“Assessing value for performance contracting
solutions”
A Case study of No Limit Ships hydrographic survey vessel builder
Author:
Árpád-Szilárd Márton
University of Groningen
Masters Program in Business Administration Faculty of Marketing Management
University of Groningen
“Assessing value for performance contracting solutions”
A Case study of No Limit Ships hydrographic survey vessel builder
Department of Marketing
Master Thesis (20 credits)
Completion Date: 10.04.2010
Author: Árpád-Szilárd Márton
Address: Crangului Street Bl:17 Ap: 19, Sfantu Gheorghe, Jud. Covasna,
Romania
(In NL:Van Julsinghastraat 47, 9724 LP Groningen )
Phone number: +31(0)631207642
E-mail: szilardka_tm@yahoo.com
Student number: s1841017
Supervisor: Dr. Jenny Van Doorn
External Supervisor:
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Management summary
Keywords: Performance contracting Conjoint AnalysisValue in use analysis Willingness to pay
Customer value assessment
The aim of this research was to build a customer value assessment model for performance contracting solutions which is well embedded in literature nevertheless offers practical insights for business marketing managers on how to assess customers‘ preferences, their costs (total cost of ownership) and extra benefits afferent with the usage of performance contracting solutions, and their willingness to pay for these solutions. During the thesis we compare two competing methods: Value in use analysis (VIU) and Conjoint Analysis (CA). We investigate to which extent value in use analysis and conjoint analysis can be used for assessing value for complex industrial solutions like performance contracting solutions. We identify the possible advantages and limitations of each method in assessing customer value for performance contracting solutions.
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Acknowledgements
I want to express my special thanks to my thesis supervisor Dr. Jenny van Doorn for the help, advice and thorough guide she gave me throughout the whole thesis writing process. Many thanks for her support that made this research a reality! Also would like to thank my family for the tremendous support they gave me throughout my study years, for being there for me whenever I needed help and for having faith in me.
Furthermore, I would like to thank my professors for providing me outstanding education, and all others from the University of Groningen for creating an exceptional atmosphere and the support for learning, which contributed a lot to my professional development!
I would like to thank the ―No Limit team‖ for all the help and practical advice they gave me during my internship at No Limit Ships bv., it was a very nice experience!
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Table of contents
1. Introduction………..…… 7
2. Literature framework……….………… 12
2.1 Conceptualization of value in business markets……….………… 12
2.2 Assessing Customer Value in Business Marketing……….………... 15
2.2.1 WTP gauging methods ………....….…... 19
2.2.2 Cost and benefit data assessment methods………..23
2.3 Value creation through performance contracting solutions……….……... 25
2.3.1 Introduction – Background of Performance contracting……….…... 25
2.3.2 Definition of performance contracting……….……26
2.3.3 Differences between regular and performance contracting solutions….….27 2.3.4 Pitfalls of performance contracting……….….……28
2.4 Assessing value for performance contracting solutions……….……..29
2.4.1 Value assessment model for performance contracting solutions….……….30
2.5 Summary……….……….………32 3. Research design……….………… 33 3.1 Research purpose………..…………33 3.2 Research method……….…….……34 3.3 Data collection ………...……… 35 3.4 Data analysis ……….……….…… 37 4. Results……….. 39
4.1 Case no. 1 (Company 1)……….…….……... 39
4.1.1 WTP Calculation……….…………..…. 39
4.1.2 Value in use analysis……….. 41
4.2 Case no. 2 (Company 2)……….…….…….43
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4.2.2 Value in use analysis……….…..………44
4.3 Case no. 3 (Company 3)……….……..………46
4.3.1 WTP Calculation……….……….……..……..46
4.3.2 Value in use analysis……….………..….……48
4.4 Case no. 4 (Company 4)....………..…..…….……..50
4.4.1 WTP Calculation……….………….…50
4.4.2 Value in use analysis……….…..….…51
4.5 Comparing results from CA and VIU………...………...52
5. Conclusions and recommendations………...………... 56
6. References………..……. 59
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1. Introduction
―
W
e are facing the severest crisis since the Great Depression‖ (The World Bank, 2009)! ―The firms that will survive these harsh economic times (…) are those who find new, efficient ways to do business (Soros, 2009).‖8
and his/her real needs, and assess these needs first with market-sensing and customer-linking capabilities that lead to superior organizational performance (Day at al 1994). In recent research about customer value, and customer solutions Tuli et al (2007) argue that customers do not see products and services bundled in different forms as solutions; they rather see solutions as a set of customer-supplier relational processes that accompany them along their operations to have the desired outcomes. The tendency went from the initial commoditization attempts and price wars to customers who expect turnkey solutions from suppliers, thus buy outcomes, not physical products or accompanying services. Even though performance contracting in essence sounds promising: ―Pay for performance!‖, if the vendor offers performance contracts that do not deliver greater value for the targeted customer segment than the (traditional) alternative products and services the clients can use, than using performance contracts has no rationale point. Developing new solutions that would fail would mean a waste of resources, and no firm would want to experiment with that in tough economic times (Grewal & Tansuhaj, 2001), like the one we are facing now. This view is also sustained by the findings of Lapierre, Tran-Khanh & Skelling (2008) who argue, that anticipating the value that key customers will want in the future becomes a matter of survival for companies, in an increasingly turbulent business environment. Hence, it is vital that customer value is assessed before spending on the development of any new solution, yet assessing customer value is always a challenging task (Van Der Haar, Kemp , Omta 2001).
Because until recent years the focus on business markets was on products and services, the literature stream on value assessment for classic business models is considerable. A range of value assessment methods are in use for products, yet we still do not know if these methods can be used effectively for assessing value for new more complex solutions, preferred by industrial buyers as shown in the results of Palmatier et al (2008) and Tuli et al (2007).
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development and launch of new products and services (Grunert et al, 2009). Anderson, Jain, and Chintagunta (1992) besides arguing about the importance of WTP when assessing customer value also point out that in the case of industrial products, the value analysis should also be concerned with use value—the performance and reliability of the product — rather than its existing value (based on prestige or aesthetics, or exchange value). It is hard to determine the value in use of a product before actually using it, but as Grewal & Tansuhaj (2001) argues, value in use can be assessed by gathering and analyzing cost and extra benefit data afferent with one solution‘s utilization, hence VIU has to be viewed with respect to the set of benefits that the customer receives from the usage of the product offering compared to the next best offer (Anderson, Jain, and Chintagunta, 1992).
