www.hbrreprints.org

Under pressure to keep costs down, customers may only Customer Value look at price and not listen to your sales pitch. Help them Propositions in understand—and believe in— the superior value of your offerings. Business Markets

by James C. Anderson, James A. Narus, and Wouter van Rossum

Included with this full-text Harvard Business Review article:

1 Article Summary The Idea in Brief—the core idea The Idea in Practice—putting the idea to work

2 Customer Value Propositions in Business Markets

11 Further Reading A list of related materials, with annotations to guide further exploration of the article’s ideas and applications

Reprint R0603F

Customer Value Propositions in Business Markets

The Idea in Brief The Idea in Practice If you sell products to other companies, you To craft compelling customer value propositions: conduct on-site pilots at prospective cus- know how hard it’s become to win their tomer locations to gather data on your prod- business. Your customers—pressured to UNDERSTAND CUSTOMERS’ BUSINESSES ucts’ performance. control costs—seem to care only about Invest time and effort to understand your cus- Example: price. But if you lower prices to stimulate tomers’ businesses and identify their unique Chemical manufacturer Akzo Nobel con- sales, your profits shrink. requirements and preferences. ducted a two-week pilot on a production So how can you persuade your business Example: reactor at a prospective customer’s facility. customers to pay the premium prices your The resin manufacturer deepened its un- AN’s goal? To study the performance of its offerings deserve? Craft a compelling cus- derstanding of key customers in several high-purity metal organics product relative tomer value proposition. Research poten- ways. It enrolled managers in courses on to the next best alternative in producing tial customers’ enterprises, identifying their how painting contractors estimate jobs. It compound semiconductor wafers. The unique requirements. Then explain how conducted focus groups and field tests to study proved that AN’s product was as your offerings outmatch your rivals’ on the study products’ performance on crucial cri- good as or better than rivals’ and that it criteria that matter most to customers. Doc- teria. It also asked customers to identify per- significantly lowered energy and mainte- ument the cost savings and profits your formance trade-offs they were willing to nance costs. products deliver to existing customers— make and to indicate their willingness to and will deliver to new customers. pay for paints that delivered enhanced per- MAKE CUSTOMER VALUE PROPOSITION A CENTRAL BUSINESS SKILL The payoff? You help your customers slash formance. And it stayed current on cus- costs—while generating profitable growth tomer needs by joining industry associa- Improve and reward managers’ ability to craft for yourself. One company that manufac- tions composed of key customer segments. compelling customer value propositions. tured resins used in exterior paints discov- Example: SUBSTANTIATE YOUR VALUE CLAIMS ered this firsthand. By researching the needs Quaker Chemical conducts a value- of commercial painting contractors—a key “We can save you money!” won’t cut it as a proposition training program annually for customer segment—the company learned customer value proposition. Back up this chemical program managers. The manag- that labor constituted the lion’s share of claim in accessible, persuasive language that ers review case studies from industries contractors’ costs, while paint made up just describes the differences between your offer- Quaker serves and participate in simulated 15% of costs. Armed with this insight, the ings and rivals’ . And explain how those differ- customer interviews to gather information resin maker emphasized that its product ences translate into monetary worth for needed to devise proposals. The team with dried so fast that contractors could apply customers. the best proposal earns “bragging rights”— two coats in one day—substantially lower- Example: highly valued in Quaker’s competitive culture. ing labor costs. Customers snapped up the Rockwell Automation precisely calculated Managers who develop proposals that their product—and happily shelled out a 40% cost savings from reduced power usage director deems viable win gift certificates. price premium for it. that customers would gain by purchasing Rockwell’s pump solution instead of a com- petitor’s comparable offering. Rockwell used industry-specific metrics to communi- cate about functionality and performance— including kilowatt-hours spent, number of operating hours per year, and dollars per kilowatt-hour.

DOCUMENT VALUE DELIVERED Create written accounts of cost savings or added value that existing customers have ac-

OPYRIGHT © 2006 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. BUSINESS SCHOOLOPYRIGHT © 2006 HARVARD PUBLISHING CORPORATION. tually captured by using your offerings. And C

page 1

Under pressure to keep costs down, customers may only look at price and not listen to your sales pitch. Help them understand—and believe in—the superior value of your offerings.

