Flexible Market Offerings:Naked Solutions, With Options

James C. AndersonNorthwestern University

James A. NarusWake Forest University

ISBM REPORT 7-1994

Institute for the Study of Business Markets. The Pennsylvania State University

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FLEXIBLE MARKET OFFERINGS: NAKED SOLUTIONS, WITH OPTIONS

James C. Anderson James A. Narus’

February 18, 1994

*James C. Anderson is the William L. Ford Distinguished Professor of Marketing and WholesaleDistribution, and Professor of Behavioral Science in Management, J. L. Kellogg Graduate School ofManagement, Northwestern University. He is also the AT&T ISBM Research Fellow at the Institute forthe Study of Business Markets (ISBM), located at Penn State University. James A. Narus is AssociateProfessor of Management and a Babcock Research Professor, Babcock Graduate School of Management,Wake Forest University. The authors gratefully acknowledge the financial support of ISBM, and thetremendous contributions made by the managers who participated in the field research. Finally, they areparticularly indebted to Ame Bennbom of ABB Asea Brown Boveri Ltd. for his support throughout thisresearch and for the phrase “Naked solutions, with options”.

Send correspondence to:

James C. AndersonDepartment of MarketingJ. L. Kellogg Graduate School of ManagementNorthwestern UniversityEvanston, IL 60208

(708) 49 l-2724

FLEXIBLE MARKET OFFERINGS: NAKED SOLUTIONS, WITH OPTIONS

Firms in business-to-business markets are learning that success depends upon adroitly balancing

three ubiquitous and often conflicting marketplace requirements. First, markets are becoming highly

fragmented and buyers are requesting, and getting, more customized offerings.’ Second, customers are

uncompromising in their demands that product offerings be sold for either the lowest price or lowest total

cost. Third, due to the success of the “total quality management” (TQM) movement, many purchasers

now take quality as a given and believe that there are few meaningful differences between competing

products. Customer firms increasingly expect that added-value and differentiation will be delivered in

the form of an augmenting bundle of services, nrograms, and systems such as those listed in Exhibit 1 .2

Hereafter, for simplicity, we most often inclusively refer to these as “services“.

Yet, few firms have discovered all the implications of these requirements. Instead, most choose

to add layer-upon-layer of services to their market offerings at prices that neither reflect customer value

nor their own costs, in the hope of keeping customers satisfied and gaining some competitive advantage.

As the following anecdotes reveal, such efforts often produce unintended consequences.

A manufacturer of closures and terminals for copper and fiber optic cables recently losta multimillion dollar contract to a renegade, “bare bones” competitor. The customer hadbeen an account for over fifteen years and the manufacturer felt that it completelyunderstood its requirements. At contract renewal time, manufacturer sales personnel hadvisited the customer’s plant site and come away with a list of detailed productspecifications and service requests. In response, the manufacturer had developed apremium-priced, “full-service” package that completely met stated customerrequirements. Managers were shocked when they learned that they had lost the accountto a new competitor that had offered a low-priced, “no frills” package. Not only did thiscompetitive offer contain no support services, but the products included also fell slightlybelow the customer’s stated specifications. When asked why they had switched to the newvendor, customer managers replied that the competitor’s quote was so low that even ifthe products failed, the firm would have enough funds available from the cost savings toreadily pay for a consulting engineering company to correct the problems. In retrospect,manufacturer management concluded that if its sales force had spent more timeunderstanding what the customer actually valued and was willing to pay for, it mighthave avoided this sizeable loss in sales.

In an attempt to grab market share in a stagnant, commodity marketplace, a textilemanufacturer volunteered to store its products “on consignment” at the plants of a major,apparel-manufacturer customer. In addition to keeping the inventory on its books untilthe customer firm used it, the textile manufacturer agreed to: lease warehouse space inthe customer’s plant to store the inventory, furnish an optical scanner and computer

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system to monitor textile consumption, and pay for insurance against inventory damage,theft, or loss. Not surprisingly, the customer immediately jumped at the opportunity toimplement this innovative program. What came as a shock to the textile supplier, though,was that within one week, all three of its major competitors had duplicated that programfor the apparel manufacturer. Moreover, after a short-term increase in its share of thecustomer’s business, the textile manufacturer saw its share and those of its competitorsreturn to their pre-program levels. And, other apparel manufacturers began to demandthe same service. Taking stock at the end of the year, the textile manufacturer discoveredthat the consignment program had resulted in an overall loss of several million dollarsin operating profits. Its managers assumed the same was the case for its competitors.Because of this, the supplier took little solace in the fact that its customer satisfactionratings from the apparel manufacturer had soared to an all time high.

________________-~---Insert Exhibit 1 here

______________________I____

How can business-to-business marketers avoid such nightmares, and confront seemingly

paradoxical pressures to meaningfully differentiate themselves from competitors, yet keep their own costs,

and prices to customers, down? On the product side of the market offering, flexible manufacturing,

modularization and product platform design have each been part of a paradigm shift that has challenged

conventional thinking that it is impossible to provide product variety a low cost.3 On the services,

programs and systems side of the market offering, a counterpart paradigm shift is just beginning to occur.

The firms that are leading the way have begun to provide what we call flexible market offerings,

consisting of naked solutions, each with ontions.

THE CONCEPT OF FLEXIBLE MARKET OFFERINGS

Business-to-business marketers must start with the realization that no matter how precisely a firm

segments a market, some “residual” variation in the product and service requirements of segment

members will remain. That is, even though customers within a segment may be essentially the same in

some of their requirements, they also remain different in other requirements. In the past, suppliers either

ignored or were unable to deal with this variation, choosing instead to provide market offerings comprised

of “standard” bundles or packages of products and services designed to meet the needs of the “average”

customer within each segment. Even worse, in many instances, suppliers have provided what is

5

essentially the same “vanilla” offering across segments. As a result, some customers felt that they were

forced to pay for services they did not need, while others did not get the depth of service they required,

even if they were willing to pay extra.

Rather than ignore residual variation, perceptive business-to-business marketers take advantage

of it by building flexibility into their market offerings. They do so by first constructing “naked solutions”

for each market segment. These contain the bare minimum of products and services that are uniformly

valued by d segment members. Importantly, naked solutions are sold at the lowest profitable price. In

turn, naked solutions are wrapped with “options” that are offered separately for those segment members

that value them.

Exhibit 2 contains simplified examples of flexible market offerings from Siemens Electrical

,

Apparatus Division for the “small manufacturing firm” segment and from Mitsubishi Electric Industrial

Controls for the machining center segment. On one dimension, products versus services are listed. On

the other, “standard” elements which everyone gets at no charge are contrasted with “options” that are

offered for additional charges. Although flexible market offerings are comprised of both product

components and services components, here, we focus solely on the services part of the market offerings.

______________-_-__-----~Insert Exhibit 2 here

Why do flexible market offerings work for progressive business marketers? Sonoco’s Industrial

Products Division has found that by offering customers greater choice, they can more precisely meet the

requirements of all segment members and in doing so, provide greater customization. Those customers

that want a basic market offering at a low price can get it, while those customers that are willing to pay

for an enhanced market offering can also do so. Apple Computer has learned that when naked solutions

furnished to each segment are constructed as modules or platforms, Apple gains economies of scale and

lower costs in the delivery of services. Baxter Scientific Products Division believes that it has gained

greater latitude in its pricing decisions. Finally, Asea Brown Boveri, Ltd. (ABB) has discovered that the

4

low price aspect of naked solutions opens doors at the stingiest of accounts. More importantly, once they

have the attention of a prospect, ABB marketers find that they can use consultative selling techniques to

“trade-up” the account to higher value and priced market offerings.

How can business-to-business marketers move to flexible market offerings? In the following

sections, we discuss how this approach is put into practice. In the process, we consider the difficulties

that marketers can expect to encounter and suggest ways that they may be overcome.

