Book Review: "Value Merchants" by Anderson, Kumar and Narus

4 Stars (Out of 5)

The following is a book review of "Value Merchants: Demonstrating and Documenting Superior Value in Business Markets" by James C. Anderson, Nirmalya Kumar and James A. Narus. The book was published in 2007 by Harvard Business School Press.

This book serves as a "how-to" for value based pricing in a B2B context. "Value Merchants" is written for the business leader or sales manager that sells products to businesses (B2B) who wants to get a better return on their products by quantifying (in terms of dollars) the benefits and savings for their customers to eliminate the need to provide price concessions in order to make a sale. The book could be read over a short flight as it is clearly written and has good flow.

The book makes the case for the use of and demonstrates how to create "value calculators" to document cost savings and incremental profit gains delivered to customers by purchasing the suppliers products and services, which they call "Customer Value Management Process". The authors show going through the process can help make stronger value propositions, quantify value claims, construct business cases for change, tailor market offerings, and transform the sales force into "value merchants" as opposed to "value spendthrifts".

There are only two criticisms that I have of this book. First, the "Customer Value Management Process" should actually be called the "Value Merchant Process" or the "Customer Value Based Marketing & Sales Process", as Customer Value Management is a much broader domain of thought comprising many tools that include the "Value Merchant Process". The second criticism is that the bibliography and references to scholarly works is very limited, where nearly half of the references point to author's own journal publications.

In summary, this book provides an introduction and a "how-to" for value based pricing in a B2B context and how are interested in learning about one of the many tools that make up Value Based Management.

Book Review: "Know Your Customer" by Woodruff and Gardial

5 Stars (Out of 5)

The following is a book review of "Know Your Customer: New Approaches to Understanding Customer Value and Satisfaction" by Robert B. Woodruff and Sarah F. Gardial. The book was published in 1996 by Blackwell Publishers Ltd.

"Know Your Customer" is for the intellectually curious marketing manager who wants to gain a foundational understanding of the differences between customer satisfaction and customer value (how customers value products). Although this book might be a bit much for the general manager who is interested in the results of satisfaction and value studies only, the general manager will benefit from an enriched view of how customer value insights can lead to innovation and the limitations of customer satisfaction metrics.

The authors lay down a framework for satisfaction and value and explain why analyzing both is key to business intelligence. The book is clearly written, uses a formal voice, has a good bibliography for the time that it was published, uses examples from industry to help illustrate important concepts and accomplishes what it sets out to do--explain the relationship and differences between customer satisfaction and value.

The book serves well as a foundational piece, but may fall short for those interested in the latest analytical techniques that include quantifying and forecasting value in terms of a willingness-to-pay metric in dollars (called product value). Product value is particularly helpful when making tradeoff decisions that influence product cost and when it is necessary to dedicate precious resources to a list of possible product innovations.

In summary, this book is perfect for managers interested in a foundational understanding of customer satisfaction and value. This book is not for those interested in the latest analytical concepts and tools.

Customer Satisfaction Versus Product Value

Many companies have systems in place to measure product satisfaction (the more popular term is customer satisfaction) and use the information to aid decision making. Alternatively, very few companies have systems in place to measure product. I share the belief with others that satisfaction and value metrics are different, they tell different kinds of stories and that together they provide the complete story. In this post I'd like to explain the following:

• The difference between satisfaction and value metrics.
• Show that both satisfaction and value metrics are necessary for decision making.

Customer Satisfaction and Value Defined

Customer Satisfaction is a customer's perception of how well a product (good or service) performs in specific situations or in general relative to their expectations. 

Product Value is a metric that is a property of a product (good or service), similar to product cost in that it is measured in $, but measures the worth of a product (customer's willingness-to-pay) for a specific market and is independent of use situations.

Below is a table that compares satisfaction and value in more detail.

Customer Satisfaction and Value in Decision Making

Both measures are needed to get a complete picture of how the business is doing and neither alone is a substitute for the other. Below is a table that shows how the metrics aid different types of decisions.

Five Disciplines for Creating What Customers Want

“Risk comes from not knowing what you’re doing.” – Warren Buffett


Carlson & Wilmot say that businesses must address at least the following types of value:

• Customer Value
• Company Value
• Shareholder Value
• Employee Value
• Public Value

Many folks use the words "customer value" to mean "value to the customer". I like to use the words "product value" because for me it represents a property of the product just like "product cost" (a product can be a good, service, or combination of the two). Whatever you call "value to the customer", everyone can agree that it is the center around which all other types of value are based. Everyone can also agree that product value fluctuates over time as the tastes of customers change.


