Monday, September 30, 2019
Customer Value Propositions in Business Markets
Customer Value Propositions in Business Markets by JAMES C. ANDERSON, JAMES A. NARUS, AND WOUTER VAN ROSSUM Under pressure to keep costs down, customers may only look at price and not listen to your sales pitch. Help them understand Ã¢â¬â and believe in Ã¢â¬â the superior value of your offerings. Ã¢â¬Å"CUSTOMER VALUE PROPOSITIONÃ¢â¬ 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 Ã¢â¬â or what makes one persuasive. Moreover, we ? d that most value propositions make claims of savings and bene? ts to the customer without backing them up. An offering may actually provide superior value Ã¢â¬â but if the supplier doesnÃ¢â¬â¢t demonstrate and document that claim, a customer manager will likely dismiss it as marketing puffery. Customer managers, increasingly held accountable for reducing costs, donÃ¢â¬â¢t have the l uxury of simply believing suppliersÃ¢â¬â¢ assertions. PETER HOEY march 2006 91 C u s t o m e r Va l u e P ro p o s i t i o n s i n B u s i n e s s M a r ke t s 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 supplierÃ¢â¬â¢s salesperson learned that he was competing against a company whose price was 10 cents lower per unit. The customer asked each salesperson why his companyÃ¢â¬â¢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 companyÃ¢â¬â¢s offering, though 10 cents higher in price per IC, was actually worth 15. cents more. The electronics engineer who was leading the development project had recommended that the purchasing manager buy those ICs, even a t the higher price. The service was, indeed, worth something in the modelÃ¢â¬âbut just 0. 2 cents! Unfortunately, the salesperson had overlooked the two elements of his companyÃ¢â¬â¢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 companyÃ¢â¬â¢s offering to that of the competitor. Not surprisingly,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 dif? cult to ? nd 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 suppliersÃ¢â¬â¢ efforts on creating super ior value.Three Kinds of Value Propositions We have classi? ed the ways that suppliers use the term Ã¢â¬Å"value propositionÃ¢â¬ into three types: all bene? ts, favorable points of difference, and resonating focus. (See the exhibit Ã¢â¬Å"Which Alternative Conveys Value to Customers? Ã¢â¬ ) All bene? ts. Our research indicates that most managers, when asked to construct a customer value proposition, simply list all the bene? ts they believe that their Customer managers, increasingly held accountable for reducing costs, donÃ¢â¬â¢t have the luxury of simply believing suppliersÃ¢â¬â¢ assertions. hen push came to shove, perhaps suspecting that his service was not worth the difference in price, the salesperson offered a 10-cent price concession to win the business Ã¢â¬â 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. T his 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 scarce company resources in developing new offerings. offering might deliver to target customers. The more they can think of, the better. This approach requires the least knowledge about customers and competitors and, thus, the least amount of work to construct. However, its relative simplicity has a major potential drawback: bene? t assertion. Managers may claim advantages for features that actually provide no bene? to target customers. Such was the case with a company that sold highperformance gas chromatographs to R&D laboratories in large companies, universities, and government agencies in the Benelux countries. One feature of a particular chromatograph allowed R&D lab customers to maintain a high degree of sample integrity. Seeking growth, the company began to market the most basic model of this chromatograph to a new segment: commercial laboratories. In initial meetings with prospective customers, the ? rmÃ¢â¬â¢s James C. Anderson is the William L.Ford Distinguished Professor of Marketing and Wholesale Distribution at NorthwesternÃ¢â¬â¢s Kellogg School of Management in Evanston, Illinois; the Irwin Gross Distinguished ISBM Research Fellow at the Institute for the Study of Business Markets in University Park, Pennsylvania; and a visiting research professor at the School of Business, Public Administration, and Technology at the University of Twente, the Netherlands. James A. Narus is a professor of business marketing at the Babcock Graduate School of Management at Wake Forest University in Charlotte, North Carolina.Wouter van Rossum is a professor of commercial and strategic management at the School of Business, Public Administration, and Technology at the University of Twente. 