ARTICULATE THE PRESENT MARKET OFFERING FOR EACH MARKET SEGMENT

To start, managers need to take stock of how their firm is presently doing business by

summarizing their current market offerings for each segment. As an illustration, consider the service

portion of Baxter Healthcare Corporation’s market offerings to two segments of interest: transactional

hospital customers, and hospital customers that have made a commitment to a closer relationship with

Baxter and are referred to as strategic customers (see Exhibit 3). These market offerings have been

constructed to provide ordinary and extraordinary levels of services, programs and systems that reinforce

Baxter’s commitment toward marshaling resources that meet strategic customers’ requirements and

enhance their medical services and financial performance. Even programs that are options and are

charged for separately, such as Baxter Corporate Consulting, reflect this commitment because they

provide value or savings that far exceed their cost to the strategic customer.

--_-_____-__-----Insert Exhibit 3 here--_----_---

In our experience, finding businesses that have market offerings as well-articulated and managed

as Baxter’s are rare. More often, managers’ understanding of the services, programs and systems offered

within and across market segments is piecemeal, uneven, and inaccurate. Because of this, we recommend

that managers from all functional areas that “touch” the customers in some way take part in a structured

process to elicit the present market offerings for each segment. Meeting as a group, these managers are

systematically taken through the various kinds of services, programs and systems a business might offer.

At least three different kinds of insights can be gained from this process.

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The True Breadth of the Market Offering. In our discussions with managers, we have found that

they invariably tend to spend the greatest amount of time and to have the least difficulty in elaborating

the product portions of their market offerings. On the other hand, most have trouble identifying the

services that their firms provide. Inevitably, the services portion of market offerings are found to be

more extensive than any one manager realized. For example, in one chemical business that we are

familiar with, the number of services offered with one product turned out to be an amazing 186. The

proliferation of marketing offering elements is due, in part, to a number of services that are “sometimes

done”, typically in response to a customer request or to counter a competitor’s offer.

The Arbitrary Nature of Charges. Another common insight is the revelation of a lack of

discipline in what is offered as “standard” at the package price, and what is marketed as an “option” for

which customers pay separately. All too often, suppliers find that their sales forces are guilty of “fourth-

quarter habits”; that is, the practice of giving away service options “for free” at the end of the year in

order to meet their sales quotas. Related to this, because salespersons tend to focus on the transaction

and often don’t know how or why to say no to customer requests for free service, they cloud customer

expectations of what services are standard and what are optional. In other cases, marketers learn that

some options are de facto standard in that charges are continually waived. For example, one textile

company offers optional TQM-based cost reduction studies on a “for-fee” basis. A formal review of the

service, however, has revealed that its principal customer not only receives the service repeatedly “for

free” but also keeps all resulting cost savings. Alternately, suppliers discover that certain customers are

adroit in circumventing charges, perhaps through knowing who to call for a favor or special treatment.4

Lack of Variation Across SePments. A final insight that can be gained from the examination of

market offerings is the “vanilla” nature of many suppliers’ offerings across segments. In business

markets, a number of firms still segment the market, and then proceed to offer much the same, if not

exactly the same, offering to each segment. As the marketing manager for a large chemical company

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related, “For 90% of our customers, we offer the identical mix of support services.” This finding may

suggest an alternate segmentation of the market by application, customer capabilities, relationship type,

and/or geography (region, country, sector) should be investigated’ Alternatively, it may mean that

managers don’t truly understand the requirements of each segment.

ASSESS CUSTOMER VALUE AND OWN COST

Before supplier managers can formulate flexible market offerings for each segment, they need

to gain an estimate of the value of each service, and the cost to provide it. Having this knowledge would

seem to be fundamental in managing market offerings. Yet, in our experience, few businesses have

undertaken any formal value or cost assessments.

Measuring Customer Value

Perhaps due to the popularity of the TQM movement, many business-to-business marketers seem

content to rely solely on measures of customer satisfaction. As one manager related to us, “Our research

exclusively takes the form of ‘how are we doing’ surveys (i.e., customer satisfaction) rather than ‘how

much are they worth to you’ studies (i.e., value assessment).” Customer satisfaction studies capture a

supplier’s performance against expectations about services that have been shaped by customer managers’

past experiences in dealing with a supplier as well as with its competitors. They also capture what the

customer perceives to be “fair and appropriate” in a market offering’ content and price.

Because they delineate customer expectations and supplier performance against them, customer

satisfaction measurement studies are worthwhile, but sole reliance on them can lead to serious errors in

judgment. Naturally, customers will be more satisfied when they receive services for free than when they

have to pay for them. After all, the supplier is giving value away. Because of this, a supplier can easily

overcommit resources and overspend budgets by blindly pursuing incremental improvements in customer

satisfaction. Finally, by not assessing the “worth” of services, marketers are ill-equipped to set market

offering prices at fair levels. In today’s environment, prudent business-to-business marketers gather

multiple measures and use them to triangulate the value of their market offerings.

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A number of methods are used for customer value assessment in business markets, but they have

been most frequently employed to address business decisions about product design or modification. In

a recent state-of-practice study, understanding the value of present or potential augmenting services

received the lowest frequency of mention of nine business decisions that are addressed with customer

value assessment methods .6 How do leading-edge firms measure the value of their augmenting services?

Sonoco’s Semibulk Division, which manufactures fiber and plastic drums, routinely conducts what

it calls “cost-in-use studies” to document the incremental cost savings, and thus superior value, that a

customer gains by using the Sonoco products and services in place of those of a competitor. To add

credibility to the results, research is completed by one of Sonoco’s technical service managers working

together with customer managers. In addition to examining manufacturing, the team undertakes a series

of “process flow analyses” in which the customer’s entire business operations are diagrammed and current

costs are estimated. From these estimates, Sonoco managers brainstorm “system solutions” for the

customer. For example, this might entail a complete materials handling system including just-in-time

deliveries, utilized delivery systems (e.g., placing rollers on trucks to facilitate unloading), and drum

recycling. Importantly, Sonoco gives the customer a variety of service alternatives along with estimates

of cost savings. In this way, customers can make informed purchase decisions based upon the worth

to them of proposed system solutions.

Baxter Corporate Consulting (KC), which furnishes cost and quality improvement consulting

to strategic hospital customers, provides another example. As part of each proposal that BCC provides

to strategic customers, metrics are specified that will be used to ascertain the value of the study to the

client. As a condition of using BCC services, the client agrees to work with BCC in applying these

metrics and documenting the results in a Value Summary. Armed with this knowledge, BCC can give

firm answers to prospective clients as to what they will likely experience as a return (i.e., documented

savings and identified opportunities) on the dollars invested in BCC services.

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Coming to Grins with Service Costs

As for costs, recent strides in the development and implementation of activity-based costing

(ABC) techniques would seem to facilitate the assessment of costs on a customer-by-customer basis.’

However, we have found few companies to be using ABC in the management of their market offerings.

Why? For starters, existing ABC techniques are best suited for the measurement of manufacturing and

product-related costs. Little work has been done to apply ABC techniques to service, program, or

systems costs. * Thus, many firms simply don’t know how to apply ABC to services. We find three

specific factors inhibiting the application of ABC techniques in managing the services portion of the

market offering: services definitions are often ‘fuzzy”; services costs are often buried in the fixed costs

of staff departments; and many companies remain organized around tangible products rather than around

market segments or customers.

A basic problem with service cost assessment arises because suppliers don’t take the time to

operationally define what actually constitutes a particular service and its various levels. As result: its

meaning remains “fuzzy”. When this happens, it becomes difficult to track which customer gets what

service and to allocate related costs. An example of a fuzzy service is “technical problem-solving” which,

in practice, can run the gambit from an inside sales person who tells a customer over the phone to use

part A instead of part B to an engineering team that works for months with a customer to redesign a

faulty manufacturing process.

