Value Merchants

Demonstrating and Documenting Superior Value in Business Markets

by James C. Anderson, Nirmalya Kumar and James A. Narus

Copyright © 2007 James C. Anderson, Nirmalya Kumar and James A. Narus.
Summarized by permission of Harvard Business School Press
240 pages

Focus Take-Aways
Leadership & Mgt. • Business-to-business (B2B) suppliers often have a hard time selling superior
Strategy product value.
Sales & Marketing
Finance • They often market their products with low price strategies, leading to price wars.
Human Resources
• Many B2B salespeople have no idea what their customers actually find valuable.
IT, Production & Logistics
Career Development • Many suppliers emphasize sales volume over profit margins. Look to the bottom line.
Small Business
Economics & Politics • Suppliers must demonstrate and document their products’ true value.
Industries
• A supplier’s salesforce represents a major corporate expense that cannot be
Intercultural Mgt.
justified if salespeople focus solely on price during their sales calls.
Concepts & Trends

• Many B2B salespeople operate as “value spendthrifts,” not “value merchants.”

• Numerous suppliers claim to offer superior value but cannot prove it.

• Show objective research to your customers to validate your claim of product value.

• “Value word equations” can help you secure a much better price for your products.

Rating (10 is best)

Overall Applicability Innovation Style

8 9 8 7

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 Relevance

What You Will Learn

In this Abstract, you will learn: 1) What three basic sales approaches dominate today’s
business-to-business (B2B) marketplace; 2) Why many B2B suppliers base their sales
on price, not value; 3) Why such companies and their salespeople should become “value
merchants;” and 4) How to sell the value of your product to your B2B customers.

Recommendation
Too often, businesses that sell to other businesses find it nearly impossible to convince
their customers that their products deliver superior value. This usually means that they
base their sales pitches on price and that they don’t know what their customers truly
value. Is that the case at your company? If so, marketing professors James C. Anderson,
Nirmalya Kumar and James A. Narus have a solution: Focus your product development,
marketing, branding, pricing and sales activities strictly on value – and not on being a low
price leader. You cannot make an equitable return on your products if your salespeople
always conduct fire sales. Wouldn’t it be great to end the B2B price wars? Now you can.
That’s where this savvy book comes into play. getAbstract recommends it to company
executives, including sales managers and marketing managers, who are willing to do the
research and analysis necessary to sell their products on the basis of true proven value,
and not as price-cut, run-of-the-mill Brand X commodities.

Abstract

Are Your Salespeople “Value Spendthrifts” or “Value Merchants?”

“Customer value
management If your business sells products mostly to other businesses, you operate in an extremely
relies on customer competitive environment. Customers tend to regard your products as commodities
value assessment that they can replace easily with similar products from other competitors. Given this
to gain an
understanding
atmosphere, you may believe that your company can sell its products only by deeply
of customer discounting them. This is not true. You can do business a better way: Present yourself
requirements as a supplier that delivers true value – and price your goods accordingly. Then, you can
and preferences, realize an equitable return in the business-to-business (B2B) marketplace.
and what fulfilling
those are worth in To achieve this aim, your company must truly offer real value to customers, and be able to
monetary terms.”
substantiate and certify this value in comparison to the customer’s “next-best alternative.”
Just as important, you may need to re-educate your marketing and salespeople about the
way they operate in the field. Often, salespeople fail to understand what value means
from the customer’s perspective. Thus, they find it hard to communicate their product’s
value in a meaningful way.
“As the need
to cut costs
Even more problematic, many salespeople are value spendthrifts, always ready to discount
in companies their products at the least sign of sales resistance. What does this tell the customer? The
continues, the message is clear: The salespeople regard their products as interchangeable commodities
pricing pressure
that offer no competitive advantages. So, when the time comes for the customer to sign
that such
customers place on the dotted line, your company leaves money (and profits) on the table. Instead, B2B
on their suppliers salespeople should act as value merchants. They should always stress their products’
is not likely extraordinary value and they should price them accordingly to realize a fair profit with
to abate.”
every sale.