92 harvard business review C u s t o m e r Va l u e P ro p o s i t i o n s i n B u s i n e s s M a r ke t s Which Alternative Conveys Value to Customers? Suppliers use the term Ã¢â¬Å"value propositionÃ¢â¬ three different ways. Most managers simply list all the bene? ts they believe that their offering might deliver to target customers. The more they can think of, the better.Some managers do recognize that the customer has an alternative, but they often make the mistake of assuming that favorable points of difference must be valuable for the customer. Best-practice suppliers base their value proposition on the few elements that matter most to target customers, demonstrate the value of this superior performance, and communicate it in a way that conveys a sophisticated understanding of the customerÃ¢â¬â¢s business priorities. VALUE PROPOSITION: ALL BENEFITS FAVORABLE POINTS OF DIFFERENCE All favorable po ints of difference a market offering has relative to the next best alternativeRESONATING FOCUS Consists of: All bene? ts customers receive from a market offering The one or two points of difference (and, perhaps, a point of parity) whose improvement will deliver the greatest value to the customer for the foreseeable future Answers the customer question: Ã¢â¬Å"Why should our ? rm purchase your offering? Ã¢â¬ Ã¢â¬Å"Why should our ? rm purchase your offering instead of your competitorÃ¢â¬â¢s? Ã¢â¬ Ã¢â¬Å"What is most worthwhile for our ? rm to keep in mind about your offering? Ã¢â¬ Requires: Knowledge of own market offering Knowledge of own market offering and next best alternativeKnowledge of how own market offering delivers superior value to customers, compared with next best alternative Has the potential pitfall: Bene? t assertion Value presumption Requires customer value research salespeople touted the bene? ts of maintaining sample integrity. Their prospects scoffed a t this bene? t assertion, stating that they routinely tested soil and water samples, for which maintaining sample integrity was not a concern. The supplier was taken aback and forced to rethink its value proposition. Another pitfall of the all bene? ts value proposition is that many, even most, of the bene? s may be points of parity with those of the next best alternative, diluting the effect of the few genuine points of difference. Managers need to clearly identify in their customer value propositions which elements are points of parity and which are points of difference. (See the exhibit Ã¢â¬Å"The Building Blocks of a Successful Customer Value Proposition. Ã¢â¬ ) For example, an international engineering consultancy was march 2006 bidding for a light-rail project. The last chart of the companyÃ¢â¬â¢s presentation listed ten reasons why the municipality should award the roject to the ? rm. But the chart had little persuasive power because the other two ? nalists could make mos t of the same claims. Put yourself, for a moment, in the place of the prospective client. Suppose each ? rm, at the end of its presentation, gives ten reasons why you ought to award it the project, and the lists from all the ? rms are almost the same. If each ? rm is saying essentially the same thing, how do you make a choice? You ask each of the ? rms to give a ? nal, best price, and then you award the project to the ? rm that gives the largest price concession.Any distinctions that do exist have been overshadowed by the ? rmsÃ¢â¬â¢ greater sameness. 93 C u s t o m e r Va l u e P ro p o s i t i o n s i n B u s i n e s s M a r ke t s Favorable points of difference. The second type of value proposition explicitly recognizes that the customer has an alternative. The recent experience of a leading industrial gas supplier illustrates this perspective. A customer sent the company a request for proposal stating that the two or three suppliers that could demonstrate the most persuasive v alue propositions would be invited to visit the customer to discuss and re? e their proposals. After this meeting, the customer would select a sole supplier for this business. As this example shows, Ã¢â¬Å"Why should our ? rm purchase your offering instead of your competitorÃ¢â¬â¢s? Ã¢â¬ is a more pertinent question than Ã¢â¬Å"Why should our ? rm purchase your offering? Ã¢â¬ The ? rst question focuses suppliers on differentiating their offerings from the next best alternative, a process that requires detailed knowledge of that alternative, whether it be buying a competitorÃ¢â¬â¢s offering or solving the customerÃ¢â¬â¢s problem in a different way.Knowing that an element of an offering is a point of difference relative to the next best alternative does not, however, convey the value of this difference to target customers. Furthermore, a product or service may have several points of difference, complicating the supplierÃ¢â¬â¢s understanding of which ones deliver the grea test value. Without a detailed understanding of the customerÃ¢â¬â¢s requirements and preferences, and what it is worth to ful? ll them, suppliers may stress points of difference that deliver relatively little value to the target customer. Each of these can lead to the pitfall of value presumption: assuming that favorable points f difference must be valuable for the customer. Our opening anecdote about the IC supplier that unnecessarily discounted its price exempli? es this pitfall. Resonating focus. Although the favorable points of difference value proposition is preferable to an all bene? ts proposition for companies crafting a consumer value proposition, the resonating focus value proposition should be the gold standard. This approach acknowledges that the managers who make purchase decisions have major, ever-increasing levels of