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

Publilius Syrus, first century B.C.

How do you define value? tin you measure it? What are your products and services actually worth to customers? Remarkably few suppliers in business markets are able to reply those questions. And yet the ability to pinpoint the value of a product or service for one's customer has never been more important. Customers—peculiarly those whose costs are driven by what they purchase—increasingly look to purchasing every bit a manner to increase profits and therefore force per unit area suppliers to reduce prices. To persuade customers to focus on total costs rather than but on acquisition cost, a supplier must accept an authentic understanding of what its customers value, and would value.

Put yourself, for a moment, in the office of a commercial grower. Two suppliers are trying to sell yous mulch film: thin plastic sheets that are placed on the basis to concur in moisture, prevent weed growth, and let melons and vegetables to be planted closer together. The outset supplier comes to you with this proposition: "Trust u.s.—our mulch flick will lower your costs. We'll provide superior value for your money." The second supplier says, "We tin can lower the price of your mulch film by $sixteen.83 per acre," and offers to show you lot exactly how. Which proffer would you find more convincing?

Many customers, like the commercial grower, understand their own requirements but exercise 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 assist customers make smarter purchasing decisions.

A minor but growing number of suppliers in business markets depict on their noesis of what customers value, and would value, to proceeds market place 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 exercise for its customers.

Customer value models are based on assessments of the costs and benefits of a given market offering in a detail client awarding. 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, cartoon on data gathered from several customers in that segment.

Customer value models are not easy to develop. Only 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 Mutual Definition of Value

To mensurate value in practice, it is crucial to have a shared understanding of exactly what value is in business organisation 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 cost information technology pays for a market offer. We will elaborate on some aspects of this definition.

First, we express value in budgetary terms, such equally dollars per unit of measurement, guilders per liter, or kroner per hour. Economists may care about "utils," merely we have never met a manager who did! Second, by benefits, nosotros mean net benefits, in which any costs a client 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 cost of a market offering does non change the value that such an offering provides to a customer. Rather, information technology changes the client'south incentive to purchase that market offering. Finally, considerations of value accept place within some context. Even when no comparable market offerings exist, at that place is e'er 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 tin can capture the essence of this definition of value in the following equation:

Valuesouth and Prices are the value and price of the supplier's market offer, and Valuea and Pricea are the value and cost 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.

Building Customer Value Models

Field value assessments (also known by other names, such as value-in-use or cost-in-employ studies) are the nearly unremarkably used—and, we believe, the almost accurate—method for building customer value models. Field value assessments call for suppliers to get together data most their customers firsthand whenever possible. Conspicuously, however, conducting such direct research isn't always an option. In cases where field value assessments are non feasible, 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, operation, and worth of a supplier's offering. (Encounter the insert "Using Customer Focus Groups to Assess Value.") Beneath, we describe a process for building a value model using field value assessments.

Get started.

Without a doubt, the most difficult customer value model that a supplier will build is its commencement one. Indeed, gaining a comprehensive understanding of the value of a market place offer in a particular customer setting may appear monumentally hard. Only information technology can be washed. The starting time step is putting together the right kind of value research squad. The team should include people with product, field engineering, and marketing experience, 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 too know which customers might exist willing to cooperate in value enquiry. Sales-people who are role of a value assessment initiative from the outset are also more likely to empathize and appreciate it. They volition, therefore, support the approach and tin then persuasively relate their experiences to others in the sales force.

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

Before approaching a customer, the squad should call back through what it volition need from the customer and what the customer will gain, and be prepared to offer an incentive. For instance, the supplier might offer to provide the resources to gather the data at no accuse to the customer and guarantee to share all findings. For most companies, the promise of shared inquiry findings among participating customers in an aggregated or bearded manner is an irresistible incentive because it allows them to benchmark. W.W. Grainger, a major benefactor of maintenance, repair, and operating supplies in Due north America, offered both incentives for the xv companies that participated in its initial model-building effort.

Generate a comprehensive list of value elements.

