Value First, Then Price

Building Value-Based Pricing Strategies

Andreas Hinterhuber, Todd C. Snelgrove, Andreas Hinterhuber, Todd C. Snelgrove

• Editorial: Routledge
• Año: 2021
• ISBN:
  9781000515190
• Edición: 2
• Categoría: Betriebswirtschaft
• Categoría: Vertrieb

Value-based pricing – pricing a product or service according to its value to the customer rather than its cost – is the most effective and profitable pricing strategy. Value First, Then Price is an innovative collection that proposes a quantitative methodology to value pricing and road-tests this methodology through a wide variety of real-life industrial and B2B cases.

This book offers a state-of-the art and best practice overview of how leading companies quantify and document value to customers. In doing so, it provides students and researchers with a method by which to draw invaluable data-driven conclusions, and gives sales and marketing managers the theories and best practices they need to quantify the value of their products and services to industrial and B2B purchasers. The 2nd edition of this highly-regarded text has been updated in line with current research and practice, offering three new chapters covering new case studies and best practice examples of quantified value propositions, the future of value quantification, and value quantification for intangibles.

With contributions from global industry experts this book combines cutting edge research on value quantification and value quantification capabilities with real-life, practical examples. It is essential reading for postgraduate students in Sales and Marketing with an interest in Pricing Strategy, sales and pricing specialists, as well as business strategists, in both research and practice.

Part I

Introduction

1 Introduction

Quantifying and documenting value in business markets

Hinterhuber, Andreas and Snelgrove, Todd C.

DOI: 10.4324/9781003177937-2

The essential challenge that sales and marketing managers in industrial markets face is this: converting their firm’s own competitive advantages into quantified, monetary customer benefits. Doing so enables business-to-business (B2B) sales and marketing personnel to justify price differences between competing offers with a difference in monetary value. A disguised project example illustrates this fundamental principle of value quantification.

Customer value is the sum of (a) the price of the customer’s best available alternative and (b) the subjective, customer-specific value of all the differentiating features that distinguish the supplier’s own offering from the customer’s best available alternative (Nagle and Holden, 2002). Customer value is thus the quantified sum of the customer-specific benefits accruing to purchasers as a result of purchasing the offering. This sum is the maximum price that rational buyers will be prepared to pay. The price difference between the supplier’s own offering and the customer’s best available alternative is then related to the difference in value between the two offerings (see Figure 1.1).

Value quantification thus enables suppliers to perform return on investment calculations: The price difference between two offerings is the investment customers make to obtain the quantified, monetary customer benefits identified.

Value quantification is arguably the most important capability in B2B selling. It is also a capability that many companies in industrial markets lack (Anderson et al., 2007); these companies, however, are at least conscious of their lack in value quantification capabilities and recognize the potential benefits of developing them (Töytäri and Rajala, 2015).

The contents of the book

This book is one of the few books – possibly the only book – exclusively dedicated to the topic of value quantification in business markets. Individuals from leading institutions, such as the Kellogg School of Management, Ca’ Foscari University Venice, Boston College, Aalto University, the University of Tennessee, the Ohio State University, Case Western Reserve University, Deloitte, and Hinterhuber & Partners, and practitioners from companies including SKF, DHL, Borealis, the Strategic Account Management Association (SAMA), and Parker Hannifin, provide best practices, case studies, tools, and principles of value quantification in industrial markets. The book has two implicit premises. First, selling should be based on value first, then price. Second, procurement should also be based on value first, then price. Buyers and sellers in business markets must focus first on value, then on price, in order to increase performance.

A unique feature of this book is that it explores the topic of value quantification from the perspective of both sellers and buyers in industrial markets.

