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"Everything is worth what its purchaser will pay for it."

Publilius Syrus, first century B.C.

How do you ascertain value? tin yous measure it? What are your products and services really worth to customers? Remarkably few suppliers in business markets are able to answer those questions. And withal the ability to pinpoint the value of a product or service for ane's client has never been more important. Customers—especially those whose costs are driven by what they purchase—increasingly look to purchasing equally a manner 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 footing to hold in wet, prevent weed growth, and allow melons and vegetables to be planted closer together. The first supplier comes to you with this proposition: "Trust the states—our mulch moving-picture show volition lower your costs. We'll provide superior value for your money." The second supplier says, "We tin lower the cost of your mulch film past $sixteen.83 per acre," and offers to testify you exactly how. Which proposition would you find more convincing?

Many customers, like the commercial grower, empathise their own requirements only do non 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 simply growing number of suppliers in concern markets describe on their knowledge of what customers value, and would value, to proceeds marketplace advantages over their less knowledgeable competitors. These suppliers have developed what we call customer value models, which are information-driven representations of the worth, in monetary terms, of what the supplier is doing or could practise for its customers.

Client 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 equally availability of information and a customer's cooperation, a supplier might build a value model for an private customer or for a market place segment, drawing on information gathered from several customers in that segment.

Client value models are not easy to develop. Simply the experiences of suppliers that accept built and used them successfully suggest several guidelines that we believe volition be useful to any visitor attempting to define and measure value for its customers.

A Common Definition of Value

To measure out value in practice, information technology is crucial to have a shared understanding of exactly what value is in business markets. Before we get into any detail about edifice value models, we need to provide a brief explanation of what we mean by value. Value in concern markets is the worth in budgetary terms of the technical, economic, service, and social benefits a customer visitor receives in substitution for the price information technology pays for a market offer. Nosotros will elaborate on some aspects of this definition.

Beginning, we limited value in monetary terms, such equally dollars per unit of measurement, guilders per liter, or kroner per 60 minutes. Economists may care about "utils," but we have never met a director who did! 2nd, by benefits, we mean internet benefits, in which any costs a client incurs in obtaining the desired benefits, except for purchase price, are included. 3rd, value is what a client gets in exchange for the price it pays. We encounter a market place offering as having ii elemental characteristics: its value and its toll. 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 client's incentive to purchase that market offering. Finally, considerations of value take identify within some context. Even when no comparable market offerings exist, there is e'er a competitive alternative. In business concern markets, one competitive alternative may be that the customer decides to make the production itself rather than buy information technology.

We can capture the essence of this definition of value in the post-obit equation:

Values and Costsouthward are the value and price of the supplier's market place offering, and Valuea and Tolla are the value and price of the next best alternative. The difference between value and price equals the customer's incentive to purchase. But 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.

Building Customer Value Models

Field value assessments (also known by other names, such as value-in-use or toll-in-use studies) are the most commonly used—and, we believe, the about accurate—method for building client value models. Field value assessments call for suppliers to gather data almost their customers firsthand whenever possible. Clearly, however, conducting such direct research isn't always an choice. In cases where field value assessments are not viable, it is possible to gain a worthwhile understanding of value through such methods as direct and indirect survey questions, conjoint analysis, and focus groups, all of which rely primarily on customers' perceptions of the functionality, performance, and worth of a supplier'southward offering. (See the insert "Using Customer Focus Groups to Assess Value.") Beneath, nosotros describe a procedure for building a value model using field value assessments.

Get started.

Without a dubiousness, the most difficult customer value model that a supplier volition build is its first one. Indeed, gaining a comprehensive understanding of the value of a market offering in a particular client setting may appear monumentally hard. Simply it can be washed. The outset step is putting together the right kind of value inquiry squad. The team should include people with product, field engineering, and marketing feel, and two or three forward-thinking salespeople. Having salespeople involved at the start is particularly important. They know the client and how the offering is used; they also know which customers might be willing to cooperate in value research. Sales-people who are function of a value assessment initiative from the showtime are also more likely to sympathize and appreciate it. They will, therefore, support the approach and tin then persuasively relate their experiences to others in the sales strength.

Selecting the right market segment to target is the next step. Because the supplier will demand to conduct value assessments with at to the lowest degree 2 and perhaps up to a dozen customers to build an initial value model, information technology's a good idea to start with a segment in which the supplier has particularly shut, collaborative relationships with customers, extraordinary knowledge of how customers use the offering in question, or relatively uncomplicated offerings.