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 “Customer Value Management”
“Remarkably
Of course, demonstrating product value to cynical purchasing managers is never easy.
few suppliers Today’s purchasing managers face increased pressures to reduce costs, so many focus
have made any almost exclusively on price. They are the first to argue with suppliers that their products
systematic or are just commodities, like coal or cement. Instead of getting increasingly frustrated
methodical effort
to understand with this message, salespeople can deflect it by using the customer value management
the value of approach. This strategy has two goals: to provide great value and to realize a fair return
their offerings on this deliverable value. Customer value management depends on assessing the value
to customers.”
you offer from the customer’s perspective. Once you know what your customers value,
you must show them how much of that value your product adds – in their terms – and
how much money it saves, compared to products from your competitors.

Three Basic Sales Approaches

Suppliers use three approaches to sell their products in the business marketplace. The
first is to sell on the basis of price. This competitively cutthroat policy is really a “cut-your-
“Most suppliers…
claim that they
own-throat” policy. The only way to sustain it is to slash your production and other costs
provide superior to the bone, and to try to trade high volume (if attainable) for low margins. This often
value – and becomes a very dangerous balancing act that many firms cannot sustain. The second
deserve to be approach is to claim exceptional value to realize a higher return on sales. Unfortunately,
compensated
appropriately. salespeople often cannot substantiate these claims in any meaningful way. Therefore,
Unfortunately… this approach seldom works. Purchasing managers are too sophisticated to fall for a
most often this “trust us” appeal. The third option is the customer value management approach, using
translates into
‘Trust us, our
verifiable data to demonstrate your product’s value in solid financial terms.
offerings are Few companies use this approach, but many would benefit from it, since it is the best
worth more’.”
way to get a fair price. However, most companies can’t sell according to customer value
management because they make no effort to understand their products’ full, inherent
value from the customers’ perspective.

