James C. Anderson, Marc Wouters and Wouter van Rossum. How to practice value-based pricing that boosts profits and promotes better relationships with customers.

'Charge what the market will bear' pretty well summarizes the pricing strategy of many suppliers serving business markets. They believe that practicing value-based pricing means finding out what the value of their offering is relative to alternatives for their customers and then charging as high a price as they can. If they think their offering is superior, they include in their pricing the full premium that they think the superiority earns.

But pursuing value-based pricing in that way is usually shortsighted in two respects. First, it neglects other potential means of profiting from delivering superior value that may result in greater overall profitability to a supplier. Second, it weakens customer relations rather than strengthening them, which a more progressive and comprehensive approach to value-based pricing can accomplish. We’ll propose a framework for practicing value-based pricing in this more nuanced, strategic way. But consider first a recent case that demonstrates how the shortsighted pursuit...

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James C. Anderson, James A. Narus, and Wouter van Rossum, "Customer Value Propositions in Business Markets," Harvard Business Review, March 2006, 90 - 99.

Examples of customer value propositions that resonate with customers are exceptionally difficult to find. When properly constructed, value propositions force suppliers to focus on what their offerings are really worth. Once companies become disciplined about understanding their customers, they can make smarter choices about where to allocate scarce resources.

The authors illuminate the pitfalls of current approaches, then present a systematic method for developing value propositions that are meaningful to target customers and that focus suppliers' efforts on creating superior value. When managers construct a customer value proposition, they often simply list all the benefits their offering might deliver. But the relative simplicity of this all-benefits approach may have a major drawback: benefit assertion. In other words, managers may claim advantages for features their customers don't care about in the least.

Other suppliers try to answer the customer question, Why should our firm purchase your offering instead of your competitor's? But without a detailed understanding of the customer's requirements and preferences, suppliers can end up stressing points of difference that deliver relatively little value to the target customer. The pitfall with this approach is value presumption: assuming that any favorable points of difference must be valuable for the customer.

Drawing on the best practices of a handful of suppliers in business markets, the authors advocate a resonating focus approach. Suppliers can provide simple, yet powerfully captivating customer value propositions by making their offerings superior on the few elements that matter most to target customers, demonstrating and documenting the value of this superior performance, and communicating it in a way that conveys a sophisticated understanding of the customer's business priorities and concerns.

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James C. Anderson and James A. Narus, "Business Marketing: Understanding What Customers Value," Harvard Business Review, November-December 1998, 53 - 65.

How do you define the value of your market offering? Can you measure it? Few suppliers in business markets are able to meaningfully answer those questions, and yet the ability to pinpoint the value of a product or service for one's customers has never been more important. By creating and using what the authors call customer value models, suppliers are able to figure out exactly what their offerings are worth to customers.

Field value assessments - the most commonly used methods for building customer value models - call for suppliers to gather data about their customers firsthand whenever possible. Through these assessments, a supplier can build a value model for an individual customer or for a market segment, drawing on data gathered from several customers in that segment.

Suppliers can use customer value models to create competitive advantage in several ways. First, they can capitalize on the inevitable variation in customers' requirements by providing flexible market offerings. Second, they can use value models to demonstrate how a new product or service they are offering will provide greater value. Third, they can use their knowledge of how their market offerings specifically deliver value to craft persuasive value propositions. And fourth, they can use value models to provide evidence to customers of their accomplishments.

Doing business based on value delivered gives companies the means to get an equitable return for their efforts. Once suppliers truly understand value, they will be able to realize the benefits of measuring and monitoring it for their customers.

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James C. Anderson and James A. Narus, "Capturing the Value of Supplementary Services," Harvard Business Review, January-February 1995, 75 - 83.

Virtually all managers are aware that the key to winning in business markets is tailoring one's offerings to the requirements and preferences of each customer while maintaining low costs and prices. But most suppliers have focused only on the products themselves, largely ignoring another element that differentiates a company's offerings and has a huge impact on costs and profits: supplementary services.

Instead of tailoring their packages of services to customers' individual requirements and preferences, many suppliers simply add layers of services to their offerings. The authors have found that suppliers usually give customers more services than they want at prices that reflect neither their value to customers nor the cost 'f providing them. Many companies don't know which services customers with similar requirements really want, nor do they understand which services should be part of a standard package and which can be offered as options. Most companies don't even know the cost of providing many of their services. And all too many let salespeople give away services to land a deal, even if those freebies reduce profitability.

But some companies are realizing that they can lower the cost of providing services and use them more effectively to meet customers' requirements, gain more business, and enhance profits. From the authors' study of the best practices of those companies, they have developed a model for providing flexible service offerings, which they believe will help a wide range of manufacturing and service companies figure out how to reduce the number and cost of services they use to augment their core products, how to charge more for those services on average, and how to provide greater value to customers.

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