufac­turing efficiency in the custom er’s fill lines,through higher-speed closing, and provide adistinctive look that consum ers would findmore ap p ealin g -all for the same price as thepresent packaging. Sonoco chose to include a point of parity inits value proposition because, in this case, thecustomer would not even consider a packagingredesign if the price went up. The first point ofdifference in the value proposition (increasedefficiency) delivered cost savings to the cus­tomer, allowing it to move from a seven-day,three-shift production schedule during peaktimes to a five-day, two-shift operation. The sec­ond point of difference delivered an advantageat the consumer level, helping the customerto grow its revenues and profits incrementally.In persuading the customer to change to the redesigned Here’s how the company played it. Intergraph’s res­packaging, Sonoco did not neglect to mention the other onating focus value proposition for this software con­favorable points of difference. Rather, it chose to place sisted of one point of parity (which the customer in itiallymuch greater emphasis on the two points of difference thought was a point of contention), followed by threeand the one point of parity that mattered most to the cus­ points of difference:tomer, thereby delivering a value proposition w ith res­ Point of parity: Using this software, customers can createonating focus. P& ID graphics (either drawings or reports) as fast, if not Stressing as a point o f parity what customers may faster, as they can using CAD, the next best alternative.m istakenly presume to be a point of difference favoring Point of difference: This software checks all of the cus­a competitor’s offering can be one of the most im portant tomer’s upstream and downstream data related to plantparts of constructing an effective value proposition. Take assets and procedures, using universally accepted engi­the case of Intergraph, an Alabama-based provider of neering practices, company-specific rules, and project- orengineering software to engineering, procurement, and process-specific rules at each stage of the design process,construction firms. One software product that Intergraph so that the customer avoids costly mistakes such as miss­offers, Sm artPlant P& ID , enables customers to define ing design change interdependencies or, worse, orderingflow processes for valves, pumps, and piping w ithin plants the wrong equipment.they are designing and generate piping and instrum enta­ Point of difference: This software is integrated w ith up­tion diagram s (P & ID ). Some prospective customers stream and downstream tasks, such as process sim ulationwrongly presume that SmartPlant’s drafting performance and instrum entation design, thus requiring no reentrywould not be as good as that of the next best alternative, of data (and reducing the margin for error).because the alternative is built on computer-aided design Point of difference: W ith this software, the customer is(CAD), a better-known drafting tool than the relational able to link remote offices to execute the project and thendatabase platform on which SmartPlant is built. So Inter­ merge the pieces into a single deliverable database tograph tackled the perception head on, gathering data hand to its customer, the facility owner.from reference customers to substantiate that this point Resonating focus value propositions are very effective,of contention was actually a point of parity. but they’re not easy to craft: Suppliers must undertakeM A RCH 20 0 6 95
  7. 7. C u s to m er Value Propositions in B u s i n e s s Marketscustomer value research to gain the insights to construct savings from reduced power usage that a customer wouldthem. Despite all of the talk about customer value, few gain by using a Rockwell Autom ation motor solutionsuppliers have actually done customer value research, instead of a competitor’s comparable offering:which requires time, effort, persistence, and some creativ­ity. But as the best practices we studied highlight, think­ Power Reduction Cost Savings = [k W s p e n t x n u m b e r of o p e ratin g hours pering through a resonating focus value proposition disci­ y e a r x $ p er k W h our x n u m b er of y e a rs systemplines a company to research its customers’ businesses solution in o p e ra tio n ] C o m p e tito r S o lu tio nenough to help solve their problems. As the experience - [k W s p e n t x n u m b e r of o p e ratin g hours perof a leading resins supplier amply illustrates, doing cus­ y e a r x $ p er k W hour x n u m b e r of y e a rs systemtomer value research pays off. (See the sidebar “Case in solution in o p e ra tio n ] R o c k w e ll A u t o m a tio n S o lu tio nPoint: Transforming a Weak Value Proposition") This value word equation uses industry-specific term i­ nology that suppliers and customers in business marketsSubstantiate Customer Value rely on to communicate precisely and efficiently aboutPropositions functionality and performance.In a series of business roundtable discussions we con­ducted in Europe and the United States, customer manag­ers reported that “We can save you money!” has become Demonstrate Customer Valuealmost a generic value proposition from prospective sup­ in Advancepliers. But, as one participant in Rotterdam w ryly ob­ Prospective customers must see convincingly the costserved, most of the suppliers were