Customer Value Propositions in Business Markets

by James C. Anderson, James A. Narus, and Wouter van Rossum

“Customer value proposition” has become pany’s offering was superior. This salesperson one of the most widely used terms in business based his value proposition on the service that markets in recent years. Yet our management- he, personally, would provide. practice research reveals that there is no agree- Unbeknownst to the salesperson, the cus- ment as to what constitutes a customer value tomer had built a customer value model, proposition—or what makes one persuasive. which found that the company’s offering, Moreover, we find that most value proposi- though 10 cents higher in price per IC, was tions make claims of savings and benefits to actually worth 15.9 cents more. The electronics the customer without backing them up. An of- engineer who was leading the development fering may actually provide superior value— project had recommended that the purchas- but if the supplier doesn’t demonstrate and ing manager buy those ICs, even at the higher document that claim, a customer manager price. The service was, indeed, worth some- will likely dismiss it as marketing puffery. Cus- thing in the model—but just 0.2 cents! Unfor- tomer managers, increasingly held account- tunately, the salesperson had overlooked able for reducing costs, don’t have the luxury the two elements of his company’s IC offer- of simply believing suppliers’ assertions. ing that were most valuable to the customer, Take the case of a company that makes inte- evidently unaware how much they were grated circuits (ICs). It hoped to supply 5 mil- worth to that customer and, objectively, how lion units to an electronic device manufacturer superior they made his company’s offering for its next-generation product. In the course of to that of the competitor. Not surprisingly, negotiations, the supplier’s salesperson learned when push came to shove, perhaps suspect- that he was competing against a company ing that his service was not worth the differ- whose price was 10 cents lower per unit. The ence in price, the salesperson offered a 10- customer asked each salesperson why his com- cent price concession to win the business— OPYRIGHT © 2006 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. BUSINESS SCHOOLOPYRIGHT © 2006 HARVARD PUBLISHING CORPORATION. C

harvard business review • march 2006 page 2

Customer Value Propositions in Business Markets

consequently leaving at least a half million lar chromatograph allowed R&D lab customers dollars on the table. to maintain a high degree of sample integ- Some managers view the customer value rity. Seeking growth, the company began to proposition as a form of spin their marketing market the most basic model of this chro- departments develop for advertising and matograph to a new segment: commercial promotional copy. This shortsighted view ne- laboratories. In initial meetings with prospec- glects the very real contribution of value tive customers, the firm’s salespeople touted propositions to superior business performance. the benefits of maintaining sample integrity. Properly constructed, they force companies to Their prospects scoffed at this benefit asser- rigorously focus on what their offerings are re- tion, stating that they routinely tested soil ally worth to their customers. Once companies and water samples, for which maintaining become disciplined about understanding cus- sample integrity was not a concern. The sup- tomers, they can make smarter choices about plier was taken aback and forced to rethink where to allocate scarce company resources in its value proposition. developing new offerings. Another pitfall of the all benefits value We conducted management-practice re- proposition is that many, even most, of the search over the past two years in Europe and benefits may be points of parity with those of the United States to understand what consti- the next best alternative, diluting the effect of tutes a customer value proposition and what the few genuine points of difference. Managers makes one persuasive to customers. One need to clearly identify in their customer value striking discovery is that it is exceptionally propositions which elements are points of parity difficult to find examples of value proposi- and which are points of difference. (See the ex- tions that resonate with customers. Here, hibit “The Building Blocks of a Successful Cus- drawing on the best practices of a handful of tomer Value Proposition.”) For example, an in- suppliers in business markets, we present a ternational engineering consultancy was systematic approach for developing value bidding for a light-rail project. The last chart of propositions that are meaningful to target the company’s presentation listed ten reasons customers and that focus suppliers’ efforts why the municipality should award the project on creating superior value. to the firm. But the chart had little persuasive power because the other two finalists could Three Kinds of Value Propositions make most of the same claims. We have classified the ways that suppliers use Put yourself, for a moment, in the place of the term “value proposition” into three types: the prospective client. Suppose each firm, at James C. Anderson is the William L. all benefits, favorable points of difference, and the end of its presentation, gives ten reasons Ford Distinguished Professor of Mar- resonating focus. (See the exhibit “Which Al- why you ought to award it the project, and the keting and Wholesale Distribution at ternative Conveys Value to Customers?”) lists from all the firms are almost the same. If Northwestern’s Kellogg School of Man- All benefits. Our research indicates that most each firm is saying essentially the same thing, agement in Evanston, Illinois; the Irwin managers, when asked to construct a cus- how do you make a choice? You ask each of Gross Distinguished ISBM Research tomer value proposition, simply list all the the firms to give a final, best price, and then Fellow at the Institute for the Study of benefits they believe that their offering you award the project to the firm that gives the Business Markets in University Park, might deliver to target customers. The more largest price concession. Any distinctions that Pennsylvania; and a visiting research they can think of, the better. This approach do exist have been overshadowed by the firms’ professor at the School of Business, requires the least knowledge about customers greater sameness. Public Administration, and Technology and competitors and, thus, the least amount Favorable points of difference. The second at the University of Twente, the Nether- of work to construct. However, its relative type of value proposition explicitly recog- lands. James A. Narus is a professor of simplicity has a major potential drawback: nizes that the customer has an alternative. business marketing at the Babcock benefit assertion. Managers may claim advan- The recent experience of a leading industrial Graduate School of Management at tages for features that actually provide no gas supplier illustrates this perspective. A cus- Wake Forest University in Charlotte, benefit to target customers. tomer sent the company a request for pro- North Carolina. Wouter van Rossum Such was the case with a company that posal stating that the two or three suppliers is a professor of commercial and strate- sold high-performance gas chromatographs that could demonstrate the most persuasive gic management at the School of to R&D laboratories in large companies, uni- value propositions would be invited to visit Business, Public Administration, and versities, and government agencies in the the customer to discuss and refine their pro- Technology at the University of Twente. Benelux countries. One feature of a particu- posals. After this meeting, the customer