Busacca et al (2008) argue that for gauging customers willingness to pay for a product or to assess the value in use of that product, in the business marketing literature we can find two groups of value assessment methods (described more extensively in part 2.2). Suppliers use cost and benefit analysis tools to gather data on customers‘ total costs (TCO), and benefits resulting from their market offer‘s usage, and perceived value analysis tools to assess customers willingness to pay for that offer (Busacca et al 2008).
―Cost and benefit data assessment methods‖ are used to measure and compute cost and benefit data. On business markets, field value in use analysis is most frequently used for this purpose (Piscopo, Johnston and Bellenger 2008). This method measures the costs that are involved in the acquisition and usage of purchased products and services, going beyond price to consider all costs of an offer (Wouters et al. 2004).
As argued before the second category of value assessment methods is ―perceived value analysis‖. The methods from this category are used mostly for determining the willingness to pay of customer for different market offers. Research methods from this category are: focus groups; experimental auction; compositional approach; conjoint analysis; etc. (Plank & Ferrin, 2001).
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estimating willingness to pay of customers for products and services (Grunert et al, 2009; Wittink et al, 1992). CA practically presents different complete product concepts to customers and assesses the value of different attribute and level combinations separately (Cohen et al 1997), other methods described in academic literature having deficiencies in gauging with such preciseness the willingness to pay of customers (Green & Srinivasan 1990).
These two classes of value assessment methods are successfully used on business markets for assessing the value of industrial products, yet their effectiveness for assessing value for complex industrial solutions is still unclear. The present research has two major aims:
1. To investigate whether value in use analysis and conjoint analysis from these two method classes can be used for assessing value for complex industrial solutions like performance contracting.
2. To compare the competing methods: Value in use analysis versus Conjoint Analysis- to identify the possible advantages and limitations of each method of assessing customer value in performance contracting solutions, to offer valuable means for managers regarding customer value assessment in performance contracting solutions.
Measuring the total costs of an offer will not provide information on how customers value the brand of the market offer, or what risks customers associate with the offer. And yet all non cost based elements of the offer influence customers in their choice making. The value of non cost based elements of a market offer, e.g. brand equity or the risks associated with the offer - is difficult and beyond the purpose of a field value in use assessment conducted at the customer company‘s site, yet the value of all these elements can be assessed with conjoint analysis. The value of all these features of the market offer will be then reflected in the total willingness to pay of customers. Hence throughout the research we will use value in use analysis to assess cost and extra benefit data, and we will employ conjoint analysis to measure customers‘ willingness to pay, hence assess all tangible and intangible benefits or sacrifices customers see in performance contracting (e.g. brand equity; risk perceived by the customers, etc.).
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2.
Literature framework
Conceptualizing value is a topic of major interest in business marketing. The literature gives many definitions of value in business markets, and offers us insights about how to measure the value of products and services. Customers though do not see products and services bundled together as solutions, instead they see it as customer-supplier relational processes (Tuli et al 2007). The academic literature on measuring the value for customer solutions it is still scarce, although in recent years the stream started evolving. This leaves uncertainty for business managers who intend to engage in customer-supplier relationships, but they miss the tools of assessing the value created by such relationships. In this chapter, we will review the existing literature on ―value‖ in business markets, its assessment; furthermore, we will investigate the latest insights in performance contracting customer solutions. Finally based on previous findings we will create our value assessment model for performance contracting customer solutions, to offer valuable guidelines for industrial managers.
2.1 Conceptualization of value in business markets
Before trying to measure what customers‘ value, it is imperative to have an in-depth knowledge about the meaning of value in business markets. Defining the concept of value is becoming a relevant topic, but many firms often cannot define value or measure it (Lindgreen & Wynstra 2003). Still until this day just little research ―examined what (...) value is, how it is produced, delivered and consumed and how it is perceived by the customer‖ (Tzokas & Saren, 1999). The role of marketing here is to assist the firm to create value for its customers that is superior to competition (Tzokas & Saren, 1999). If the firm can realize this, Doyle (2000) argues that the firm can deliver superior value to its shareholders. A number of authors like Buzzell (1987), Webster (1994), and Day (1997) have linked achieving higher customer value to higher profitability for the company.
The concept of value is not new in marketing, argue Lindgreen & Wynstra (2003). They illustrate that buyers and sellers have long gained value from their business relationships and, as a result, have continued to stay in these relationships (Lindgreen & Wynstra 2003). This is an important finding because customers, who are satisfied with a firm‘s goods or services that
Note: No Limit Ships, Groningen (The Netherlands) based shipyard, uses the latest technology for
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offer them value, remain loyal to that firm and place their future purchases with that firm (Bolton& Drew, 1991; Fornell, 1992; Rust & Zahorik, 1993).
Although the concept of value is not new, academicians started to study it more profoundly just in recent years (Lindgreen & Wynstra 2003), though writers began to study value from the mid-20th century (Payne & Holt, 1999). This is due to the fact that in the past value creation was not always a necessary condition for companies for making profit; because markets were regulated, production resources were scarce, distribution channels were controlled, or poorly performing firms were acquired and rationalized (Doyle, 2000). This is not the case anymore, nowadays ―value is not only an increasingly relevant concept in the area of marketing (Wouters, Anderson, and Wynstra, 2005), but business markets can only be understood applying the concept of value (Walter, Ritter & Gemünden, 2001). Anderson and Narus (1999) see value ―as the cornerstone of business market management because of the predominant role that functionality or performance plays in business markets.‖, as it can be said to be very closely connected to the concept of total cost of ownership (Wouters, Anderson, and Wynstra, 2005). In the definition of Anderson and Narus (1998) value in business markets is the worth in monetary terms of the technical, economic, service, and social benefits a customer company receives in exchange for the price it pays for a market offering. Flint, Woodruff, and Gardial (1997); and Wilson, (1995) argue that value can be regarded as a trade-off between benefits and sacrifices.
Value in business markets is defined many times in monetary terms (Anderson and Narus 1998); while other authors use a broader definition of value, which also includes non-monetary revenues, such as market position, social rewards, and competence (Wilson, 1994 1995). To comprise all the definitions and meanings given to ―value‖ by a broad range of authors it is certainly challenging and it is beyond the scope of this research. Furthermore, it is rather questionable if a generally valid definition can or has to be given to ―value‖ having in view the broad range of situations in which value can be created in business markets. Anderson and Narus (1999) argue that the value of one and the same product can be very different for different customers; they specifically look at the value in use of a product in a particular usage situation. The view it is already supported by the work of Miles (1961) arguing, ―there is no universally agreed-upon view of value‖.
