a different direction. Given that customers are happier paying a lower price, there appears to be tension between customer value as maximum price or satisfaction received. Yet the individuals providing these definitions do not go into much detail about what their definition means, nor do they discuss the conceptualizations of customer value that their definitions suggest.
Another problematic aspect about customer value that has not been addressed is how disparate constituent elements defining value might be combined. As an instance of this, consider benefits mentioned in the preceding definition from Smith. To make this tangible, consider two benefits for titanium dioxide, which is a pigment that whitens, brightens, and opacifies (as an ingredient in coatings). Each benefit is an improvement over a previous industry standard. Dispersability improves by reducing (from thirty minutes to ten minutes) the time required to reach 7 Hegman fineness units in a Cowles high-speed disperser. The second benefit, gloss, improves from 78 to 86 60° gloss units. How, specifically, a customer manager would combine Hegman fineness units and 60° gloss units is not at all clear. This example is typical of business markets where benefits—desirable changes in performance—are expressed in precisely defined scientific, engineering, and cost-accounting terms.
We find a number of elements in definitions of customer value: benefits, benefits expressed in monetary terms, costs, costs expressed in monetary terms, and price. What is lacking is a consideration of the commensurability of measurement units, which is essential to arrive at a meaning for customer value. Just as when one learns to combine fractions in school, one must first find a common denominator, convert the respective numerators to their units on this common denominator, and then combine them to reach an answer. So it would appear to be necessary in conceptualizing customer value, too. Of the five elements just given, however, only three have direct commensurability: benefits expressed in monetary terms, costs expressed in monetary terms, and price.
Conceptualizing Customer Value to Guide Its Assessment in Practice
With its emphasis on assessing customer value in practice, customer value management requires a conceptualization of customer value that is well reasoned, comprehensive, and easily grasped. We start by defining customer value: “Value in business markets is the worth in monetary terms of the technical, economic, service, and social benefits a customer firm receives in exchange for the price it pays for a market offering.”3 We elaborate next on some aspects of this definition.
First, we express value in monetary terms, such as dollars per unit, euros per liter, or renminbi per hour. Economists may care about “utils,” but we have never met a manager who did!
Second, we can conceptually represent any market offering as a set of economic, technical, service, and social benefits that a customer firm receives. By “benefits,” we mean net benefits, which include any costs a customer incurs in obtaining the desired benefits, except for purchase price.
Third, value is what a customer firm gets in exchange for the price it pays. Raising or lowering the price does not change the set of benefits that an offering delivers to customers, only the willingness of those customers to purchase the offering. Thus, we conceptually view a market offering as having two elemental characteristics: its value and its price. That we do not include price as part of customer value is a critical distinction between our conceptualization and many others. To us, having price as a part of value adds considerable confusion. If we were to include price, we could significantly improve the value of our offering simply by cutting price dramatically, which goes against what most suppliers have in mind when they think of improving the value of their offerings to customers. It also goes against the fundamental concept of exchange in markets, where customers exchange money (i.e., price) with suppliers for offerings that the customers value.4
Finally, we contend that customer value in business markets is a comparative concept in which customers assess the value of a given market offering relative to what they regard as the next-best alternative to it. There always is an alternative. It might be:
1 A market offering from a competitor using comparable, or alternative, technology to fulfill the customer’s requirements and preferences. This is the most frequently encountered situation in business markets.
2 The customer’s decision to source an item from an outside supplier or to make the item itself. An example is a company that decides to outsource a part of its IT operations to an Indian supplier.
3 The status quo (i.e., not doing anything). Companies deciding whether to expand their facilities or purchasing management consulting services are examples.
4 The most recent offering from the same supplier. A challenge that Microsoft had, for example, was persuading its customers to upgrade from its Windows NT/2000 Server to its Windows XP Server when many of them still were satisfied with the performance of NT/2000 Server.
The Fundamental Value Equation
We can capture the essence of the concepts in our definition of value in a fundamental value equation:
(Valuef — Pricef) > (Valuea - Pricea) (Eq. 2-1)
In this equation, Valuef and Pricef are the value and price of a particular firm’s market offering, and Valuea and Pricea are the value and price of the next-best-alternative market offering. In this fundamental value equation, we subtract price from value, relating them to one another in a difference formulation. We demonstrate the superiority of this formulation over a ratio formulation to interested readers in appendix A.
We do not specify a particular perspective in our definition of value, such as the customer firm’s point of view, because we regard value in business markets as a construct, similar to market share. Because it is a construct, in practice, we can only estimate value, just as we can only estimate market share. For example, the supplier may overestimate the value of a given market offering to a customer, while the customer may underestimate the value. The supplier may have a significantly different perception than the customer of the technical, economic, service, and social benefits that the customer firm actually receives from a market offering or of what specific benefits are actually worth in monetary terms to the customer.
Value changes occur in two fundamental ways. First, a market offering could provide the same functionality or performance while its cost to the customer changes. Remember, price is not considered in this cost. Thus, the technical, service, and social benefits remain constant while the economic benefits change. For example, one product has higher value than another product because it has lower conversion costs and has the same performance specifications.
Second, value changes whenever the functionality or performance provided changes while cost remains the same (again, price is not a part of this cost). For example, a redesigned component part now provides longer usage until failure for the customer’s customers, yet its acquisition and conversion costs to the customer remain the same.
Even if functionality or performance of a product is lowered, it may still meet, or even exceed, a customer’s specified minimum requirement. More is better for some, but not all, customer requirements. Exceeding minimum requirements continues to deliver benefits to the customer, even though the customer deems a lesser level to be acceptable. For example, lowering the melting point of a plastic resin beyond a specified temperature requirement continues to lower the customer’s energy costs and to reduce the time it takes to convert the resin into a molded plastic part.
In our definition value is the expression in monetary terms of what the customer firm receives in exchange for the price it pays for a market offering. Because make-versus-buy decisions are possible in business markets, the value provided must exceed the
