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Doing Business on Demonstrably Superior Value

A SUPPLIER OF integrated circuits (ICs) for correcting power input was competing for the business of an electronic device manufacturer, which was projecting a demand of 5 million units for incorporation into its next-generation device. In the course of the negotiation, the supplier’s salesperson learned that he was competing against another firm whose price for the integrated circuits was 10¢ lower per IC—45¢ versus 35¢. The customer asked the salespeople from both firms to explain the source of the superior value for their offering relative to the competing offering. This particular salesperson replied that it was his personal and dedicated servicing of the account.

Unbeknownst to him, the customer had built a customer value model in which it had found that his offering, though 10¢ higher in price, was actually worth 15.9¢ more than the alternative supplier. Further, the electronics engineer who was leading the development project had recommended to the purchasing manager supporting the project that he purchase those ICs, even at the higher price. The salesperson’s personal and dedicated servicing as a favorable point of difference was worth something in the model—0.2¢! Unfortunately, the salesperson overlooked the two elements providing the greatest differential value, apparently unaware of the magnitude of the differences and what those differences were worth to that customer. As expected, when push came to shove in the negotiations with purchasing, the salesperson gave a 10¢ price concession to match the competitor’s price and “win” the business (perhaps he suspected that his superior service was not worth the 10¢ difference after all). The result? The firm lost $500,000 (5 million units at 10¢) of potential profit on a single transaction!

Talk to seasoned general managers or business unit executives in business markets, and they will recount a similar story in which:

 Their salespeople have a poor understanding of what really creates value for customers.

 Their business makes vague promises of superior value without any supporting data.

 Salespeople frequently play the role of value spendthrifts, giving value away through price concessions to make the sale, rather than value merchants., who sell profitable growth by stressing the superior value of the firm’s offerings.

 Despite providing greater value than competitors, their business is forced to compete as a commodity and therefore does not get a fair return from its superior value.

The result, as in the case just examined, is that even though the supplier believed that its products and services had greater value than those of the next-best alternative, it ended up matching competitor prices. “Leaving money on the table,” as this supplier did, has a direct and substantial negative impact on the supplier’s profitability. Why does this happen as often as it does in business markets?

Purchasing managers in business markets are becoming increasingly sophisticated in their strategies and tactics. Increasingly held accountable for reducing costs, purchasing and other customer managers don’t have the luxury of simply believing suppliers’ claims of cost savings. A relatively easy and quick way to obtain savings is for purchasing managers to focus on price and obtain price concessions from suppliers. To enhance their negotiating power, purchasing managers attempt to convince suppliers that their offerings are the same as their competitors—that they could be easily replaced. In the face of such pressure, as the IC example illustrates, suppliers cave in and match competitor prices. It is a rare commodity in business markets to find firms that do business based on demonstrably superior value.

Senior managers of companies serving business markets—that is, firms, institutions, or governments—are frustrated that they often are cast as “commodity” suppliers. Their customers have been effective in demanding more but have been unwilling to pay for it. As the need to cut costs in companies continues, the pricing pressure that such customers place on their suppliers is not likely to abate. Thus, business as usual—or even doing more of the same with less, which is a common response—will not provide solutions worth pursuing.