responsibility and often are pressed for time.They want to do business with suppliers that fully grasp critical issues in their business and deliver a customer value proposition thatÃ¢â¬â¢s simple yet powerfully captivating. Suppliers can provide such a customer value proposition by making their offerings superior on the few elements that matter most to target customers, demonstrating and documenting the value of this superior performance, and communicating it in a way that conveys a sophisticated understanding of the customerÃ¢â¬â¢s business priorities. This type of proposition differs from favorable points of difference in two signi? cant respects.First, more is not better. Although a supplierÃ¢â¬â¢s offering may possess several favorable points of difference, the resonating focus proposition steadfastly concentrates on the one or two points 94 of difference that deliver, and whose improvement will continue to deliver, the greatest value to target customers. To better leverage limited resources, a supplier might even cede to the next best alternative the favorable points of difference that customers value least, so that th e supplier can concentrate its resources on improving the one or two points of difference customers value most.Second, the resonating focus proposition may contain a point of parity. This occurs either when the point of parity is required for target customers even to consider the supplierÃ¢â¬â¢s offering or when a supplier wants to counter customersÃ¢â¬â¢ mistaken perceptions that a particular value element is a point of difference in favor of a competitorÃ¢â¬â¢s offering. This latter case arises when customers believe that the competitorÃ¢â¬â¢s offering is superior but the supplier believes its offerings are comparableÃ¢â¬âcustomer value research provides empirical support for the supplierÃ¢â¬â¢s assertion.To give practical meaning to resonating focus, consider the following example. Sonoco, a global packaging supplier headquartered in Hartsville, South Carolina, approached a large European customer, a maker of consumer packaged goods, about redesigning the packaging T he Building Blocks of a Successful Customer Value Proposition A supplierÃ¢â¬â¢s offering may have many technical, economic, service, or social bene? ts that deliver value to customers Ã¢â¬â but in all probability, so do competitorsÃ¢â¬â¢ offerings. Thus, the essential question is, Ã¢â¬Å"How do these value elements compare with those of the next best alternative? WeÃ¢â¬â¢ve found that itÃ¢â¬â¢s useful to sort value elements into three types. Points of parity are elements with essentially the same performance or functionality as those of the next best alternative. Points of difference are elements that make the supplierÃ¢â¬â¢s offering either superior or inferior to the next best alternative. Points of contention are elements about which the supplier and its customers disagree regarding how their performance or functionality compares with those of the next best alternative.Either the supplier regards a value element as a point of difference in its favor, while the custom er regards that element as a point of parity with 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. harvard business review C u s t o m e r Va l u e P ro p o s i t i o n s i n B u s i n e s s M a r ke t s for one of its product lines. Sonoco believed that the customer would pro? from updated packaging, and, by proposing the initiative itself, Sonoco reinforced its reputation as an innovator. Although the redesigned packaging provided six favorable points of difference relative to the next best alternative, Sonoco chose to emphasize one point of parity and two points of difference in what it called its distinctive value proposition (DVP). The value proposition was that the redesigned packaging would deliver signi? cantly greater manufacturing ef? ciency in the customerÃ¢â¬â¢s ? l lines, through higher-speed closing, and provide a distinctive look that consumers would ? nd more appealing Ã¢â¬â all for the same price as the present packaging. Sonoco chose to include a point of parity in its value proposition because, in this case, the customer would not even consider a packaging redesign if the price went up. The ? rst point of difference in the value proposition (increased ef? ciency) delivered cost savings to the customer, allowing it to move from a seven-day, three-shift production schedule during peak times to a ? e-day, two-shift operation. The second point of difference delivered an advantage at the consumer level, helping the customer to grow its revenues and pro? ts incrementally. In persuading the customer to change to the redesigned packaging, Sonoco did not neglect to mention the other favorable points of difference. Rather, it chose to place much greater emphasis on the two points of difference and the one point of parity that mattered most to the customer, thereby delivering a value proposition with resonating focu s.Stressing as a point of parity what customers may mistakenly presume to be a point of difference favoring a competitorÃ¢â¬â¢s offering can be one of the most important parts of constructing an effective value