telling “fairy tales.” savings or added value they can expect from using theAfter he heard a pitch from a prospective supplier, he supplier’s offering instead of the next best alternative.would follow up w ith a series of questions to determine Best-practice suppliers, such as Rockwell Autom ationwhether the supplier had the people, processes, tools, and precision-engineering and manufacturing firm Nij-and experience to actually save his firm money. As often dra Groep in the Netherlands, use value case histories toas not, they could not really back up the claims. Simply demonstrate this. Value case histories document the costput, to make customer value propositions persuasive, sup­ savings or added value that reference customers have ac­pliers must be able to demonstrate and document them. tually received from their use of the supplier’s market Value word equations enable a supplier to show points offering. Another way that best-practice firms, such asof difference and points of contention relative to the Pennsylvania-based GE Infrastructure Water & Processnext best alternative, so that customer managers can eas­ Technologies (G EIW &PT) and SKF USA, show the valueily grasp them and find them persuasive. A value word of their offerings to prospective customers in advance is Some best-practice suppliers are even willing to guarantee a certain amount of savings before a customer signs on.equation expresses in words and simple mathematical through value calculators. These customer value assess­operators (for example, + and +) how to assess the differ­ ment tools typically are spreadsheet software applicationsences in functionality or performance between a sup­ that salespeople or value specialists use on laptops as partplier’s offering and the next best alternative and how to of a consultative selling approach to demonstrate theconvert those differences into dollars. value that customers likely would receive from the suppli­ Best-practice firms like Intergraph and, in Milwaukee, ers’ offerings.Rockwell Autom ation use value word equations to make W hen necessary, best-practice suppliers go to extraor­it clear to customers how their offerings w ill lower costs dinary lengths to demonstrate the value of their offeringsor add value relative to the next best alternatives. The relative to the next best alternatives. The polym er chem­data needed to provide the value estimates are most often icals unit of Akzo Nobel in Chicago recently conductedcollected from the custom er’s business operations by an on-site two-week pilot on a production reactor at asupplier and customer managers working together, but, prospective customer’s facility to gather data firsthandat times, data may come from outside sources, such as in ­ on the performance of its high-purity metal organics of­dustry association studies. Consider a value word equa­ fering relative to the next best alternative in producingtion that Rockwell Autom ation used to calculate the cost compound semiconductor wafers. Akzo Nobel paid this96 HARVARD BUSINESS REVIEW
  8. 8. C u s to m er Value Propositions in Business Marketsprospective customer for these two weeks, in which each ated) their offerings deliver to the companies that haveday was a trial because of daily considerations such as purchased them. Thus, suppliers work w ith their custom­output and maintenance. Akzo Nobel now has data from ers to define how cost savings or increm ental profitsan actual production machine to substantiate assertions w ill be tracked and then, after a suitable period of time,about its product and anticipated cost savings, and evi­ work w ith customer managers to document the results.dence that the compound sem iconductor wafers pro­ They use value documenters to further refine their cus­duced are as good as or better than those the customer tomer value models, create value case histories, enablecurrently grows using the next best alternative. To let its customer managers to get credit for the cost savings andprospective clients’ customers verify this for themselves, increm ental profits produced, and (because customerAkzo Nobel brought them sample wafers it had produced managers know that the supplier is w illing to return laterfor testing. Akzo Nobel combines this point of parity with to document the value received) enhance the credibilitytwo points of difference: significantly lower energy costs of the offering’s value.for conversion and significantly lower maintenance costs. A pioneer in substantiating value propositions over the past decade, GEIW &PT documents the results provided to custom ers through its value generation planningDocument Customer Value (VGP) process and tools, which enable its field personnelDemonstrating superior value is necessary, but this is no to understand customers’ businesses and to plan, execute,longer enough for a firm to be considered a best-practice and document projects that have the highest value im ­company. Suppliers also must document the cost savings pact for its customers. An online tracking tool allowsand increm ental profits (from additional revenue gener­ GEIW &PT and customer managers to easily m onitor the Case in Point: Transforming a Weak Value Proposition A leading su p p lie r o f specialty resins search to better understand the re­ w as the re alizatio n that only 15% of used in architectural c o a tin g s-s u c h as q uirem