View Resources

Delivering value profitably is the heart of all marketing practice, especially business marketing.

According to ISBM’s Founding Director, Professor Irv Gross, marketers generally understand of the concepts of “price” and “cost,” but many do not have a clear picture of “value.” Is it the actual or perceived quality for the price charged, whatever “quality” means? Or is value whatever the customer is willing to pay to acquire a set of product and service benefits? Our answer relies on Dr. Gross’s definition of customer value-in-use:

“The value-in-use of an offering to a customer is the hypothetical price at which a particular offering, for that particular customer, leaves that customer at overall economic break-even with respect to the next-best alternative.”

In other words, what is it worth to the customer to buy your offering instead of the next-best competition’s offering? The total value of a business offering has two components:

• Functional value-in-use: the tangible benefits to the specific customer expressed in hard-currency terms. This usually is the largest and most crucial element of the offering.
• Intangible benefits: supplier reputations, trust, and brand relationships, for example, which address the uncertainties of a transaction. Usually, intangibles are the most important and powerful value components in consumer markets, particularly when competitive products perform more or less the same.

In business markets, marketers usually can discern the real value of an offering by analyzing how customers use it and what they would get were they to use the nextbest alternative. Harvesting that value involves pricing. Therefore, quantifying value is crucial for setting realistic prices.

Companies without a full understanding of value often find that they’ve priced their offerings too low, cutting their profit unnecessarily. Firms that follow the discredited but still widely used practice of pricing based on cost are particularly vulnerable to giving value away to their customers. Therefore, knowing how value should influence price decisions and profits earned is critical, and hinges on several dimensions, such as:

• The actual economic value of the offering (product and related services) delivered to the hypothetically typical customer.
  
• The value of the supplier to the customer, and the brand strength and relationship value of the supplier.
• How value differs among actual and prospective customers, and among the individuals who collectively make a buying decision.
• How specific marketing activities (e.g., marketing communication, positioning, distribution, selling, and customer service investments) influence customer recognition of value.
• How value builds through the industry supply chain and how much of that value is actually captured in prices charged by supply-chain members.

Determining value is where a variety of market research tools—many unique to business market studies—prove useful.

• Among the powerful techniques available to business marketers, “Voice of the Customer” analysis refined by Professor Abbie Griffin of the University of Illinois, an ISBM Fellow. Her methods provide detailed pictures of the value drivers influencing business buyers.
• The “Marketing Engineering Toolkit,” developed by Professor Gary Lilien, ISBM Research Director, and Professor Arvind Rangaswamy at Penn State, brings powerful tools such as conjoint analysis to the desktop of the business marketer.
• Market research and the techniques of competitive intelligence are essential for tracking what competitors do to create the customer’s “next-best alternative.”