Value-Based Strategies for Business Marketing

Business Marketing refers to the marketing operations of businesses whose mission is to serve other businesses, whether companies, government agencies, institutions or resellers. Since it is known that customers purchase value (and not products, services or features) suppliers seeking competitive advantage must ensure that they offer the best value to their targeted customers in selected consumer value segments. The trend, therefore, is for companies to move away from cost-based strategies to customer-oriented value-based strategies, to ensure optimal value creation and value delivery.

Business marketing is the development of strategic plans and the execution of the idea, price, advertisement, and allocation of ideas, goods, and services by organizations (including commercial business organizations, governments, and institutions) to other organizations that resell them, use them as components in their products or services, or use them to support their operations.

Business marketing, also known as "business-to-business marketing," "b-to-b marketing," "B2B marketing," and "industrial marketing," therefore refers to the marketing operations of businesses whose mission is to serve other businesses. Such businesses usually have a specific business customer and strategy in mind. Consumer marketing, also known as "business-to-consumer marketing" or "B2C marketing," on the other hand, is generally characterized by organizations offering their goods and services directly to households via the mass media and retail channels.

The practice of traders doing business with each other dates back to time immemorial, but the subfield of industrial marketing has only been in existence since the mid-nineteenth century, and the discipline of business marketing, in its modern form, is even more recent.

There are four broad categories of business marketing customers:

• Companies that consume products or services (either to use in their operations or for their own consumption);
• National and local government agencies;
• Institutions (including schools, hospitals and nursing homes, churches, and charities); and
• Resellers (wholesalers, brokers, and industrial distributors).

In most countries, the largest of the four categories is the government agencies.

Since the mid-1970s, business marketing has gradually overtaken consumer marketing in terms of its popularity as an academic discipline and a career choice, as well as in monetary terms. The volume of transactions in the industrial or business market is significantly larger than that of the consumer market. The purchases made by companies, government agencies, and institutions in industrialized countries account for a significant portion of the economic activity in those countries.

Business-to-business marketers in the United States alone spent 10.1 percent of their firm budgets in February 2013 just in the promotion of their services and 10.8 percent on marketing their goods, the CMO Survey found (Moorman, 2013). This promotional budget is spent on trade shows and events, the Internet and electronic media, promotion and market support, magazine advertising, publicity and public relations, direct mail, dealer and distributor materials, market research, telemarketing, directories, and other promotional efforts.

Business marketing differs from consumer marketing in several ways:

• First, it often involves shorter and more direct distribution channels than consumer marketing.
• Second, the negotiation process between buyers and sellers is more personal in business marketing than in consumer marketing, where the target markets are larger demographic groups and the main marketing communications vehicles in use are the mass media and retailers.
• Another difference is the fact that most business marketers spend less on advertising than consumer marketers.

The phenomenal growth and development taking place in the business marketing arena is largely due to the fast-paced changes occurring within the fields of technology, entrepreneurship, and marketing. Technological advancement has served and still serves as a catalyst to the development of new products and services. Progress in entrepreneurship has led to leaner, "meaner," reinvented companies, and the twenty-first-century field of marketing is characterized by adaptability, flexibility, speed, aggressiveness, and innovativeness. Relationships, partnerships, and alliances are considered to be prerequisites of success.

Due to the above-mentioned developments, the Internet has become an indispensable tool in helping business marketers manage their relationships with their customers, improve on their customer service in general, and improve the opportunities they have with their distributors. The Internet has also given rise to new e-commerce middlemen, such as infomediaries and metamediaries.

Infomediaries are information intermediaries: They are information providers, such as Google and Yahoo, that collect personal data from customers and market that data to businesses while maintaining consumer privacy, offering consumers a percentage of the brokered deals. Metamediaries, on the other hand, are intermediaries that gather and coordinate the products and services offered by mediators who specialize in specific areas.

The Internet has also paved the way for an increasing amount of collaborations between businesses, with virtual marketplaces allowing companies and their suppliers to conduct business in real time, while simplifying purchase processes and cutting costs.

Further Insights

The Importance of Value

It is a well-known fact that customers buy value, not products, services, or features. Discerning customers make purchases from the company that generates the greatest benefit for them, making sure that they purchase the products and services that are in their best interest.

