Customer value proposition” 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—or what makes one persuasive. Moreover, we find that most value propositions make claims of savings and benefits to the customer without backing them up. An offering may actually provide superior value—but if the supplier doesn’t demonstrate and document that claim, a customer manager will likely dismiss it as marketing puffery. Customer managers, increasingly held accountable for reducing costs, don’t have the luxury of simply believing suppliers’ assertions. Customer managers, increasingly held accountable for reducing costs, don’t have the luxury of simply believing suppliers’ assertions.
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 supplier’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 company’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 company’s offering, though 10 cents higher in price per IC, was actually worth 15.9 cents more.
The electronics engineer who was leading the development project had recommended that the purchasing manager buy those ICs, even at the higher price. The service was, indeed, worth something in the model—but just 0.2 cents! Unfortunately, the salesperson had overlooked the two elements of his company’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 company’s offering to that of the competitor. Not surprisingly, when 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—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. This 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. 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 difficult to find 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 suppliers’ efforts on creating superior value. Three Kinds of Value Propositions
We have classified the ways that suppliers use the term “value proposition” into three types: all benefits, favorable points of difference, and resonating focus. (See the exhibit “Which Alternative Conveys Value to Customers?”) Which Alternative Conveys Value to Customers?
Suppliers use the term “value proposition” three different ways. Most managers simply list all the benefits 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 customer’s business priorities.
Our research indicates that most managers, when asked to construct a customer value proposition, simply list all the benefits they believe that their 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: benefit assertion. Managers may claim advantages for features that actually provide no benefit to target customers.
Such was the case with a company that sold high-performance 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 firm’s salespeople touted the benefits of maintaining sample integrity. Their prospects scoffed at this benefit 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.