ents and preferences o f its cus­ a p ainting contractors costs are the p aint for b u ild in g s -re c o g n iz e d that its to m e rscu sto m ers and how the perfor­ coatings; labor is by far the largest cost custom ers w ere com ing u nde r pres­ m ance o f the new resin w ould affect com ponent. If a coating could provide sure to com ply w ith incre asin gly strict th e ir total cost o f doing busin ess.T h e greater p ro d u c tiv ity -fo r exam ple, a e nvironm ental regulations. At the resins su p p lie r w ent so far as to study faster drying tim e that allow ed two sam e tim e, the su p p lie r reasoned, no the requ irem ents and preferences of coats to be applied du ring a single coating m a n u fa ctu re r w ould w an t to the com m ercial painting contractors eight-hour s h ift-c o n tra cto rs w ould sacrifice perform ance. So the resins c u s to m e rs -b u ild in g o w n e rs.T h e sup­ likely accept a h igh er price. su p p lie r developed a new type o f high- p lie r conducted a series o f focus The resins su p p lie r retooled its value p erform ance resins that w ould enable g roups and field tests w ith painting proposition from a single dim ension, its custom ers to com ply w ith stricter contractors to gather data. The perfor­ e nvironm ental regulation com pliance, e n viro n m e n ta l s ta n d a rd s -a lb e it at m ance on p rim ary custom er require- to a resonating focus value proposition a h igher price but w ith no reduction in m e n ts - s u c h as coverage, dry tim e, w here e nvironm ental com pliance perform ance. and d u ra b ility -w a s stu d ie d ,an d cus­ played a sig n ifica n t but m inor part. In its initial d iscussions w ith custom ­ tom ers w ere asked to make perfor­ The new value proposition w as "The ers w ho w ere using the product on a m ance trade-offs and indicate th eir new resin enables coatings producers trial basis, the resins su p p lie r was su r­ w illin g n ess to pay for coatings that to make architectural coatings w ith prised by the tepid reaction it received, delivered enhanced perform ance. The h igher film build and gives the paint­ p articu la rly from com m ercial m anag­ resins su p p lie r also jo in e d a com m er­ ing contractors the ab ility to put on ers. They w ere not enth usiastic about cial painting contractor industry asso­ two coats w ithin a single shift, thus the sales prospects for higher-priced ciation, enrolled m anagers in courses increasing p ainter p roductivity w hile coatings w ith com m ercial painting on how contractors are taught to esti­ also being e nviro nm e ntally com pliant.” contractors, the prim ary target market. mate jobs, and trained the staff to w ork Coatings custom ers enthusiastically They w ould not, they said, move to the w ith the job-estim ation software used accepted this value proposition, and new resin until regulation m andated it. by painting contractors. the resins su p p lie r was able to get a Taken aback, the resins su p p lie r de­ Several insights em erged from this 40% price prem ium for its new offering cided to co n d u ct cu sto m e r va lu e re­ custom er value research. Most notable over the traditional resin product.M A RCH 2006 97
  9. 9. C u s to m er Value Propositions in B u s i n e s s Marketsexecution and documented results of each project the zation can submit N P I requests whenever they have ancompany undertakes. Since it began using VGP in 1992, inventive idea for a customer solution that they believeGEIW &PT has documented more than 1,000 case histories, would have a large value im pact but that G EIW & PTaccounting for $1.3 b illion in customer cost savings, 24 b il­ presently does not offer. Industry marketing managers,lion gallons of water conserved, 5.5 m illion tons of waste who have extensive industry expertise, then performeliminated, and 4.8 m illion tons of air emissions removed. scoping studies to understand the potential of the pro­ As suppliers gain experience documenting the value posed products to deliver significant value to segmentprovided to customers, they become knowledgeable customers. They create business cases for the proposedabout how their offerings deliver superior value to cus­ product, which are “racked and stacked” for review. Thetomers and even how the value delivered varies across senior management team of GEIW &PT sort through a Best-practice suppliers make sure their people know how to identify what the next value propositions ought to be.kinds of customers. Because of this extensive and detailed large number of potential initiatives competing for lim ­knowledge, they become confident in predicting the cost ited resources. The team approved Panichella’s initiative,savings and added value that prospective custom ers which led to the development of a new offering that pro­likely w ill receive. Some best-practice suppliers are even vided refinery customers w ith documented cost savingsw illing to guarantee a certain amount of savings before a amounting to five to ten times the price they paid for thecustomer signs on. offering, thus realizing a compelling value proposition. A global automotive engine manufacturer turned to Sonoco, at the corporate level, has made custom erQuaker Chemical, a Pennsylvania-based specialty chemi­ value propositions fundamental to its business strategy.cal and management services firm , for help in signifi­ Since 2003, its CEO, H arris DeLoach,Jr., and the executivecantly reducing its operating costs. Q uaker’s team of committee have set an am bitious growth goal for thechem ical, m echanical, and environm ental engineers, firm : sustainable, double-digit, profitable growth everyw hich has been m eticulously docum enting cost savings year. They believe that distinctive value propositions areto customers for years, identified potential savings for this crucial to support the growth initiative. At Sonoco, eachcustom er through process and productivity im prove­ value proposition must be:ments. Then Quaker im plem ented its proposed solu- •Distinctive. It must be superior to those of Sonoco’stio n -w ith a guarantee that savings would be five times competition.more than what the engine manufacturer spent annually •Measurable. A ll value propositions should be based onjust to purchase coolant. In real numbers, that meant sav­ tangible points of difference that can be quantified inings of $1.4 m illion a year. W hat customer wouldn’t find monetary terms.such a guarantee persuasive? •Sustainable. Sonoco must be able to execute this value proposition for a significant period of time. Unit managers know how critical DVPs are to businessSuperior Business Performance unit performance because they are one of the ten keyWe contend that customer value propositions, properly metrics on the managers’ performance scorecard. In se­constructed and delivered, make a significant contribu­ nior management reviews, each unit manager presentstion to business strategy and performance. GE Infrastruc­ proposed value propositions for each target market seg­ture Water & Process Technologies’ recent development ment or key customer, or both. The managers then re­of a new service offering to refinery customers illustrates ceive sum mary feedback on the value proposition met­how general manager John Panichella allocates lim ited ric (as w ell as on each of the nine other performanceresources to initiatives that w ill generate the greatest in ­ metrics) in terms of whether their proposals can lead tocremental value for his company and its customers. For profitable growth.example, a few years ago, a field rep had a creative idea for In addition, Sonoco senior management tracks the re­a new product, based on his comprehensive understand­ lationship between business unit value propositions anding of refinery processes and how refineries make money. business unit performance - and, year after year, has con­The field rep submitted a new product introduction (N PI) cluded that the emphasis on DVPs has made a signifi­request to the hydrocarbon industry marketing manager cant contribution toward sustainable, double-digit, prof­for further study. Field reps or anyone else in the organi- itable growth.98 HARVARD BUSINESS REVIEW
  10. 10. C u s to m er Value Propositions in Business Markets Best-practice suppliers recognize that constructing managers have 90 days to submit a proposal for a savings and substantiating resonating focus value propositions is project that they plan to present to their customers. The not a onetime undertaking, so they make sure their peo­ director of chemical management judges these proposals ple know how to identify what the next value proposi­ and provides feedback. If he deems a proposed project tions ought to be. Quaker Chem ical, for example, con­ to be viable, he awards the manager w ith a gift certifi­ ducts a value-proposition training program each year for cate. Implementing these projects goes toward fulfilling its chemical program managers, who work on-site with Quaker’s guaranteed annual savings commitments of, customers and have responsibility for form ulating and on average, $5 m illion to $6 m illion a year per customer. executing customer value propositions. These managers Each o f these businesses has made custom er value first review case studies from a variety o f industries propositions a fundamental part of its business strategy. Quaker serves, where their peers have executed savings Drawing on best practices, we have presented an ap­ projects and quantified the monetary savings produced. proach to customer value propositions that businesses Com peting in teams, the managers then participate in can im plem ent to communicate, w ith resonating focus, a sim ulation where they interview “customer managers” the superior value their offerings provide to target market to gather inform ation needed to devise a proposal for a segments and customers. Customer value propositions customer value proposition. The team that is judged to can be a guiding beacon as w ell as the cornerstone for have the best proposal earns “bragging rights,” w hich are superior business performance. Thus, it is the responsibil­ highly valued in Quaker’s competitive culture. The train­ ity of senior management and general management, not ing program, Quaker believes, helps sharpen the skills of just marketing management, to ensure that their cus­ chemical program managers to identify savings projects tomer value propositions are just that. ^ when they return to the customers they are serving. As the final part of the training program, Quaker stages Reprint R 0603F; HBR OnPoint 3544 an annual real-world contest where the chemical program To order, see page 151.RC. VEY m a r c h 20 0 6 99
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