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Goldstein (1996) defining value as ―the emotional bond established between a customer and a producer after the customer has used a salient product or service produced by that supplier and found the product to provide an added value.‖ Several academicians ―synthesize‖ value in the perspective of competitive advantage as the ability to make customers an offer what they perceive as providing superior value compared to what competitors offer (Doyle 2000); others see it in relation with two other constructs: customer-perceived quality and customer satisfaction (Ulaga & Chacour 2001). Van Der Haar, Kemp, Omta (2001) define customer value as the concept which ―assesses the value a product offers to a customer, taking all its tangible and intangible features into account‖.
Kotler (2000) defines value in a scheme having three dimensions ―Total customer value‖; ―Total customer cost‖, and ―Customer-delivered value‖. These 3 dimensions build up the whole picture in terms of benefits and costs customers expect from a given good or service, and the difference the value delivery makes for the customer. Net customer value is not a simple concept, its value being always intuitively calculated by the customer, based on what values and believes in one product or service (Butz & Goldstein 1996). Butz & Goldstein (1996) further argue that suppliers rarely will know initially which customers, if any, are receiving a sufficiently high net customer value to cause them to buy their market offering. Ulaga & Eggert (2006), develop an overall measure of value creation in key supplier relationships. Ulaga & Eggert (2006) beyond defining customer value as the trade-off of benefits and sacrifices, go further and find that in business markets cost reduction is only one source of value in business relationships. When considering costs and extra benefits one should think beyond economic costs (Ulaga & Eggert, 2006). Ulaga & Eggert (2006) suggest thinking of value in terms of a matrix that distinguishes between two fundamental dimensions of value creation (costs and benefits) and three levels at which these drivers function (the core offering, the sourcing process, and the customer firm‘s internal operations).
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Anderson and Narus (1998): ―value in business markets is the worth in monetary terms of the
technical, economic, service, and social benefits a customer company receives in exchange for the price it pays for a market offering.‖
Butz & Goldstein (1996): ―The emotional bond established between a customer and a producer
after the customer has used a salient product or service produced by that supplier and found the product to provide an added value.‖
Ulaga & Eggert (2006): ―On business markets value distinguishes between two fundamental
dimensions of value creation (costs and benefits) and three levels at which these drivers function (the core offering, the sourcing process, and the customer firm‘s internal operations).‖
Van Der Haar, Kemp , Omta (2001): ―The customer value concept assesses the value a
product offers to a customer, taking all its tangible and intangible features into account.‖
Ulaga & Chacour (2001): (1) ―customer-perceived value‖ is customer-perceived quality and
customer satisfaction. (2) ―Value is a trade-off between benefits and sacrifices perceived by the customer in a supplier‘s offering.‖
Flint, Woodruff, & Gardial (1997); and Wilson, (1995): ―value can be regarded as a trade-off
between benefits and sacrifices.‖
Miles (1961): ―there is no universally agreed-upon view of value‖
Walter et al (2001): “In the context of this study we understand value as the perceived trade-off
between multiple benefits and sacrifices gained through a customer relationship by key decision makers in the supplier‘s organization.‖
Consequently in this research we agree with the definition of Ulaga & Chacour‘s (2001): ―value is what customers perceive they get for their sacrifices (can be monetary or non-monetary)‖, and with Ulaga & Chacour, (2001); Flint et al, (1997); Walter et al (2001); Anderson and Narus (1998): ―value is a trade-off between benefits and sacrifices perceived by the customer in a supplier‘s offering‖ (Ulaga & Chacour, (2001); Flint et al, (1997); Walter et al (2001); Anderson and Narus (1998)). Hence customers always intuitively ―put on balance‖ the benefits and sacrifices of a market offer.
Therefore in this study we use the term ―value‖ as the customer perceived trade-off between multiple benefits and sacrifices associated with the market offer of a supplier (Walter et al 2001).
2.2 Assessing Customer Value in Business Marketing
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challenges for business marketing managers is to incorporate the ―voice of the customer‖ into the blueprint of new products and services (Van Der Haar, Kemp , Omta 2001).
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Reddy (1991) suggested five ways customers find out the value of an offering: use value, value analysis, value engineering, value in-use and perceived value. Anderson et al (1999) in an experimental examination, identify nine value assessment methods buyers can use to assess value for a market offering: internal engineering assessment, focus group value assessment, direct survey questions, importance ratings, benchmarks, conjoint analysis, compositional approach, indirect survey questions and field value-in-use. The typology used by Anderson et al (1999) is more inclusive, the study was directed at identifying best practices which firms can use, hence not all the methods described in this work can be considered as research tools for scientific research purposes. In the following section I will shortly describe the value assessment methods most frequently used on business markets to assess the value in use of a market offer and the willingness to pay of customers for that market offer.
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knowledge about a solution or no former experience with it cannot accurately assess its value (Ellram & Siferd, 1998). A ―product, service or solution is worth as much as customers‘ are willing to pay for it‖ (Kohli & Mahajan, 1991), and for assessing this perceived value analysis tools (e.g. conjoint analysis) can be used with success. On the other hand often, perceived value analysis tools (conjoint analysis), are not enough to assess the total value of an industrial product, or solution, many times being difficult to assess its total value before consumption. A very good example used many times in industrial marketing literature is the photocopying machine. Ellram & Siferd (1998) argue that different photocopiers work on different speeds, have different reliability, have different downtime rates, repair costs, etc, yet all these attributes of different photocopiers are difficult to be assessed and verified before consumption. These attributes if the photocopier will influence the office labour, hence to buy the machine based on its shape and product description can be misleading (Ellram & Siferd, 1998).
This is the case for industrial products and services, and it is even more important in the case of complex market solutions, where relying ―just‖ on customers‘ perceptions, cannot capture the total value in use that the business market solution can offer to the customer (Kohli & Mahajan, 1991). Industrial marketing literature uses value-in-use analysis to determine the total cost of ownership (TCO) and the benefits of a market offer (Cokins , 1996).
