Flexible Market Offerings:
Naked Solutions, With Options
James C. Anderson
Northwestern University
James A. Narus
Wake Forest University
ISBM REPORT 7-1994
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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 Wholesale
Distribution, and Professor of Behavioral Science in Management, J. L. Kellogg Graduate School of
Management, Northwestern University. He is also the AT&T ISBM Research Fellow at the Institute for
the Study of Business Markets (ISBM), located at Penn State University. James A. Narus is Associate
Professor 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 the
tremendous contributions made by the managers who participated in the field research. Finally, they are
particularly indebted to Ame Bennbom of ABB Asea Brown Boveri Ltd. for his support throughout this
research and for the phrase “Naked solutions, with options”.
Send correspondence to:
James C. Anderson
Department of Marketing
J. L. Kellogg Graduate School of Management
Northwestern University
Evanston, 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 lost
a multimillion dollar contract to a renegade, “bare bones” competitor. The customer had
been an account for over fifteen years and the manufacturer felt that it completely
understood its requirements. At contract renewal time, manufacturer sales personnel had
visited the customer’s plant site and come away with a list of detailed product
specifications and service requests. In response, the manufacturer had developed a
premium-priced, “full-service” package that completely met stated customer
requirements. Managers were shocked when they learned that they had lost the account
to a new competitor that had offered a low-priced, “no frills” package. Not only did this
competitive offer contain no support services, but the products included also fell slightly
below the customer’s stated specifications. When asked why they had switched to the new
vendor, customer managers replied that the competitor’s quote was so low that even if
the products failed, the firm would have enough funds available from the cost savings to
readily pay for a consulting engineering company to correct the problems. In retrospect,
manufacturer management concluded that if its sales force had spent more time
understanding what the customer actually valued and was willing to pay for, it might
have avoided this sizeable loss in sales.
In an attempt to grab market share in a stagnant, commodity marketplace, a textile
manufacturer 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 until
the customer firm used it, the textile manufacturer agreed to: lease warehouse space in
the customer’s plant to store the inventory, furnish an optical scanner and computer
2
system to monitor textile consumption, and pay for insurance against inventory damage,
theft, or loss. Not surprisingly, the customer immediately jumped at the opportunity to
implement 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 program
for the apparel manufacturer. Moreover, after a short-term increase in its share of the
customer’s business, the textile manufacturer saw its share and those of its competitors
return to their pre-program levels. And, other apparel manufacturers began to demand
the same service. Taking stock at the end of the year, the textile manufacturer discovered
that the consignment program had resulted in an overall loss of several million dollars
in 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 satisfaction
ratings 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
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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.
5
At least three different kinds of insights can be gained from this process.
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 “fourthquarter 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
6
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.
7
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.
8
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 activitybased 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
10
services for the next year are recommended.
Arthur D. Little, Inc. (ADL) provides another outstanding example. As opposed to most
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, whereAK20 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 pricing implications of flexible market
offering and conclude this section with two recent examples.
- - - - - - - - - - Insert Exhibit 4 here
~_-M------- Reevaluating Existing Standard Services
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 candidates.
One source is those services that are rarely used by most segment members.
Because , of differential learning or experience, most firms no longer believe they gain value from a
service. 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 valueadded 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 prespecified 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
“Baxter dollars” based on the amount and growth in their purchases from Baxter Healthcare, which can
then be applied to any of a number of optional services, programs and systems. In this way, strategic
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 highlyvalued 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 consumptionmonitoring, 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
18
value increases.
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 in the collaborative segment is add new services that anticipate and are
responsive to the changing requirements of collaborative customers. Each year, Baxter Healthcare
introduces new standard (as well as option) elements to its strategic customer segment offering that are
responsive to the evolving 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
19
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
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 singlesource 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, a supplier
preserves the wider latitude in alternatives of if and how to be paid for them. One alternative is to show
the element charge on an invoice and then “net out” the charge for a specific reason (e.g., 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 SPENDTHRIFTS
TO 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
24
the form of a “system” of products a services.
Allen-Bradley’s (A-B) Industrial Automotive Products Division puts this philosophyinto 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 problemsolving 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 adequateunderstanding 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 thecosts, 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 laptop 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 shortand 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,singlesource, 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 crosssubsidized 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). AlthoughAK20 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. Rahul
Jacob, “Beyond Quality & Value” Fortune, 128 (Autumn/Winter 1993), 8-l 1.
3Steven C. Wheelwright and Kim C. Clark, Revolutionizing Product Development, New York: The Free
Press, 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, “Segmenting Customers in Mature
Industrial Markets,”-Journal of
- Marketing, 56(0ctober 1992), 72-82.
6James C. Anderson, Dipak C. Jain and Pradeep Chintagunta, “Customer Value Assessment in Business
Markets: 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 Business
Review, 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
H o &
w Wholesaler’
A s -tHouse
t -ine Order
nA t -i o n
& Returned Goods Processing Can Improve the
Bottom
Line
Reston
(VA):
National
Wholesale
---’
Druggists’ 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 Business
Review, 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, process
redesign, cost reduction, responsiveness to information requests, joint marketing
research, co-promotions, communication, partnering and participation in other
customer 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
a. Siemens Electrical Apparatus Division
Small Manufacturer Market Segment
Product(s)
Services
Standard
metal clad boxes
product availability
de1 ivery
product reliability warranties
Outions
electromechanical or
electronic instrument
controls
enhancements
communications
peripherals
installation
maintenance contracts
tests
inspections
drawings
retrofit designs
b. Mitsubishi Electric Industrial Controls, Inc.
Machining Center Segment
Product(s)
Services
Standard
computerized numerical
controls
CRT terminal
program panel
axle and drive motors
spindle drives and motors
basic software
product availability
delivery
installation
set-up
training
field engineering
Options
high-performance hardware
interactive screens
advanced drives and motors
customized software
2-year guarantee on parts, labor,
and repair
retrofitting
customized PLC design
.
EXHIBIT 3
BAXTER HEALTHCARE’S MARKET OFFERINGS TO TWO SEGMENTS:
TRANSACTIONAL AND STRATEGIC HOSPITAL CUSTOMERS
Market Offering Element
Segment
Services
Transactional Customer
Strategic Customer
product returns
standard
standard
technical assistance
standard
standard
single point-of-contact
not offered
standard
future disease incidence forecast
not offered
option
price deals
standard
standard
Corporate Customer bonus
(financial incentive)
not offered
standard
Executive Perspectives
not offered
standard
consolidated purchasing report
summary
not offered
standard
ACCESS@ Program
not offered
option
Baxter Corporate Consulting
not offered
option
ASAP@ order-entry system
standard
standard
COMDISCO technology assessment
not offered
standard
ValueLir@ stockless inventory
program .
option
option
COMDISCO asset management
system
option
option
Programs
Systems
EXHIBIT 4
FLEXIBLE MAbET OFFERING STIWI’EGY GRID
FOR SERVICES, PROGRAMS AND SYSTEMS
Service Element Deployment
Do Not
Market
Market as
“Standard”
Market as
“ODtion”
existing
“standard”
service
prune from
standard offering
retain in
standard offering
recast as
surcharge option
existing
“optional w
service
discontinue
option
enhance
standard offering
retain as
value-added
option
new service
keep on
shelf
augment
standard offering
introduce
as value-added
option
Service Element Status