Accounting systems that allow the sales force to “bury” service costs in the fixed costs of other

staff departments make unraveling customer or segment service costs difficult, if not impossible. A

typical scenario: in order to close a deal, a sales rep promises an extraordinary level of customer service,

say, in the form of design assistance. Neither the customer nor the sales rep are directly charged for the

service. Instead, the charges are eaten by the “applications R&D group” whose engineers must work with

the customer. When budgets are later analyzed, design assistance appears as fixed costs in the form of

engineer salaries and overhead. Division-wide revenues are then used to cover these costs.

9

Finally, many companies remain organized around products rather than around market segments

or customers. As a result, they can readily generate costs on a product-by-product basis, but they are

unable to aggregate market offering costs on a segment-by-segment or customer-by-customer basis.Such

aggregations are needed because market offerings are likely to vary by segment and customer and be

comprised of a variety of products and services.

Overcoming inertia and systems “roadblocks” are essential, as more fully and accurately allocated

costs can provide quite a different picture of how costly some services actually are. In a recent activity-

based costing study, drug wholesalers found that the returned goods service that they provided to

customers cost approximately 3.7 percent of the average wholesaler’s gross sales, not the 1 or 2 percent

that was commonly thought. This substantial disparity was due to reliance on credited dollars as a

percent of sales as a measure of service cost, which did not recognize a number of “hidden” transaction

costs for wholesalers.’

How do progressive companies come to grips with the services costs associated with their market

offerings? To eliminate the problems associated with fuzzy services and the tendency of sales reps to

bury service costs, Van Den Bergh Foods, a manufacturer of food additives and seasonings, revamped

its service delivery and planning systems. For starters, the company more precisely defined its services

and the levels of each that are offered. Its sales force, which is comprised of highly trained technical

representatives, was then required to handle all minor services such as basic problem-solving. Charges

for such services are accounted for with a portion of the sales representative’s salary. All major services,

such as detailed technical problem-solving, are now offered on a project basis and delivered by technical

experts from departments such as customer service. The sales representative, and in turn, a specific

customer are charged for each project. At the beginning of each year, Van Den Bergh managers

construct an “AMu~ Operational Plan” for each major customer account that defines financial and

volume targets and specifies the levels of services to be provided. At the end of the year, these plans

are reviewed, service costs and account profitability are examined, and changes in level of account

services for the next year are recommended.

Arthur D. Little, Inc. (ADL) provides another outstanding example. As opposed to most

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manufacturing firms, ADL knows the profitability of each account. They religiously track the amount

of resources and billable hours of consultant time allocated to each account. In addition, they monitor

specific services provided annually to each customer. Because costs and revenues are determined largely

as a function of billable hours and services provided, calculating profit per account becomes a relatively

straightforward task. They have created a measurement system that determines whether or not their

market offerings are successful and how productive their consultants are at billing clients. With this

system, ADL management can tell if a service is either not in demand or unprofitable and shed it quickly.

Putting Measures of Exnectations. Value. and Costs to Use

About ten years ago, spurred on by unacceptable profitability, managers at the Netherlands-based

AK20 Industrial Coatings asked themselves the question, “Are we not giving more service than the

customer is paying for?“. To answer this, AK20 managers first developed a method based on ABC

costing and then undertook an analysis of the contribution to profit (CTP) of each customer. Next,

relying on a field industrial engineering approach to value assessment, they determined the value of each

service that was provided. So, for example, when an investigating engineer was dispatched to analyze

dust in a customer’s paint line and identify where the dust came from, the value of this service would be

quantified in terms of the effects of this problem on customer cost (e.g., downtime and scrap parts) and

other performance parameters, such as the first-run OK percentage and the percentage of defects.

AKZO managers discovered that they were in fact giving away more service than many customers

were paying for. Furthermore, they learned that some of their services provided little value to customers.

Although many of these services were offered by competing firms “for free” and customers expected to

get them, even though they didn’t place much value on some, AK20 managers decided to take

unprecedented strategic action. First, embracing a philosophy of “growth in selected areas”, they targeted

those industries and market segments where AKZO products furnished the greatest customer value and

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thus had the greatest profit potential. Second, utilizing CTP measures, they revamped their market

offerings and pricing. Price discussions were held with selected customers, where AK20 was determined

to get an equitable return on the services provided.

The Pavoff from Value and Cost Assessments

Gaining an estimate of the value of market offering elements is not always easy; having one,

though, is essential. With an understanding of value, discussions with customers focus on performance

and meeting customer requirements; absent this knowledge, discussions center on price. Yet, fine-grained

estimates of each element are not required. Instead, supplier managers are seeking to make a basic,

categorical judgment about the value of each element. That is, what supplier managers are trying to do

is to isolate those elements that are uniformly highly-valued within a segment from those that are highly

valued by some but not others within the segment, and those that are not highly-valued by any customers

in the segment. Because of this, when the number of customers is too large to permit some value

assessment for each individual customer, value estimates can be obtained by sampling subgroups of

customers within segments, using descriptors such as customer capabilities.

Much the same can be said about trade-offs between precision and cost in activity-based costing

analyses. AKZO managers caution about pursuing too fine a level of allocation. The goal of a realistic

assessment of each business activity needs to be acceptably met; beyond this, resources are better directed

elsewhere. As a useful start, if supplier managers have not already done so, they should establish

baselines of element usage across customers within segments.

FORMULATE FLEXIBLE MARKET OFFERINGS BY MARKET SEGMENT

When formulating flexible market offerings for each market segment, business-to-business

marketers can choose among three strategic alternatives for service elements having one of three statuses.

A useful way of organizing the nine resulting strategies is a flexible market offering strategy grid (see

Exhibit 5), which integrates “service element status”, which captures whether and how a service &

currentlv marketed, with “service element deployment”, which captures whether the service will be

IL

marketed. This grid provides a systematic picture of the nature and balance of a supplier’s market

offering. It also can promote further inquiry and offering strategy development, as when, for example,

after arraying the elements themselves in the grid, managers find one or more cells empty of elements.

We consider, in turn, the alternative potential deployments of existing “standard” services, existing

“optional” services, and new services. We then discuss the

offering and conclude this section with two recent examples.

- - - - - - - - - - -Insert Exhibit 4 here

~_-M------- -

Reevaluating Existing Standard Services

pricing implications of flexible market

In making deployment decisions, the overriding philosophy should be to keep the standard

offering as “naked” as possible -- only those service, program, and system elements that are uniformly

highly-valued by firms within a segment should be included. The first place to start in putting this

philosophy into practice is by reevaluating the existing standard services. By pruning existing standard

offerings and recasting some previously standard services as options, business marketers retain just the

subset of standard services that will serve as the base of an updated standard offering.

Religiouslv Prune Services. In our experience, suppliers are far more reluctant to prune existing

services than they are to add services. Nonetheless, managers need to scrutinize existing elements for

pruning

Because

service.

,

candidates. One source is those services that are rarely used by most segment members.

of differential learning or experience, most firms no longer believe they gain value from a

The customers that still value the service are so few that it is not worthwhile for the supplier

to continue to offer it. In the interest of these customers, though, the supplier sometimes can move to

outsource the service, and suggest another firm that will provide it. Alternately, in situations where

customers share their business with several suppliers, it may be better for the customer to get it from

another supplier that is better able to provide it. For example, rather than perform routine maintenance

services for customers itself, Okuma instead has its distributors provide customers a choice of either

13

annual maintenance contracts or individual services “on demand”.

Certain services are readily pruned. For example, those that provide low customer value yet

incur high costs for the supplier are ideal candidates for elimination. Following detailed investigations,

the chemical manufacturer mentioned earlier learned to its chagrin that while each of the 186 services

continued to incur annual fixed costs, many had not been used in years! Its managers responded by

pruning a large number of these services. And, its managers report that many customers don’t even

realize that the services have been dropped.