Before approaching a customer, the team should recollect through what it will need from the customer and what the customer will gain, and exist prepared to offering an incentive. For instance, the supplier might offering to provide the resources to gather the data at no charge to the customer and guarantee to share all findings. For near companies, the promise of shared research findings among participating customers in an aggregated or disguised manner is an irresistible incentive considering it allows them to benchmark. Due west.W. Grainger, a major distributor of maintenance, repair, and operating supplies in Northward America, offered both incentives for the 15 companies that participated in its initial model-building effort.

Generate a comprehensive list of value elements.

Value elements are anything that bear upon the costs and benefits of the offering in the customer's concern. These elements may be technical, economic, service, or social in nature and volition vary in their tangibility. How well a pigment disperses in a coating, for case, would exist a technical chemical element; providing a consolidated monthly invoice rather than a dissever invoice for each purchase would be an economic chemical element; design assistance would fall nether the service heading; and ease of doing business with the supplier would be social. As information technology is generating the list, the team should consider the entire life cycle of the offering in question, from how the client acquires and uses it to how the customer disposes of it when it is no longer needed. The list should capture all the potential effects that doing business with a supplier might take on the customer'southward concern.

Information technology's important to exist as inclusive as possible. Leaving out elements, especially those that might make the supplier'due south market offering await unfavorable next to the incumbent or next-best-culling offering, will undermine the projection'southward credibility.

Past identifying as many elements every bit possible, the team volition be able to approximate more accurately the differences in functionality and performance its offer provides relative to the next best alternative. Broadly stated categories, such as the toll of an hr of downtime in a customer'due south plant, may be easier to place. But they tend to leave out cost elements, producing less valid estimates of worth. A canteen breaking in a filling line causes downtime, certainly, just information technology also generates costs in flake, discards, disposal, maintenance labor, cleaning and sanitizing chemicals, and then on, many of which tend to be cached in diverse plant-overhead accounts.

Often, the value research team will have to brand trade-offs between relying on a customer's perception of what all the relevant elements are and really observing firsthand the ways in which the supplier'due south offering affects the customer. The customer'due south management may not have an accurate understanding of all the value elements associated with a particular offering. Assertive that this was frequently the case, Alcoa Aerospace developed a program in which the company trained its salespeople in field-value-assessment methods and and so gave them an consignment in which they had to comprehensively chart all the steps a customer took in acquiring, converting, and disposing of an Alcoa offer. Interestingly, the plan gave salespeople a reason to approach customers: to ask them to cooperate in letting them do their assignments. The promise of enhanced cognition of their own businesses provided an incentive for those customers.

Alcoa's initiative paid off. At the end of a 2-month period, the sales-people got together and presented their findings to i another. The presentations allowed participants to learn from others' experiences and to exchange ideas about various customers' situations and the potential for hereafter sales. The customers benefited because they learned well-nigh cost and benefit elements they had previously been unaware of—elements they could now factor into their own assessments of suppliers' proposals.

Gather information.

With a comprehensive list of value elements in mitt, the side by side step is obtaining initial estimates for each chemical element and finding out what each 1 is worth in budgetary terms. Sometimes, suppliers find it useful to gather information by placing a squad member in a key functional area of the customer's organization for a week or two in order to gain a amend understanding of what is actually beingness done and where things can go incorrect during the day. For instance, a supplier might have a team member work in the customer'southward receiving section. To abate whatsoever concerns on the office of the employee, client management should tell them that the person is in that location to aid out and to acquire.

Frequently, the customer doesn't know that it has the information or information the supplier is looking for. The customer may think the data does not be. In fact, the kind of data that needs to be pulled together in the analysis may reside on six or seven databases or systems in dissimilar functional areas.

Ofttimes, the customer doesn't know that it has the data or information the supplier is looking for.

Sometimes, the only fashion to find the data is for team members to enquire around until they come across the individual who knows where the information is.

Focus groups made upwardly of representatives from each functional area in a company can also be an effective machinery for uncovering data. The Proaction Group, a Chicago-based consulting and strategy implementation company, recently conducted four internal focus groups at a customer company for exactly that purpose. To set themselves and the prospective focus-grouping participants, Proaction consultants met individually with each prospective participant before the session, learning what the problems might be and gathering some initial data. During the session, participants were asked what kinds of information they idea should be used in a value model and and then where in the organisation to look for that information. The consultants discovered sources of information in places that neither they nor the client'due south management had previously identified.