Value elements are anything that affect the costs and benefits of the offering in the customer'south business concern. These elements may be technical, economic, service, or social in nature and will vary in their tangibility. How well a pigment disperses in a coating, for example, would be a technical element; providing a consolidated monthly invoice rather than a divide invoice for each buy would be an economic element; design assist would fall under the service heading; and ease of doing business with the supplier would be social. Equally it is generating the list, the team should consider the entire life cycle of the offering in question, from how the customer 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 have on the customer'southward business organisation.

Information technology'southward important to exist every bit inclusive equally possible. Leaving out elements, peculiarly those that might make the supplier's market offer await unfavorable next to the incumbent or next-best-alternative offer, will undermine the project's credibility.

By identifying as many elements as possible, the squad volition be able to approximate more accurately the differences in functionality and performance its offer provides relative to the next all-time alternative. Broadly stated categories, such as the cost of an hr of downtime in a customer's constitute, may exist easier to identify. But they tend to leave out toll elements, producing less valid estimates of worth. A canteen breaking in a filling line causes reanimation, certainly, merely it also generates costs in scrap, discards, disposal, maintenance labor, cleaning and sanitizing chemicals, and and so on, many of which tend to be buried in diverse found-overhead accounts.

Often, the value research team volition take 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'south offering affects the customer. The customer's management may not have an accurate agreement of all the value elements associated with a particular offering. Believing that this was frequently the case, Alcoa Aerospace developed a program in which the company trained its salespeople in field-value-assessment methods and then gave them an consignment in which they had to comprehensively nautical chart all the steps a customer took in acquiring, converting, and disposing of an Alcoa offering. Interestingly, the program gave salespeople a reason to arroyo customers: to inquire them to cooperate in letting them practise their assignments. The hope of enhanced knowledge of their own businesses provided an incentive for those customers.

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

Gather data.

With a comprehensive list of value elements in hand, the side by side step is obtaining initial estimates for each element and finding out what each 1 is worth in monetary terms. Sometimes, suppliers observe information technology useful to gather information past placing a team member in a central functional area of the customer'southward organization for a calendar week or 2 in order to gain a better agreement of what is actually beingness done and where things tin go incorrect during the mean solar day. For case, a supplier might accept a team member work in the customer's receiving department. To allay any concerns on the role of the employee, customer direction should tell them that the person is there to assistance out and to acquire.

Frequently, the customer doesn't know that it has the data or information the supplier is looking for. The customer may think the information does not exist. In fact, the kind of data that needs to be pulled together in the analysis may reside on 6 or seven databases or systems in different functional areas.

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

Sometimes, the but manner to find the data is for team members to inquire around until they see the individual who knows where the information is.

Focus groups made upwards of representatives from each functional area in a visitor can also be an effective mechanism for uncovering information. The Proaction Group, a Chicago-based consulting and strategy implementation company, recently conducted four internal focus groups at a client company for exactly that purpose. To prepare themselves and the prospective focus-group 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 thought should be used in a value model and and so where in the arrangement to wait for that data. The consultants discovered sources of data in places that neither they nor the customer'southward direction had previously identified.

The value research team as well needs to be artistic in finding other sources of data. Contained industry consultants or knowledgeable personnel inside the supplier company tin be good sources of initial estimates. San Diego-based Qualcomm, a supplier of satellite-based mobile communications systems for truck fleets, for instance, 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's risk, it tin can be useful to tap actuarial consultants to estimate what the cost of the potential difficulty would be.

The ease with which the team can establish budgetary estimates for its value elements will vary. The value of social elements such as greater peace of heed, for example, is generally very difficult to limited in budgetary terms. In fact, almost suppliers do not even endeavor to assign monetary amounts to social elements. Instead, they put those elements aside and hash out them with the customer in a qualitative way after presenting quantitative results. Qualcomm does not assign monetary amounts to many less-tangible elements merely still includes them in its assay equally "value placeholders." In this way, Qualcomm conveys to its customers that those elements are worth something and leaves open the possibility that a specific budgetary amount might exist ascertained in the hereafter.

In any field value cess, suppliers will detect that some assumptions must be made in lodge to consummate an analysis. These assumptions might be about the functionality or performance a market offering actually provides in the customer's specific setting, particularly for elements that are extraordinarily hard or costly to measure. Or they might be about the monetary worth of perceived or measured differences in functionality or performance that an offer provides in the customer'southward setting. It is critical for the supplier to be explicit well-nigh whatsoever assumptions information technology makes. If the client doesn't know how or why the squad assigned a certain value to an element—or is non encouraged to offer its own rationale if information technology disagrees with the supplier's estimates and then to join the supplier in researching a mutually acceptable solution—the supplier's credibility will be compromised.