Suppliers must have firm resolve in pruning services, as they can anticipate stiff resistance from

three sources. First, engineers and customer service personnel who design and implement the services

are likely to fight attempts to delete them. Often, their pride of ownership, perceptions of service

elegance, and emotional investment in a service can blind them from the need to eliminate it. Second,

sales persons used to “throwing in services at the last minute to win deals” are likely to protest,

perceiving the pruning efforts as a threat to their ability to close deals and meet sales quotas. Third,

customers who expect to get the service are likely to be angry about its discontinuation.

Recast a Service as a Value-Added Ontion. Universally, supplier managers claim that this is the

most difficult of the nine strategies to implement. This is due to the fact that customers react angrily

when told that they must now pay for something that they expect to get for free. And, it is even more

difficult when competitors continue to market the service for free as part of a standard offering.Nowhere

is this more of a problem that in industries characterized by high levels of fixed costs (e.g., commodity

industrial chemicals and fully-integrated steel mills). In such industries, managers are hesitant to

implement any scheme that may result in reduced sales volume because it may jeopardize their ability to

reach capacity utilization breakeven points. As a result, services are routinely added to retain volume

and rarely dropped.

Infrequently-performed services that deliver value at specific points in time, such as training,

installation and retrofitting, are perhaps the best candidates for redeployment as surcharge options. By

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marketing these services as value-added options, suppliers retain business with those customers that still

derive value from them and are willing to pay for them. Often, this provides a “litmus test” for services

that customers claim have no value for them (or are said to be the same as those obtainable for free from

other suppliers), but suppliers believe are “worth something” to customers. Depending on the market

response, in the next period, they can be either continued as value-added options or discontinued.

Leading business-to-business marketers use a variety of approaches to recast services as value-

added options. To ameliorate customer discontent, the Angus Chemical Company implements a variation

of this strategy. Along with microancrobials, Angus sells a variety of services including laboratory

support, field consulting, on-site testing, and educational seminars, all of which are costly. Realizing that

its customers differentially value and utilize these services, Angus managers offer customers a choice

among a variety of levels for each service. If a customer purchases a minimum amount of products from

Angus each year, it receives “basic” levels of services along with the standard offering. If that same

customer wants to receive a higher level of service, it can either increase its annual purchases to a pre-

specified amount or pay-extra. Thus, some level of each service that customers expect is available with

each standard offering. Customers that place greater value on the service have the option to buy more.

As a prelude to making some previously standard package services value-added options, a large

computer company recently began listing a charge for the provided services, which was then subtracted

off with a notation of “do not pay this”. An accompanying letter explained that the company was pleased

to have been able to provide the field service, and what it estimated this service was worth to the

customer, using market-based rates for independent industry consultants. The company positioned the

services as ones that only collaborative accounts would receive at no charge. Thus, a sharp distinction

can be drawn between offering an element separately, even with an off-invoice “no charge”, versus

simply “burying” it within the standard package.

Another alternative is to have the customer pay, wholly or in part, for whatever options they

value with “bonus dollars”, earned from doing business with the supplier. Strategic customers accrue

IJ

Healthcare, which can

In this way, strategic

“Baxter dollars” based on the amount and growth in their purchases from Baxter

then be applied to any of a number of optional services, programs and systems.

hospital customers use a common “Baxter dollars” resource to tailor Baxter’s market offering to their

own, individual requirements.

Retaining Services within Standard Packapes. Beyond those services that are highly-valued by

all firms within a segment, there are some circumstances where additional elements are retained in the

standard offering. The success of certain services, in terms of their value or cost, depends upon their

widespread usage by customers. Electronic data interchange (EDI), automated order processing and

logistics management systems are examples.

Service elements that are not readily differentiated from those of competitors are candidates for

matching, and most likely, inclusion in the standard offering. Such elements, often regarded as

“standard” in industry market offerings, can often make up a substantial part of the naked offering. The

challenge in offering these parity services is to have their value be perceived as not significantly less than

competitors’ comparable services, but to understand and manage the costs down below those of the

competitors. The rationale for this is that since these services are typically not the ones that are highly-

valued by customers, as long as they are minimally acceptable, they do not factor into customers’

decisions about changing suppliers.

Reexamininp Ontional Services

Next, supplier managers reexamine existing optional services to determine whether they should

be discontinued, used to enhance the standard offering, or continued as options.

Prune Ontions Too. As is the case with the standard package, evaluation and construction of

options menus should begin with a deliberate attempt to prune existing optional services. Optional

services that were once good sources of revenue for the supplier, but are no longer used enough to justify

their fully-allocated costs are pruning candidates. Similarly, services where the cost to provide them has

outstripped customers’ willingness to pay for them (e.g., due to changes in technology, necessary

16

expertise, or insurance risk) are also candidates. As with pruning standard services, suppliers sometimes

can help customers that still need these services to outsource them from other firms.

RecastinP Ontions as Part of the Standard Offering. At times, services that have been marketed

as options may be folded into standard offerings. This is likely to occur as the value of the service

declines; yet, customers increasingly expect to receive them as part of the standard offering. Most often,

this practice is initiated by a competitor.

In other settings, where the product part of the market offering is regarded as a “commodity”,

suppliers look to augment or enhance the standard offering as a means of differentiating themselves in

the marketplace. Customers do business on the basis of which supplier has the best or most extensive

set of services. What suppliers essentially do is try to offer services that have the greatest value to the

“marketplace” at the lowest cost to themselves. But, because customers within segments will vary in how

they value these services, the supplier is often driven to offer more elements in the standard offering.

Instead of doing this, suppliers might do well to consider the alternative of trimming the standard

offering to the naked solution, offer separately a set of options, and let customers pay, wholly or in part,

for whatever options they value with “bonus dollars”, earned from doing business with the supplier. The

more the customers concentrate their purchases with the supplier, the more bonus dollars that they earn,

and the more service they can “purchase”. Not only does this allow the customers to tailor the supplier’s

market offering to their own particular requirements, it reinforces to them that they do not have to pay

for services that they do not want, as with the totally bundled offering. And, to underscore the value of

the services it offers, a supplier can promise to give customers cash for any unused bonus dollars at the

end of their agreement, as does Baxter Healthcare.

Retain Services as Value-Added Ontions. Through marketing services separately, managers

systematically build flexibility into their market offerings. As an illustration, although the Industrial

Products Division of Sonoco Products markets fiber cores, management considers the group to be a

service business. Rather than focusing on its products, managers try to be customer-driven by offering

II

its accounts as much choice (i.e., options) as is possible. This is accomplished by giving customer firms

an extensive menu of services (e.g., warehousing, package consumption monitoring, and process redesign

of the customer’s packaging systems) from which they can assemble their own market offering. Each

service is priced as a function of its value. All costs associated with providing each service are covered.

Managers claim that customers are delighted with the opportunity to pick-and-choose service options.

Building Flexibilitv with New Services

What are the sources of new services? Some suppliers drive off their own skill set and internal

capabilities to identify new services to offer. An alternative source of ideas, which may be preferred,

is to focus on the cost structures and strategic imperatives of targeted key customers.

Because they have not been offered in the past, new services do not have the baggage of customer

expectations about how they should be provided (“Now you want us to pay extra for something we used

to get for free?“). Thus, new services provide represent the best means to build flexibility into market

offerings. So, while there should perhaps be a bias toward preserving new services as stand-alone

options, at times, suppliers may elect to not offer them or use them to enhance the standard offering.

Keening New Services on the Shelf. Suppliers may decide to not offer a new element because

of a variety of market timing issues. It may be that customers have not yet recognized an element’s value

(as in technology-push services), the cost of providing it is still too high, or the present element that it

would replace is still deemed adequate. An example of this is provided by AKZO Industrial Coatings.

Anticipating greater environmental concerns about current painting technologies, the division has invested

substantial time and resources in the technological development of a process for “water-born” paint

application. As a service to its customers, AKZO will consult with them on changing to this more

environmentally-benign technology. Unfortunately, although many customers are interested to learn that

AK20 possesses this capability, no one is willing to pay extra for it. AK20 managers believe that

customers will not value the process until environmental protection laws require a significant reduction

in solvent emissions. As a result, they have decided to keep the technology on the shelf until customer

value increases.