Figure 1.1Value quantification and value-based pricing

Source: Hinterhuber & Partners

The buyer perspective: in many organizations, sourcing criteria were heavily weighted toward tangible criteria, such as price, quality, and delivery. Practitioners as well as procurement scholars have started to explore procurement models that consider an array of tangible and intangible benefits in sourcing decisions. Several chapters in this book present procurement frameworks that consider the total value of supplier contributions in the offer evaluation process. This book also presents anecdotal evidence that sourcing criteria considering the total value of benefits lead to increased firm performance and allow to create value – for example, environmental benefits – that traditional procurement models typically do not create. We need, however, more research. Specifically, we need research developing these metrics, such as total value of ownership or total value contribution (TVC) models (see Chapter 13) that reflect innovation, management capabilities, sustainability, and other elements beyond quality, price, and delivery. We also need quantitative research exploring the consequences of the use of total value of ownership models by procurement on company performance and on value creation.

On to the perspective of sales: There is now increasingly robust evidence that value quantification capabilities are beneficial for firm performance. The core focuses of this book are case studies, best practices, and recent research findings exploring the factors that enable companies to acquire and successfully deploy value quantification capabilities.

The structure of the book

Part I, “Introduction,” contains this introductory chapter by Andreas Hinterhuber and Todd C. Snelgrove.

Part II, “Selling value: Value quantification capabilities,” contains several chapters that address the capabilities needed to quantify and document value in business markets.

The opening chapter, “Value first, then price: The new paradigm of B2B buying and selling” by Andreas Hinterhuber, Todd C. Snelgrove, and Bo-Inge Stensson, sets the frame for the entire book. Our key argument is this: Most companies today take an inherently adversarial approach to buying and selling in industrial markets, thereby missing out on opportunities for joint value creation with customers and suppliers. Sales and procurement are too obsessed with price and not enough with value. We present a set of principles that put joint value creation at the center of the relationship with customers and suppliers. With respect to customers, the value quantification capability is the most important competency of the sales function, that is, the ability to translate a firm’s competitive advantages into one quantified, monetary value reflecting both qualitative and quantitative customer benefits. Several chapters in this book (all in Part III) provide examples of quantified value propositions, for both B2B services and B2B products. With value quantification capabilities (sales) and total value of ownership models (procurement) the key element of relationship with both customers and suppliers is value first, then price.

In an interview, Robert Russell and Andreas Hinterhuber explore several key issues related to value quantification. First, since pricing is always the result of a chain of prior activities, optimizing pricing cannot involve price optimization alone. Managers should instead map the most important processes related to pricing – in B2B typically the offer development process. Once this process is mapped, once bad and best practices along every process step are described, and, finally, once managers have compared their own current practices with best practices, then opportunities to improve profits via pricing are typically identified very effectively. This interview also explores the topic of change management in the context of value-based pricing and value quantification. Hinterhuber suggests that companies benefit from holding an underlying, implicit organizational change management theory in order to effectively implement value quantification: Useful theories include the influence model by McKinsey & Company (Keller and Price, 2011), Kotter’s eight-step model of organizational transformation (Kotter, 1995), the switch model by the Heath brothers (Heath and Heath, 2010), and the free-spaces theory of social movement research (Kellogg, 2008). These theories, examples, and recent research related to pricing strategy implementation are discussed in detail in another book (Hinterhuber and Liozu, 2020).

In the subsequent interview, “Muddling through on customer value in business markets?,” Todd C. Snelgrove and James C. Anderson discuss two key aspects of value quantification: how to develop value quantification capabilities and how to quantify value for weakly differentiated products. The authors first suggest that companies move through three stages when building value quantification capabilities: in the first stage – the prove-the-concept stage – companies undertake several value quantification projects in order to learn the concepts, process, and tools and to obtain the benefits from these pilot projects. In the second stage – the build-the-structure-and-culture stage – companies significantly expand the scope of value quantification: They train experts, build value quantification tools and repositories of case studies, conduct more projects, measure the success consistently, and link value quantification with other projects such as the new product development process. In the third stage – the sustain-the-advantage stage – companies institutionalize value quantification by, for example, appointing champions whose primary responsibility is value quantification. A second insight of this interview is that value quantification differs between strategic and non-strategic products, that is, between products that contribute significantly to differentiating the customer’s offering and those that do not: Value quantification is suitable for strategic products. For non-strategic products, by contrast, detailed value quantification is typically not possible and not even desired by customers; instead, suppliers provide customers with resonating arguments such as generic case studies – in the author’s terms, with a tiebreaker – able to shift the balance in the supplier’s favor. In sum, the more a supplier’s product contributes to creating meaningful differentiation in the customer’s products, the more value quantification has to be detailed, collaborative, and customer-specific.

