“Value Merchants”

by James Anderson, Nirmalya Kumar and James Narus (HBS Press 2007)

The message of this book is to understand the value of your product to its buyers so that pressure for price concessions does not diminish its utility and profitability. In times of increasing competition, products are easily reduced to commodities by aggressive buyers who are seeking ever lower prices to meet their savings targets. Where a product is not clearly differentiated, and its true value to the user not established, it is difficult to substantiate the reasons for “premium” prices.

“Value Merchants” seeks to define customer value and show how to measure and demonstrate it, so that sales people become “value merchants” and can work with customers to understand how to add value to the products and services offered. The processes are exhaustively explored and priced so that the offering is enhanced and more clearly focussed on customer values. No mention is made of brands as a means of winning customer preference; the process is totally objective – ignoring the fact that buyers’ motivations are more subjective than most are willing to admit.

This is half a book. Its examples are principally from manufactured products and utilities, which are easy to cost and measure. Little is said in detail about service, other than as an adjunct to product. With manufacturing representing less than 10% of GDP in most developed economies, it is regrettable that no attempt is made to tackle the service economy.

The idea of “value management” is more interesting than the cost-reduction philosophy which is now prevalent. Real “value management” requires, however, a means of identifying, measuring and pricing intangible factors which are increasingly weighty in establishing value. Such intangible factors sometimes emerge as brands, and the value of brands can now be given weight in balance sheets to the satisfaction of accountants and auditors. Other intangible factors, such as fashion, are less tangible but often equally value enhancing.

A broader critique of the book is its obsession with data and objectivity. The analysis of data and the analysis of customer needs provide a basic defence against blind attempts to commoditise products and reduce prices. It may help even to disadvantage competitors in the short term but does not create long term customer preference. This requires a more strategic approach, built on close co-operation with customers (not just buyers), sharing knowledge and new ideas, so that trust is built on both sides. This does not invalidate data analysis and value measurement, but it recognises that concrete data are only part of an evaluation which increasingly includes intangible elements. Where those elements are recognised and their value is mutually agreed, the full value of the product/service and relationship is apparent and trust is built.

Value management is not just about analysing the tangible attributes of a product but about understanding how the premium enjoyed by market leaders is achieved and how it can be sustained and even enhanced. This is not to create some new form of “tulip mania”, but to understand all elements of value and to manage them in a mutually satisfactory and sustainable way.

Adrian Davies

30th March 2008