harvard business review • march 2006 page 3

Customer Value Propositions in Business Markets

would select a sole supplier for this business. able points of difference, the resonating focus As this example shows, “Why should our firm proposition steadfastly concentrates on the purchase your offering instead of your com- one or two points of difference that deliver, petitor’s?” is a more pertinent question than and whose improvement will continue to “Why should our firm purchase your offer- deliver, the greatest value to target customers. ing?” The first question focuses suppliers on To better leverage limited resources, a sup- differentiating their offerings from the next plier might even cede to the next best alterna- best alternative, a process that requires de- tive the favorable points of difference that tailed knowledge of that alternative, whether customers value least, so that the supplier can it be buying a competitor’s offering or solving concentrate its resources on improving the the customer’s problem in a different way. one or two points of difference customers Knowing that an element of an offering is a value most. Second, the resonating focus point of difference relative to the next best al- proposition may contain a point of parity. ternative does not, however, convey the value This occurs either when the point of parity is of this difference to target customers. Further- required for target customers even to consider more, a product or service may have several the supplier’s offering or when a supplier points of difference, complicating the sup- wants to counter customers’ mistaken per- plier’s understanding of which ones deliver the ceptions that a particular value element is greatest value. Without a detailed understand- a point of difference in favor of a competi- ing of the customer’s requirements and prefer- tor’s offering. This latter case arises when cus- ences, and what it is worth to fulfill them, sup- tomers believe that the competitor’s offering pliers may stress points of difference that is superior but the supplier believes its offer- deliver relatively little value to the target cus- ings are comparable—customer value re- Customer managers, tomer. Each of these can lead to the pitfall of search provides empirical support for the value presumption: assuming that favorable supplier’s assertion. increasingly held points of difference must be valuable for the To give practical meaning to resonating accountable for reducing customer. Our opening anecdote about the focus, consider the following example. Sonoco, IC supplier that unnecessarily discounted its a global packaging supplier headquartered in costs, don’t have the price exemplifies this pitfall. Hartsville, South Carolina, approached a large Resonating focus. Although the favorable European customer, a maker of consumer pack- luxury of simply points of difference value proposition is pref- aged goods, about redesigning the packaging believing suppliers’ erable to an all benefits proposition for com- for one of its product lines. Sonoco believed panies crafting a consumer value proposition, that the customer would profit from updated assertions. the resonating focus value proposition should packaging, and, by proposing the initiative it- be the gold standard. This approach ac- self, Sonoco reinforced its reputation as an in- knowledges that the managers who make pur- novator. Although the redesigned packaging chase decisions have major, ever-increasing provided six favorable points of difference levels of responsibility and often are pressed relative to the next best alternative, Sonoco for time. They want to do business with sup- chose to emphasize one point of parity and pliers that fully grasp critical issues in their two points of difference in what it called its dis- business and deliver a customer value proposi- tinctive value proposition (DVP). The value tion that’s simple yet powerfully captivating. proposition was that the redesigned packaging Suppliers can provide such a customer value would deliver significantly greater manufactur- proposition by making their offerings supe- ing efficiency in the customer’s fill lines, rior on the few elements that matter most to through higher-speed closing, and provide a target customers, demonstrating and docu- distinctive look that consumers would find menting the value of this superior perfor- more appealing—all for the same price as the mance, and communicating it in a way that present packaging. conveys a sophisticated understanding of the Sonoco chose to include a point of parity in customer’s business priorities. its value proposition because, in this case, the This type of proposition differs from favor- customer would not even consider a packag- able points of difference in two significant re- ing redesign if the price went up. The first spects. First, more is not better. Although a point of difference in the value proposition supplier’s offering may possess several favor- (increased efficiency) delivered cost savings to