Table 2 Categorization of value assessment methods
Value assessment methods
2.2.1 WTP gauging methods (Perceived value analysis)
a. Contingent Valuation
b. Experimental Auctions
c. Focus Group
d. Conjoint Analysis
2.2.2 Cost and benefit data assessment methods
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The above discussed two research method categories will be discussed in order to gain better understanding of their advantages and limitations of acquiring customer data for customer value analysis.
2.2.1 WTP gauging methods
a. Contingent valuation
Grunert et al (2009) argue that contingent valuation is a survey-based declared preference method that gives survey respondents the opportunity to make an economic decision concerning a relevant non-market good. The value of the good is then inferred from the induced economic decision. Boccaletti & Nardella (2000) argue that this method has been very popular with regard to estimating willingness to pay in cases where market prices do not exist, but was also used for obtaining WTP predictions for food products, like: pesticide-free fruits and vegetables and organic products. Because responses from CV are hypothetical there is little incentive for customers to honestly reveal their willingness to pay, thus the WTP results from this method are questionable (Grunert et al 2009). From field or laboratory experiments revealed that hypothetical WTP is significantly higher than actual willingness to pay (Grunert et al 2009). This tendency to overestimate the survey respondents‘ WTP has led to an increased skepticism towards the use of CV technique in eliciting WTP measurements (Lusk & Schroeder, 2004). Some researchers recommend using the Experimental Auction method instead of CV, pointing out the element of hypothetical versus non-hypothetical bids as the main factor distinguishing these two value assessment methods.
b. Experimental auction
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random division from the point of view of the bidder (Grunert et al 2009). One‘s own offer only decides whether one is allowed to buy at all. By this type of auction is called ‗incentive compatible‘, since, if participants act rationally, their dominant strategy is to bid exactly their willingness to pay (Grunert et al 2009; Jaeger et al., 2004).
The incentive compatibility and the fact real money is used are appealing properties of these auctions. They have some disadvantages, though. The procedure is pretty cumbersome, since participants must gather as a group (Grunert et al 2009). Furthermore, the procedure to be followed is noticeably unusual from the hoe the everyday shopping occurs, making the external validity questionable (Jaeger et al., 2004). The fact that participants are competing for a product – only one of them ending up being allowed to buy it – is different from purchasing usual consumer goods, which usually exist in ample supply, and the push to buy can result in overbidding. Another drawback is that the procedure cannot be used for product concepts, because presupposes that the product is physically available.
c. Focus Groups
In industrial marketing, focus groups are less frequently used than in business to consumer marketing; still the method is an important tool for acquiring feedback regarding new industrial products, and services. Focus groups allow companies wanting to develop, or test market a new industrial product or service, to discuss, view, and test the offer before it is made available to the market (Calder, 1977). In contrast with other research methods focus groups are not used for assessing the monetary value of a market offering, instead the method is mostly utilized at exploratory stages of the research. Can be used at the preliminary or exploratory stages of a study (Kreuger, 1988); during a research, possibly to evaluate or develop a particular course of activities (Race et al 1994); or after a programme has been completed, to assess its impact, furthermore to generate further avenues of research.
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from group interviewing, where a number of people are interviewed at the same time and where the weight is on the information exchanges between the researcher and the participants, focus groups primarily rely on interaction and stimulation among the group members themselves (Gibbs et al 1997, Morgan 1997). Usually the number of respondents varies between six and ten participants, but these numbers can change depending on the research purpose, from a small number of three-four people (mini focus groups – see Kitzinger et al, 1995), to as many as twelve (Goss & Lindbach, 1996). Focus group assessment can be effective tool when there is no possibility to obtain quantitative data (Malhotra & Birks, 2008) or when the results obtained from quantitative data is not conclusive enough (Morgan, 1993). The clear advantage research tool is that reveals through interaction the beliefs, experiences, attitudes, and feelings of group participants, in a way that other qualitative methods like questionnaires, observation, or individual interviews would not be feasible (Gibbs, 1997). Focus groups can be used during the preliminary or exploratory stages of a research project, can be used as primary or supplementary source of data, and also in so called ―multi method studies‖ which combine the data gathering methods (Morgan, 1997), and allows researchers to find out what is salient and why in a certain topic (Morgan, 1988). Furthermore, using focus groups is effective when discovering new information (e.g. new service); examining participants, brainstorming; exploring controversial issues and complex topics; assessing participants attitudes, views, beliefs, perceptions on a certain subject, exploring ―why‖ people feel or think in the way they do (Morgan 1988; Krueger 1994; Race et al. 1994; Powel and Single 1996; Gibbs 1997). Focus groups can be used effectively in many research situations as seen before, but as all other research methods this method has also limitations. Morgan (1988), argues that the moderator has less control on the data produced that in quantitative studies or one to one interviews, having very small influence on the interaction of the participants, thus the research is open ended. Focus groups can be difficult to organize, it is hard to get the right people for every topic, and the topic in itself can discourage some people to deliberately express their opinions.
d. Conjoint Analysis
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called conjoined profiles and price as they predict consumer preferences (Cohen et al 1997; Van Der Haar, Kemp, Omta 2001). Industrial market managers referred to the method as offering the greatest satisfaction among any value assessment methods (Mahajan and Wind 1991). The method represents real life conditions, hence gives a more realistic picture of what customers will buy in the real buying situation, unlike other traditional methods (Cohen 1997). Van Der Haar et al (2001) advocate the use of conjoint analysis to close the information gap between the company and its customers, by confronting the value the company intends to offer to its customers with the value desired by the customers. Other authors argue about the power of conjoint analysis in assessing perceived customer value (Mahajan and Wind 1991; Cohen 1997; Auty 1995). Conjoint analysis presents the complete product concept to the customer for evaluation, in contrast with traditional, so-called ―compositional‖ approaches that evaluate the different attributes separately (Cohen 1997). Conjoint analysis defines salient attributes for customers that can be further divided into levels (Van Der Haar, Kemp, Omta 2001). By assessing the multiple attributes and attribute levels jointly, respondents can identify the product profile that includes the most preferred combination of attributes and their levels (Van Der Haar, Kemp, Omta 2001).