proposition. Take the case of Intergraph, an Alabama-based provider of engineering software to engineering, procurement, and construction ? rms. One software product that Intergraph offers, SmartPlant P&ID, enables customers to de? ne ? ow processes for valves, pumps, and piping within plants they are designing and generate piping and instrumentation diagrams (P&ID).Some prospective customers wrongly presume that SmartPlantÃ¢â¬â¢s drafting performance would not be as good as that of the next best alternative, because the alternative is built on computer-aided design (CAD), a better-known drafting tool than the relational database platform on which SmartPlant is built. So Intergraph tackled the perception head on, gathering data from reference customers to substantiate tha t this point of contention was actually a point of parity. march 2006 HereÃ¢â¬â¢s how the company played it.IntergraphÃ¢â¬â¢s resonating focus value proposition for this software consisted of one point of parity (which the customer initially thought was a point of contention), followed by three points of difference: Point of parity: Using this software, customers can create P&ID graphics (either drawings or reports) as fast, if not faster, as they can using CAD, the next best alternative. Point of difference: This software checks all of the customerÃ¢â¬â¢s upstream and downstream data related to plant assets and procedures, using universally accepted engineering practices, company-speci? c rules, and project- or process-speci? rules at each stage of the design process, so that the customer avoids costly mistakes such as missing design change interdependencies or, worse, ordering the wrong equipment. Point of difference: This software is integrated with upstream and downstream tasks, such as process simulation and instrumentation design, thus requiring no reentry of data (and reducing the margin for error). Point of difference: With this software, the customer is able to link remote of? ces to execute the project and then merge the pieces into a single deliverable database to hand to its customer, the facility owner.Resonating focus value propositions are very effective, but theyÃ¢â¬â¢re not easy to craft: Suppliers must undertake 95 C u s t o m e r Va l u e P ro p o s i t i o n s i n B u s i n e s s M a r ke t s customer value research to gain the insights to construct them. Despite all of the talk about customer value, few suppliers have actually done customer value research, which requires time, effort, persistence, and some creativity. But as the best practices we studied highlight, thinking through a resonating focus value proposition disciplines a company to research its customersÃ¢â¬â¢ businesses enough to help solve their problems.As the exper ience of a leading resins supplier amply illustrates, doing customer value research pays off. (See the sidebar Ã¢â¬Å"Case in Point: Transforming a Weak Value Proposition. Ã¢â¬ ) savings from reduced power usage that a customer would gain by using a Rockwell Automation motor solution instead of a competitorÃ¢â¬â¢s comparable offering: Power Reduction = [kW spent number of operating hours per Cost Savings year $ per kW hour number of years system solution in operation] Competitor Solution ? [kW spent number of operating hours per year $ per kW hour number of years system solution in operation] Rockwell Automation SolutionSubstantiate Customer Value Propositions In a series of business roundtable discussions we conducted in Europe and the United States, customer managers reported that Ã¢â¬Å"We can save you money! Ã¢â¬ has become almost a generic value proposition from prospective suppliers. But, as one participant in Rotterdam wryly observed, most of the suppliers were telling Ã¢â¬Å"fairy tales. Ã¢â¬ After he heard a pitch from a prospective supplier, he would follow up with a series of questions to determine whether the supplier had the people, processes, tools, and experience to actually save his ? m money. As often as not, they could not really back up the claims. Simply put, to make customer value propositions persuasive, suppliers must be able to demonstrate and document them. Value word equations enable a supplier to show points of difference and points of contention relative to the next best alternative, so that customer managers can easily grasp them and ? nd them persuasive. A value word This value word equation uses industry-speci? c terminology that suppliers and customers in business markets rely on to communicate precisely and ef? iently about functionality and performance. Demonstrate Customer Value in Advance Prospective customers must see convincingly the cost savings or added value they can expect from using the supplierÃ¢â¬â¢s off ering instead of the next best alternative. Best-practice suppliers, such as Rockwell Automation and precision-engineering and manufacturing ? rm Nijdra Groep in the Netherlands, use value case histories to demonstrate this. Value case histories document the cost savings or added value that reference customers have actually received from their use of the supplierÃ¢â¬â¢s market offering.Another way that best-practice ? rms, such as