A value-based strategy differs from a mass-marketing strategy in that it is a targeted strategy directed at selected consumer value segments deemed profitable by the supplier. To be successful in highly competitive markets, companies must try to achieve and maintain competitive advantage, and to do so, they must ensure that they offer the best value to their targeted customers. They must be able to show that their product offers better value for money, and this must be evidenced by higher ratios of value to cost.

Business-to-business marketers must therefore be able to explain to their business customers what the customers are getting from their product, and hence, they must be able to justify the price they are charging in return for those benefits. Their customers must be persuaded to recognize, purchase, and value the difference between the company and its competitors, and they must also be made to believe that what the supplier is offering them is beyond their expectation.

Offering better value, even when it comes at a higher price, is a customer-oriented approach that has several benefits:

• A customer-oriented approach based on value gives rise to sustainable competitive advantage, since it is relatively difficult for competitors to duplicate advantage that is derived from the overall value generated for the customer.
• This customer-oriented approach can also reinforce the company's reputation for providing high-quality goods or services, which is altogether a better strategy than trying to generate volume and experience advantage through the reduction of costs or rapid growth of market share. In fact, to some, value itself is the best leading indicator of market share (Market Value Solutions, n.d.).
• Value is created for the supplier as well as the customer, especially when the supplier is able to manage costs and run the business effectively.

Value Defined

In marketing parlance, value can be defined both qualitatively and quantitatively. On a purely qualitative level, value is gain perceived by an individual, based on his or her emotional, mental, and physical condition, along with a range of social, economic, cultural, and environmental factors. In pure quantitative terms, on the other hand, value is tangible benefit measured by financial numbers, percentages, or actual money.

By combining the qualitative and quantitative definitions, the value of a product or service can be described as the association between a consumer's expectations for product or service quality and the total amount they paid for it. Thus defined, value can be expressed in terms of an equation as follows:

Value = Benefits / Price

or:

Value = Quality Received / Expectations

(Argent, 2007, para. 3)

Value-based pricing is a pricing strategy where products or services are uniquely priced for each customer to reflect the precise value delivered to each customer. Prices must be based on how the customer (and not the supplier) measures value. For instance, a customer might measure value based on the number of users of the product, the number of annual transactions, the size of their revenues, the amount of money that would be saved through the purchase, and so on. Information on how a customer measures value can be obtained by a thorough evaluation of the customer's operations or by feedback from a survey.

Value is dynamic. It is affected by changes in time, location, people, and environmental factors. For instance, customer expectations are likely to vary from one geographical location to another and from one market to another, since customer expectations are closely related to cultural expectations.

Knowledge of the customer must always be at the core of business-to-business marketing strategies. It is therefore essential that business-to-business marketers get to know their customers very well, have a good firm understanding of individual and organizational behavior, and understand how their customers determine value. Business marketers must also know how they themselves can build customer loyalty for their products and services.

Value Creation & Value Delivery

A major prerequisite to the development of a value-based consumer strategy is the identification of a target audience. One of the means of doing so is for a supplier to analyze the customer lifetime value (CLV) of different customer segments and, from the results, identify which customer value segment(s) to target.

DeBonis, Balinsky, and Allen (2002) suggest that in order to create competitive value, companies must follow a sequence in which they must first discover and quantify needs to determine the need their product or service would fulfill and how or why they are different from other companies in the same market. Next, they must commit to impacting their customer, and then they must go on to create meaningful and understandable customer value. Afterward, they must assess how they did, and subsequently, they must improve upon their value package. They must constantly seek to generate and maintain competitive advantage while delivering value to customers. To compete profitably in their marketplace, companies must follow the following value creation and delivery process:

• Identification of the value expectations of their target customers;
• Selection of the values with which they choose to compete;
• Analysis of their organization's ability to deliver that value;
• Communication of the value and sale of the value message; and
• Distributing the promised value and enhancing the company's value model.

As stated above, business marketers must assess the value of their products and services to their customers, so that they can market them effectively. There are several ways in which a company can determine value and ensure that it delivers value to its customers. These include the consideration of the "total market offering," the "economic value to the customer (EVC)," and the "customer-value model."

Total Market Offering

The total market offering of a product, simply put, compares the totality of the company's reputation, its employees, product advantages, and technological capabilities to competitors' market offerings and the cost of those offerings. Value, in terms of the total market offering, is perceived as the comparison between a company's market offerings and those of its competitors.