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conjoint analysis estimated at the individual level considers interaction effects only in the very simplest circumstances (Cohen 1997). Cohen (1997) argues about another problem with conjoint analysis when it is used for obtaining market share estimates. Conjoint analysis must be used in a share simulator to translate the preference values into a predicted choice, using many sets of rules from which the researcher has to select which he or she likes. Hence, the traditional two-stage conjoint procedure can yield different results, depending on the opinion of the researcher (Cohen 1997). Other drawbacks like the complexity and rigour of carrying out such an assessment are also frequently mentioned in literature, furthermore conjoint analysis requires deep understanding of the many decisions that need to be taken when designing, implementing, and interpreting the study (Auty 1995). Most of the scientists agree that the advantages of conjoint analysis outweigh the disadvantages of the method. The method‘s effectiveness is unmatched by other methods and it is widely used in business markets (Cohen et al 1997). CA precisely assesses customer preferences for different levels of different product features; it is effective in crafting new market offers which will most probably be successful on the market. Nevertheless, conjoint analysis is a valuable tool for assessing customers‘ willingness to pay for different market offers.
2.2.2 Cost and benefit data assessment methods a. Internal Engineering Assessment
Anderson, Narus, and Narayandas (2008) argue that the ―internal engineering‖ value assessment method usually takes place in a laboratory, where scientists, and engineers of the supplier company run exploratory tests on the product to estimate its value to potential customers. This is very cost effective because the company can test the new product without spending big amounts on manufacturing it on large scale, on the launch process, or on marketing. The company will get the results of these tests ran on product prototypes, hence further investments in the product can be stopped at an early stage if the obtained result not match the expectations (Reid & Plank, 2001).
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buying conditions. Therefore using just internal engineering can be useful in an early stage of industrial product development, but it is not designed for measuring the customer value of products and services in real market conditions (Reddy, 1991).
b. Field value in use analysis
Field value in use analysis is widely employed by business market managers for gathering first hand information about cost and benefit elements associated with a market offering‘s usage compared to the next best substitute offer. The information is gathered through in depth interviews conducted by the supplier firm with selected customers, and it requires a close cooperation between them in order to arrive at the desired results, thus at a close estimate of customer value (Anderson, Narus, and Narayandas 2008). If done correctly it can be a strong method for supplier firms to capture all the cost elements and benefits associated with their market offering, and if the underlying elements are important for customers.
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To avoid this hazard, suppliers can use TCO models to gauge, document, and communicate the real value that their offering represents to their customer in the way of lower costs and/ or higher revenues relative to the next best alternative (Piscopo, Johnston and Bellenger 2008). TCO assessment can be pursued by customers as well when they want to gauge suppliers‘ performance, and the total delivered value before making purchasing decisions.
We can conclude that TCO is a very popular method, offering valuable means for business market managers for assessing customer value on business markets. Clearly, TCO has its advantages; yet we have to see if it has possible pitfalls as well. Degraeve et al (1998) dispute that selecting suppliers through TCO requires a considerable management accounting system that captures the relevant costs of the activities afferent to a used product or service. Another possible drawback is in the execution of a TCO analysis, which can be misleading; requiring experts from both the buyer and seller organizations to work together and share information on costs, and benefits, one could be motivated to mislead the other to gain personal advantage. Thus, suppliers have to select customers for TCO analysis carefully (Wouters et al., 2004), making sure that the collaboration is honest, and the process besides the numerous advantages presented above can contribute to strengthen trust, and establish long-term buyer– seller relationships (Piscopo, Johnston and Bellenger, 2008).
2.3 Value Creation through Performance Contracting Solutions
2.3.1 Introduction – Background of Performance contracting
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aims to replace traditionally used fixed price and cost-plus contracts, to improve product availability, tying supplier‘s compensation to the output value, of the product generated by the customer. On the other hand what is considered a new way of creating value is ―performance contracting‖ (Donahue 1989, p. 220). This is especially true for business markets, where regulatory contracting still rules over performance contracting, the latter being considered too abstract by many companies (customers). A very important finding of recent years research is the service transition model of Palmatier et al (2008) where it is argued that companies can increase their value by service transition, hence by offering complete value adding solutions for their clients, not just the core product. Similarly the trend is changing quickly in contracting out. More and more organizations from the private and public sector shifting from conventional (regulatory) contracting to turnkey solutions represented by performance contracting (Behn and Kant 1999). More and more companies realize that besides offering their core product, they can increase and diversify their product portfolio and increase their revenues by adding to their core offers more and more services. By increasing the proportion of services in the product portfolio, thus by making a transition to services, companies can increase their revenues (Palmatier et al, 2008). Palmatier et al (2008) argue that a firm in order to successfully transit to services and increase the firm‘s value (as measured by Tobin‘s q) a critical mass of service sales between 20%–30% has to be reached, until this point the value of the firm remaining relatively flat or slightly negative. Moreover, the effect of service sales on the value of the firm depends on both firm and industry factors (Palmatier et al, 2008).
2.3.2 Definition of performance contracting
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delivery, by rewarding contractors for their performance, punishing them for inadequate performance. An important characteristic of performance contracting is the clear separation between the buyer‘s expectations of service (the performance goal) and the supplier‘s implementation (how it is achieved): hence ―The contract explicitly identifies what is required, but the contractor determines how to fulfill the requirement‖ (Macfarlan and Mansir, 2004). The Office of Federal Procurement Policy (OFPP) defines performance contracting as an approach where the statement of work is based on ―objective, measurable performance standards outputs‖ (OFPP, 1998:5). Martin (1999), defines performance contracting as one that ―focuses on the outputs, quality and outcomes of service provision and ties at least a portion of a contractor‘s payment as well as any contract extension or renewal to their achievement‖.
2.3.3 Differences between regular and performance contracting solutions
28 Table 3 Main differences between regulatory and performance contracting
Regulatory Contracting Performance Contracting
Pay for inputs, processes, and technologies High certainty for buyer (paying for processes, and technologies used) Adversarial relationships
Regulations drive behavior Low responsibility for contractor
Pay for results
Low certainty for buyer (paying for performance)
Cooperative relationships
Payments for results drive behavior High responsibility for contractor Source: Behn and Kant (1999)
2.3.4 Pitfalls of performance contracting
29
2.4 Assessing value for performance contracting solutions
Companies operating on business markets are realizing that the total solution is what offers value to their customers, thus they are progressively selling more ―customer value‖ rather than products and services (Van Der Haar et al, 2001). Increasingly, companies are extending their product/service offerings, providing customers with full-service contracts (Stremersch, Wuyts & Frambach, 2001). Hence, it is essential for these companies to assess the potential value of their offerings and to learn how this value can be further enhanced (Parasuraman et al, 1997; Woodruff et al, 1997). Therefore, the clear measurement of the value that a solution can offer to the customer has become a subject of growing interest in business marketing (Woodruff et al, 1997). Tuli et al (2007) demonstrate that customers do not see solutions as bundles of different products and services, but as a set of customer–supplier relational processes consisting of (1) customer requirements definition, (2) customization and integration of goods and/or services and (3) their deployment, and (4) post deployment customer support, hence their assessment has to consider these relational processes.
