Understanding customer value in business to business relationships

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Journal of Business-to-Business Marketing

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Understanding Customer Value in Business-to-Business Relationships

Ajay Menon , Christian Homburg & Nikolas Beutin

To cite this article: Ajay Menon , Christian Homburg & Nikolas Beutin (2005) UnderstandingCustomer Value in Business-to-Business Relationships, Journal of Business-to-BusinessMarketing, 12:2, 1-38, DOI: 10.1300/J033v12n02_01

To link to this article: http://dx.doi.org/10.1300/J033v12n02_01

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Understanding Customer Valuein Business-to-Business Relationships

Ajay MenonChristian Homburg

Nikolas Beutin

ABSTRACT. Although literature emphasizes the importance of creat-ing value for the customer in business-to-business marketing, our under-standing of this concept is limited. Against this background, this paperexamines the antecedents of customer value within the context of busi-ness-to-business relationships. In a departure from previous conceptual-izations of value, the paper introduces the concept of core benefits andadd-on benefits as well as purchasing price, acquisition costs, and opera-tions costs to the business-to-business marketing literature. The impactof product, relational, and supplier characteristics on the perceived ben-efits and sacrifices are examined. Results from a survey of 981 purchas-ing managers across multiple manufacturing product categories in theUnited States and in Germany provide support for the hypotheses proposed

Ajay Menon is Dean of the College of Business, Colorado State University, 129Rockwell Hall, Fort Collins, CO 80523 (E-mail: [email protected]).

Christian Homburg is Chair of the Marketing Department, University of Mannheim,L 5, 1, 68131 Mannheim, Germany (E-mail: [email protected]).

Nikolas Beutin is Managing Director/Partner, Homburg & Partners, Willy-Brandt-Platz 7, 68161 Mannheim, Germany (E-mail: nbeutin@homburg-und-partner. de).

The authors would like to thank the Institute for the Study of Business Markets(ISBM) in the United States and the Deutsche Forschungsgemeinschaft (DFG) in Ger-many for their generous financial support of this project. The authors also thank JosephP. Cannon, Dave Gilliland, Marko Grozdanovic, Ken Manning, Anil Menon, andSundar Bharadwaj for their helpful comments on a previous draft of the article and ac-knowledge the research assistance provided by Jeff Kraft, Steve Shattuck, and JanMorgan in the United States.

Journal of Business-to-Business Marketing, Vol. 12(2) 2005Available online at http://www.haworthpress.com/web/JBBM

2005 by The Haworth Press, Inc. All rights reserved.Digital Object Identifier: 10.1300/J033v12n02_01 1

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in this paper. Managerial implications and directions for future researchare identified following a discussion of the results. [Article copies availablefor a fee from The Haworth Document Delivery Service: 1-800- HAWORTH.E-mail address: <[email protected]> Website: <http:// www.HaworthPress.com> © 2005 by The Haworth Press, Inc. All rights reserved.]

KEYWORDS. Customer value, business-to-business relationships, cus-tomer benefits and sacrifices, product, relational, and supplier character-istics

Both in practice and in academic research, the issue of customer value hasemerged as critical for customer relationship management efforts and achiev-ing organizational goals. Customer value has been referred to as “the corner-stone of business market management” (Anderson and Narus 1999, p. 5). It isconsidered to be an important determinant for creating satisfaction, and morerecently as a driver of customer loyalty (Bearden and Teel 1983; Fornell 1992;Fornell et al. 1996; Gale 1994; Treacy and Wiersma 1995). Given its signifi-cance to organizational performance, an issue of keen interest in research andpractice appears to be the determinants of customer value (Grisaffe and Kumar1998; Holbrook 1994; Lapierre 2000; Treacy and Wiersma 1995). It has beensuggested that understanding the components of customer value will allowfirms to better manage the customer value delivery process (Parasuraman1997; Slater and Narver 1992; Woodruff 1997).

A firm’s ability to manage customer value drivers will depend on abroad-based understanding of the value construct. However, research in mar-keting thus far has lagged in the systematic investigation of the value construct(Parasuraman 1997; Sinha and DeSarbo 1998; Woodruff 1997).

