Tuesday, September 21, 2010

Quantifying Value in B2B Transactions

Value, Value, Value
Value is a word that can have many meanings based on the conversation at hand. To clarify, I offer the following graphic representation of the different types of value from the supplier's perspective that are important in B2B transactions:

The way you capture value in B2B transactions is by calculating the value the customer puts on your product (good and/or service)--calculating the product value. When we create B2B value calculators through Economic Value Analysis, we systematically quantify the value drivers for a particular customer. This is the major difference between Value Driven Management in a B2B market versus a B2C market where a product value metric is calculated and used to represent the worth an entire market gives to a particular product.

As the chart shows, if you know product value and product cost, its easier to understand what price is equitable for both the supplier and customer. Ultimately, product value and price don't change much. Price is therefore changed to give more or less incentive to the customer to go forward with a purchase. This difference between Product Value and Price is called Customer Value and in B2B transactions Customer Value usually translates directly into economic value (profit) for the customer.

What to Expect

As you work with your customers to create the value calculation, each Critical-to-Value Attribute will fall into one of the following categories (see Value Merchants below):

  1. Attribute of Parity
  2. Attributes of Difference
  3. Attributes of Contention

An attribute of parity is an attribute that performs essentially the same as a competing alternative. An attribute of difference is an attribute that performs either better or worse than a competing alternative. Alternatively, an attribute of contention is an attribute where it is not clear whether a the competing alternative is better or worse, so more data is required.

Value Propositions from Value Calculations

Value propositions might actually vary from customer to customer due to different product use situations. Nevertheless, value propositions become clear as the value consultant and customer develop a shared mental model of how value is delivered. The attributes that perform better than the competition form the basis for the value proposition and the two or three attributes that deliver the most value become the focus. These high value earners WILL likely be what sets the supplier's products apart from the competition and ultimately become the foundation for brand building.

Additional Reading:
"Value Merchants: Demonstrating and Documenting Superior Value in Business Markets"

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