Ulaga & Eggert (2006) argue that efficient value creation, and the availability of the created value was spurred on business markets, managers looking more after performance, total costs and benefits of an offer, while asset ownership, and price lost in its significance In recent years considerable changes were observed in the seller-buyer relationship on business markets, many companies transiting from product sales to service sales (Palmatier et al, 2008), whereas on the buyers side shifting from product ownership to full service, or maintenance contracts (Stremersch, Wuyts & Frambach, 2001).
30 2.4.1 Value assessment model for performance contracting solutions
Figure 1 Model for assessing value for performance contracting solutions
As discussed more extensively in part 2.2 industrial suppliers use two groups of value assessment methods: 1. perceived value analysis methods to assess customers willingness to pay for a market offer, and 2. cost and benefits assessment tools to gather data on customers‘ total costs (TCO), and benefits resulting from the usage of a market offer (Busacca et al 2008).
From the first category we find conjoint analysis the most widely used perceived value analysis tool that can be used as a powerful tool for addressing willingness to pay of
Supplier
(Contractor)
Performance
Contracting
solutions
Supplier (Contractor) - 1 . . . Supplier (Contractor) - nConjoint Analysis (assessing WTP)
Field value in use analysis
(assessing total cost of ownership)
Solution - 1
.
.
.
Solution - n
Comparing to the next best alternative offer
Buyer
All cost and benefits of the
31
customers (Green & Rao, 1971; Green & Srinivasan, 1978, 1990; Wittink & Cattin, 1989; Mahajan and Wind, 1991; Wittink et al 1992; Cohen et al, 1997). And yet CA can have difficulties in assessing the importance for the client of the qualitative data about customer– supplier relational processes researched by Tuli et al (2007). Moreover, Green and Krieger (1989) argue that multi attribute cost functions are difficult to estimate reliably with conjoint analysis. Managers need to get information about the direct and indirect cost savings and extra benefits their solution offer‘s compared to other alternative solutions (Butz & Goldstein, 1996). Consequently managers need to show to their customers what they will gain in monetary terms from buying this solution instead of another. All the direct and indirect costs have the meaning that the purchaser considers the indirect costs as well of an offer, this being its value in use (Plank & Ferrin, 2001). Purchasing management literature uses the term total cost of ownership, to describe value in use (Ellram & Sifred, 1998). Thus, for a more thorough situational analysis, field value in use can be used which beyond offering information about total cost of ownership, can yield valuable qualitative data what a perceived value analysis tool might not grasp (Wouters et al. 2004). The two categories also share some common traits, let‘s just mention that both can measure customer value on the individual level; and can point out the strengths and weaknesses of the market offer.
As argued before from the ―cost and benefit data assessment methods‖ category, on business markets field value in use analysis is most frequently used for measuring the value in use of a market offer (Piscopo, Johnston and Bellenger 2008). Wouters et al. (2004) argue that this method is the most powerful research tool for measuring value in use. This method measures the costs that are involved in the acquisition and usage of purchased products and services, going beyond price to consider all costs of an offer (Wouters et al. 2004).
We saw that there are also several research methods that can be used for perceived value analysis. Still, industrial market managers clearly pointed out the superiority of conjoint analysis among all methods used for perceived value analysis, finding the method as offering the greatest satisfaction (Mahajan and Wind, 1991). Conjoint analysis became the most widely used research tool in a considerably short time (Wittink et al 1992) and has been the most preferred method used for addressing willingness to pay issues in marketing for a long time (Green & Rao, 1971; Green & Srinivasan, 1978, 1990; Wittink & Cattin, 1989).
32
assessing value for complex industrial solutions is still unclear, although recent year‘s research demonstrates that more and more supplier companies realize that they can increase their value by offering more services within their product portfolio, hence by offering complete value adding solutions for their clients, not just the core physical product (Palmatier et al, 2008). These firms made the transition from conventional market offers to turnkey solutions (Behn and Kant 1999), buying more services trough which they can increase their revenues (Palmatier et al, 2008).
Performance contracting proved as being a good example of this view, not just adding extra value to the operations of firms on business to business markets by bundling all necessary physical products, tools, expertise (Martin (1999), to make a solution to function, but adding extra services to industrial buyer companies through which again they can increase their revenues from their customers (Tuli et al, 2007).
Therefore from the two research categories used for assessing value for industrial products and services, in this research we chose the most effective method from each category based on academic literature and compare their adequateness and effectiveness in assessing customer value for performance contracting solutions. We will use value in use analysis to assess cost and extra benefit data, and conjoint analysis to measure customers‘ willingness to pay, hence assess all benefits or sacrifices customers see in relatively new, more complicated solutions like performance contracting.
2.5 Summary
33
3. Research design
Throughout this chapter, the research and data collection methods used in the study are discussed and explained.
First, the purpose of the research is discussed and motivated. Afterwards the research methods used throughout the study are selected and justified. Then, data collection methods will be depicted, and an outline will be given on how the data will be presented and analyzed. Finally, means of ensuring the validity and reliability of the data will be discussed.
3.1 Research purpose
In recent years very important findings came out in business marketing. These studies argue that apart from what was usual until now on industrial markets: buy products and services- companies can increase their value by service transition by offering complete value adding solutions for their clients, not just the core product (Palmatier et al, 2008). Customers do not see solutions as bundles of different products and services, but as a set of customer–supplier relational processes (Tuli et al, 2007), finding long term seller-buyer relationship as more important than single transaction. Buyers are shifting from product ownership, to buying more service, thus to full service, or maintenance contracts (Stremersch, Wuyts & Frambach, 2001).
These results show that industrial customers’ perception about value has changed considerably in recent years, and yet no scientific research investigated how these new avenues of creating customer value can be assessed.
The present thesis attempts to investigate how customer value can be assessed for complex business solutions, like performance contracting. It aims to provide solid base for future research in finding or creating an effective method of measuring customer value, but has also a practical mean, for business marketing managers attempting to gauge customer value for various complex market solutions.
