Customer Value Propositions In Business Markets

'Customer value proposition' has become one of the most widely used terms in business markets in recent years. Yet our management-practice research reveals that there is no agreement as to what constitutes a customer value proposition - or what makes one persuasive. Moreover, we find that most value propositions make claims of savings and benefits to the customer without backing them up. An offering may actually provide superior value - but if the supplier doesn't demonstrate and document that claim, a customer manager will likely dismiss it as marketing puffery. Customer managers, increasingly held accountable for reducing costs, don't have the luxury of simply believing suppliers' assertions.

Take the case of a company that makes integrated circuits (ICs). It hoped to supply 5 million units to an electronic device manufacturer for its next-generation product. In the course of negotiations, the suppliers' salesperson learned that he was competing against a company whose price was 10 cents per unit lower. The customer asked each salesperson why his company's offering was superior. This salesperson based his value proposition on the service that he, personally, would provide.

Unbeknownst to the salesperson, the customer had built a customer value model, which found that the company's offering, though 10 cents higher in price per IC, was actually worth 15.9 cents more. The electronics engineer who was leading the development project had recommended that the purchasing manager buy those ICs, even at the higher price. The service was, indeed, worth something in the model - but just 0.2 cents! Unfortunately, the salesperson had overlooked the two elements of his company's IC offering that were most valuable to the customer, evidently unaware how much they were worth to that customer and, objectively, how superior they made his company's offering to that of the competitor.

Not surprisingly, when push came to shove, perhaps suspecting that his service was not worth the difference in price, the salesperson offered a 10-cent concession to win the business - consequently leaving at least a half million dollars on the table.

Some managers view the customer value proposition as a form of spin their marketing departments develop for advertising and promotional copy. This shortsighted view neglects the very real contribution of value propositions to superior business performance. Properly constructed, they force companies to rigorously focus on what their offerings are really worth to their customers. Once companies become disciplined about understanding customers, they can make smarter choices about where to allocate scare company resources in developing new offerings.

We conducted management-practice research over the past two years in Europe and the United States to understand what constitutes a customer value proposition and what makes one persuasive to customers. One striking discovery is that it is exceptionally difficult to find examples of value propositions that resonate with customers. Here, drawing on the best practices of a handful of suppliers in business markets, we present a systematic approach for developing value propositions that are meaningful to target customers and that focus suppliers' efforts on creating superior value.

"Customer Value Propositions in Business Markets', James C. Anderson, James A. Narus and Wouter van Rossum, Harvard Business Review, March 2006.