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Introducing New Services as Part of the Standard Offering. In a number of instances, suppliers

enhance the standard offerings with new services. Where suppliers segment the market by relationships,

managers look for new elements that will sustain and invigorate the collaborative relationships.One way

to continue to build value

responsive to the changing

introduces new standard (as

responsive to the evolving

in the collaborative segment is add new services that anticipate and are

requirements of collaborative customers. Each year, Baxter Healthcare

well as option) elements to its strategic customer segment offering that are

problems faced by senior hospital management. Okuma, the Japanese

manufacturer of computerized numerical control (CNC) lathes, grinders, and flexible manufacturing

systems uses the same approach. In 1992, it introduced a “24-Hour Parts Shipment Guarantee”, while

in 1993 it began to sell a “Guaranteed Trade-In Program.” In addition to being responsive to changing

market needs, Okuma management believes that the practice forces their distributors and employees to

be more efficient (e.g., they must learn how to ship parts anywhere in the US in 24-hours) and gives the

sales force “something new and interesting” to discuss during sales presentations.

Shrewd suppliers also add new services to standard offerings to thwart or stymie competitors.

Baxter Scientific Products’ Industrial Division, for example, deliberately seeks out new services that

customers’ value and that Baxter can perform better than the competition or at lower costs. By bundling

them in with the standard offering, Baxter forces competitors to choose from a series of unpleasant

alternatives. If they decline to offer the service altogether, Baxter can tout their unique service to

customers as an extra benefit of doing business with Baxter. Alternatively, if competitors attempt to

match Baxter and offer the service, they must incur both added costs and time delays associated with

learning how to deliver the new service.

New elements that also are likely candidates for inclusion in the standard offering are those

where: most of their costs are incurred in their initial development or deployment; there are continuing

fixed costs that are relatively invariant over the number of customers actually using the element; or usage

of the element in some way reduces the supplier’s own costs. In many instances, this will also reduce

the customer’s costs, but in some instances, it might actually raise the customer’s costs. In this latter

19

case, the supplier needs to provide some incentive to change to the customer, such as a price reduction

for using the service. ABB’s Low Voltage Apparatus business is developing competence in electronic

data interchange (EDI) for an order management system. Because it mutually reduces the costs of

ordering, ideally, ABB would like to have all of their customers use this system. To start, though, ABB

built a priority list of customers to approach, initially focusing on those customers with the largest

business potential and those that ordered frequently. In time, ABB will work down to the smaller

customers to get them on the system.

Increasing Flexibilitv with New Service Ontions. Offering new elements separately provides

value-added options for customers that seek them. By offering them separately, suppliers can readily

gauge interest in new services, programs and systems. For example, although the R.R. Donnelley

Company’s traditional business has focused around printing, binding, film preparation, and pre-press

work, its management believes that future growth and profits will come from innovative services such

as database management, consulting and training, dimensional and talking ads, direct marketing, layout

systems, and mapping services. To test their viability in the marketplace, Donnelley is currently offering

these services as value-added options.

Managing new services in this way ‘can also provide a systematic response to subsets of customers

that are asking for “more” from their suppliers. That is, some but not all customers are seeking new

ways of doing business between suppliers and customers. This can range from shifting of subfunctions

between firms to full-blown outsourcing, such as dedicated logistics or information management.

“New” elements that can be offered separately as value-added options can emerge from

reconsidering services in the standard offering. For each service that is offered at a “constant” level,

supplier managers should ask whether, in reality, there are alternate levels that can be defined that could

have different value for different customers. In one electrical wholesaler, overnight air freight was used

3n

to cover mistakes made by an overworked inside sales force and was regarded as “standard” (i.e., the

sole service recovery element), when in many instances, second-day UPS and third-day common carrier

would have been viable options. In a similar way, process redesign approaches that transform businesses

in ways that provide value to customers should routinely investigate alternate processes that systematically

provide ordinary versus extraordinary levels of services. lo

ABB’s Power Transformers business has recognized that not all customers want the same level

of maintenance service, nor value it the same. Traditionally, utilities have had equipment maintenance.

ABB provides maintenance services today as part of a service agreement, but it offers both a basic service

package and an extraordinary service package. Each service contract’s pricing is based upon ABB’s

experience in providing the different levels of service to customers. Rather than having service on all

their transformers, some customers even tell ABB what transformers to check, and then ask how much

ABB will charge for providing just that service.

Finally, in some situations, suppliers may not want customers to know what the charge is for an

individual service. This occurs, for instance, when suppliers are concerned that customers might impute

the value of a service from its charge. When this is the case, suppliers can group elements together in

one or more option packages that are offered separately. This is similar to the longtime usage of option

packages by automobile manufacturers.

Pricing Imnlications

It is crucial to recognize that what we have discussed about constructing flexible market offerings

says little, if anything, about their pricing. This must come from consideration of the supplier’s strategy

for each market segment. For example, suppliers that pursue enhancing the standard offering with

additional services may alternately decide to raise the price, keep it the same, or even lower the price.

The market offering’s price might be raised commensurate with the greater value provided, or raised less

than the added value to “soften” the effects of a needed price increase due to rising costs. A supplier

might keep the price the same in a stable marketplace to gain new or incremental business through

21

superior value, or in a price-declining marketplace, simply to hold price. The price might even be

.lowered in support of an aggressive market development or share growth strategy.

Further, certain services offered as standard may be valued by customers, but the only way they

are affordable to a supplier is if its has all the customer’s business. With single sourcing, a supplier can

take responsibility for the customer process in which its products play a principal role, such as a coatings

supplier taking responsibility for the whole painting process in a customer’s paint shop. These single-

source service arrangements can lead to innovative pricing, such as the customer paying for the number

of painted objects, rather than liters of paint.

Similarly, pruning offering elements has no inherent pricing implications, but again depends on

the segment market strategy. A supplier might lower its price equal to the cost of the discontinued

elements, thereby maintaining the competitive status quo. Alternatively, to improve contribution margins,

a supplier might not lower the price at all, or lower the price but less than the cost of providing the

element. This latter tactic has the dual of advantage of improving the value of the offering to customers

that did not value the pruned elements, while providing an incentive for competitors that are similarly

looking to improve their profitability to match the supplier’s action. Suppliers might even raise prices

in situations where they are pursuing a harvest strategy.”

Elements that are offered separately provide flexibility not only to the customers within a

segment, but to the supplier too in terms of pricing. In offering an element separately,

preserves the wider latitude in alternatives of if and how to be paid for them. One alternative

the element charge on an invoice and then “net out” the charge for a specific reason (e.g.,

a supplier

is to show

initial use

discount). This has at least three advantages. It provides a readily-captured way of tracking element

“give-aways” . It can be employed in a selective, transitory way, such as to close a deal, to blunt a

competitive inroad or to attract business in targeted new segments. For example, Mitsubishi Electric

Industrial Controls offers as a option a proprietary software development tool, but to win targeted new

accounts, it may be provided at no charge. Consulting on usage of this software tool, which also is

offered separately, initially may be provided at no charge, but subsequent consulting is not.

Two Recent Examnles of Flexible Market Offerings

In the past, Okuma sold only state-of-the art CNC lathes that performed universal turning

functions including milling, drilling, and boring. All of these machines were high performance but they

also tended to be high priced. This served as a barrier, preventing smaller manufacturers that bought on

price or that did not own computer-controlled equipment from purchasing Okuma machines. Realizing

that small job-shops would be a primary source of growth in the future, Okuma Charlotte championed

the development of an affordable line of CADET horizontal lathes. The CADET line, which performs

basic horizontal turning operations and is offered is five different versions, is responsive to a very large

and competitive market niche. It comes with very rudimentary computerized controls and sells for a very

low price. Once a CADET is sold to a small manufacturer, Okuma and its distributor demonstrate to

the customer the value of computer-controlled machines. After six months, the customer is usually ready

to invest in a higher performance vertical CNC machine.

