Value Merchants. Nirmalya Kumar

value elements on which the supplier and its customers disagree about performance or functionality relative to the counterpart elements of the next-best alternative

FIGURE 2-1

      Grainger advertisement: Acquisition cost transcends price

      Source: W. W. Grainger, Inc. Used with permission.

      Points of contention arise in two ways: the supplier regards a value element as a point of difference in its favor, while the customer regards that element as a point of parity relative to the next-best alternative; or the supplier regards a value element as a point of parity, while the customer regards it as a point of difference in favor of the next-best alternative.

      Without getting too philosophical, we do not believe that there are multiple realities. We believe that there is only one reality but that the supplier and customer can have different perceptions of it. Far from being negative, points of contention provide motivation for the supplier and its customers to work together to gather data to resolve the differences in perception.⁶

      The Three Kinds of Customer Value Propositions

      Points of parity, points of difference, and points of contention are the inputs for developing the supplier firm’s value proposition to the customer. When supplier managers use the term “customer value proposition,” what specific meaning do they have in mind, and is this the same meaning that others have for this term? We have found in our research that there is considerable variation in what managers mean in their usage of “customer value proposition.”⁷

From our research we can classify the substantially different ways managers use customer value proposition into three basic alternatives. We provide these alternatives in table 2-1 and organize our exposition of them to address four fundamental questions that distinguish the alternatives from one another:

TABLE 2-1

      Value propositions in business markets: Which alternative conveys value?

      Source: Reprinted by permission of Harvard Business Review. “Customer Value Propositions in Business Markets,” by James C. Anderson, James A. Narus, and Wouter van Rossum, March 2006. © 2006 by the Harvard Business School Publishing Corporation; all rights reserved.

      1 What does the value proposition consist of?

      2 What customer question is the supplier attempting to answer with the value proposition?

      3 What is required for a supplier to construct the value proposition and for the sales force to deliver it?

      4 What is a potential pitfall of the value proposition?

      A// Benefits

      The all-benefits customer value proposition is the meaning that supplier managers most frequently attach to the term. Why? It requires the least detailed knowledge about customers and competitors and, thus, is the easiest for supplier managers to construct and deliver. They simply list all the potential benefits they believe that their offering might deliver to targeted customers. The more they can think of, the better.

      Yet simply listing all the benefits has the potential pitfall of benefit assertion: claiming distinctions for the offering that actually have no benefit to target customers. Consider the following example: a value-added reseller of gas chromatographs was accustomed to selling high-performance instruments to R&D laboratories in large companies, universities, and government agencies in Belgium, the Netherlands, and Luxembourg. One feature of a particular chromatograph, a patented injection system, enabled R&D lab customers to maintain sample integrity by avoiding high-temperature vaporization, eliminating the risk of thermal degradation, enhancing test discrimination, and permitting the use of volatile solvents. Seeking growth, the firm began to market the most basic model of this chromatograph to a new market (application) segment for the firm: contract laboratories.

      In initial meetings with prospective contract lab customers, the firm’s salespeople touted the injection system feature and its benefit of maintaining sample integrity. The prospects scoffed at this, stating that they were doing routine testing of soil and water samples for environmental regulation compliance, for which maintaining sample integrity was not a concern, and that room-temperature sample injection served their requirements adequately. The supplier was taken aback and forced to rethink its value proposition.

      Another pitfall of the all-benefits proposition is that many, if not most, of the benefits may be points of parity with the next-best alternative, diminishing the effect of the few actual points of difference. An international engineering consulting firm was bidding for a light-rail project, and on the last chart of its presentation to the prospective municipal client, it listed the ten reasons why the municipality should award it the project. The other two finalist firms, though, could make most of the same claims because they were points of parity. Put yourself, for a moment, in the place of the prospective client. Suppose each firm, at the end of its presentation, gives ten reasons why you ought to award it the project. The lists are almost the same. How do you resolve the impasse? By asking each of the firms to “sharpen their pencils” and give a final best price. You then award the project to the firm that gives the largest price concession. Any distinctiveness that does exist between firms has been overshadowed by the greater overlapping sameness.

      Favorable Points of Difference

      The second customer value proposition, favorable points of difference, explicitly recognizes there is an alternative open to the customer. The recent experience of a leading industrial gas supplier underscores this distinction. It received a request for proposal from a customer for a major piece of business stating that the two or three suppliers that could demonstrate the most persuasive value propositions in their proposals would be invited to visit the supplier and to discuss and refine their proposals. After the meeting, the customer would select a supplier for this business.

      As this example illustrates, “Why should our firm purchase your offering instead of your competitor’s?” is a more pertinent question than “Why should our firm purchase your offering?” Why? Because the former question focuses supplier managers on differentiating their offering from the next-best alternative, which requires more detailed knowledge of it. A characteristic that the favorable-points-of-difference proposition shares with the all-benefits proposition, though, is that more is regarded as better, so supplier managers strive to list as many favorable points of difference as they can.

      Knowing that an offering element is a point of difference relative to the next-best alternative does not, however, convey what the value of this difference is to target customers. Further, a supplier’s market offering may have several points of difference relative to the next-best alternative, which complicates understanding which of them delivers the greatest value to target customers. Without a detailed understanding of the customer’s requirements and preferences, and what it is worth to fulfill them, suppliers may stress points of difference that deliver relatively little value to the target customer. Each of these can lead to the potential pitfall of value presumption : assuming that favorable points of difference must be valuable for the customer. Our opening anecdote in chapter 1 about the IC supplier that unnecessarily discounted its price nicely illustrates the likely outcome when supplier salespeople stress favorable points of difference that actually have little value for the customer.

      Resonating Focus

      Although we contend that a favorable-points-of-difference proposition is preferable to an all-benefits