Many businesses make the mistake of assuming that price is the only thing that matters when it comes to making a sale. Don’t get me wrong, it’s certainly important. But there’s a concept that’s even more important that price – and that’s value. Value sets the stage for long-term company growth far more than price ever can.
For the purposes of this discussion, let’s define “value” as the total benefit of product and service translated into economic worth, as seen in the below figure.
People buy based on what the best deal is – what they’re getting versus what they’re paying. All things being equal, the customer, yes, is going to buy on price. But, the truth is, all things are almost never equal – there are differences in dimensions, adherence to customer specifications, product appearance, raw material, finish, features and functionality, and performance. And there are always differences between suppliers, differences that can be exploited.
Those differences can take the form of tech support, extended warranties, superior customer service, ongoing product development efforts that continually improve what you can provide, and so forth.
Even if you’re talking about two suppliers who sell the exact same product, they’re not going to supply the same overall value. Every supplier brings unique value attributes to the table – and those value attributes can be sold at a higher price.
Understanding Value Attributes
There are three main categories of features or attributes which a business can use to create value for their customers:
- Price/Cost Value
Price/Cost Value includes, obviously, the cost of the product, but also includes payment terms, transactions costs and other elements. When people think about value, they typically (and very quickly) associate this particular aspect with it. However, value also includes many non-price attributes as well…
- Performance Value
Performance Value is one of those non-price attributes. You may supply the cheapest widget in the world, but if that widget breaks after three uses, you’re not supplying a high level of value. If the product does not perform as advertised, or if it performs well, but not the way the customer wanted or expected, the performance value is reduced. This attribute also includes product delivery as well as service and support.
- Potential Value
The other non-price value attribute has to do with Potential Value. The customer may benefit from a supplier that possesses a broad product line, for example, or one that has a high-level image or reputation. A supplier may also have access to new markets, due to their plant locations or market knowledge that could benefit the customer. These benefits offer the customer potential value that will require some further action or investment to fully exploit.
The difficulty in convincing a customer to pay a higher price for the latter two categories of non-price value attributes can be considerable. But the fact is, especially when it comes to B2B sales, those particular attributes actually provide the highest potential gain to the customer. The customer has to be made aware of that potential gain, and understand how it benefits them.
The Price/Cost value attribute is often far from the biggest factor involved in customer’s decision to use a specific supplier. Certainly, the price has to be competitive, but Performance Value and Potential Value are far more important.
Increasing Performance Value by hiring a local sales rep to increase service levels, offering products with superior performance capabilities, ensuring the ability to supply long-term, and many other investments made solely to deliver increased value to the market. When it came to Potential Value, one of our clients invested one million dollars into a lab to insure quality control and reduce the possibility of any off-quality product being shipped to a large automotive customer. The value combination provided a unique cost-effective product that would help their customer sell cars.
If you take a look at the above chart, you’ll see the larger significance of Performance and Potential Value visually demonstrated – and you’ll also see that Potential Value has the biggest pay-off for the customer, but takes the longest time for the customer to successfully interpret and capture in their business.
Delivering the Perfect "Bundle of Benefits"
We’ve verified this value phenomenon repeatedly with our research – time after time, we’ve heard customers comment that they are willing to pay a premium price for suppliers with superior product knowledge, customer service, long-term stability and other facets unrelated to actual product cost. A supplier investing in these “intangibles” may not immediately profit from them but will, down the line, realize more revenues and discover new business opportunities because of them. And the amazing fact is that, in many cases, the additional customer value is created with no incremental cost of production or delivery.
That’s because of an important change of perspective. The supplier stops looking at what they sell as simply the product itself, and starts looking at all the intangibles they can provide with that product – what some marketers call a “bundle of benefits.” The tangible and intangible elements of the product are benefits only to the customer – that’s why the change of perspective is critical. The supplier usually can’t see the same elements as benefits. To the supplier, they are just things – extra costs, added hassle, more time, a change in the way they do business. These types of auxiliary benefits fall mostly into the Performance and Potential Value categories.
To give you a consumer-based example, when a cell phone service provider sells you a phone, it’s not just selling you that phone. It’s selling you its monthly plan of minutes, internet features on the phone, available games, ringtones, the camera that’s in the phone, and the warranty on the phone, among other things.
In B2B markets, even a sales rep can be part of that “bundle of benefits.” If the rep has a great relationship with the customer, if that person demonstrates a good understanding of the customer’s business, that’s worth money to them. If the rep can help with credit terms and solve delivery problems, that also adds important value. Whatever way you can bring increase to your side of the equation, you add value to your product.