Most Okuma services offered with the CADET are optional. However, because the CADET is

a narrow use product, the extent and nature of technical assistance, engineering, and training are more

focused. On the other hand, because the CADET is manufactured in the U.S., new service options

(e.g., 24-Hour Parts Shipment Guarantee) are likely to be less costly to deliver and to be valued higher

by customers. The guarantee, for instance, is not offered on products manufactured solely in Japan.

Management recognizes that because the product competes in a highly price-sensitive market, a naked

solution at an attractive low price is a necessity for success. Interestingly, though, management has

discovered its broad set of separate service options are often the deciding factor in product acquisition

decisions, simply because most competitors offer little service, even as options.

The Microsoft Corporation has recently implemented flexible market offerings for its support

services. Spurred on by customer requests for greater choice and its own rising costs, Microsoft has

created a number of flexible services offerings. Now, customers can select among four basic types of

23

increasingly-sophisticated, technical support, ranging from “Fast Tips & Electronic Services” (a 24-hour

automated system) to “Premier Support” (custom consulting on highly specialized applications).

Depending on the type of software purchased, which ranges from “Desktop Applications” (e.g., Word@

or Excel@) to “Advanced Systems” (e.g., Windows NY), these services are either not offered, marketed

as standard or marketed as optional “for fee”. In addition, for each “for fee” optional service, customers

are given a choice of payment plans. They can buy an annual contract, they can purchase “incident

packs” for selected numbers of technical-support episodes, they can pay by the incident, or they even can

choose to be billed by the minute!

CHANGE THE SALES FORCE FROM VALUE SPENDTHRIFTSTO VALUE MERCHANTS

Flexible market offerings also imply a shift in the philosophy and practices of the sales force.

The present, widespread practice has the sales force with, at most, limited pricing authority, focusing on

volume, units or sales revenue. Held accountable so that they cannot easily give price away, adroit

salespeople instead have turned to services, often under the mantra of “providing quality customer

service”. Included at no charge or deeplydiscounted rates, these elements have been used to “sweeten”

offers to customers to win business. Even in those instances when sales compensation is tied to

profitability, most often it is profitability narrowly defined as product profitability. The service elements

are often provided by other functional units in the organization, whose costs are typically not tracked or

managed at the individual customer level, nor charged back to the sales force. The result is an often

misleading picture of what customers are the firm’s nbest”.12

Creatine Value Merchants

To start creating value merchants, senior management needs to put in place a philosophy that the

firm generates value with both its products anJ services, and that the firm expects to receive an equitable

return for this. To paraphrase a senior manager at Baxter Scientific Products, you must begin by making

sales persons aware of the fact that they aren’t just selling products; rather, they are delivering value in

the form of a “system” of products a services.

24

Allen-Bradley’s (A-B) Industrial Automotive Products Division puts this philosophy into practice

in the way it “collects” on the value provided by its services. A-B begins by charging either customers

or sales persons for key services it provides (e.g., training, support, application assistance, and start-up).

Consistent with this philosophy, A-B charges customers for problem-solving assistance if it can be shown

that the customer firm has misused the product or has not maintained it properly. In addition, a variety

of functional areas within A-B are charged for services. For instance, the sales force will be charged if

they issue a request for service (e.g., for field technical support). Manufacturing is charged for problem-

solving service when a production mistake (e.g., poor quality) causes a customer problem. Finally,

engineering can be charged if a poorly-designed product generates substantial warranty work.

Sonoco Products Company’s corporate culture reinforces the preeminence of value in the firm’s

overall market strategy to each sales person. From the day that they are hired, sales representatives learn

that Sonoco products are typically higher priced than those of competitors. And, they quickly discover

that Sonoco prospers because it provides value to its customers in the form of technologically superior

products and outstanding services. From these lessons, sales persons readily conclude that if they are

to succeed at Sonoco, they must sell value and not price. Moreover, the Sonoco “value story” is

repeatedly reinforced through such things as annual reports, brochures, company newsletters, case

histories presented at sales meetings, and sales tools.

Based on experience, changing the salesforce from value spendthrifts to value merchants requires

changes in training, particular in using value-based sales tools, and compensation.

Training Value Merchants. Giving value away is easy and requires no particular training;

obtaining an equitable return on services provided to customers is quite the opposite. The sales force must

have a greater understanding of how each element adds value or lowers cost in customer operations, and

how this will vary across different customer characteristics. Yet, few salesforces know how to sell value.

As a consequence, when pressured by customers, their tendency is to cut price.

LJ

As a first step in countering this, sales persons need an adequate understanding of not only the

value provided by services, but their cost and profitability as well. Often, sales persons are kept in the

dark by upper-level managers who either believe that sales persons are incapable of understanding

financial information or feel that sales persons are not trustworthy with sensitive information. When it

comes to selling value, however, each of these beliefs must be challenged. Companies such as Angus

Chemicals and Van Den Bergh Foods furnish sales persons with information on the costs, and the amount

of time and resources it takes to deliver each of their services. They are also made aware of the

relationship between sales volume and account profitability. Based upon this information, sales reps are

encouraged and expected to “telescope” their efforts and those of service providers toward those accounts

that have the greatest profit potential.

Knowledge of the value of services is not enough. Opportunities to practice value-based selling

in a controlled selling situation are needed to build up the requisite skill set. To create a breed of value

merchants, Sonoco Products Company provides extensive training on how Sonoco products and services

create customer value. As part of these value-selling programs, Sonoco trainers give salespeople

experience in using case studies in the selling process. Based upon market research and often including

videotapes, these case histories demonstrate three benefits to customers: 1) Sonoco products provide

lower costs to customers; 2) Sonoco products and services result in greater sales to end-users; and 3)

Sonoco products and services are more innovative than those of the competition. These value case studies

enable Sonoco salespersons to persuasively demonstrate that it is in their best interest to pay a premium

for Sonoco products and service.

As the Sonoco example demonstrates, value-based sales tools are a necessity in selling value.

Salespeople need to be armed with sales tools and collateral materials that enable them to persuasively

convey the value of elements offered. To augment salesperson expertise, expert systems that run on lap-

top computers can be used to conduct value-in-use analyses on-site with the customer providing their own

input. Sonoco’s “cost-in-use studies”, discussed earlier, are conducted in this way. Baxter Corporate

26

Consulting’s Value Summaries, separately and taken together, also provide potent examples. A BCC

pamphlet that reports on their overall 1992 results contains a number of eye-catching statements that

convey value provided, such as: “For every dollar invested in BCC services in 1992, our Customers

averaged over eleven times that amount in combined documented savings and identified opportunity”.- -

In addition to these “snapshot” value-based sales tools, experienced value merchants employ some

complementary, value-accumulation tool that documents the value provided over time to a customer. This

arms them with a proactive response to customer questions of “What have you done lately?“, which tend

to occur in account reviews. Astute suppliers create this tool and compensate the salesperson for taking

the time to keep score on the value created in the relationship, which tends to be forgotten.

Finally, as another ongoing way to sustain salesforce awareness of customer value, AK20

Aramid Fibers Division actively involves its salesforce in value analyses. For example, salespeople

participated and assisted in a conjoint analysis study designed to measure the value of its Twaron@ fiber

to the non-passenger transportation industry. In fact, to reinforce that salespeople are marketers too,

AK20 senior managers have them purchase their own sophisticated market research and value

studies. Comnensatinp Value Merchants. By and large, people do what they are

paid to do; the sales force is no different. Thus, compensation of the sales force needs to be based on

short-term and long-term profitability. A recent reorganization at Sonoco Consumer Products Division

provides a noteworthy example. Division accounts are now divided up on a market-by-market basis, and

cross-functional teams comprised of about five members are each responsible for a portfolio of accounts.