Using product value as a metric to manage the business is about creating what customers want. Carlson & Wilmot list five disciplines for doing this:

1. Focus on important needs
2. Have a system for creating value
3. Make sure your organization has innovation champions
4. Use innovation teams
5. Align the organization around creating value

It should be clear that being able to measure product value is key to all five disciplines, but let's role up our sleeves and take a look.


Prioritizing Important Needs


Products satisfy the needs of people who purchase them. My car not only takes me from point A to point B, but it carries me safely, it moves my groceries, my friends, it provides excitement by accelerating swiftly, and so on. The car possesses several critical-to-value (CTV) attributes for which I'll pay. Quantifying how my willingness-to-pay changes as the level of CTV attribute changes is one of the best way to prioritize important needs.


Value Creating Systems


To be successful in the long term, businesses must have a system for making improvements. The best systems are based on the principles of value driven innovation, which focuses on building the net-value of a product over time. Net-value is the difference between product value and product cost and its growth has been linked directly to growth in market share in several studies.


Innovation Champions 


Innovation champions are individuals in the business that encourage and support product and process improvements in the organization. In The Tipping Point, Gladwell listed three important roles of innovation champions:

1. They share knowledge
2. They influence others to take action
3. They connect the right people to enable action

Of the five disciplines, this is the one where quantifying product value may be nice, but not that important. The innovation champion may just need to have an intuitive sense that an opportunity exists and have the innovation team quantify the innovative power of an idea when it comes to obtain funding from upper-management.


Innovation Teams


Kaizen teams are a well known approach for gathering a cross-functional team to attack innovation opportunities. These teams are often formed to focus on process improvements, which can result in cost savings and improved service. Although improving service is one way to increase product value, it is often a secondary objective of Kaizen teams and there exist opportunities to improve the "economic good" part of product value. This is a view held by some of the Six Sigma thought leaders. Indeed, it is my view that Kaizen event charters should quantify the expected change in both product value and cost as a way to understand the projects true innovative power.


Product Value and the Organization


A consistent theme throughout my blogs is that improving the net-value of products and services is everyone's job. Nevertheless, unless businesses learn how to quantify product value, net-value will remain a fuzzy metric and the it will be difficult to set targets and monitor progress. One of the key benefits of measuring product value for the organization is that it is an outward looking metric, which tells you how you are doing with respect to your direct and indirect competition. Ultimately, quantifying the fundamental metrics is what helps the entire organization play the same sheet of music, to set targets, and innovate.

Know Where You Are, Know Where You Are Going

“If we could first know where we are, and whither we are tending, we could then better judge what to do and how to do it.”  –Abraham Lincoln

Every day we are getting better at managing the mounds of data that our businesses produce. The size of databases tend to double every 12 to 18 months according to an InformationWeek article. Not only are the data sets getting bigger, they're becoming more real-time, where Wal-Mart is adding a billion records daily. With this explosion of data, how do we bring order to guide the business?

A Single Version of the Truth

Business Intelligence strives to deliver a single version of the truth based on trusted information to help business leaders make better decisions. To give our leaders clarity of action, we need to simplify the masses of data into manageable metrics that let us do the following:

• Know Where We Are: Understand the competitive landscape
• Know Whither We Are Tending: Identify opportunities and trends
• Know What To Do: Set targets and monitor results so we can see what works
• Know How To Do It: Create a common context and objectives for decision making across the organization

Business Intelligence for Driving Innovation

In the case of Wal-Mart, the focus is on managing a gigantic supply chain and identifying tactical moves to improve sales and minimize costs. "Supply Chain Management" is not the only area of business that can benefit from improved business intelligence. R&D and Product Managers can use sales data to obtain a single version of the truth using Voice of the Customer Exploration tools that monitor customers' willingness-to-pay for products (what I call product value) in a portfolio. A generic representation of what this would look like is shown in the figure below.

If your product is A and your competitor's is B, don't you think it's important to know when the consumers in your market become willing to pay more for your competitor's product? Total Product Value Analysis is about "Knowing Where You Are". One of the major benefits of this form of analysis is the ability to compare how you are doing against the competition (an outward looking metric). 

