Changing Trends in Marketing- Value Communication in B2B marketing
Posted in Marketing & Strategy Articles, Total Reads: 900
, Published on 20 March 2015
In our last post (link here) where we discussed on how in today’s world of business for B2C, value communication has become important as compared to price communication here we would do the same for a B2B scenario. Though the fundamentals remain the same but in B2B marketing the method of value communication and value derivation itself is quite different, primarily because of two major reasons:
1. B2B customers are far more rational in the process of decision making, because the stakes are high, the products costs a lot and the ill effects of a bad product can be even worst
2. B2B customers – the community is quite small and connected, with each organization having its own specialized need and hence a market survey method (discussed for B2C) do not help here. It is worth mention here that when we talk about B2B community we are talking about individual players in terms of numbers only else the volume of transactions is quite high in B2B as compared to B2C.
In order to understand the B2B market and to understand the process of value creation, let us consider the following example:
Let’s take an example of an automobile manufacturer who transact with several B2B players for different components like Tyres from Tyre manufacturer (T1, T2), glasses for window screens, screws, nuts & bolts so and so forth. Taking up the role of, say, Tyre manufacturer and persuading the customer to buy the product (and built a long term relationship) comes from the result of value creation for the buyer. This process involves complexity for the manufacturer which makes the B2B transaction difficult. More is added to complexity considering the volume of transactions and the total cost of products.
Here, we see that the process involves three main stakeholders viz. the customer who buys the car as the end customer, the manufacturer of the car as the buyer and the Tyre manufacturer as the supplier. In an ordinary scenario, the goal of the manufacturer would be to get the least price from the supplier while for the supplier it would be to get the best price from the manufacturer. However, such an approach (popularly known as Buyer’s orientation) would ultimately lead to a price war where no one would be able to get benefit because when supplier tries to reduce price and remain competitive, in order to maintain his margin he would also reduce cost which would subsequently impact quality. On the other hand the supplier would also suffer as the prices would be much lower as compared to what he is capable of getting. This can be overcome by what is known as – “Value creation and Value communication”.
In order to understand the process of value creation and communication, it is important to understand value elements – which are nothing but the components of a market offering (MO) which can create value. The major value elements for a MO (combination of product, process, systems and programs) are:
• Benefits: What are the gains which a firm would get from the offering?
• Price: The price of the product which is charged by the supplier to the customer
• Cost (Other than Price): this is the cost which is incurred by the buyer for buying the product (search cost etc.) as well the cost incurred by the buyer for deriving the benefit (which may or may not be used by the buyer).
• Placeholders: All those considerations which cannot be classified into the above mainly because they are not explicitly quantitative like brand etc.
• Assumptions: These are the assumptions made while deriving the benefits from the MO.
Now, it is important to quantify the value elements of a product as far as possible so that the comparison is easy. For example, simply saying that the Tyre made by manufacturer T1 is using X1 material which provides longer life and better grip does not help the buyer for making relevant comparison, instead a proposal like Tyre made by manufacturer T1 using X1 provides 10 years of life and 2 times the grip of rubber Tyre makes more sense and is easy to compare.
Once individual elements are quantified as explained above (other than the placeholders and of course the assumptions), then we need to form is the value-word equation. A value word equation is helpful to understand and summarize what is going into making up the value of the product and what is the cost associated with it.
Value of offering = benefits (in monetary value) – cost other than price (in monetary value)
In our example of Tyres suppose we have the only benefit as life of Tyre by manufacturer T1 is 10 years as compared to 5 years but at the same time it requires a special plug-in of Rs.200 to install that Tyre. Then suppose the price of competitor Tyre (for 5 years) is Rs. 1000 then
Benefits (for T1) = Rs.2000 (for the 2 * 5 years)
Costs other than price (for T1) = Rs.200
Therefore, value of offering by T1 = 2000 – 200 = 1800
And, Value of offering by competitor = Rs. 1000
Writing the value-word equation is a necessary step for the following reasons:
1. The value-word equation shortens the value elements which makes it easy to comprehend and access if anything is missed
2. The value-word equation is helpful for people to communicate the value creation process as mere numbers makes communication difficult
From the value-word equation, it is clear that the value which T1 created is more than that of the competitor and hence he can charge a better price which can be theoretically determined by the fundamental value equation:
V0 - Vc >= P0 - Pc
Where V0 is the value of T1 MO, P0 is the price of our offering, Vc is the value of competitor MO and Pc is the price of competitor offering.
Therefore, P0 (Max) which is the maximum price which T1 can charge is:
P0 (Max) = (V0 –Vc) + PC
However, in a competitive market it would be highly unlikely that a supplier would be willing to switch to T1 without having any benefit in terms of value and hence the price of MO by T1 would be somewhere between Pc and P0 (Max). This in turn is determined by the share of value, which determines out of total additional value created by the MO what part of value would be kept by the suppliers and what would be retained by manufacturers.
It is worth to mention here that above is a very simplistic example of value creation, delivery and communication while in real life scenarios there can be multiple avenues to create and communicate value.
However, It is difficult to create and communicate value because of one of the following reasons:
• The product in discussion is a commodity product with little or no differentiation which would imply V0 - Vc tends to zero meaning only differentiation factor is price
• The realization of value is bit subjective in nature especially when benefits cannot be quantified which makes communication of value difficult
• The process may of buying in B2B is such that there is little scope for creation of value primarily because the specifications to the product are very specific with little scope for modification, this is generally true for B2G (Business to Government) transactions.
• The benefits of value is difficult to understand because it may not be very apparent or intuitive
• The orientation of business may be buying orientation where focus is only on price (which generally happens in a commoditized business purchase)
What is the way out for B2B selling?
The below flowchart explains a stepwise process of what a seller in B2B scenario should do for making the deal. Though the ways of negotiation, type of buyer etc. may be tricky to find, it is advisable to do a background research on buyer to get an appropriate if not accurate nature of buyer as it helps in directing the efforts towards selling and identifying the points of value creation and communication.