harvard business review • march 2006 page 4

Customer Value Propositions in Business Markets

the customer, allowing it to move from a Stressing as a point of parity what customers seven-day, three-shift production schedule may mistakenly presume to be a point of dif- during peak times to a five-day, two-shift op- ference favoring a competitor’s offering can be eration. The second point of difference deliv- one of the most important parts of construct- ered an advantage at the consumer level, ing an effective value proposition. Take the helping the customer to grow its revenues case of Intergraph, an Alabama-based pro- and profits incrementally. In persuading the vider of engineering software to engineering, customer to change to the redesigned packag- procurement, and construction firms. One ing, Sonoco did not neglect to mention the software product that Intergraph offers, Smart- other favorable points of difference. Rather, it Plant P&ID, enables customers to define flow chose to place much greater emphasis on the processes for valves, pumps, and piping two points of difference and the one point of within plants they are designing and generate parity that mattered most to the customer, piping and instrumentation diagrams (P&ID). thereby delivering a value proposition with Some prospective customers wrongly pre- resonating focus. sume that SmartPlant’s drafting performance

Which Alternative Conveys Value to Customers? Suppliers use the term “value proposition” has an alternative, but they often make the strate the value of this superior perfor- three different ways. Most managers simply mistake of assuming that favorable points of mance, and communicate it in a way that list all the benefits they believe that their of- difference must be valuable for the cus- conveys a sophisticated understanding of fering might deliver to target customers. tomer. Best-practice suppliers base their the customer’s business priorities. The more they can think of, the better. Some value proposition on the few elements that managers do recognize that the customer matter most to target customers, demon-

VALUE PROPOSITION: ALL BENEFITS FAVORABLE POINTS RESONATING FOCUS OF DIFFERENCE

Consists of: All benefits customers All favorable points of The one or two points of dif- receive from a market difference a market offering ference (and, perhaps, a point offering has relative to the next best of parity) whose improve- alternative ment will deliver the great- est value to the customer for the foreseeable future

Answers the customer “Why should our firm “Why should our firm pur- “What is most worthwhile question: purchase your offering?” chase your offering instead for our firm to keep in mind of your competitor’s?” about your offering?”

Requires: Knowledge of own market Knowledge of own Knowledge of how own offering market offering and next market offering delivers best alternative superior value to customers, compared with next best alternative