The value research team also needs to be creative in finding other sources of information. Contained industry consultants or knowledgeable personnel within the supplier visitor can be skillful sources of initial estimates. San Diego-based Qualcomm, a supplier of satellite-based mobile communications systems for truck fleets, for example, drew on the American Trucking Association's research studies to provide ranges for some of the elements in the value model it developed for its OmniTRACS mobile communications system. When a supplier provides a service that mitigates the customer'south take chances, it tin be useful to tap actuarial consultants to gauge what the toll of the potential difficulty would be.

The ease with which the team can establish monetary estimates for its value elements volition vary. The value of social elements such as greater peace of listen, for case, is generally very difficult to express in monetary terms. In fact, most suppliers do not fifty-fifty effort to assign budgetary amounts to social elements. Instead, they put those elements aside and discuss them with the client in a qualitative way afterward presenting quantitative results. Qualcomm does not assign monetary amounts to many less-tangible elements but still includes them in its analysis as "value placeholders." In this style, Qualcomm conveys to its customers that those elements are worth something and leaves open the possibility that a specific monetary amount might exist ascertained in the future.

In whatsoever field value cess, suppliers will find that some assumptions must be fabricated in guild to complete an analysis. These assumptions might be most the functionality or performance a marketplace offering actually provides in the customer's specific setting, particularly for elements that are extraordinarily difficult or costly to measure out. Or they might exist about the monetary worth of perceived or measured differences in functionality or performance that an offer provides in the customer's setting. It is disquisitional for the supplier to be explicit about whatsoever assumptions it makes. If the customer doesn't know how or why the team assigned a sure value to an element—or is non encouraged to offer its own rationale if it disagrees with the supplier'due south estimates and so to join the supplier in researching a mutually acceptable solution—the supplier's credibility will exist compromised.

Validate the model and understand variance in the estimates.

After building the initial value model, the supplier should validate it by conducting additional assessments with other customers or potential customers in the market segment. Conducting further assessments enables the supplier to refine its value estimates and to sympathise better how the value of its market offering varies beyond customers' applications, capabilities, and usage.

What's more, every bit the supplier conducts additional value assessments, it will develop a greater agreement of where it needs to utilise firsthand information and where it can rely on customers' perceptions. (In soliciting perceptions, the supplier should call up that people are generally better at making comparative judgments [more than or less than] than absolute judgments [it's worth Ten]. In other words, the supplier should provide the initial guess and ask the informants whether that chemical element is more or less valuable to them than the gauge.)

In conducting additional assessments, the supplier will also learn how the value its offerings provide varies beyond kinds of customers. The supplier can then build a database that contains value estimates—and the individual client characteristics, which we call descriptors, that might touch on those estimates—from all participating companies. Looking at all of the information together, the supplier tin then determine which descriptors have more than impact than others on the value customers receive from the offering in question. Equally a result, the supplier can choose to pursue those customers and prospective customers for which its offering will provide superior value.

Create value-based sales tools.

Suppliers can not merely use value models to inform and guide their ain decision making but also to create persuasive sales tools. One common sales tool is a value case history. Value case histories are written accounts that certificate the cost savings or added value that a customer receives from its utilize of a supplier'south market offering. Sonoco Products Visitor's protective packaging division, for instance, tracks the savings its customers gain from implementing an offering it calls total packaging solutions. Rather than selling customers the more unremarkably marketed corrugated-cardboard packaging materials, Sonoco offers packaging systems that, it maintains, are stronger, lighter, and smaller. The major elements in Sonoco'due south value model thus include savings from reduced product impairment, packaging costs, shipping costs, and storage costs. When a customer has used these "solutions" for a year, Sonoco constructs a case study well-nigh the cost savings and reports the findings to the customer. Sonoco maintains a file of these example studies, which its salespeople draw on when making proposals to other prospects. The studies persuasively convey the cost savings that the prospects themselves would likely realize.

Value cess can besides become a service that suppliers offering every bit part of a consultative selling approach. For example, a supplier can develop a spreadsheet software awarding that salespeople tin can apply on-site with a laptop computer to evaluate the potential value of the offering to a particular customer. (For an illustration of how such a tool tin can be used, see the insert "How BT Products Uses Value Models as Sales Tools.")