The discussion of customer value has its roots in modeling purchase deci-sions and goes all the way back to the seminal works of Kotler (1967) andLeavitt (1967) who were to our knowledge among the first to address this is-sue. The literature on supplier selection in the 1960s indirectly addressed cus-tomer value as a relevant factor in vendor selection decisions (e.g., Dickson1966). This stream of research was further developed in the organizationalbuying behavior literature where the kind of benefits customers get from prod-ucts and services where analyzed in a relational buyer-seller context (Bonomaand Zaltman 1978; Lehmann and O’Shaughnessy 1974; Robinson, Faris, andWind 1967; Sheth 1973; Webster and Wind 1972). The Industrial Marketingand Purchasing (IMP) Group expanded this research direction in the 1980s byanalyzing and conceptualizing business relationships as interactive and

2 JOURNAL OF BUSINESS-TO-BUSINESS MARKETING

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dyadic (Håkansson 1982; Möller and Laaksonen 1986). This dyadic approachhas then been extended to a network approach (Anderson, Håkansson, andJohanson 1994; Ford 1990). Despite these attempts to analyze and conceptual-ize business relationships, customer value was not regarded as a central con-struct and not looked at in its fundamental sense. Especially a detailedconceptualization, definition, and analysis of the antecedents has not beenperformed.

Since then, a few studies have examined the issue of customer value as a fo-cal construct from a consumer product perspective (e.g., Bolton and Drew1991; Dodds, Monroe, and Grewal 1991; Zeithaml 1988). As Woodruff(1997) points out “ . . . because existing customer value theory typically as-sumes the . . . (individual or end consumer) context, new research should focuson building theory to understand how customers perceive value fromlong-term relationships” (p. 150). Given the increasing focus on customervalue as a basis for establishing enduring business-to-business relationships(Anderson and Narus 1998, 1999), our review of literature indicates that re-search oriented efforts to systematically conceptualize and empirically ana-lyze customer value in business-to-business relationships have been few(exceptions are, e.g., Anderson, Jain, and Chintagunta 1993; Grisaffe andKumar 1998; Walter, Ritter and Gemünden 2001).

The advances made in the literature regarding business-to-business rela-tionships notwithstanding, our current understanding of customer value inbusiness marketing is lacking in such a way that it is not yet fully developed(e.g., Parasuraman 1997; Walter, Ritter, and Gemünden 2001). Much of thecontemporary literature on customer value takes a broad view of value driversby not delving more deeply into the nature and scope of benefits and sacrificesthat determines the customer value construct. As such, the determinants ofcustomer value in business markets remain unclear and largely under-ex-plored. Especially in an era of relationship marketing, where many firms strivefor enduring relationships, the determinants of a customer value assessmentneed to be considered.

Against this background, the purpose of this paper is to advance our currentunderstanding of customer value in business-to-business relationships by pro-viding a systematic analysis of the determinants of customer value. Customervalue is conceptualized as being dependent on benefits received and sacrificesmade by customers. In this paper, we argue that benefits should be categorizedto include “core benefits” and “add-on benefits.” With reference to Andersonand Narus (1999, p. 5), we evaluate the benefits with regard to customer valueseparately from the sacrifices as it has also been done by other researchers be-fore (cf. Grewal, Monroe, and Krishnan 1998; Sinha and DeSarbo 1998).Moreover, a more precise view of sacrifices in a business-to-business relation-

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ship context needs to consider a lifetime view of costs. Such a treatment ofcosts would consider acquisition costs and operations costs in addition to thebasic purchase price of a product (cf. Anderson and Narus 1999). We believesuch a conceptualization will provide a finer decomposition of the typicallydiscussed components of value–benefits and sacrifices. Furthermore, we ana-lyze how product, relational and supplier characteristics affect the differenttypes of benefits and sacrifices. The resulting deeper understanding of whatdrives customer value can help firms allocate and manage appropriate re-sources needed to deliver superior customer value.

