Customer value models

According to Anderson, Jain & Chintagunta (1993) there are nine methods to assess customer value that are commonly used by companies: (1) internal engineering assessment, (2) field value-in-use assessment,
(3) focus group value assessment, (4) direct survey questions, (5) importance ratings, (6) benchmarks, (7) conjoint or tradeoff analysis, (8) compositional approach, (9) indirect survey question. Although, as suggested above, the companies have a wide range of tools to measure customer value, Anderson & Narus (1998) suggest that the best toolkit to measure what customers value  is provided by customer value models. They are based on assessments of the costs and benefits of a given market offering in a particular customer application. For this purpose field value assessment needs to be used, also known as value-in-use or cost-in-use, which is believed to be the most accurate method. It is worth noting that in practice customer value can only be estimated.

Ideally, field value assessment should be based on primary research data among the customers. However, conducting such direct research isn't always an option. In such cases it is possible to gain an understanding of value through other methods as suggested above, e.g. direct and indirect survey questions, conjoint analysis, and focus groups, all of which rely primarily on customers’ perceptions of the functionality, performance, and worth of a supplier’s offering.

Anderson & Narus (1998) suggest a 6-steps customer value model.

1. Put together value research team. The team ideally should include people from product management, field engineering and marketing experience. It is very important to incorporate two or three people from sales, because they know their customers and know possible applications of the offering. Additionally, participation of the salespeople in the process will enable customer value model buy-in within the sales organization.

2. Select the right market segment. Supplier should conduct value assessment with at least two (up to a dozen) customers. It is very important to target the segment of customers where the supplier has particularly close, collaborative relationships with customers, extraordinary knowledge of how customers use the offering in question. Before approaching a customer, the team should think through what it will need from the customer and what the customer will gain, and be prepared to offer an incentive.

3. Generate a comprehensive list of value elements. Value elements are anything that affect the costs and benefits of the offering in the customer’s business. These elements may be technical, economic, operational, or social in nature and will vary in their tangibility. As it is generating the list, the team should consider the entire life cycle of the offering in question. The list should capture all the potential effects that doing business with a supplier might have on the customer’s business. It is important to be as inclusive as possible. Leaving out elements, particularly those that might make the supplier’s market offering look unfavorable next to the incumbent or next-best-alternative offering, will undermine the project's credibility. By identifying as many elements as possible, the team will be able to gauge more accurately the differences in functionality and performance its offering provides relative to the next best alternative.

4. Gather data. Next step is obtaining initial estimates for each element and finding out what each one is worth in monetary terms. Frequently, the customer doesn’t know that it has the data or information the supplier is looking for. The value research team needs to be creative in finding other sources of information. Independent industry consultants or knowledgeable personnel within the supplier company can be good sources of initial estimates. In any field value assessment, suppliers will find that some assumptions must be made in order to complete an analysis. These assumptions might be about the functionality or performance a market offering actually provides in the customer’s specific setting, particularly for elements that are extraordinarily difficult or costly to measure. It is critical for the supplier to be explicit about any assumptions it makes. It is important that customer understands how the value to an element was assigned and what are the assumptions behind it. Otherwise the credibility of the supplier will be compromised.

5. Validate the model and understand variance in the estimates. After building the initial value model, the supplier should validate it by conducting additional assessments with other customers or potential customers in the market segment. Conducting further assessments enables the supplier to refine its value estimates and to understand better how the value of its market offering varies across customers’ applications, capabilities, and usage. The supplier should provide the initial estimate and ask the customers whether that element is more or less valuable to them than the estimate. In conducting additional assessments, the supplier will also learn how the value its offerings provide varies across kinds of customers. As a result, the supplier can choose to pursue those customers and prospective customers for which its offering will provide superior value.

6. Create value-based sales tools. Suppliers can not only use value models to inform and guide their own decision making but also to create persuasive sales tools. One common sales tool is a value case history. Value case histories are written accounts that document the cost savings or added value that a customer receives from its use of a supplier’s market offering. The studies persuasively convey the cost savings that the prospects themselves would likely realize. Value assessment can also become a service that suppliers offer as part of a consultative selling approach.