Has the potential pitfall: Benefit assertion Value presumption Requires customer value research

harvard business review • march 2006 page 5

Customer Value Propositions in Business Markets

would not be as good as that of the next best Point of difference: With this software, the alternative, because the alternative is built on customer is able to link remote offices to exe- computer-aided design (CAD), a better-known cute the project and then merge the pieces drafting tool than the relational database into a single deliverable database to hand to platform on which SmartPlant is built. So In- its customer, the facility owner. tergraph tackled the perception head on, Resonating focus value propositions are gathering data from reference customers to very effective, but they’re not easy to craft: substantiate that this point of contention was Suppliers must undertake customer value re- actually a point of parity. search to gain the insights to construct them. Here’s how the company played it. Inter- Despite all of the talk about customer value, graph’s resonating focus value proposition for few suppliers have actually done customer this software consisted of one point of parity value research, which requires time, effort, (which the customer initially thought was a persistence, and some creativity. But as the point of contention), followed by three points best practices we studied highlight, thinking of difference: through a resonating focus value proposi- Point of parity: Using this software, customers tion disciplines a company to research its can create P&ID graphics (either drawings or customers’ businesses enough to help solve reports) as fast, if not faster, as they can using their problems. As the experience of a lead- CAD, the next best alternative. ing resins supplier amply illustrates, doing Point of difference: This software checks all customer value research pays off. (See the of the customer’s upstream and downstream sidebar “Case in Point: Transforming a Weak data related to plant assets and procedures, Value Proposition.”) using universally accepted engineering prac- tices, company-specific rules, and project- or Substantiate Customer Value process-specific rules at each stage of the de- Propositions sign process, so that the customer avoids In a series of business roundtable discussions costly mistakes such as missing design change we conducted in Europe and the United interdependencies or, worse, ordering the States, customer managers reported that “We wrong equipment. can save you money!” has become almost a ge- Point of difference: This software is integrated neric value proposition from prospective with upstream and downstream tasks, such as suppliers. But, as one participant in Rotter- process simulation and instrumentation de- dam wryly observed, most of the suppliers sign, thus requiring no reentry of data (and re- were telling “fairy tales.” After he heard a pitch ducing the margin for error). from a prospective supplier, he would follow up with a series of questions to determine whether the supplier had the people, pro- cesses, tools, and experience to actually save The Building Blocks of a Successful Customer his firm money. As often as not, they could not really back up the claims. Simply put, to Value Proposition make customer value propositions persuasive, A supplier’s offering may have many rior or inferior to the next best alternative. suppliers must be able to demonstrate and technical, economic, service, or social Points of contention are elements document them. benefits that deliver value to customers— about which the supplier and its cus- Value word equations enable a supplier to but in all probability, so do competitors’ tomers disagree regarding how their show points of difference and points of con- offerings. Thus, the essential question is, performance or functionality compares tention relative to the next best alternative, “How do these value elements compare with those of the next best alternative. so that customer managers can easily grasp with those of the next best alternative?” Either the supplier regards a value ele- them and find them persuasive. A value word We’ve found that it’s useful to sort value ment as a point of difference in its favor, equation expresses in words and simple mathe- elements into three types. while the customer regards that element matical operators (for example, + and ÷) how Points of parity are elements with essen- as a point of parity with the next best al- to assess the differences in functionality or tially the same performance or function- ternative, or the supplier regards a value performance between a supplier’s offering ality as those of the next best alternative. element as a point of parity, while the and the next best alternative and how to Points of difference are elements that customer regards it as a point of differ- convert those differences into dollars. make the supplier’s offering either supe- ence in favor of the next best alternative. Best-practice firms like Intergraph and, in

harvard business review • march 2006 page 6

Customer Value Propositions in Business Markets

Milwaukee, Rockwell Automation use value This value word equation uses industry-spe- word equations to make it clear to customers cific terminology that suppliers and customers how their offerings will lower costs or add in business markets rely on to communicate value relative to the next best alternatives. precisely and efficiently about functionality The data needed to provide the value esti- and performance. mates are most often collected from the customer’s business operations by supplier Demonstrate Customer Value in and customer managers working together, Advance but, at times, data may come from outside Prospective customers must see convincingly sources, such as industry association studies. the cost savings or added value they can ex- Consider a value word equation that Rock- pect from using the supplier’s offering instead well Automation used to calculate the cost of the next best alternative. Best-practice savings from reduced power usage that a suppliers, such as Rockwell Automation and customer would gain by using a Rockwell precision-engineering and manufacturing Automation motor solution instead of a com- firm Nijdra Groep in the Netherlands, use petitor’s comparable offering: value case histories to demonstrate this. Value Power Reduction Cost Savings case histories document the cost savings or = [kW spent x number of operating added value that reference customers have hours per year x $ per kW hour x actually received from their use of the sup- number of years system solution in plier’s market offering. Another way that operation] Competitor Solution best-practice firms, such as Pennsylvania-based - [kW spent x number of operating GE Infrastructure Water & Process Technolo- hours per year x $ per kW hour x num- gies (GEIW&PT) and SKF USA, show the ber of years system solution in opera- value of their offerings to prospective cus- tion] Rockwell Automation Solution tomers in advance is through value calculators.