Putting an Understanding of Value to Use

Suppliers can use their understanding of value to strengthen performance and create competitive reward in several ways. For instance, a supplier can use its noesis to tailor supplementary services, programs, and systems in its electric current marketplace offerings and to guide the development of new offerings. Integrating everything it has learned about value into its marketing efforts, information technology can also gain new customers. Finally, information technology can better sustain customer relationships past documenting its commitment of superior value over time and by discovering new ways to update and reinvigorate those relationships.

Managing Market Offerings.

In the article "Capturing the Value of Supplementary Services" (HBR January–Feb 1995), we argued that suppliers can capitalize on the inevitable variation in customers' requirements within market place segments and increase their profitability by providing flexible market offerings. Doing so entails constructing what nosotros call naked solutions with options. Naked solutions consist of but those production and service elements that all customers within a marketplace segment value. We said that suppliers should strive to sell naked solutions at the everyman possible price that will yield a turn a profit. Then suppliers should "wrap" those solutions with options-specific product and service elements that some, only not all, customers value.

A company's ability to manage flexible market offerings successfully rests on its understanding of the value each component of an offering creates also every bit its associated toll. An understanding of how customers value those components—and what they toll the supplier to evangelize—enables suppliers to identify and eliminate what we call value drains. These are services that cost the supplier more to provide than they are worth to the customers receiving them and that have no strategic significance.

Consider this: A producer of chemicals used in extracting oil from wells routinely performed a field analytic monitoring service for its customers to determine when, and in what amounts, they should apply its products. A salesperson visiting i of the company'south small, less sophisticated customers noticed the reports stacked in a corner of the product shed. When asked about their usefulness, the customer replied that he was non using the information at all and instead just had the producer'due south truck commuter pump a few gallons of the chemicals into each well whenever the truck came past. Learning this, the supplier offered to discontinue the service and, in substitution, give the client a 7% per-gallon cost reduction. The customer readily agreed, and the profitability of that account jumped from minus 6% to 32%!

Rather than finding value drains by chance, as in the example, suppliers can set out to detect them by using field value cess in conjunction with activity-based-costing analysis. Identifying and eliminating value drains results in better resource allotment of resources and improved profitability. Well-nigh always, the results more than than pay for the cost of doing the field-value-assessment research.

Guiding the Development of New or Improved Products and Services.

Most marketplace enquiry that is conducted to provide an agreement of a customer's requirements and preferences does non address the question: "If we exercise Ten, what is information technology worth to that customer?" Knowing that an improvement in some functionality is important does not tell a supplier if the customer is willing to pay for it. Value models provide that information.

Knowing that an improvement in some functionality is important does non tell a supplier if a customer is willing to pay for it.

In cases where the supplier'due south new offering will introduce technology into the market, for case, a value model can demonstrate to prospective customers how the engineering can provide greater value for them. That'southward an peculiarly critical signal when the new engineering science makes the market offering itself higher priced than the culling choices, which may utilise more than established and familiar technologies. At the same time, a model allows the supplier to run into how the value of its new engineering science varies across applications, customer capabilities, and usage situations.

When a supplier is developing a new offering in response to customers' requests or demands, it can use value assessments to determine what improvements are worthwhile and which ones accept the highest priority. For instance, the supplier could ask managers in unlike functional areas of customer companies to evaluate potential improvements. One chemical pigment supplier asked managers in its client's production and R&D areas to perform a conjoint analysis for potential changes in its offering. Specifically, the supplier wanted to know how the client would value some near-term-achievable changes in technical attributes, such as gloss or dispersibility. At the same time, the supplier asked the customer's general managers and purchasing managers to consider the potential value of changes in the products' commercial attributes, such as the supplier's commitment service and payment terms. Although the findings largely conformed to the supplier's management expectations, at that place was at least one important discovery: the relatively high value the customers placed on improved dispersibility. Subsequent field investigation confirmed that the supplier's customers were indeed having many troubles with "flocking," the clumping that tin sometimes occur every bit a dry pigment is dispersed into a liquid solution.

Gaining Customers.

Noesis of how their market offerings specifically deliver value to customers enables suppliers to craft persuasive value propositions. Consider the case of Greif Brothers Corporation, which produces fiber drums, plastic drums, and intermediate bulk containers for nutrient products and chemicals manufacturers. Rather than competing on a price-per-container ground, Greif markets consummate packaging systems. That is, Greif stays involved with its customers throughout the life bike of the containers—monitoring how the customer uses the container, following the container's path to the end user and retrieving information technology when it is empty, and disposing of information technology or reconditioning it. Greif's value proposition—full-cost-based packaging—promises that its systems can significantly reduce a client'due south full packaging costs.