A benefit to the customer can even be something as simple as a supplier’s location. If you’re physically closer to the customer than other suppliers, that’s probably a big benefit to them. Going back to a consumer example, there are thousands of Subway sandwich franchises across the country – and they all provide the same basic food choices, one isn’t going to be markedly better than the other. But obviously, you’re going to eat at the one that’s across the street, because it’s the most convenient. Similarly, you may sell corrugated boxes, the same boxes as a thousand other suppliers, but you might be able to sell yours to a buyer just because your facility is closest.
Once you realize that certain aspects of your business can be more important to your future growth than the products you actually sell, the next question becomes which value attributes do you focus on to achieve real growth?
Going Beyond Price: Value Determination
Deciding which value attributes to focus on means you must understand how your customers determine which attributes are most important to them. Understanding how a buyer in a B2B transaction makes a value determination, however, can be very difficult. It differs markedly from how a consumer makes their buying decision.
For example, when a consumer is trying to decide which brand of toothpaste to purchase, it’s usually just up to that consumer. Does he or she want the reassurance of a big name brand, the cost benefit of a generic or store brand, or the premium expense of toothpaste with an extra feature, such as whitening or plaque prevention?
The final decision is either a default one (he or she buys the same kind of toothpaste they always buy) or it’s made on the fly while cruising down the aisle of the store, informed possibly by advertising exposure as well as personal preferences. And if that one consumer rejects a certain brand of toothpaste, the manufacturer never really knows about it and doesn’t really care – unless, of course, a huge chunk of consumers begin rejecting the brand over time. That always seems to get a company’s attention!
When a buyer makes a value determination in the B2B world, however, it’s almost never an individual decision. Instead, it’s a complex verdict that involves a number of people – it could be five, six or even fifteen people involved in the buying decision. Those people require a substantial amount of information about the product, the supplier, the channel of distribution, the raw materials used in manufacture and the suppliers of those raw materials, and on and on. Once the specifications are set and the potential suppliers of products that meet those specs are identified, the decision ostensibly comes down to price – who can supply that set of specs at the lowest cost.
Of course, that’s hard on the sellers; they don’t want to have to compete strictly on a price basis. And, the shocking fact is that neither do the customers – but it’s difficult for a buyer to justify other factors beyond cost once the specs have been finalized, if, in fact, the products from all suppliers appear to have no point of difference. That message gets heard loud and clear by the supplier’s sales reps, who will end up going back and telling the home office that making a deal needs to be all about charging the least amount of money.
And make no mistake, in this buying situation, there’s a lot more pressure on a supplier selling to a business than a business selling to a consumer. If the supplier’s bid is rejected, that company is looking at large amounts of dollars lost and, as a result, jobs, management and even infrastructure. When providing the lowest bid seems to be the easiest path to getting the business the supplier so desperately wants, that’s the option that will frequently be chosen.
But that’s not usually the case.
It isn’t really the sales rep’s fault for focusing on price. He usually doesn’t have the tools to effectively sell other value attributes – price is the easiest path to pursue. And it’s not the buyer’s fault for focusing on price – especially when no supplier is actually dealing with real value propositions. However, if the supplier can demonstrate they provide superior value in the areas that count, that supplier can win the deal – even though the price may be higher than the competition’s.
But again, the supplier needs to know which value attributes are going to make the difference. All those people involved in the buying decision that we spoke of earlier all have different needs. For instance, the engineer involved doesn’t particularly care about price, he cares about the product meeting all his technical criteria – without any worries on his end. The warehouse manager only cares that she can keep the necessary components and pieces in stock and can supply them quickly when needed. The marketing manager wants a product that adds value in the eyes of the end user – adding a feature that is demanded by the end user and, even better, different from competition.
Everyone has their own particular “wish list” – and many of those wishes have nothing to do with Price/Cost Value and have everything to do with our old friends, Performance Value and Potential Value.
Now imagine that, when all these people involved in the buying decision sat down at a meeting to decide on a supplier, you could actually know what each of them valued – and you also knew what the relative importance of each of those aspects was. That would enable you, as a supplier, to create a value proposition that would put you ahead of the pack not only in terms of what you were offering, but in terms of the price you could command – because you would be supplying greater value attributes to all parties concerned than the competition.
Well, of course, you can’t know exactly what all the people in that meeting are actually thinking. A Customer Insight survey, however, gets you as close as you possibly can to having that ideal information. When done properly, Customer Insight will tell you what everyone who’s in on the buying decision is looking for, what each of them value and what your competitive position is. With that information in hand, you can create a value proposition that works – delivering dollars to the buyer and potentially to the end users by allowing them to do more, do it in new ways, do it faster, and reduce costs.