CONCEPTUALIZING CUSTOMER VALUEIN BUSINESS-TO-BUSINESS RELATIONSHIPS

Figure 1 describes the general relationships proposed in this paper. As sup-ported by the literature it suggests that customer value is a function of the ben-efits offered by the seller and the sacrifices made by the customer for thesebenefits (e.g., Anderson and Narus 1999; Zeithaml 1988). Benefits offered bythe seller take the form of core benefits and add-on benefits (cf. Bitner,Gwinner, and Gremler 1998; McMurrian and Wilson 1996, Thompson 1998).Sacrifices refer to the purchasing price, acquisition costs, and operations costs


ProductCharacteristics

Product Quality

Service Quality

RelationalCharacteristics

Trust

Joint Working

SupplierCharacteristics

Flexibilityof the Supplier

Commitmentof the Supplier

CB: H (+)PP: H (+)AC: H (–)OC: H (–)

3a

3b

3c

3d

CB: H (+)PP: H (+)OC: H (–)

4a

4b

4c

CB: H (+)AC: H (–)

5a

5b

AB: H (+)AC: H (–)OC: H (–)

6a

6b

6c

AB: H (+)AC: H (–)OC: H (–)

7a

7b

7c

AB: H (+)OC: H (–)

8a

8b

Benefits

Core Benefits(CB)

Add-on Benefits(AB)

Purchasing Price(PP)

Acquisition Costs(AC)

Operations Costs(OC)

Sacrifices

CustomerValue

CV: H (+)1a

CV: H (+)1b

CV: H (–)2a

CV: H (–)2b

CV: H (–)2c

FIGURE 1. Overview of Hypothesis

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for the buyer (cf. Claycomb and Frankwick 1997; Dahlstrom and Nygaard1999; Grönroos 1997; Ravald and Grönroos 1996). Further, the figure pre-sents antecedents of core benefits and add-on benefits. In the following sec-tions, we discuss each of these constructs and present our rationale for theproposed hypotheses. The way our hypotheses have to be understood is thatthe hypotheses always mean “all other parameters being equal” (ceteris pari-bus assumption).

In our rationale we do not explicitly consider a possible interrelatedness be-tween benefits and sacrifices. But since these constructs are affected by thesame antecedents we implicitly take the relationship between benefits andcosts into account. Furthermore, this paper looks at business relationships inan isolated dyadic way (see also Anderson and Narus 1990; Dwyer, Schurr,and Oh 1987) as compared to, e.g., Anderson, Håkansson, and Johanson (1994)or Ford and McDowell (1999) who look at business relationships from a net-work perspective.

Customer Value

Value is often defined and explicated in terms of a trade-off between bene-fits and sacrifices (Anderson, Jain, and Chintagunta 1993; Anderson andNarus 1999; Woodruff 1997; Zeithaml 1988). Following this approach, we de-fine customer value as a business customer’s overall assessment of the utilityof a relationship with a vendor based on perceptions of benefits received andsacrifices made. Like in previous marketing studies (Forbis and Mehta 1981;Gardial et al. 1994; Holbrook 1996; Ravald and Grönroos 1996), customervalue is viewed from the customer’s evaluation of the experience as opposedto a valuation of the customer–a perspective typically found in finance.

Benefits

As stated earlier, benefits take two forms–core benefits and add-on benefits(cf. Bitner, Gwinner, and Gremler 1998; McMurrian and Wilson 1996; Thomp-son 1998). We define core benefits as the degree to which the supplier offers aset of minimum attributes required by an organizational buyer. Core benefitsare said to be the basic features required and viewed as a “must” for a relation-ship to exist. In business-to-business markets these might include specificproduct quality and pre- or post-sales service. These core requirements for arelationship have to be met completely by the supplier to be in the consider-ation set of the customer. This conceptualization of core benefits is akin toconcepts such as relationship “qualifiers” (Doney and Cannon 1997), “basicrequirements” (Thompson 1998), “core value” (Grönroos 1997) or “core ele-


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ments” (Anderson and Narus 1999). Therefore we assume a positive relation-ship between core benefits and the perceived customer value.

Add-on benefits are those attributes, typically not required, that assist thecustomer in selecting a supplier from among a qualified set of potential sup-pliers. Add-on benefits can be viewed as “thrill-factors” that differentiate thesuppliers. These imply going beyond the basic denominator provided by allqualified vendors and identifying attributes that create “added value” andform an “attractor” attribute in a buyer-seller relationship (Grönroos 1997;Thompson 1998). Add-on benefits have been alluded to in the business serviceliterature where concepts such as “additional service” and “value added cus-tomer service” have been discussed at length (Grönroos 1997; McMurrian andWilson, 1996). In summary, we expect a positive relationship between add-onbenefits and perceived customer value.

Based on our conceptualization and following our definition, we propose:

H1a: The greater the perceived core benefits, the greater the perceived cus-tomer value.