34
profile of an occurrence, or situation as it is in descriptive researches (Sounders et al 2000), but it aims to explore methods of assessing value for performance contracting solutions on business to business markets.
Furthermore, no previous research was found in business marketing literature on how value can be assessed for complex customer solutions like performance contracting solutions. Yet the need for contractors to know what solutions their potential buyers value is essential to craft schemes that can deliver the desired value.
For this reason, the goal of this research is to offer a framework for assessing value for complex industrial solutions, which can be used and further developed by academicians in future research.
For this purpose the research has in view two major objectives:
1. To investigate whether two different research methods which were effectively used for measuring customer value for products and services: field value in use analysis and conjoint analysis - can be used for assessing value for more complex industrial solutions like performance contracting.
2. Compare two competing methods: Field value in use analysis versus Conjoint Analysis- to identify the possible advantages and limitations of each method in assessing customer value for performance contracting solutions, to offer valuable means for academicians in future research engaging in customer value assessment for complex industrial market solutions.
3.2 Research method
35
studying larger samples, whereas case studies collect data from a smaller sample, instead provides more in-depth information about the problem, analyzing many variables thoroughly (Saunders et al, 2000). On business markets one buyer can represent a significant share of the market, having specific needs that are crucial to grasp and fulfill for those seller who want these companies in their buyer portfolio (Wuyts & Geyskens, 2005). Sellers on business markets build up value models for each buyer company individually (Ulaga & Chacour, 2001). The subject of this thesis did not let in the usage of a large sample; hence individual case studies should be employed. Researchers can use one case study when it represents a special, unique case or a revelatory case which can provide a chance to examine an until now unreachable research area (Yin, 1994). This was not the case here; therefore a multiple case study approach was taken. Data was collected from 4 customer companies of NLS (totally 7 respondents) in a set of 4 case studies. Two competing value assessment tools were used, conjoint analysis for assessing value as perceived by the customer, and field value in use analysis to gauge the cost savings and extra benefits that the selected offerings represent to customers‘ via lower costs and higher revenues, relative to the next best alternative offer (Piscopo, Johnston and Bellenger 2008).
3.3 Data collection
36 Table 4: Attributes and levels depicted for conjoint analysis
Attributes OWN EQUIPMENT SERVICE PRICE
Levels
Full ownership Fully equipped No service 120
No ownership Not equipped Fleet
management
150
Full service 180
210
37
For our research the systematic part (expressed in parthworths) is equal to:
Because 16 cards still represent a considerable number of choices respondents had to choose from, first they were asked to group the cards into 3 different groups, based on preference: ―most preferred, least preferred, and neutral‖. Afterwards respondents were asked to rank order cards within each of the 3 groups. Hence the final ranking of the 14 cards (2 cards were defined as hold out cases) occurred by rank ordering cards from each of the 3 groups: ―most preferred group‖, ―neutral‖ group, and ―least preferred‖ group.
To acquire data for value in use analysis, 7 interviews were conducted. The interview questions were mostly about costs of the company afferent with the procurement and maintenance, of vessels from the company‘s fleets, as well as afferent with fleet management (see questionnaire in Appendix). Technical questions about the vessels were also asked, to assess the productivity of vessels, hence to benchmark costs based on performance (e.g. Engine consumption: 160 liters of diesel/ hour, etc.). The interviews were held in an interactive style, every question being discussed, in order to obtain some background information about the problems and needs of these companies. Afterwards customers‘ were presented with a new solution for their problem in form of a ―performance contracting solution‖. After presenting the new offer, customers‘ were asked several questions, about the extra value and cost reductions they think will have by using the new offer compared to the next best alternative offer (what they have now, or what they could get from competitors). During the presentation of the new solution to customers, and the discussions related to the offer data was obtained about the costs and extra benefits customers will encounter while using performance contracting solution offered, instead of another offer.
3.4 Data analysis
38
background. In the cases where we had 2 respondents from the same company, responses of participants were saved into a common (sav.) data file, to incorporate the utilities from the individual respondents into a new conjoint file, without losing information. Afterwards the conjoint plan was prepared with 4 (discrete) attributes, with a command of rank ordering cards from 1 to 16. The plan was run from spss syntax editor – run menu. From the output of the analysis, utilities were obtained for each attribute and level. Using the obtained utility part worth‘s the total utility of a regular solution (vessel ownership, not equipped, no service, price) was calculated and compared with the utility of a 1 year full service performance contracting solution‘s (vessel renting, fully equipped, full service) total utility without price. The difference between the 2 utilities is then the delta (Δ). From the utility scores and the delta score the monetary value of the performance contracting solution was calculated (contract period one year); for each company who qualified for this (the delta fell in the utility point range of the price attribute).
Cost data was calculated per company not per respondent. Thus, responses obtained from the two participants were compared. If more than a marginal difference was found in the two responses, a new cost data was calculated representing the mean of the two initial numbers The results from these calculations were compared with the total costs data obtained from field value in use analysis.
The value assessed via the two assessment methods was compared:
1. Value of a PC-solution based on a Value-in-use analysis: assessing all the cost data. Calculating how much a survey vessel costs a year for each company. This amount is then the maximum willingness to pay for the respective company.
2. Value of a PC-solution based on Conjoint Analysis: Calculating willingness to pay for PC-solutions as can be inferred from Conjoint Analysis (as discussed above). Qualitative insights obtained from field value in use analysis will be added to the findings, and value placeholders will be defined.
39
4.
Results
In the following section each of the 4 cases (companies) will be discussed. Results obtained via the two competing research methods: conjoint analysis and value in use analysis - will be compared and analyzed. As discussed before, on business markets the buying decision is made by a group of employees called the buying center. For our research the individual respondents from the same company represent the buying center of the company, hence the results from rank ordering cards were grouped into common company data files. Thus, utilities were obtained per company using the ―conjoint‖ command syntax. Results from individual respondents were also obtained. When the joint utility estimates did not yield conclusive results, data from individual respondents were reviewed and included in the analysis. For each company in part utility points of attribute levels were computed for a regular, non-performance contracting solution, then the willingness to pay for a 1 year full service performance contracting solution was calculated. For value in use analysis the total costs of buying and maintaining the survey vessel were calculated for a period of one year. In the following section the 4 case studies will be discussed.