Pennsylvania-based GE Infrastructure Water & Process Technologies (GEIW&PT) and SKF USA, show the value of their offerings to prospective customers in advance is Some best-practice suppliers are even willing to guarantee a certain amount of savings before a customer signs on. equation expresses in words and simple mathematical operators (for example, + and ? ) how to assess the differences in functionality or performance between a supplierÃ¢â¬â¢s offering and the next best alternative and how to convert those differences into dollars.Best-practice ? rm s like Intergraph and, in Milwaukee, Rockwell Automation use value word equations to make it clear to customers how their offerings will lower costs or add value relative to the next best alternatives. The data needed to provide the value estimates are most often collected from the customerÃ¢â¬â¢s business operations by supplier and customer managers working together, but, at times, data may come from outside sources, such as industry association studies.Consider a value word equation that Rockwell Automation used to calculate the cost 96 through value calculators. These customer value assessment tools typically are spreadsheet software applications that salespeople or value specialists use on laptops as part of a consultative selling approach to demonstrate the value that customers likely would receive from the suppliersÃ¢â¬â¢ offerings. When necessary, best-practice suppliers go to extraordinary lengths to demonstrate the value of their offerings relative to the next best alte rnatives.The polymer chemicals unit of Akzo Nobel in Chicago recently conducted an on-site two-week pilot on a production reactor at a prospective customerÃ¢â¬â¢s facility to gather data ? rsthand on the performance of its high-purity metal organics offering relative to the next best alternative in producing compound semiconductor wafers. Akzo Nobel paid this harvard business review C u s t o m e r Va l u e P ro p o s i t i o n s i n B u s i n e s s M a r ke t s prospective customer for these two weeks, in which each day was a trial because of daily considerations such as output and maintenance.Akzo Nobel now has data from an actual production machine to substantiate assertions about its product and anticipated cost savings, and evidence that the compound semiconductor wafers produced are as good as or better than those the customer currently grows using the next best alternative. To let its prospective clientsÃ¢â¬â¢ customers verify this for themselves, Akzo Nobel brought them sample wafers it had produced for testing. Akzo Nobel combines this point of parity with two points of difference: signi? cantly lower energy costs for conversion and signi? antly lower maintenance costs. Document Customer Value Demonstrating superior value is necessary, but this is no longer enough for a ? rm to be considered a best-practice company. Suppliers also must document the cost savings and incremental pro? ts (from additional revenue gener- ated) their offerings deliver to the companies that have purchased them. Thus, suppliers work with their customers to de? ne how cost savings or incremental pro? ts will be tracked and then, after a suitable period of time, work with customer managers to document the results.They use value documenters to further re? ne their customer value models, create value case histories, enable customer managers to get credit for the cost savings and incremental pro? ts produced, and (because customer managers know that the supplier is willing to return later to document the value received) enhance the credibility of the offeringÃ¢â¬â¢s value. A pioneer in substantiating value propositions over the past decade, GEIW&PT documents the results provided to customers through its value generation planning (VGP) process and tools, which enable its ? ld personnel to understand customersÃ¢â¬â¢ businesses and to plan, execute, and document projects that have the highest value impact for its customers. An online tracking tool allows GEIW&PT and customer managers to easily monitor the Case in Point: Transforming a Weak Value Proposition A leading supplier of specialty resins used in architectural coatings Ã¢â¬â such as paint for buildings Ã¢â¬â recognized that its customers were coming under pressure to comply with increasingly strict environmental regulations. At the same time, the supplier reasoned, no coating manufacturer would want to sacri? e performance. So the resins supplier developed a new type of highperformance resi ns that would enable its customers to comply with stricter environmental standards Ã¢â¬â albeit at a higher price but with no reduction in performance. In its initial discussions with customers who were using the product on a trial basis, the resins supplier was surprised by the tepid reaction it received, particularly from commercial managers. They were not enthusiastic about the sales prospects for higher-priced coatings with commercial painting contractors, the primary target market.They would not, they said, move to the new resin until regulation mandated it. Taken aback, the resins supplier decided to conduct customer value research to better