Product Cost is traditionally the metric that can be measured, so this is the metric that gets managed. Unfortunately, this isn't the way to make your products more valuable to your customers. However, if your Business Intelligence Systems gain the ability to measure and monitor Product Value, value driven product management becomes possible because you "Know What To Do". Ultimately, the product manager evaluating new innovative ideas by understanding how to balance the increased value to the customer with the possible increases in product cost. The only way to do this without a product value metric is to use intuition or "gut feel", which is no way to be competitive in todays ultra-competitive global economy as I discussed in a previous blog.

How It Would Work

The Business Intelligence System will be able to drill down and role up to identify trends within markets, within regions, and as a whole. Performance bands can be placed at each level so that product managers can be alerted to major changes in value that could be attributed to successful advertising campaigns or new product introductions introduced by competitors. With these alerts it becomes possible to react both tactically and strategically to drive product value back into your products via additional promotion or making tweaks to products and services.

Guidelines for a Value Driven BI System

Transforming processes into a system begins by integrating the right information and being able to summarize the data so that it is useful in supporting decisions making. Here are some guidelines:

• The system should aggregate product value and customer satisfaction data
• Managers should be able to drill down and roll up the data by product, market, segment
• The database should be able to show trends

This data should be made available to executives, general & product managers, brand managers, sales, quality, product development, R&D and customer service.

Find the Voice of the Customer Signals, Ignore the Noise

“An expert is someone who has succeeded in making decisions and judgments simpler through knowing what to pay attention to and what to ignore.”  -Edward de Bono

Product managers often must determine what aspects of the product that consumers value. The marketing folks will use their qualitative and quantitative techniques to try and understand the voice of the customer and pass on what they learn. If the product is a car, the respondents will tell you that they want better fuel economy, better acceleration, improved safety, comfortable seating, room for the luggage, etc. Since the beginning its been up to product managers to understand their target market and strike the right balance between product performance and cost.

The challenge in today's marketplace is making the performance/cost tradeoff decisions for evermore complex product, increasingly diverse consumer tastes, and increasing sophistication of competitors in making the same decisions. Moreover, the technology required to make the necessary leaps in product performance must be planned and developed, which ties up precious capital. Indeed, now more than ever, it is critical that the business is able to "Find the Signals and Ignore the Noise". 

If product managers want to be experts in their domain, they must be able to make decisions based on the "true" voice of the customer. By quantifying the voice of the customer in terms of product value, product managers can make high quality decisions about future product because they'll be able to develop solid business cases for future product concepts and ultimately R&D expenditures.

Clarity Please-A Product Value Metric for Decision Making

In "Clarity Please-Customer Value for an Individual"  I defined the metric to measure a single consumer's willingness to pay, which I labeled VI. Nevertheless, because a market is composed of many consumers, this single estimate of value does us no good when it comes to make decisions involving the whole market. What we need is an overall metric of product value that summarizes the willingness-to-pay of the entire market of consumers. This overall metric is critical to modeling how the market will respond to alternative product and service offerings.

According to Harry E. Cook (an expert in the area of measuring customer value), there are three properties that an overall measure of value for an economic good must possess (Cook 1997):

1. It must have the same units as price
2. The net value of an economic good to the consumer decrease as price approaches value
3. If a product change creates an increase in demand while holding price constant, value has been increased.

Let's say our TV manufacturer wants to determine an overall metric that sums up the willingness-to-pay of those consumers that actually purchased his TVs and he wants to call this metric VB (buyer's value).

Let's also say that the TV manufacturer was able to get a representative sample of the market to participate in a survey that was able to discern the VI of each respondent (idealistic I know, but work with me) and when he graphs out the results it looks like the maroon curve in the figure below. The demand curve between the green and the yellow dots represents the consumers who wouldn't take the TV unless you paid them (maybe its unfashionable to own a TV in their neighborhood!). The demand curve between the yellow and the red dots represent the consumers that believe the TV is a positive economic good (they'd pay for it). The red dot represent the market's reservation price (no one will buy the TV if it is priced larger than the red dot).