In essence, each team manages its own business. They develop market plans, prepare budgets, and

initiate product and service improvements. Their compensation system reinforces salespeople for short-

and long-term customer profitability. Each sales manager can earn up to 50% and each salesperson can

earn up to 25 % of their respective salaries in bonuses that are based on account sales and operating profit

improvement, customer satisfaction, customer account-receivables levels, and securing long-term, single-

source, supply contracts. Looking to the future, Sonoco executives see more and more of sales force

27

compensation being based on the long-term provision of value to customers.

More fine-grained criteria also emerge when the supplier gains the capability of monitoring what

services are used by each customer. Senior management must guard against compensation schemes that

reward sales people for selling separately as many services as they can to the customer. While this will

most likely provide a short term “spike” in customer contribution to profitability, long-term it will

undermine credibility with the customer and sacrifice future business. Considering the opposite, the tactic

of providing some optional services at “no charge” can have long-term strategic value for targeted

accounts. The challenge is for sales management to integrate the short-term performance with long-term

results. This suggests the need for a more encompassing set of performance measures that capture how

well the firm is meeting customers’ present and envisioned requirements.13

TarPetine Value-Seeking Customers

In the shift to flexible market offerings, customer selection plays a more prominent role. Just as

targeting gives direction as to which segments are of particular interest to the supplier, flexible market

offerings provide direction and feedback on what customers are of particular interest to the supplier.

Some customers that have in the past taken advantage of the supplier’s inability to know customer

profitability will continue to want all services, but not to pay for them. So, in implementing flexible

market offerings, some change in customer mix is likely to occur.

Similarly, customers that have valued and used particular elements have been essentially cross-

subsidized by other customers that have not. When these elements are offered as surcharge options,

particular early on, some of the affected customers may be unhappy with this and defect. Suppliers need

to have the discipline to ask, “Is this a relatively important customer to us, or is it, in honesty, a bad

customer? ” . In its performance review of partners, one large accounting firm counts the loss of any

client as a negative. Suppliers such as this, that apparently believe they have never made a bad customer

selection decision, are fooling themselves.

LO

IMPLEMENTING FLEXIBLE MARKET OFFERINGS WITH CUSTOMER

Next, suppliers need to decide how flexible market offerings will be presented to customers in

the marketplace. In the process, they must anticipate implementation problems with customers and

breaking away from the pack of competitors’ market offerings.

Ontion Menu versus Tailored-Value Package

A fundamental decision is what the customer will see in making their decision: an option menu

approach versus a tailored-value package. The option menu approach makes the flexible market offering

transparent to the customer. Although the salesperson provides consultation, the customer has the

primary responsibility for tailoring the market offering to their perceived requirements. Apple Computing

and Microsoft each provide detailed, multiple-page menus of technical support services with pricing

options to customers, and let them decide.

Rather than treating all elements as options, suppliers most often provide a standard package with

a menu of options, and let the customer craft their own market offering. Certainly, in negotiated bid

situations, a preferred strategy is to start with a “naked” offering at the lowest bid price possible, so as

to be selected for further negotiations. The supplier then uses consultative selling efforts to “trade-up”

the customer to select option elements that will provide value to them. Astute suppliers realize that if

they do not have a competitively low bid price, they have no opportunity to do business, and so, develop

a two-part negotiations strategy based around this.

In contrast, the tailored-value package approach keeps the flexible market offerings opaque to

customers. Working with the customer, the salesperson develops a list of specifications and then craft

an offering for them based on a menu of options that only he or she sees. This places greater

responsibility on the salesperson to accurately comprehend and respond to stated customer requirements

with a tailored-value package. In practice, salespeople would most often respond with several packages

and let the customer choose amongst them. And, purchasing managers may request several packages in

an attempt to gain an understanding of trade-offs that the supplier is implicitly offering.

29

Sonoco’s Industrial Products Division uses both approaches. The division manufactures fiber

cores around which products such as newsprint, commercial printing paper, textiles, yarns, plastic films,

and aluminum foil can be wrapped. Its customers select from several market offerings. For customers

that want the lowest possible price, it markets a naked solution comprised of “parent” cores (i.e., uncut

cores in standard lengths ranging from 8 to 30 feet) plus a minimum of support services. Sonoco will

also sell these customers “trimming equipment” to cut the parent cores into usable sizes. For those

customers that don’t want to be bothered with the tasks and investments associated with cutting cores,

Sonoco markets “precut” cores that match customer specifications. Along with the pre-cut cores, Sonoco

offers a variety of optional services such as: linked materials requirement planning systems, just-in-time

inventory systems, set-up carts that can be directly connected to customer’s equipment, and process

redesign of customer packaging systems. Finally, for customers that are located great distances from

Sonoco plants and are concerned that deliveries won’t arrive on time, Sonoco even will set-up a “satellite”

plant (often in space leased in industrial parks) near the customer’s location. There Sonoco employees

will cut the cores to customer specifications. These customers are also offered the optional services.

As mentioned, Sonoco sales representatives sell these market offerings in two ways. If the

customer desires it, reps will provide customers with a detailed “menu” of all its products and services

along with their respective prices. Then, that customer can pick and choose the products and services

it desires. Alternatively, Sonoco sales reps can use their expertise to assemble several tailored packages

of products and services. Along with the prices of each proposed package, Sonoco sales reps also

provide a summary of the cost savings that the customer can expect to gain if they buy the package. In

this way, the customer can choose an appropriate package not only based on its price, but also on its

value. Importantly, Sonoco managers report that since they began offering customers such extensive

choices, both division sales volume and market share have increased.

Anticinating Imnlementation Problems with Customers

Implementation problems can be minimized by understanding customer requirements and

30

proactively shaping customer expectations through education and persuasion about the superior value of

the flexible market offerings. Suppliers need to manage service and pricing expectations to avoid

acquiring a “nickel and diming” reputation. Collateral materials and case histories need to be developed

that convey “less is more”, and that combat the “we used to get it for free” gripes. Flexible market

offerings should be portrayed as “You don’t have to pay for what you don’t want”.

Suppliers need to be relentless in communicating the value story to customers. As mentioned

earlier, new services provide perhaps the best opportunity to implement flexibility in market offerings.

As a roll-out or phase-in, supplier also might consider implementing flexible market offerings at the same

time as product changes or introductions.

Breaking Awav from the Pack

In our field research, a number of managers wistfully expressed a desire to have things be

different, but were concerned about what would the competitors do. These managers believed that their

competitors similarly were looking to improve their profitability, but what if they didn’t match the move

to flexible market offerings? In addition to this, there are timing and discipline concerns. Before taking

these up, we first consider breaking away as a means of countering competitors’ dubious parity claims.

Offering services separately is one way to handle competitors that claim that they, too, can

perform the service. Some customers may attempt to have the competitor do it initially, but where there

is truly differential value, most customers either continue to use, or sample elsewhere and return to use,

the service. One way to break away (which also works for services included in the standard offering)

is to warranty or guarantee outcomes based on the service. The larger and more complicated the list of

services marketed by a firm becomes, the more likely that competitors will promise, “we can do that.”

When this occurs, savvy marketers respond by transforming service “claims” into “guarantees.” For

instance, when Okuma’s competitors began to promise rapid delivery, it announced its “24-Hour Delivery

Guarantee”. The program states that Okuma guarantees that if a customer orders a part and it is not

delivered in 24 hours, the customer gets the part for free.

31

Sonoco Products Company’s Semibulk Division takes the guarantee one step farther. In the past

few years, the division introduced a “Guaranteed Cost Savings Program”. If a customer request that they

be given a 5 % price cut, the division guarantees to find at least a 5% cost savings. This is. formalized

into a written contract. If they don’t realize the 5% savings, Sonoco agrees to pay the difference. Thus,

if Sonoco promised 5% and only deliver 2%, they would pay them the 3% in cash. If more than 5%

of savings are found, the customer gets to keep it all. To date, Sonoco has had no problem delivering

as guaranteed. Furthermore, managers find that it’s a great way to turn discussions away from price.