Validate the model and understand variance in the estimates.

Subsequently 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 empathise better how the value of its marketplace offering varies beyond customers' applications, capabilities, and usage.

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

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

Create value-based sales tools.

Suppliers tin can not only employ value models to inform and guide their own decision making but as well to create persuasive sales tools. Ane common sales tool is a value example history. Value case histories are written accounts that document the toll savings or added value that a customer receives from its employ of a supplier'southward market offering. Sonoco Products Visitor'south protective packaging division, for example, tracks the savings its customers gain from implementing an offering it calls total packaging solutions. Rather than selling customers the more than commonly marketed corrugated-paper-thin packaging materials, Sonoco offers packaging systems that, information technology maintains, are stronger, lighter, and smaller. The major elements in Sonoco'southward value model thus include savings from reduced product harm, packaging costs, shipping costs, and storage costs. When a customer has used these "solutions" for a yr, Sonoco constructs a case study about the price savings and reports the findings to the customer. Sonoco maintains a file of these case 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 assessment can also go a service that suppliers offer as part of a consultative selling approach. For example, a supplier tin develop a spreadsheet software awarding that salespeople can use on-site with a laptop computer to evaluate the potential value of the offer 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 equally Sales Tools.")

Putting an Agreement of Value to Employ

Suppliers tin utilize their understanding of value to strengthen functioning and create competitive reward in several ways. For example, a supplier tin use its knowledge to tailor supplementary services, programs, and systems in its electric current market offerings and to guide the development of new offerings. Integrating everything information technology has learned about value into its marketing efforts, it can besides gain new customers. Finally, it tin improve sustain customer relationships by documenting its delivery of superior value over time and past discovering new ways to update and reinvigorate those relationships.

Managing Market place Offerings.

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

A company'due south ability to manage flexible marketplace offerings successfully rests on its understanding of the value each component of an offering creates too equally its associated cost. An understanding of how customers value those components—and what they cost the supplier to evangelize—enables suppliers to place and eliminate what we call value drains. These are services that toll the supplier more than to provide than they are worth to the customers receiving them and that accept 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 one of the visitor's minor, less sophisticated customers noticed the reports stacked in a corner of the production shed. When asked about their usefulness, the client replied that he was not using the information at all and instead but had the producer'southward truck driver pump a few gallons of the chemicals into each well whenever the truck came by. Learning this, the supplier offered to discontinue the service and, in exchange, requite the client a 7% per-gallon price reduction. The customer readily agreed, and the profitability of that account jumped from minus half-dozen% to 32%!

Rather than finding value drains by chance, equally in the case, suppliers tin can set out to discover them by using field value assessment in conjunction with activity-based-costing assay. Identifying and eliminating value drains results in better resource allotment of resource and improved profitability. Nigh e'er, the results more than pay for the price of doing the field-value-assessment research.

Guiding the Evolution of New or Improved Products and Services.

Most market inquiry that is conducted to provide an understanding of a customer's requirements and preferences does non address the question: "If nosotros practise Ten, what is it worth to that customer?" Knowing that an comeback in some functionality is important does not tell a supplier if the client is willing to pay for information technology. Value models provide that information.

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

In cases where the supplier's new offering volition introduce engineering into the market place, for example, a value model tin can demonstrate to prospective customers how the technology tin can provide greater value for them. That's an especially critical point when the new technology makes the market offering itself higher priced than the alternative choices, which may use more established and familiar technologies. At the same time, a model allows the supplier to meet 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 tin can use value assessments to determine what improvements are worthwhile and which ones have the highest priority. For example, the supplier could enquire managers in different functional areas of client companies to evaluate potential improvements. One chemical paint supplier asked managers in its customer'due south production and R&D areas to perform a conjoint assay for potential changes in its offering. Specifically, the supplier wanted to know how the client would value some near-term-doable changes in technical attributes, such as gloss or dispersibility. At the aforementioned 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'southward delivery service and payment terms. Although the findings largely conformed to the supplier'southward management expectations, there was at to the lowest degree one important discovery: the relatively high value the customers placed on improved dispersibility. Subsequent field investigation confirmed that the supplier'south customers were indeed having many troubles with "flocking," the clumping that can sometimes occur every bit a dry paint is dispersed into a liquid solution.