understand the requirements and preferences of its customersÃ¢â¬â¢ customers and how the performance of the new resin would affect their total cost of doing business. The resins supplier went so far as to study the requirements and preferences of the commercial painting contractorsÃ¢â¬â¢ customers Ã¢â¬â building owners. The suppl ier conducted a series of focus groups and ? eld tests with painting contractors to gather data.The performance on primary customer requirements Ã¢â¬â such as coverage, dry time, and durability Ã¢â¬â was studied, and customers were asked to make performance trade-offs and indicate their willingness to pay for coatings that delivered enhanced performance. The resins supplier also joined a commercial painting contractor industry association, enrolled managers in courses on how contractors are taught to estimate jobs, and trained the staff to work with the job-estimation software used by painting contractors. Several insights emerged from this customer value research.Most notable was the realization that only 15% of a painting contractorÃ¢â¬â¢s costs are the coatings; labor is by far the largest cost component. If a coating could provide greater productivity Ã¢â¬â for example, a faster drying time that allowed two coats to be applied during a single eight-hour shift Ã¢â¬â contractors would likely accept a higher price. The resins supplier retooled its value proposition from a single dimension, environmental regulation compliance, to a resonating focus value proposition where environmental compliance played a signi? cant but minor part.The new value proposition was Ã¢â¬Å"The new resin enables coatings producers to make architectural coatings with higher ? lm build and gives the painting contractors the ability to put on two coats within a single shift, thus increasing painter productivity while also being environmentally compliant. Ã¢â¬ Coatings customers enthusiastically accepted this value proposition, and the resins supplier was able to get a 40% price premium for its new offering over the traditional resin product. march 2006 97 C u s t o m e r Va l u e P ro p o s i t i o n s i n B u s i n e s s M a r ke t s xecution and documented results of each project the company undertakes. Since it began using VGP in 1992, GEIW&PT has documented more th an 1,000 case histories, accounting for $1. 3 billion in customer cost savings, 24 billion gallons of water conserved, 5. 5 million tons of waste eliminated, and 4. 8 million tons of air emissions removed. As suppliers gain experience documenting the value provided to customers, they become knowledgeable about how their offerings deliver superior value to customers and even how the value delivered varies across ation can submit NPI requests whenever they have an inventive idea for a customer solution that they believe would have a large value impact but that GEIW&PT presently does not offer. Industry marketing managers, who have extensive industry expertise, then perform scoping studies to understand the potential of the proposed products to deliver signi? cant value to segment customers. They create business cases for the proposed product, which are Ã¢â¬Å"racked and stackedÃ¢â¬ for review. The senior management team of GEIW&PT sort through aBest-practice suppliers make sure the ir people know how to identify what the next value propositions ought to be. kinds of customers. Because of this extensive and detailed knowledge, they become con? dent in predicting the cost savings and added value that prospective customers likely will receive. Some best-practice suppliers are even willing to guarantee a certain amount of savings before a customer signs on. A global automotive engine manufacturer turned to Quaker Chemical, a Pennsylvania-based specialty chemical and management services ? m, for help in signi? cantly reducing its operating costs. QuakerÃ¢â¬â¢s team of chemical, mechanical, and environmental engineers, which has been meticulously documenting cost savings to customers for years, identi? ed potential savings for this customer through process and productivity improvements. Then Quaker implemented its proposed solution Ã¢â¬â with a guarantee that savings would be ? ve times more than what the engine manufacturer spent annually just to purchase cool ant. In real numbers, that meant savings of $1. 4 million a year.What customer wouldnÃ¢â¬â¢t ? nd such a guarantee persuasive? large number of potential initiatives competing for limited resources. The team approved PanichellaÃ¢â¬â¢s initiative, which led to the development of a new offering that provided re? nery customers with documented cost savings amounting to ? ve to ten times the price they paid for the offering, thus realizing a compelling value proposition. Sonoco, at the corporate level, has made customer value propositions fundamental to its business strategy. Since 2003, its CEO, Harris DeLoach, Jr. and the executive committee have set an ambitious growth goal for the ? rm: sustainable, double-digit, pro? table growth every year. They believe that distinctive value propositions are crucial to support the growth initiative. At Sonoco, each value proposition must be: Ã¢â¬ ¢ Distinctive. It must be superior to those of SonocoÃ¢â¬â¢s competition. Ã¢â¬ ¢ Measurable. A ll value propositions should be based on tangible points of difference that can be quanti? ed in monetary terms. Ã¢â¬ ¢ Sustainable. Sonoco must be able to execute this value proposition for a signi? ant period of time. Unit managers know how critical DVPs are to business unit performance because they are one of the ten key metrics on the managersÃ¢â¬â¢ performance scorecard. In senior management reviews, each unit manager presents proposed value propositions for each target market segment or key customer, or both. The managers then receive summary feedback on the value proposition metric (as well as on each of the nine other performance metrics) in terms of whether their proposals can lead to pro? table growth.In addition, Sonoco senior management tracks the relationship between business unit value propositions and business unit performance Ã¢â¬â and, year after year, has concluded that the emphasis on DVPs has made a signi? cant contribution toward sustainable, double-digit, profitable growth. harvard business review Superior Business Performance We contend that customer value propositions, properly constructed and delivered, make a signi? cant contribution to business strategy and performance. GE Infrastructure Water & Process TechnologiesÃ¢â¬â¢ recent development of a new service offering to re? ery customers illustrates how general manager John Panichella allocates limited resources to initiatives that will generate the greatest incremental value for his company and its customers. For example, a few years ago, a ? eld rep had a creative idea for a new product, based on his comprehensive understanding of re? nery processes and how re? neries make money. The ? eld rep submitted a new product introduction (NPI) request to the hydrocarbon industry marketing manager for further study. Field reps or anyone else in the organi98 C u s t o m e r Va l u e P ro p o s i t i o n s i n B u s i n e s s M a r ke t sBest-practice suppliers recognize that construct ing and substantiating resonating focus value propositions is not a onetime undertaking, so they make sure their people know how to identify what the next value propositions ought to be. Quaker Chemical, for example, conducts a value-proposition training program each year for its chemical program managers, who work on-site with customers and have responsibility for formulating and executing customer value propositions. These managers ? rst review case studies from a variety of industries Quaker serves, where their peers have executed savings projects and quanti? d the monetary savings produced. Competing in teams, the managers then participate in a simulation where they interview Ã¢â¬Å"customer managersÃ¢â¬ to gather information needed to devise a proposal for a customer value proposition. The team that is judged to have the best proposal earns Ã¢â¬Å"bragging rights,Ã¢â¬ which are highly valued in QuakerÃ¢â¬â¢s competitive culture. The training program, Quaker believes, he lps sharpen the skills of chemical program managers to identify savings projects when they return to the customers they are serving. As the ? al part of the training program, Quaker stages an annual real-world contest where the chemical program managers have 90 days to submit a proposal for a savings project that they plan to present to their customers. The director of chemical management judges these proposals and provides feedback. If he deems a proposed project to be viable, he awards the manager with a gift certi? cate. Implementing these projects goes toward ful? lling QuakerÃ¢â¬â¢s guaranteed annual savings commitments of, on average, $5 million to $6 million a year per customer.Each of these businesses has made customer value propositions a fundamental part of its business strategy. Drawing on best practices, we have presented an approach to customer value propositions that businesses can implement to communicate, with resonating focus, the superior value their offerings pr ovide to target market segments and customers. Customer value propositions can be a guiding beacon as well as the cornerstone for superior business performance. Thus, it is the responsibility of senior management and general management, not just marketing management, to ensure that their customer value propositions are just that.Reprint R0603F; HBR OnPoint 3544 To order, see page 151. P VEY . C. Ã¢â¬Å"What we need are some fresh new ideas. You know, like we had last year. Ã¢â¬ march 2006 99 Harvard Business Review Notice of Use Restrictions, May 2009 Harvard Business Review and Harvard Business Publishing Newsletter content on EBSCOhost is licensed for the private individual use of authorized EBSCOhost users. It is not intended for use as assigned course material in academic institutions nor as corporate learning or training materials in businesses.Academic licensees may not use this content in electronic reserves, electronic course packs, persistent linking from syllabi or by a ny other means of incorporating the content into course resources. 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