In the interview “Nurturing value quantification capabilities in strategic account managers,” Andreas Hinterhuber, Todd C. Snelgrove, and Bernard L. Quancard discuss the importance of value quantification capabilities for strategic account managers. Quancard is adamant: Only about 30% of account managers truly create value for customers; the remaining 70% are merely commercial coordinators. In order to truly create value, value quantification capabilities are fundamentally important. These capabilities are valuable and rare: Only 10% of companies, Quancard suggests, are able to translate into monetary terms the value they create for customers. Quancard further observes thoughtfully in what may become a noteworthy quote: “Most projects go to request for proposal (RFP), because there is not a compelling monetization of the value.” In this view, a request for proposal is thus nothing else than a reflection of the supplier’s inability to quantify value. Quantified value propositions, accompanied by approximate price ranges for competitive products, eliminate the need for a request for proposal and allow the isolation of collaborative customer relationships from competition. This interview also sheds light on the antecedents of value quantification capabilities: active listening skills, cross-functional collaboration, financial acumen, and an unlimited curiosity. CEO support is, like in all cases of organizational transformation, essential. A further element to consider in the process of building value quantification capabilities is the selection of customers. Not all large customers are or will be receptive to joint value creation and value quantification. Those that are not should not be strategic accounts, irrespective of their purchase volume. Account managers thus need to define criteria for determining which large customers are strategic. Only with these strategic accounts should collaborative value quantification occur.

In “Salesforce confidence and proficiency – the main cornerstone of effective customer value management” Gary Kleiner presents a case study on customer value quantification. This chapter stresses the importance of sales force confidence in addition to the required technical skills in order to effectively and convincingly quantify customer value.

Part III, “Selling value: Best practices in value quantification,” contains six chapters highlighting best practices in value quantification. In “Value quantification – processes and best practices to document and quantify value in B2B,” Andreas Hinterhuber presents the results of a study on value quantification capabilities in European and U.S.-based B2B companies. This chapter presents five key steps that can guide managers in industrial companies in quantifying value: generation of customer insight, value creation through meaningful differentiation and collaboration, value proposition development, value quantification, and implementation/documentation. This chapter also highlights several case studies of quantified customer value propositions, SKF and SAP among them. SKF is, of course, a special case: Todd C. Snelgrove has played a leading role in quantifying and documenting value for thousands of use cases at SKF.

In “Quantifying your value so customers are willing and able to pay for it,” Todd C. Snelgrove highlights that quantified value that relies on tangible evidence and that has a high likelihood of occurrence acts as a very strong purchase motivator in industrial markets. For sales managers, value-based selling requires two conditions: ability and motivation. The ability to sell value depends on the ability to conceptualize value in a way that resonates with customers, on processes encouraging a focus on value, on the availability of value-selling tools, on initial training, and on ongoing experience in value selling. The motivation to sell value is a function of salesforce compensation, of the ability to build long-term collaborative relationships with customers where both parties are committed to creating mutually beneficial value, of a company culture led by a strong CEO committed to value-based selling and, finally, of customers who recognize the opportunity to work collaboratively with suppliers. This chapter thus takes a nuanced view of the multiple facets that companies can and should control in order to implement value-based selling and value quantification. Todd also discusses a new term, “total profit added,” as a measurement for both buyer and seller to quantify total customer benefits. This approach considers not just cost reductions but also includes estimated revenue improvements.

In the chapter “An inside look at value quantification of competitive advantages” Evandro Pollono presents best-practice case studies on quantified value propositions. This is an important chapter. Many apparent experts advocate the importance of selling value, as opposed to selling price, without actually specifying in detail the data, the steps, and examples of quantified value propositions. Evandro Pollono presents four examples of quantified value propositions, tha...