Gaining Customers.

Knowledge 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 cobweb drums, plastic drums, and intermediate majority containers for food products and chemicals manufacturers. Rather than competing on a price-per-container basis, Greif markets complete packaging systems. That is, Greif stays involved with its customers throughout the life wheel of the containers—monitoring how the customer uses the container, following the container'due south path to the cease user and retrieving information technology when it is empty, and disposing of information technology or reconditioning it. Greif's value proffer—total-cost-based packaging—promises that its systems can significantly reduce a customer's total packaging costs.

How does Greif develop its propositions? First, a Greif strategic account manager, together with a representative from the customer, builds a value model to understand full costs. (Greif developed its current model based on data 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 constitute that customers—both existing and potential—tin can readily assign monetary values to some elements simply that other elements are more than difficult to pin down. For those elements that are harder to quantify, Greif takes its analysis to a deeper level. Consider the benefit of ecology stewardship. To go a handle on the value of that element, Greif determines what percentage of its customers' customers' locations (that is, the stop users' locations) are in landfill-restricted areas, where the toll of disposing of the containers is higher than at other locations. Greif's service—which, equally we said, includes retrieving the containers—not just eliminates this toll but too indemnifies its customers against improper disposal by the end users, protecting them from fines levied past the Environmental Protection Agency. While these analyses do non account for all the reasons that ecology stewardship would exist worth something to a client, such as the value added to the client's reputation, they nonetheless make environmental stewardship worth something to the client in monetary terms.

Using the value model to construct several viable total-toll-based packaging solutions, Greif'due south strategic account manager and a team of Greif experts from logistics, handling systems, and computer services then requite a comprehensive presentation to the prospective customer's senior managers. During the presentation, they discuss the merits and prices of each solution.

Sustaining Customer Relationships.

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

AIT primarily serves maintenance, repair, and operating (MRO) supplies markets within the chief metals, mining, pulp and paper, utilities, chemical processing, textiles, food processing, and agricultural industries. It operates more than 337 branch locations across the United States. In 1990, the visitor began to market place a value proposition promising to help its customers meliorate productivity rather than simply selling them parts at a low price. Through value cess, the company began to piece of work with its customers to help them save coin in areas such as maintenance, inventory, and energy consumption—any measurable area other than purchasing. The results were collected in what AIT calls documented value-added savings, which is now the cornerstone of the company's partnering efforts.

AIT trains all of its employees—from branch managers to field associates to delivery drivers—to look for ways to ameliorate customers' operations, and the company rewards them for their successes. And to support their efforts, the company has adult a customized software plan 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 have previously agreed on. Then, either on a quarterly or a semiannual footing, AIT presents each customer with a study that documents the savings, allowing customers to assess firsthand the value AIT has delivered.

In guild to establish credibility for its reports, AIT asks customers to sign and render a copy. The visitor keeps track of the performance of each cost-savings initiative and aggregates the totals. AIT calculates that terminal year it provided more than than $100 one thousand thousand in toll savings to its customers.

Delivering Superior Value and Getting an Equitable Return

Agreement value in business markets and doing business based on value delivered gives suppliers the means 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 it, both of which depend on value assessment. W.W. Grainger, the MRO supplies benefactor, is an splendid example 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 sympathise the full toll of MRO supplies management. (Run into the insert "Understanding Value: How Westward.W. Grainger and Its Customers Benefit.")

Perhaps equally compelling, though, is an observation made past a senior manager at one visitor that does business based on value: "Selling only on price—where's the fun in that?" This manager recognized that when in that location is market pressure level on price, his business organization unit needs to answer past demonstrating that it has something unlike to offer—something that will provide superior value. Assessing and truly understanding value in business markets is the beginning of the path to assisting fun.

A version of this article appeared in the November-December 1998 issue of Harvard Concern Review.