Knowing when to be the first to break away and unbundle is a difficult issue. Is there an

advantage to be the first to move to flexible market offerings, or is it better to be a rapid follower? To

be an industry paradigm-breaker, a supplier must have firm resolve and be willing initially to “take the

heat”. An intermediate strategy is to pilot test flexible market offerings in one of two ways: either add

a new service, but offer it as an option; or, pick one service from the present industry “standard”

package, and unbundle it, making it a surcharge option. Going against industry standards can be the first

step toward an industry paradigm shift and changing the rules about market offerings.

Many companies refrain from implementing flexible market offerings because they are held

hostage by the fear that requiring customers to pay extra for optional services will cause certain customers

to “walk”. Instead, managers should adopt the philosophy of MCI, which has adopted a flexible market

offering approach. Rather than worrying about accounts that they might lose, MCI managers focus on

all of the new business they will pick-up because their market offerings more closely meet customer

requirements at reasonable prices. Other suppliers that have implemented flexible market offerings have

found that they now get a better return on their resources by focusing them on segments and customers

that value them.

Timing is always a concern. As mentioned previously, AK20 Industrial Coatings (IC) initiated

its customer contribution to profitability approach in Europe about ten years ago. Because this was new

to the industry, and internally controversial, AKZO IC decided to implement it first in the Netherlands

32

and Germany, “home” markets where they were strongest. They then rolled-out the approach to

Northern Europe. Southern Europe was the last to be converted, and proved to be the most difficult

markets to bring around due to sales force resistance (because of anticipated decreases in their

commission incomes). Although AK20 IC lost some customers, because they no longer got a variety

of services for free, overall, AK20 IC’s perseverance has resulted in stable sales volume at significantly

better profitability, even during the current recession.

A final, paramount way of leading the pack is to be disciplined, operating within the imposed

structures of the flexible market offerings. To maintain this requires development of a most difficult to

acquire customer skill -- adroitly saying “no” to some customers. Flexible market offerings provide

customers with choices, from which they decide, but suppliers must be willing to say “no” to those

customers that want full-service packages at no-frills prices.14 Without this skill, flexible market

offerings devolve to business as usual, “giving it away”. Practiced deftly, it builds a reputation for the

supplier within the industry as firm, consistent and fair.

33

ENDNOTES

“‘The Secrets of the Production Line,” The Economist, 328 (October 17, 1992), 5-6.

?Fay Rice, “The New Rules of Superlative Service,” Fortune, 128 (Autumn/Winter 1993), 50-53. RahulJacob, “Beyond Quality & Value” Fortune, 128 (Autumn/Winter 1993), 8-l 1.

3Steven C. Wheelwright and Kim C. Clark, Revolutionizing Product Development, New York: The FreePress, 1992. B. Joseph Pine II, Bart Victor, and Andrew Boynton, ‘Making Mass Customization Work,”Harvard Business Review, 71 (September-October 1993), 108-l 19.

4Michael V. Mam and Robert L. Rosiello, “Managing Price, Gaining Profit,’ Harvard Business Review,70, (September-October 1992), 84-94.

‘V Kasturi Rangan, Rowland T. Moriarty, and Gordon S. Swartz,Industrial Markets,” Journal of Marketing, 56(0ctober 1992), 72-82.

“Segmenting Customers in Mature- -

6James C. Anderson, Dipak C. Jain and Pradeep Chintagunta, “Customer Value Assessment in BusinessMarkets: A State-of-Practice Study,” Journal nf Business-to-Business Marketing, l(1) 1992, 3-29.

‘Robin Cooper and Robert S. Kaplan, ‘Profit Priorities from Activity-Based Costing,” Harvard BusinessReview, 69 (May-June 1991), 130-137.

‘William Retch, “Activity-Based Costing in Service Industries,’ Cost Management, (Summer 1990) 4-14.For some recent work in this area, see Barry J. Brinker, editor, Emerging Practices in Cost Management,Boston: Warren, Gorham & Lamont, 1992.

William R. Benfield and Dale B. Christensen, Keening & Wholesaler’s House in OrderH o w A t t e n t i o n- - A -& Returned Goods Processing Can Improve the Bottom Line---’Reston (VA): National WholesaleDruggists’ Association, 1993.

“Michael Hammer, “Reengineering Work: Don’t Automate, Obliterate,” Harvard Business Review, 68(July-August 1990), 104-l 13.

“Philip Kotler, “Harvesting Strategies for Weak Products,”Business Horizons, 21 (August 1978), 15-22.

‘*Cooper and Kaplan, ibid.

13Robert S. Kaplan and David P. Norton, “Putting the Balanced Scorecard to Work,” Harvard BusinessReview, 71 (September-October 1993), 134-149.

14Rangan, Moriarty and Swartz, ibid.

EXHIBIT 1

AUGMENTING SERVICES, PROGRAMS AND SYSTEMS

corrective or remedial: problem-solving, trouble-shooting, operations assistance

fulfillment: availability assurance, order quantity, logistics, delivery, installation,maintenance, training, returns, warranty

Programs

economic: deals, terms, conditions, off-invoice, freight, coop allowances, rebates/bonuses

relationship: advice and consulting, specification, co-design, process engineering, processredesign, cost reduction, responsiveness to information requests, joint marketingresearch, co-promotions, communication, partnering and participation in othercustomer programs

Sys terns

linking: computer-to-computer ordering, shared material resource planning (MRP),information exchange (EDI)

efficacy: expert systems, logistics management systems, responsiveness systems

EXHIBIT 2

SIMPLIFIED, FLEXIBLE MARKET OFFERINGS

Standard

Outions

Standard

Options

a. Siemens Electrical Apparatus DivisionSmall Manufacturer Market Segment

Product(s) Services

metal clad boxes product availabilityde1 iveryproduct reliability warranties

electromechanical orelectronic instrumentcontrols

enhancementscommunications

peripherals

installationmaintenance contractstestsinspectionsdrawingsretrofit designs

b. Mitsubishi Electric Industrial Controls, Inc.Machining Center Segment

Product(s) Services

computerized numericalcontrols

CRT terminalprogram panelaxle and drive motorsspindle drives and motorsbasic software

product availabilitydeliveryinstallationset-uptrainingfield engineering

high-performance hardwareinteractive screensadvanced drives and motors

customized software2-year guarantee on parts, labor,

and repairretrofittingcustomized PLC design

.

EXHIBIT 3

BAXTER HEALTHCARE’S MARKET OFFERINGS TO TWO SEGMENTS:TRANSACTIONAL AND STRATEGIC HOSPITAL CUSTOMERS

Market Offering Element

Services

product returns

technical assistance

single point-of-contact

future disease incidence forecast

Programs

price deals

Corporate Customer bonus(financial incentive)

Executive Perspectives

consolidated purchasing reportsummary

ACCESS@ Program

Baxter Corporate Consulting

Systems

ASAP@ order-entry system

COMDISCO technology assessment

ValueLir@ stockless inventoryprogram .

COMDISCO asset managementsystem

Segment

Transactional Customer Strategic Customer

standard standard

standard standard

not offered standard

not offered option

standard

not offered

not offered

not offered

not offered

not offered

standard

not offered

option

option

standard

standard

standard

standard

option

option

standard

standard

option

option

EXHIBIT 4

FLEXIBLE MAbET OFFERING STIWI’EGY GRIDFOR SERVICES, PROGRAMS AND SYSTEMS

Service Element Deployment

Service Element Status

Do Not Market asMarket “Standard”

Market as“ODtion”

existing“standard”service

prune fromstandard offering

retain instandard offering

recast assurcharge option

existing“optional wservice

discontinueoption

enhancestandard offering

retain asvalue-addedoption

new service keep onshelf

augmentstandard offering

introduceas value-addedoption