Case in Point: Transforming a Weak Value Proposition A leading supplier of specialty resins used in understand the requirements and prefer- tractor’s costs are the coatings; labor is by architectural coatings—such as paint for ences of its customers’ customers and how far the largest cost component. If a coating buildings—recognized that its customers the performance of the new resin would af- could provide greater productivity—for ex- were coming under pressure to comply with fect their total cost of doing business. The ample, a faster drying time that allowed two increasingly strict environmental regulations. resins supplier went so far as to study the coats to be applied during a single eight- At the same time, the supplier reasoned, no requirements and preferences of the com- hour shift—contractors would likely accept coating manufacturer would want to sacrifice mercial painting contractors’ customers— a higher price. performance. So the resins supplier developed building owners. The supplier conducted a The resins supplier retooled its value a new type of high-performance resins that series of focus groups and field tests with proposition from a single dimension, envi- would enable its customers to comply with painting contractors to gather data. The per- ronmental regulation compliance, to a reso- stricter environmental standards—albeit formance on primary customer requirements— nating focus value proposition where envi- at a higher price but with no reduction in such as coverage, dry time, and durability— ronmental compliance played a significant performance. was studied, and customers were asked to but minor part. The new value proposition In its initial discussions with customers make performance trade-offs and indicate was “The new resin enables coatings produc- who were using the product on a trial basis, their willingness to pay for coatings that de- ers to make architectural coatings with the resins supplier was surprised by the tepid livered enhanced performance. The resins higher film build and gives the painting con- reaction it received, particularly from com- supplier also joined a commercial painting tractors the ability to put on two coats within mercial managers. They were not enthusias- contractor industry association, enrolled a single shift, thus increasing painter produc- tic about the sales prospects for higher-priced managers in courses on how contractors are tivity while also being environmentally com- coatings with commercial painting contrac- taught to estimate jobs, and trained the staff pliant.” Coatings customers enthusiastically tors, the primary target market. They would to work with the job-estimation software accepted this value proposition, and the res- not, they said, move to the new resin until used by painting contractors. ins supplier was able to get a 40% price pre- regulation mandated it. Several insights emerged from this cus- mium for its new offering over the traditional Taken aback, the resins supplier decided to tomer value research. Most notable was the resin product. conduct customer value research to better realization that only 15% of a painting con- harvard business review • march 2006 page 7