4.1 Case no. 1 (Company 1)
4.1.1 WTP Calculation
40
perspective, price can be perceived as a product quality cue (Monroe and Krishnan, 1988). Therefore, price may be viewed either as an indicator of sacrifice, or as a quality cue, or both (Monroe and Krishnan, 1988). Erickson and Johansson (1985) argue that as a consequence of the price-quality relationship, perceived price is a good proxy variable for perceived quality. In this sense one can find that respondents have negative quality associations with low price, while higher price is seen as offering greater value for them.
Regarding vessel ownership respondents clearly prefer not to own the vessels. The utility points range between - 2.188 for owning the vessel and 2.188 for no ownership. Respondent 1 considered this attribute as more important than respondent 2.
Table 5: Utilities obtained from CA
Attribute (importance: joint/resp 1/ resp 2)
Level Utilities Resp. 1 Utilities Resp. 2
Joint Utility Estimate OWN 34.097/ 42.553 / 25.641 Full ownership -2.500 -1.875 -2.188 No ownership 2.500 1.875 2.188 EQUIPMENT 14.093/ 4.255 / 23.932 Fully equipped -.250 1.750 .750 Not equipped .250 -1.750 -.750 SERVICE 15.566/ 14.894 / 16.239 no service .500 .833 .667 fleet management -1.125 .708 -.208 full service .625 -1.542 -.458 PRICE 36.243/ 38.298 / 34.188 120 -2.000 -2.750 -2.375 150 2.000 .500 1.250 180 -2.250 .000 -1.125 210 2.250 2.250 2.250 Constant 8.375 8.292 8.333
Correlations Resp.1 Resp.2
Joint Pearson's R
.731 .714 .755
Kendall's tau .521 527
.547
41
The total utility of the full service performance contracting solution offered by the shipbuilding company would be (fully equipped, full service, without price) = 8.333 +2.188+0.750-0.458= 10.813.
This results in a delta of Δ= 10.813 - 3.687 =7.126, which is outside of utility point range of the price attribute (the gap between the highest and lowest utility estimate of the price attribute). Apparently company 1 has a strong negative quality association with price level 120,000 euro for the regular solution. Hence a higher price level (level 2= 150.000 euro) will be considered. With the price level changed, the calculations for the base equipped vessel will be = 8.333-2.188-0.750+ 0.667+1.250= 7.312. The delta would then be Δ= 10.813 - 7.312 = 3.501 still outside of utility range, thus it seems that the willingness to pay for the full-service solution is higher than 210.000 € (the highest price level).
Table 6. Regulatory contracting Vs. PC solution
Nr.1: Regular Solution (attributes levels with utilities)
Base Util. Own Equipment Service Price Total Utility
8.333 Yes = -2.188 Not equipped =
-0.750 No service = 0.667
150.000 euro=
1.250 Σ 7.312
Nr.2: Performance Contracting Solution (attributes levels with utilities) Δ=3.501
Own Equipment Service Price
Total Utility Without Price
8.333 No=2.188 Fully equipped = 0.750
Full service = -0.458
(FM,Maint,Ins,Rep) ? Σ 10.813
4.1.2 Value in Use Analysis
42
0.5 million €. Furthermore, the respondents mentioned as vessel operating costs: insurance for vessel, maintenance materials, full maintenance check (every two years), maintenance workers salary, and additional costs. Other costs respondents found important were the costs afferent with loosing or damaging the survey equipment of the vessel, and the expenses for fleet management. Based on these responses a customer value model was crafted for company 1, computing all cost data afferent with the acquisition, usage and disposal of the survey vessels. This calculation will give the total cost of ownership (Piscopo, Johnston and Bellenger 2008; Wouters et al. 2004) for the survey vessel for 1 year, summarized in Table 7. Hence the total costs for company 1 for buying and operating the a survey vessel were as follows: (price of base equipped vessel + price of equipment)/ lifetime of vessel + insurance + yearly maintenance materials+ full maintenance check (every two years) +maintenance workers salary+ repair costs (non maintenance)+ additional costs = (1.5 million €+ 500.000 €) / 14 years + 15.000 €+ 4000 €+4000 €+6333 €+7000 €= 142.858 + 15.000 + 4000+ 4000+ 6333+22.000 +7000= 201.191 €
The costs of loosing or damaging the survey equipment totaled up to 100.000 euro/ year, furthermore the company operated an in-house fleet management for its 8 vessels, totally costing 50.400 euro last year. The total price of a full service performance contracting solution would be 201.191 € + 50.400 €/8 + 100.000 €/8= 219.991 €
Table 7- Cost assessment- Company 1
C o m p a n y 1 Performance Contracting Fleet Management Costs of operating the survey vessel Repair costs Loosing/ damaging equipment (LDE) Total Costs (WTP) Resp 1 In favor Resp2 Against C o s t s 6300 € 179191 € 22.000 € 12500 € 219.991 €
* Costs are calculated per year and per vessel
43 Similarities and differences in the responses of the interview participants
From the interviews held with company 2, two separate views emerged. The CEO has in view more the financial part, thus the increased profitability and cost reductions via the discussed new solutions, whereas the second respondent (surveying manager) sees things more narrowly, hence the technical part of the solutions, which in his opinion would not work. The viewpoint of the second respondent perhaps is focusing just on one particular part of the offer, but can be understood as in line with the surveyors interest, thus contradictory with externally managed fleet management (and higher vessel cruising, and surveying speed), etc, which probably would reduce the number of surveyors needed for the same amount of jobs. There is a lack of trust among the surveyors of this company towards the effectiveness of these solutions, and they are part of the buying team of the company, thus their opinion, and technical expertise has major influence on the buying center of the company. Therefore, although the CEO understands that new solutions like performance contracting are used for optimizing performance and securing results on business markets, he needs evidence on how these solutions would add extra value for his company.
4.2 Case no. 2 (Company 2)
4.2.1 WTP Calculation
For company 2 the utility (part-worth) for every attribute level was obtained (see Table 8). From the results we can see that participants found 3 attributes as almost equally important: own, service, and price. Equipment was considered not important, the attribute getting 7,8% importance score. It is surprising how utility points are distributed between price levels, the linearity being broken by the highest price level with the utility of .625 which is much higher than 3rd price level. From the ―service‖ attribute, ―no service‖ got the highest utility 1.333 both of the respondents finding no value in buying services, this being sustained by the very low utility score obtained by the ―full service‖ level (joint score: -1.917).
