What is business? Isn't it an exchange of
valuable things? I give you something in
which you perceive some value, and in
exchange, you will give me something of
equal value.
Answers
Answer:
Customers—especially those whose costs are driven by what they purchase—increasingly look to purchasing as a way to increase profits and therefore pressure suppliers to reduce prices. To persuade customers to focus on total costs rather than simply on acquisition price, a supplier must have an accurate understanding of what its customers value, and would value.
Put yourself, for a moment, in the role of a commercial grower. Two suppliers are trying to sell you mulch film: thin plastic sheets that are placed on the ground to hold in moisture, prevent weed growth, and allow melons and vegetables to be planted closer together. The first supplier comes to you with this proposition: “Trust us—our mulch film will lower your costs. We’ll provide superior value for your money.” The second supplier says, “We can lower the cost of your mulch film by $16.83 per acre,” and offers to show you exactly how. Which proposition would you find more convincing?
Many customers, like the commercial grower, understand their own requirements but do not necessarily know what fulfilling those requirements is worth to them. To suppliers, this lack of understanding is an opportunity to demonstrate persuasively the value of what they provide and to help customers make smarter purchasing decisions.
A small but growing number of suppliers in business markets draw on their knowledge of what customers value, and would value, to gain marketplace advantages over their less knowledgeable competitors. These suppliers have developed what we call customer value models, which are data-driven representations of the worth, in monetary terms, of what the supplier is doing or could do for its customers.
Customer value models are based on assessments of the costs and benefits of a given market offering in a particular customer application. Depending on circumstances, such as availability of data and a customer’s cooperation, a supplier might build a value model for an individual customer or for a market segment, drawing on data gathered from several customers in that segment.
Customer value models are not easy to develop. But the experiences of suppliers that have built and used them successfully suggest several guidelines that we believe will be useful to any company attempting to define and measure value for its customers.
A Common Definition of Value
To measure value in practice, it is crucial to have a shared understanding of exactly what value is in business markets. Before we go into any detail about building value models, we need to provide a brief explanation of what we mean by value. Value in business markets is the worth in monetary terms of the technical, economic, service, and social benefits a customer company receives in exchange for the price it pays for a market offering. We will elaborate on some aspects of this definition.
First, we express value in monetary terms, such as dollars per unit, guilders per liter, or kroner per hour. Economists may care about “utils,” but we have never met a manager who did! Second, by benefits, we mean net benefits, in which any costs a customer incurs in obtaining the desired benefits, except for purchase price, are included. Third, value is what a customer gets in exchange for the price it pays. We see a market offering as having two elemental characteristics: its value and its price. Thus raising or lowering the price of a market offering does not change the value that such an offering provides to a customer. Rather, it changes the customer’s incentive to purchase that market offering. Finally, considerations of value take place within some context. Even when no comparable market offerings exist, there is always a competitive alternative. In business markets, one competitive alternative may be that the customer decides to make the product itself rather than purchase it.
We can capture the essence of this definition of value in the following equation:
Values and Prices are the value and price of the supplier’s market offering, and Valuea and Pricea are the value and price of the next best alternative. The difference between value and price equals the customer’s incentive to purchase. Simply put, the equation conveys that the customer’s incentive to purchase a supplier’s offering must exceed its incentive to pursue the next best alternative.