Customer Value Propositions in Business Markets

These customer value assessment tools typi- plier is willing to return later to document the cally are spreadsheet software applications value received) enhance the credibility of the that salespeople or value specialists use on offering’s value. laptops as part of a consultative selling ap- A pioneer in substantiating value proposi- proach to demonstrate the value that cus- tions over the past decade, GEIW&PT docu- tomers likely would receive from the sup- ments the results provided to customers pliers’ offerings. through its value generation planning (VGP) When necessary, best-practice suppliers go process and tools, which enable its field to extraordinary lengths to demonstrate the personnel to understand customers’ busi- value of their offerings relative to the next nesses and to plan, execute, and document best alternatives. The polymer chemicals unit projects that have the highest value impact of Akzo Nobel in Chicago recently conducted for its customers. An online tracking tool al- an on-site two-week pilot on a production re- lows GEIW&PT and customer managers to actor at a prospective customer’s facility to easily monitor the execution and docu- gather data firsthand on the performance of mented results of each project the company its high-purity metal organics offering relative undertakes. Since it began using VGP in to the next best alternative in producing com- 1992, GEIW&PT has documented more than pound semiconductor wafers. Akzo Nobel 1,000 case histories, accounting for $1.3 billion paid this prospective customer for these two in customer cost savings, 24 billion gallons weeks, in which each day was a trial because of water conserved, 5.5 million tons of of daily considerations such as output and waste eliminated, and 4.8 million tons of air maintenance. Akzo Nobel now has data from emissions removed. an actual production machine to substantiate As suppliers gain experience documenting Some best-practice assertions about its product and anticipated the value provided to customers, they become cost savings, and evidence that the compound knowledgeable about how their offerings de- suppliers are even willing semiconductor wafers produced are as good liver superior value to customers and even to guarantee a certain as or better than those the customer currently how the value delivered varies across kinds of grows using the next best alternative. To let customers. Because of this extensive and de- amount of savings before its prospective clients’ customers verify this tailed knowledge, they become confident in for themselves, Akzo Nobel brought them predicting the cost savings and added value a customer signs on. sample wafers it had produced for testing. that prospective customers likely will receive. Akzo Nobel combines this point of parity Some best-practice suppliers are even willing with two points of difference: significantly to guarantee a certain amount of savings be- lower energy costs for conversion and signifi- fore a customer signs on. cantly lower maintenance costs. A global automotive engine manufacturer turned to Quaker Chemical, a Pennsylvania- Document Customer Value based specialty chemical and management ser- Demonstrating superior value is necessary, vices firm, for help in significantly reducing its but this is no longer enough for a firm to be operating costs. Quaker’s team of chemical, considered a best-practice company. Suppliers mechanical, and environmental engineers, also must document the cost savings and in- which has been meticulously documenting cremental profits (from additional revenue cost savings to customers for years, identified generated) their offerings deliver to the com- potential savings for this customer through panies that have purchased them. Thus, sup- process and productivity improvements. Then pliers work with their customers to define Quaker implemented its proposed solution— how cost savings or incremental profits will with a guarantee that savings would be five be tracked and then, after a suitable period of times more than what the engine manufac- time, work with customer managers to docu- turer spent annually just to purchase coolant. ment the results. They use value documenters In real numbers, that meant savings of $1.4 to further refine their customer value models, million a year. What customer wouldn’t find create value case histories, enable customer such a guarantee persuasive? managers to get credit for the cost savings and incremental profits produced, and (be- Superior Business Performance cause customer managers know that the sup- We contend that customer value proposi- harvard business review • march 2006 page 8

Customer Value Propositions in Business Markets

tions, properly constructed and delivered, cute this value proposition for a significant pe- make a significant contribution to business riod of time. strategy and performance. GE Infrastructure Unit managers know how critical DVPs Water & Process Technologies’ recent devel- are to business unit performance because opment of a new service offering to refinery they are one of the ten key metrics on the customers illustrates how general manager managers’ performance scorecard. In senior John Panichella allocates limited resources to management reviews, each unit manager pre- initiatives that will generate the greatest in- sents proposed value propositions for each cremental value for his company and its cus- target market segment or key customer, or tomers. For example, a few years ago, a field both. The managers then receive summary rep had a creative idea for a new product, feedback on the value proposition metric (as based on his comprehensive understanding well as on each of the nine other performance of refinery processes and how refineries make metrics) in terms of whether their proposals money. The field rep submitted a new prod- can lead to profitable growth. uct introduction (NPI) request to the hydro- In addition, Sonoco senior management carbon industry marketing manager for fur- tracks the relationship between business ther study. Field reps or anyone else in the unit value propositions and business unit organization can submit NPI requests when- performance—and, year after year, has con- ever they have an inventive idea for a cus- cluded that the emphasis on DVPs has made tomer solution that they believe would have a significant contribution toward sustain- a large value impact but that GEIW&PT pres- able, double-digit, profitable growth. ently does not offer. Industry marketing Best-practice suppliers recognize that con- managers, who have extensive industry ex- structing and substantiating resonating focus Best-practice suppliers pertise, then perform scoping studies to un- value propositions is not a onetime undertak- derstand the potential of the proposed prod- ing, so they make sure their people know make sure their people ucts to deliver significant value to segment how to identify what the next value proposi- know how to identify customers. They create business cases for the tions ought to be. Quaker Chemical, for exam- proposed product, which are “racked and ple, conducts a value-proposition training what the next value stacked” for review. The senior management program each year for its chemical program team of GEIW&PT sort through a large num- managers, who work on-site with customers propositions ought to be. ber of potential initiatives competing for limited and have responsibility for formulating and resources. The team approved Panichella’s ini- executing customer value propositions. These tiative, which led to the development of a managers first review case studies from a va- new offering that provided refinery custom- riety of industries Quaker serves, where their ers with documented cost savings amount- peers have executed savings projects and ing to five to ten times the price they paid quantified the monetary savings produced. for the offering, thus realizing a compelling Competing in teams, the managers then value proposition. participate in a simulation where they inter- Sonoco, at the corporate level, has made view “customer managers” to gather informa- customer value propositions fundamental to tion needed to devise a proposal for a cus- its business strategy. Since 2003, its CEO, tomer value proposition. The team that is Harris DeLoach, Jr., and the executive com- judged to have the best proposal earns “brag- mittee have set an ambitious growth goal for ging rights,” which are highly valued in the firm: sustainable, double-digit, profit- Quaker’s competitive culture. The training able growth every year. They believe that dis- program, Quaker believes, helps sharpen the tinctive value propositions are crucial to sup- skills of chemical program managers to iden- port the growth initiative. At Sonoco, each tify savings projects when they return to the value proposition must be: customers they are serving. • Distinctive. It must be superior to those of As the final part of the training program, Sonoco’s competition. Quaker stages an annual real-world contest • Measurable. All value propositions should where the chemical program managers have be based on tangible points of difference that 90 days to submit a proposal for a savings can be quantified in monetary terms. project that they plan to present to their cus- • Sustainable. Sonoco must be able to exe- tomers. The director of chemical manage- harvard business review • march 2006 page 9