Now, for any given price we can draw a line that is tangent to the demand curve and this line will intersect the dollars axis. Let's call this intersection VB (labeled as such in the figure above). This my friends is our metric that provides the TV manufacturer with an overall metric for the willingness-to-pay for those consumers who would actually buy the product. Over the course of this blog we will talk about VB (total product value or just product value) and how business leaders can use it to drive innovation, drive revenue growth, drive profitability, and drive customer satisfaction.

Clarity Please-Product Value for an Individual

Every marketing textbook I look at defines product value as the relationship between the consumer's perceived benefits in relation to the perceived costs of obtaining those benefits. The relationship is generally expressed as the following ratio:

Value = Benefits / Costs

I know we can measure costs, which might be transportation costs, storage costs, maintenance costs, delivery costs, etc. But someone, anyone, please give me an example of when a marketer has actually taken the time to list out and quantify the tangible AND intangible benefits..... I fear I'll be waiting a long time. Now let's say someone actually went through the trouble of quantifying these metrics, I would like to meet an executive who used the resulting ratio to make a decision. If the ratio was less than 1 (indicating costs were larger than benefits), who's to say the analyst didn't forget a benefit or two that might tip the scale???

Can we please dispose of this nonsense and move onto a metric that allows us to make decisions? Let me propose an alternative definition of product value, which has been tested in major automotive and heavy equipment companies and has shown to be rigorous and worthy to be included in the decision calculus. Rather than give a mathematical derivation (you can find this in a book), I'd like to get there using our intuition (let me know if I can make some improvements).

Let's start with the illustration below. Here we have a buyer with a sack of money and a seller holding a TV (both men and smiling) with a lady in the background who is clearly disappointed about something. If the seller's price was equal to the buyer's Individual's Customer Value (let's call this VI, where I stands for individual), then there wouldn't be a deal as this would meet the buyer's willingness-to-pay threshold. Conversely, the seller wouldn't sell the TV for a price that was equal to his cost (let's call this CS). Therefore we know that price needs to be somewhere between VI and CS. The closer that the price is to CS, the happier the buyer will be; and the closer the price is to VI, the happier the seller will be. Let's say the buyer and seller were honest and fair in their dealings, for them to share equally in the deal they would set price as follows:

Price = (VI + CS) / 2

Let's define "Net Value" as  (VI - CS), so the buyer and seller are both happy because they split net value 50/50.

The challenge with real markets is that every potential customer has a different VI so it's impossible to charge a single price to split the net value in each transaciton. It's also rare that the seller divulges his costs and/or the seller divulges his/her willingness-to-pay. In the next post I'll tell a story about a customer value metric for a market of individuals. Don't worry, I'll also talk about the angry lady in the background in a future post.

The Product Value Torque Wrench

I was have lunch with some friends of mine yesterday and they asked me why having a quantifiable metric for product value is important, because businesses and managers have been making decisions since the beginning of business based on their intuition. I answered by offering an analogy which I'll call "The Product Value Torque Wrench"and it goes something like this:

Early on in the days of nuts and bolts it was just fine for the mechanic to swing the wrench around until he felt that the nut was secure. Automobiles had plenty of redundancy and their performance was relatively slow and forgiving.

As automobiles became more sophisticated and adopted by the masses, auto companies needed to improve weight and reliability to become more competitive. Walter Percy Chrysler developed the first beam type torque wrench in the late 1920's/early 1930's for the Chrysler Corporation and licensed the Cedar Rapids Engineering Company to manufacture and distribute the invention, which was patented in 1938. Torque wrenches allowed assemblers and mechanics to swing the wrench around until the device said the nut was tightened to its proper torque as identified by engineering calculations.

Today, the automobile market is hyper-competitive and everything in the automobile is expected to operate perfectly well into high mileage. Torque wrenches are used routinely to assemble cars because there is just too much to risk by having assemblers and mechanics swing the wrench until it "feels right".

For product managers who must make decisions in today's hyper-competitive markets, choosing innovations to pursue or how to price products based on gut feelings is just to risky. One slip and your competitors will sweep your feet from under you. Not only that, if you aren't taking product value into consideration when you price your products, you might be leaving money on table!

In comes the "Product Value Torque Wrench". It is now possible to measure product value based on historical purchase data and to forecast future product value using special attribute value analytics. The time is right, especially in the automotive business. I was speaking to a former automobile executive who told, "When it comes to making decisions about product planning in the automotive world, sometimes I think there are more cowboys in Detroit than all of Texas.... everyone is shooting from the hip!"