How does Greif develop its propositions? Kickoff, a Greif strategic business relationship manager, together with a representative from the customer, builds a value model to sympathise total costs. (Greif developed its electric current model based on information from 20 major customers.) Key elements include the costs associated with tracking and retrieving the drums, cleaning and maintaining them, testing and recertifying recycled drums, and all the associated paperwork.

Greif has institute that customers—both existing and potential—can readily assign monetary values to some elements but that other elements are more than difficult to pivot downward. For those elements that are harder to quantify, Greif takes its assay to a deeper level. Consider the benefit of environmental stewardship. To go a handle on the value of that element, Greif determines what percent of its customers' customers' locations (that is, the end users' locations) are in landfill-restricted areas, where the cost of disposing of the containers is higher than at other locations. Greif's service—which, every bit we said, includes retrieving the containers—not only eliminates this cost but besides indemnifies its customers against improper disposal by the end users, protecting them from fines levied by the Environmental Protection Agency. While these analyses do not account for all the reasons that environmental stewardship would be worth something to a customer, such as the value added to the client's reputation, they all the same make environmental stewardship worth something to the client in monetary terms.

Using the value model to construct several viable total-cost-based packaging solutions, Greif's strategic account manager and a team of Greif experts from logistics, handling systems, and estimator services and then give a comprehensive presentation to the prospective customer'southward senior managers. During the presentation, they talk over the merits and prices of each solution.

Sustaining Customer Relationships.

At the core of all successful working relationships are two essential characteristics: trust and delivery. To demonstrate their trustworthiness and delivery to customers, progressive suppliers periodically provide testify to customers of their accomplishments. Sales managers at Greif, for example, give customers quarterly reviews that document actual cost savings. Applied Industrial Technologies (AIT), a major distributor of specialty replacement bearings, power manual components, and fluid power products in the United States and Canada, provides another good instance.

AIT primarily serves maintenance, repair, and operating (MRO) supplies markets inside the primary metals, mining, pulp and paper, utilities, chemical processing, textiles, nutrient processing, and agricultural industries. It operates more than 337 branch locations across the United States. In 1990, the company began to market a value proposition promising to assistance its customers ameliorate productivity rather than just selling them parts at a low price. Through value assessment, the company began to piece of work with its customers to aid them save coin in areas such equally maintenance, inventory, and energy consumption—whatsoever measurable area other than purchasing. The results were collected in what AIT calls documented value-added savings, which is at present the cornerstone of the company's partnering efforts.

AIT trains all of its employees—from co-operative managers to field associates to delivery drivers—to wait for ways to improve customers' operations, and the company rewards them for their successes. And to back up their efforts, the company has developed a customized software programme that calculates toll savings. Sales representatives can run the program on laptops while visiting customers. Working with customers' managers, representatives input data for potential value-adding and cost-reduction variables—variables that AIT and the customer accept previously agreed on. Then, either on a quarterly or a semiannual basis, AIT presents each customer with a written report that documents the savings, allowing customers to appraise immediate the value AIT has delivered.

In order to found brownie for its reports, AIT asks customers to sign and return a copy. The company keeps rails of the performance of each cost-savings initiative and aggregates the totals. AIT calculates that last yr it provided more than $100 1000000 in toll savings to its customers.

Delivering Superior Value and Getting an Equitable Return

Understanding value in business markets and doing business based on value delivered gives suppliers the ways to get an equitable return for their efforts. The essence of customer value management is to deliver superior value and become an equitable return for information technology, both of which depend on value assessment. W.W. Grainger, the MRO supplies benefactor, is an fantabulous instance of a company that has realized the benefits of measuring and monitoring value for its customers. The company has even established a consulting arm, Grainger Consulting Services, specifically to help customers sympathize the full toll of MRO supplies management. (See the insert "Understanding Value: How W.West. Grainger and Its Customers Benefit.")

Perhaps equally compelling, though, is an observation fabricated past a senior manager at ane company that does business based on value: "Selling only on price—where's the fun in that?" This manager recognized that when there is market pressure on toll, his concern unit needs to respond by demonstrating that it has something dissimilar to offering—something that volition provide superior value. Assessing and truly understanding value in business markets is the beginning of the path to profitable fun.

A version of this commodity appeared in the November-Dec 1998 issue of Harvard Business concern Review.