Economists and marketers are divided on what drives growth. Most economists believe that efficient markets are the key. An efficient market requires transparent information about prices and products that can easily be substituted one for another. Price is set by market mechanisms and is assumed to trend towards the level at which supply and demand are balanced. Marketers have a very different view of the world. Marketing generally wants to create differentiated offers, that can be branded, and where the differentiation and brand are rewarded with a price premium and higher market share. Marketers try to create and shape markets, not just respond to supply and demand.
What about buyers? Some prefer commoditized products where they can easily substitute one vendor for another and drive prices as low as possible. In other words, they want to see the market at work. This is especially true of the procurement function in large companies. Other buyers are looking for a strategic edge for their own business, and want to buy the solution that will have the most economic impact and support their own differentiation. The business buyer, who is responsible for creating value at his own organization, often thinks in these terms.
This contradiction between commoditized market prices and differentiation is resolved in Economic Value Estimation (EVE™), an approach to value modeling developed by Dr. Tom Nagle in his classic book The Strategy and Tactics of Pricing. EVE is an exceptionally powerful approach because it blends* market forces with differentiation in a way that combines the most important characteristics of each. In Economic Value Estimation, one begins by recognizing that each customer differs in how much value they can get from a solution and by identifying the buyers alternatives. Buyers always have alternatives, and the price of alternatives is set by the market. But the alternatives are generally not identical. Each will have advantages and disadvantages for a specific customer and it is these differences that create differentiation, and with differentiation comes opportunity. In the real world of B2B selling, true commodities are rare, especially when the complete package of product plus services is considered. (See Figure 1., create in LeveragePoint for Value Management
When it comes to negotiating a price, companies that rely on ROI models or customer value maps tend to overprice the commoditized aspects of their solution and to underprice their differentiation. Value modeling using EVE helps marketing and sales understand what is commodity and what is differentiation and to focus on the latter. Companies that help their sales people understand the three or four key areas of differentiation over their competitors are able to capture value beyond the commodity market.
* Concept blending is a powerful way to generate new ideas. Two different ideas are brought together and related to create a new synthesis. See Mark Turner’s website Blending and Conceptual Integration.