To what extent do you think it's important to define value? Have you tried to quantify it? Just how much value do your goods and services really offer to buyers? Surprisingly few vendors in commercial markets have adequate responses to these queries. In spite of this, it's more crucial than ever to understand how a consumer will use a product or service before selling it to them. There has been a rise in the number of customers who view purchases as a means to generate earnings, particularly those whose costs are influenced by what they buy. A supplier needs to have an accurate understanding of what its customers value and would value in order to convince them to focus on overall costs rather than just acquisition price.
Imagine for a second that you are a large-scale gardener. Mulch film, or thin plastic sheets that are laid on the ground to retain moisture, limit weed growth, and allow melons and vegetables to be planted closer together, are being sold by two different vendors. The first vendor says to you, "Have faith in us; our mulch film will help you save money. When you work with us, you can expect excellent value for your money. Another vendor boasts, "We can reduce the price of your mulch film by $16.83 per acre," and offers to demonstrate how they can achieve this. Which of these claims do you think has the most merit?
Like the commercial grower, many customers have a firm grasp on what they need, but have less of a firm grasp on how much it's important to them to have those needs met. This misunderstanding presents an opening for providers to persuade their clients of the worth of their products and services and guide them toward more informed purchases.
The understanding of what clients value and would value is helping an increasing number of suppliers in business markets get an edge over their less knowledgeable rivals. The suppliers in question have created what we call customer value models, which are monetary depictions of the value that the supplier currently provides or promises to provide to its clients.
Cost and benefit analyses of a product or service on the market are the foundation of customer value models. A supplier may construct a value model for a single client, using data collected from multiple consumers in that customer's market sector, or for the entire market, using data collected from a larger sample of customers.
Creating a customer value model is challenging. However, the successes and failures of suppliers who have created and used them point to a few suggestions that we think will help any business that is trying to establish some sort of customer value measurement.
Establishing a Shared Concept of Worth
Establishing a common definition of value in commercial markets is essential for developing useful metrics. Before we get into the specifics of how to construct value models, it is important to define value. The technical, economic, service, and social benefits acquired by a client company in exchange for the cost of a market offering are what make up its value. We'll go into more detail about how this definition works below.
To begin, we put a monetary value on things by saying how much they cost per unit of time or quantity. We have yet to meet a manager who shares the interest in "utils" that economists do. Second, when we say "benefits," we mean "net benefits," which takes into account the customer's out-of-pocket expenses beyond the initial purchase price. Third, value refers to the benefits enjoyed by the buyer in exchange for the cost. We consider pricing and value to be the most fundamental aspects of a product or service offered for sale in the market. Therefore, the value provided to a client by a market offering is unaffected by a change in the offering's price. To the contrary, it modifies the customer's motivation to buy that product or service in the market. At last, value judgments are made in a set environment. There is always a viable substitute available, even if there are no similar products on the market. As an alternative to buying a product, DIY production is a viable option for consumers in business markets.
The following equation sums up this value definition:
Comparison of Values to Costs > (Valuea – Pricea)
The Values and Prices represent the supplier's market offering, whereas the Valuea and Pricea figures represent the supplier's closest competitive offering. Customers are motivated to buy when there is a favourable price-to-value ratio. The equation illustrates, in the simplest terms possible, that the customer's motivation to buy the offering from the supplier must be greater than the customer's incentive to pursue the next best alternative.
Developing Value Proposition Models for Customers
The most popular and, in our opinion, the most accurate approach to developing customer value models is conducting field value assessments (also known as value-in-use or cost-in-use studies). Assessing client value in the field requires providers to conduct interviews and observation whenever possible. Obviously, though, it's not always possible to do such direct study. Direct and indirect survey questions, conjoint analysis, and focus groups are all viable alternatives to field value evaluations because they rely on customers' perceptions of a product or service's usefulness, effectiveness, and value. (For more on this, see the supplementary material "Using Customer Focus Groups to Assess Value.") In the following, we outline the steps necessary to create a valuation model from scratch.
Proceed at once. The initial customer value model that a supplier develops will be the most challenging of all of them. In fact, it may look insurmountable to fully grasp the worth of a market offering in a given client context. However, it is possible. The first stage entails assembling a competent value research group. Include two or three visionary salespeople and a few employees with product, field engineering, and marketing backgrounds on your team. Including salespeople from the get-go is crucial. They have intimate knowledge of the target market and their needs, as well as insight into which consumers may be amenable to participating in value research in exchange for a discount. When salespeople are involved in a value assessment project from the start, they are more likely to grasp its significance. They'll back the strategy and be able to talk about their positive experiences with it to other salespeople.
The next stage is to zero in on a certain subset of the market to focus on. Suppliers should begin with a market segment in which they have particularly close, collaborative relationships with customers, exceptional knowledge of how customers use the offering in question, or relatively simple offerings. Otherwise, they will need to conduct value assessments with at least two and possibly up to a dozen customers to build an initial value model.
The team should first consider what it needs from the client, as well as what the consumer stands to gain, and then come up with a suitable incentive before addressing the customer. For instance, the provider may offer to pay for the customer's data collection efforts and then provide the results for free. The promise of aggregated or anonymized research data shared among participating customers is an appealing inducement for most organisations because it allows them to benchmark. W.W. Grainger, a leading distributor of MRO products in North America, provided both incentives to the 15 businesses that took part in the company's pilot model-building programme.
Create an exhaustive inventory of value components. What we mean by "value aspects" is anything that has an impact on how much it costs or helps the customer out in their business as a whole because of the product. The concreteness of these factors depends on their nature and context, which could be technological, economic, service, or social. For example, the technical aspect would be how well a pigment disperses in a coating; the economic aspect would be providing a consolidated monthly invoice rather than an invoice for each purchase; the service aspect would be providing design assistance; and the social aspect would be how easy it is to do business with the supplier. While coming up with the list, the group should think about the full customer journey, from first purchase to final disposal of the product or service in question. The list needs to include everything that could go wrong for the company as a result of doing business with the supplier.
Be as welcoming as possible to all people. The project's credibility will be damaged if important details are left out, especially if they make the supplier's market offering look less attractive than the incumbent's or the next-best- alternative's.
The team will have a better idea of how its offering stacks up against the competition if it is able to uncover as many factors as feasible. Calculating the cost of something as general as an hour of plant downtime for a customer could be simpler to pin down. On the downside, they often fail to account for all associated costs, leading to inflated or inaccurate valuations. Many of the costs associated with a bottle break on the filling line are indirect and hidden in other parts of the plant's overhead, such as scrap, discards, disposal, maintenance personnel, cleaning and sanitising chemicals, and so on.
The value research group must frequently weigh the pros and cons of depending on a customer's opinion of what all the relevant parts are, vs actually witnessing the ways in which the supplier's offering affects the consumer. There's a chance the client's upper management doesn't fully see the full worth of your product. As a result of the firm's belief that this was frequently the case, Alcoa Aerospace devised a programme in which salespeople were instructed in field-value assessment methods and then tasked with creating a detailed flowchart of the customer's journey from discovering, purchasing, and using Alcoa's offering to finally selling it. Intriguingly, the technique prompted salesmen to approach clients in order to solicit their help in completing tasks. These consumers were incentivized by the prospect of a deeper understanding of their own companies.
The risk taken by Alcoa paid off. Upon completion of the two-month period, the salespeople convened to share their findings. Participants were able to get insight from the experiences of others and discuss various customer scenarios and future sales prospects as a result of the presentations. The clients profited because they gained insight into aspects of price and value they hadn't considered before, which they could then integrate into their evaluations of suppliers' proposals.
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