Kellogg School Corner | ‘Value merchants’ and cost-cutting

Kellogg School Corner | ‘Value merchants’ and cost-cutting

Most general managers, marketing managers and sales managers would jump at the chance of knowing a proven method for winning more B2B business and increasing profits.

Now, they have a new resource to help.

A book written by James C. Anderson, the Kellogg School of Management’s William L. Ford distinguished professor of marketing and wholesale distribution, is being published later this week. The text, Value Merchants: Demonstrating and Documenting Superior Value in Business Markets (Harvard Business School Press), finds Anderson and co-authors Nirmalya Kumar and James A. Narus presenting a systematic approach for gathering and analysing data to substantiate, in monetary terms, the superior value that a company can deliver to customers.

“Customer managers, particularly purchasing managers, are under tremendous pressure to reduce the cost of acquired goods and services," Anderson says. “Oneeasy way to do this is to reduce price, but if your company doesn’t want to do that, then it becomes more difficult."

Anderson says that to be the winning supplier, proposals must be backed with hard data that sets a company apart from the competition, numbers that will in turn persuade purchasing managers this firm is the best choice to help them meet their cost reduction goals. In Value Merchants, Anderson calls such a fact-based approach demonstrating and documenting.

“Demonstrating means showing the customer what kind of cost savings or profit from incremental revenue it can expect from doing business with you as opposed to the next best alternative." But, Anderson says, this is not enough. “After a suitable period of time, you then have to document just what the actual savings or additional revenue and profit have been relative to what you earlier claimed."

The concepts and tools that Anderson and his colleagues detail in the book—including how to create value propositions that resonate with customers to maximize return on superior value—have been developed through years of consulting with business clients and researching management practices.Examples from a variety of industries and countries make their approach one that today’s managers can implement.

Anderson, who joined the Kellogg School in 1984, has been interested in customer value since working at DuPont Co. in 1978 in the corporate marketing research division. There, he began performing customer value assessments, which he says have become easier to do with the increase in availability of data, access to computers and spreadsheet software.

“Companies typically are awash in data, but they’re starved with regard to information, which comes from pulling together and analysing the data," he says. “Somebody has to take the time to get in there, generate or gather the data, do the analysis and provide the results in a readily understandable way. That’s what the suppliers, and their salespeople in particular, do in our approach." This, he notes, is a critical part of how a sales force can be transformed into value merchants, rather than competing using price concessions.

But, a company also must create a culture that recognizes and rewards these value merchants. Anderson says that getting price premiums, a natural way to think about gaining a fair return for delivering superior value, is only one of four ways a supplier can be rewarded.

Other possibilities are getting a larger share of the customer’s business, gaining a more profitable mix of the customer’s business and identifying and eliminating what Anderson calls “value drains" and “value leaks". Value drains are services, programmes and systems that cost the supplier more to provide than they are worth to the customers receiving them. These drains have no strategic significance. Value leaks are customer activities and practices that increase the cost of doing business for the customer or the supplier and that yield no offsetting greater cost savings or value to either.

Drawing on the experiences of Tata Steel as a supplier, Anderson gives examples of both value drains and leaks. An example of a value drain is the expense of a special oiling process that Tata performed to coat steel tubes, protecting them from rusting before they were sent to the customer—only to find out that the customer removed the oil and actually preferred the tubes to have some oxidation for improved friction. An example of a value leak is when a customer thought it would be cheaper to purchase steel from Tata at a standard length, but in the end was wasting about 15% of the product when it was custom cut, driving up the overall cost.

The essential message in Value Merchants, Anderson says, is the importance of doing research to really understand the customers’ requirements and preferences and how an offering fulfils these better than the competitor’s. “Everyone has perceptions, opinions and beliefs, but the question is: Can you prove it?"

Anderson says this book, his second, is geared for general managers, marketing managers and sales managers because it presents a businessphilosophy and the process, concepts and tools needed for implementing that philosophy.

“It’s the idea of how we can deliver superior value to targeted customers and get an equitable return on the value we deliver," he says. “The perception of what’s equitable can be influenced by how well we demonstrate and document what that value is. If we do a poor job of that, we have to give more of that value away to the customer as an incentive to do business with us. If we do a better job, we get to keep more of that as profit."

Based on the research of James C. Anderson, the Kellogg School of Management’s William L. Ford distinguished professor of marketing and wholesale distribution; Nirmalya Kumar, professor of marketing, director of Centre for Marketing, and co-director for Aditya V. Birla India Centre at London Business School; and James A. Narus, research fellow at the Institute for the Study of Business Markets at the Pennsylvania State University.. Adrienne Murrill is a staff writer at the Kellogg School.

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