Economic Value to the Customer

Economic value to the customer (EVC) is the value a certain product offers to an individual customer in a specific application. In other words, the EVC is the amount that a customer could be expected to pay for a product, assuming that he or she has full information about the product and competitor's offerings. EVC typically corresponds to the sale price of the product the customer is already using, with subtractions or additions made on account of any value difference between the product in use and the product for which the EVC is being determined.

EVC is particularly helpful in cases where a product delivers its benefits over an extended time period; when sales effort, delivery reliability, or other intangible features add significant value to the overall product value; or when the sale price merely constitutes a fraction of the product's total cost to the consumer.

Before calculating the EVC of a product, a supplier must first know the initial costs as well as later costs of his or her own product or service, as well as the life-cycle costs (the total amount of the product's sale price, initial costs, and necessary later costs) of a similar or 'reference' product.

The EVC of a given product A is calculated by subtracting the start-up costs and post-purchase costs of product A from the life-cycle costs of a reference product B, and then adding the amount of extra value that product A offers in relation to product B.

Products that are marketed to several different customer groups and/or have a number of different usages are often have a different EVC for each different customer group and each specific application. The variations in customer EVCs serve as the foundation for dividing the market and as a springboard for seeking ways to increase the company's competitive advantage within different market segments. Once this is done, the product price can be established in order to provide sufficient profit and a strategy can be developed to sustain the company's competitive advantage.

The effective use of EVC requires a capable sales force who can maintain close and regular contact with important customers. The well-trained salespeople must endeavor to, on one hand, educate customers and, on the other hand, observe how customers obtain value from the product and funnel this knowledge back to the company.

Many companies, when switching from a cost-based strategy to a value-based strategy, find the transition difficult. As with any change in an organization, there is likely to be some amount of resistance, especially from managers who struggle to change their focus from product costs to value data. The difference between cost-based and value-based strategies is significant: In the case of cost-based strategies, managers have access to cost data that is available at regular intervals, but in the case value-based strategies, the value data required is difficult to quantify, highly dependent on the internal procedures of the customers, and often partial.

Even when they do make the transaction from cost-based strategies to value-based strategies, the managers of value-based businesses must strive to keep wide the division between value and cost, since the chance of having a sustainable competitive advantage increases as the margin between the EVC and the manufacturer's costs increases. Costs should be kept low enough to induce customers and yet provide sufficient profits to finance essential investments in areas like research and development, facilities, and training.

In companies that choose to use EVC, the concept must be understood and supported by the entire workforce. Among other benefits, EVC helps make employees customer-oriented, and EVC can also reinforce a company's reputation as a provider of high-quality products.

Customer-Value Model

As an alternative to EVC, some business marketers use the customer-value model to compare a product's worth with that of its competitors. Similar to other tools for assessing value, the customer-value model helps companies understand how value is defined by their markets and the way markets view the value of their products and services in relation to their main competitors. This is illustrated in the diagram below.

The customer-value model has two sections. The first is composed of managerial components, and the second is composed of predictive components. The managerial components are known as "quality drivers": These are the criteria on which customers rate their suppliers' performance or quality. Companies conduct qualitative research to discover how customers rate their performance across several performance criteria, which are obtained directly from the customers.

Following statistical analysis, the performance criteria or quality drivers are rated to determine the importance of each one. The ratings of the quality drivers are collated to form the consumer quality index (CQI). Once a company is able to discover which quality components have the biggest impact on customer views of value, and once it discovers the relative impact of each quality component, the company should be able to better manage its quality.

The first three elements among the predictive components are the factors on which customers base their assessment of a product's worth. These are known as "value drivers." They are CQI, image (brand image and/or corporate image), and price. A thorough analysis of customer ratings of the three value drivers will show which value driver is most important to their customers and, hence, which driver is the best predictor of value. The gives and takes among the three main elements will also be revealed.

Business marketers will also be able to determine the extent to which value predicts loyalty. The hope is that customer purchase or acquisition will lead to loyalty and that loyalty will in turn lead to customer retention. Customer loyalty would be demonstrated by the customer's eagerness to recommend the product and future buying intentions.