Customer Value Propositions in Business Markets

ment judges these proposals and provides vide to target market segments and customers. feedback. If he deems a proposed project to Customer value propositions can be a guiding be viable, he awards the manager with a gift beacon as well as the cornerstone for superior certificate. Implementing these projects goes business performance. Thus, it is the responsi- toward fulfilling Quaker’s guaranteed annual bility of senior management and general savings commitments of, on average, $5 million management, not just marketing manage- to $6 million a year per customer. ment, to ensure that their customer value Each of these businesses has made cus- propositions are just that. tomer value propositions a fundamental part of its business strategy. Drawing on best prac- Reprint R0603F tices, we have presented an approach to cus- To order, see the next page tomer value propositions that businesses can or call 800-988-0886 or 617-783-7500 implement to communicate, with resonating or go to www.hbrreprints.org focus, the superior value their offerings pro-

harvard business review • march 2006 page 10

Customer Value Propositions in Business Markets

Further Reading ARTICLES Business Marketing: Understand What Capturing the Value of Supplementary Customers Value Services by James C. Anderson and James A. Narus by James C. Anderson and James A. Narus Harvard Business Review Harvard Business Review November 1998 January 1995 Product no. 98601 Product no. 95101 The authors provide additional insights into This article presents another approach to de- how to generate a competitive advantage by veloping winning customer value propositions. crafting a compelling customer value proposi- The authors suggest that compelling value tion. First calculate what your offering is propositions are difficult to achieve by focusing worth, by gathering data firsthand about the only on your product. If so, you’re largely ignor- requirements of several customers in a partic- ing another element that differentiates your of- ular market segment. Then capitalize on inevi- ferings and has a huge impact on costs and table variation in customers’ requirements by profits: services. Instead of simply adding layers providing flexible market offerings. Also use of services to your offerings, tailor your pack- data from existing customers to provide evi- ages of services to customers’ individual needs. dence of your accomplishments to potential You’ll avoid an all-too-common error: giving new customers. When you do business with customers more services than they want at your customers based on the value you de- prices that reflect neither their value to custom- liver, you boost the odds of earning an equita- ers nor the cost of providing them. By tailoring ble return for your efforts. your services, you lower the cost of providing them. You also use them more effectively to meet customers’ needs, gain more business, and enhance profits.

To Order

For Harvard Business Review reprints and subscriptions, call 800-988-0886 or 617-783-7500. Go to www.hbrreprints.org

For customized and quantity orders of Harvard Business Review article reprints, call 617-783-7626, or e-mai [email protected]

page 11