Conceptualizing Value
Business value is the monetary expression of the worth that customers realize as a result
“The responsibility of the service and benefits they receive when they purchase a particular product. Value
for leading a is what customers get with the product. The price of the product does not figure into
value-based
market strategy in
this value definition. So, on what basis can you compare your product’s “value elements”
business markets – that is, its technical, economic and other customer benefits – with the characteristics
lies at the top of of your competitors’ products, which represent your customer’s next-best alternative?
the firm. Senior Define three primary points of distinction:
managers need
to convey to 1. “Points of parity” – Value elements that perform similarly to a competitor’s product,
the firm that it
generates value.”
that is, with virtually no discernable difference.
2. “Points of difference” – Here, one product’s value elements are clearly superior.
3. “Points of contention” – The supplier and the customer disagree about these value
elements. The supplier believes that its value elements represent points of difference,
while the customer believes they represent points of parity.
To use customer value management, cite these points of distinction to develop a
“resonating,” focused value proposition for your customers. This means carefully
“Getting targeting all the elements of your proposition to address areas that matter most deeply
salespeople to your client. To do so, present a discrete number of points of difference (one or two)
to change is
not easy.” that deliver truly superior value. Include one or two points of parity. Then, underline
the most salient points for your customer to consider, vis-à-vis the specific benefits the
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 customer will derive by purchasing your product. Give the client specific information
about the ways that your product provides better value than the next-best alternative.
Creating a planned, well-organized customer value proposition requires you to focus
“Customer value tightly on a specific customer’s needs and preferences. It clearly states the overall value
research is not this customer will receive from buying your products.
easy; it requires
time, effort,
persistence, and Formulating and Substantiating Value Propositions
some creativity. To develop your customer value proposition, first identify the points of difference you
Yet…not doing can offer that deliver clear value to the customer. Then plan, organize and conduct
customer value
research may research to make the value proposition as definitive as possible. This means gathering
actually be a information that differentiates your product. Develop specialized “value word equations”
greater pitfall.” that define your points of difference and contention. List the associated value elements.
Determine which competitor’s product your customer regards as the next-best alternative
and compare your offering to it. As best as you can, use comparative numbers to establish
the differences in value versus price differences. Always be candid and conservative in
your determinations.
“Suppliers must Research makes all the difference in establishing the true worth of your value proposition.
be willing to say
no to those that
Conduct your research by visiting the customer’s work site. Use focus groups of people
want full-service from the customer’s company who know about the type of product that you sell. Their
offerings at no- insights about your product line can be immensely helpful. Often, it is more convenient
frills prices.” to organize your focus group research during an industry event that the customer plans
to attend. If you can visit the customer’s work site, try to spend at least a day on the
premises. Learn from the customers’ representatives what specific benefits they consider
most relevant and important.
Once you conduct your research, you will have the information to develop your value
“Improving the
word equations. These numerical statements of value illustrate and demonstrate the
mix of business
makes the most monetary benefits your customer will realize from using your products. Developing
of the customer’s these essential equations can be difficult and time-consuming; it requires thought and
willingness to investigation. Consider these examples of the kinds of value you may be able to offer:
pay by selling it
other offerings
that it’s not as • “An economic benefit” – Tell customers how they will benefit monetarily. For example,
price sensitive perhaps you can consolidate their monthly invoices and reduce processing costs.
about and that
• “A technical advantage” – What technical benefit do you give your customers?
have better
margins than what Perhaps the company’s production equipment will jam less frequently if it uses your
it is presently specialized glossy coating for plastic injection molds, resulting in faster production
purchasing.” and more profits.
• “A unique service” – What will you do for your customers that no one else does? For
instance, if you collect their used chemical drums, they won’t have to bear the cost
or complexity of disposing of them in an environmentally sound manner.
Your value word equations assign financial value to the use of your product. Use
“Customer firms
often do not
mathematical operators, such as plus and minus signs, to provide precise pictures. Such
have an accurate value word equations present verifiable data that the customer can quickly understand
understanding of and appreciate. They are far superior to unjustifiable value claims. Compare these
what suppliers’ concrete facts to the absence of such benefits from the next-best alternative. For your
market offerings
actually are value propositions to be effective, you have to document and demonstrate them fully.
worth to them.” Thus, research is crucial. You may have to gather information from industry studies and
other sources, but for the most impact, go right to the customers to collect the data to
create value word equations directly from their operations.
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 Work with your customer to develop the parameters of the research, as well as the
particulars. Customer value research involves three phases: 1) Securing customer support;
2) Collecting the data (do not rely on customer attitudes or perceptions); and 3) Analyzing
the data and creating a “customer value model.” Your research team should include a couple
of salespersons and a field application engineer or rep, as well as someone from product
development or marketing. Understand that this type of research can be – and usually is
– quite time-consuming. Plus, it involves a high degree of analysis. Therefore, make sure
that all your team members can devote the needed time and attention to the project.
“Price should be Once you complete this research, develop a business case regarding the value the
set in relation to a
customer will get by changing to your product. This is an internal document that includes
market offering’s
value, which team recommendations, a list of needed resources and concerns about implementation.
is called value- This business case specifies what your company must do to develop a resonant, focused
based pricing.” customer value proposition. Use spreadsheet “value calculators” to demonstrate your
product’s value as compared to your customer’s next-best alternative. Support your
findings with comparative tests. After the customer buys from you, plan to return later to
document the actual savings. Finally, develop a value case history. This includes figures
you can use, often to great advantage, in marketing, positioning and selling.
No one wants to operate in a commodity business. To get out of this trap, tailor your
product. Ascertain that your customers understand the increased value that accrues to
them from these customized services. Also, make sure that you earn a proper return
for extra services. Do not give them away. You cannot become a value merchant if you
provide valuable services for nothing.

Turn Your Salespeople into Value Merchants

Transforming your salespeople from value spendthrifts into value merchants involves
“Customer value
management more than just compensating them on the basis of profitability. In fact, many companies
requires time emphasize volume over revenue, regardless of how they calculate their salespersons’
and money, from paychecks. Salespeople understand this and work accordingly. Indeed, this is a primary
which senior
management
reason why so much price discounting takes place in the B2B marketplace.
seeks significant To operate as a true value merchant, change your company’s emphasis from volume to
returns in
incremental total gross margin. Focus on value-selling skills in sales training and role playing. Use
profitability, sales councils and similar internal groups to promote value selling. Develop a company
knowledge…skill culture that recognizes and honors value merchants. Along this line, some companies
acquisition, and…
cultural change.”
now rate specially trained salespeople as “certified value sellers,” and they compensate
them accordingly. Make sure that your salespeople always use value case histories in the
field, and that they keep these histories up-to-date. Finally, use your marketing materials
to tout value selling at every opportunity.
Selling provable value makes profits. You can realize a fair price for your goods and,
sometimes, even charge a premium. After all, if your product delivers superior value,
the customer should compensate you for it. So, get out of the commodity business. Be a
value merchant instead. Sell on the basis of proven superior value.

About the Authors

James C. Anderson, Nirmalya Kumar and James A. Narus all teach marketing: Anderson
at Northwestern University, Kumar at London Business School and Narus at Wake Forest
University in North Carolina.
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