Terms & Concepts

Business Marketing: The development of strategic plans and the execution of the idea, price, advertisement, and allocation of ideas, goods, and services by organizations (including commercial business organizations, governments, and institutions) to other organizations that resell them, use them as components in their products or services, or use them to support their operations. Business marketing is also known as 'business-to-business marketing,' 'b-to-b marketing,' 'B2B marketing,' and 'industrial marketing.'

Competitive Advantage: A gain that a firm has over its competition, causing it to generate higher sales or margins and/or retain more customers than its competition.

Consumer Marketing: Refers to the way organizations plan and execute the idea, price, advertisement, and allocation of ideas, goods, and services to households, typically via the mass media and retail channels. Consumer marketing is also known as 'business-to-consumer marketing' and 'B2C marketing.

Consumer Quality Index (CQI): Formed out of the aggregation of customer ratings of a supplier's performance criteria or quality drivers.

Customer Lifetime Value (CLV): The net present value of future cash flows to a company from that customer. This is the revenue that one customer can spend with a company directly or through referral and recommendation, for the duration of the customer-company relationship or the customer's lifetime.

Customer-Value Model: Derived from customer grading of supplier performance across a range of performance criteria. By assessing the relative impacts that quality, image, and price have on customer perceptions of value, these models enable companies to discover the value their customers place on their products and understand how this value translates into customer loyalty.

Economic Value to the Customer (EVC): The relative value a given product offers to a specific customer in a particular application. In other words, the EVC is the amount that a customer should be willing to pay for a product, assuming that he or she is fully informed about the product and the offerings of competitors.

Infomediaries: Information intermediaries or information providers that collect personal data from customers and market that data to businesses, while maintaining consumer privacy, offering consumers a percentage of the brokered deals.

Marketing: The development of strategic plans and the execution of the idea, price, advertisement, and allocation of ideas, goods, and services to realize individual and organizational objectives.

Metamediaries: Intermediaries that gather and coordinate the products and services offered by intermediaries who specialize in specific areas.

Strategy: The making of distinctive choices about markets, products, services, internal resources (human resources, information, knowledge, land, labor, and capital), and plans for the future to gain an edge over one's competitors and integrating these decisions into a coherent system that accomplishes the necessary fit between the needs of the environment and the actions of the company.

Total Market Offering: The comparison between the totality of the company's reputation, its employees, product advantages, and technological capabilities, and those of competing companies.

Value: The connection between a consumer's expectations for the value of a product or service quality and the total amount paid for it.

Value-Based Pricing: A pricing strategy where products or services are uniquely priced for each customer to reflect the precise value delivered to each customer.

Value-Based Strategy: A targeted strategy directed at selected consumer value segments that a supplier considers profitable. Value-based strategies are also known as "value delivery marketing strategies."

Bibliography

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DeBonis, J. N., Balinski, E. W., & Allen, P. (2002). Value-based marketing for bottom-line success: 5 steps to creating customer value. New York, NY: McGraw-Hill.

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Gallarza, M. G., Gil-Saura, I., & Holbrook, M. B. (2011). The value of value: Further excursions on the meaning and role of customer value. Journal of Consumer Behaviour, 10 (4), 179-191. Retrieved November 22, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=63250263

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Singh, S. S., & Jain, D. C. (2013). Measuring customer lifetime value: Models and analysis. INSEAD Working Papers Collection, (27), 1-48. Retrieved November 22, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=85940750

Walters, D. (1997). Developing and implementing value-based strategy. Management Decision, 35(9/10), 709. Retrieved June 7, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=179984&site=ehost-live

Suggested Reading

Anderson, J., & Narus, J. (1998). Business marketing: Understand what customers value. Harvard Business Review, 76(6), 53-65. Retrieved November 23, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=1246475&site=ehost-live

Forbis, J., & Mehta, N. (1981). Value-based strategies for industrial products. Business Horizons, 24(3), 32. Retrieved November 23, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=4528306&site=bsi-live

Jacobides, M. G., &a MacDuffie, J. (2013). How to drive value your way. Harvard Business Review, 91(7), 92-100. Retrieved November 22, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=88350667

Raab, D. (2005). Customer value models. DM Review, 15(9), 64-68. Retrieved November 23, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=182 16730&site=ehost-live

Skugge, G. (2011). The future of pricing: Outside-in. Journal of Revenue & Pricing Management, 10(4), 392-395. Retrieved November 22, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=62012638