H1b: The greater the perceived add-on benefits, the greater the perceivedcustomer value.

Sacrifices

While the contemporary marketing literature has recognized value as afunction of benefits and sacrifices, much of the treatment of value has onlyconsidered purchase price as the sacrifice customers consider in contemplat-ing value (cf. Butz and Goodstein 1996; Grisaffe and Kumar 1998; Ulaga andChacour 2001; Wind 1990). In a departure from the past treatment of customervalue, in this paper, we take the broader view of costs and view sacrifices notonly as purchase price but also to include additional costs associated with theentire relationship between the buyer and the seller (cf. Anderson and Narus1999; Lapierre 2000). Such a conceptualization, in our opinion, is responsiveto the growing concern among managers about total costs incurred in a rela-tionship, and the increased call by scholars to examine more closely the lifecycle cost (Ravald and Grönroos 1996; Shank and Govindrajan 1993) or,“costs of running the system” (Williamson 1975, 1985, 1996).

More recently, the emerging literature on cost management in marketing(Cannon and Homburg 1998; Dahlstrom and Nygaard 1999) provides abroader perspective on the types of costs (sacrifices) to be considered whenevaluating a business relationship. One such breakdown describes three typesof costs associated with a buyer-seller relationship–direct purchase price, ac-


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quisition costs and operations costs (Cannon and Homburg 1998). We discussthese costs next.

The purchase price refers to the monetary sacrifices made by the buyer inpurchasing the product (cf. Day 1990; Monroe 1990; Zeithaml 1988). Thepurchase price is defined as the actual price charged by the supplier for theproduct at the time of transactional exchange. As the purchase price repre-sents a sacrifice a customer has to make we assume that it will have a negativeinfluence on customer value.

Acquisition costs refer to costs resulting from acquiring and storing theproducts involved in the transaction. Expenditures and efforts related to order-ing, delivering, storing products, as well as monitoring supplier performance,coordinating and communicating with the supplier (cf. Cannon and Homburg1998; Ellram 1990, 1996; Zenz 1994) contribute to the acquisition costs in-volved in a buyer-seller relationship. It is worth emphasizing that often times,supplier’s marketing and other operating policies can have a significant im-pact on the customer’s acquisition costs. As an example, a lack of confidencein the quality of goods provided by the supplier can force the customer firm tocarry more inventory. This lack of confidence can also increase the adminis-trative costs required to ensure that the incoming products meet the customer’sstated specifications.

Finally, operations costs refer to costs incurred by the customer in theday-to-day operations of its business. These costs reflect expenditures for re-search and development, manufacturing, internal coordination and cost asso-ciated with downtime. Writings in the quality management (Gyrna 1988a),purchasing and materials management (Zaheer, McEvily, and Perrone 1999),and cost accounting (Gyrna 1988b) areas suggest that firms can influencecosts of operations by managing the supplier relationships. As an example,improved quality of incoming raw materials and component parts will reducethe need for rework (Fine 1983) and thus keep operations costs lower.

Overall, it is well known that “value developed in long-term relationshipswas created through better cost management” (Wilson 1995, S.342; see alsoKalwani and Narayandas 1995; Williamson 1996) which implies that lowercosts lead to higher customer value.

Thus we formulate the following hypotheses even though we know thatthey are not all new. However, an empirical comparison of the strength of thedifferent types of cost effects (sacrifices) on customer value might provide fur-ther insights. Following the above, we hypothesize that:

H2a: The greater the purchasing price, the lower the perceived customervalue.


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H2b: The greater the acquisition costs, the lower the perceived customervalue.

H2c: The greater the operations costs, the lower the perceived customervalue.

ANTECEDENTS OF BENEFITS AND SACRIFICES

Perceptions of benefits and sacrifices, we posit, are influenced by severalcharacteristics that indirectly determine customer value. After screening therelevant literature on possible influence factors of customer value a set ofproduct, relational, and supplier characteristics were identified. We elaborateon these selected factors next.

Product Characteristics

Characteristics of the product received by the customer will have a stronginfluence on the customer’s perception of value. In this context the rich tradi-tion of the quality literature in the study of customer value argues for a closerand detailed view of quality characteristics and their impact on customer value(e.g., Bolton and Drew 1991; Day 1990; Ulaga and Chacour 2001; Zeithaml1988). Even though other dimensions (e.g., design, individuality, packaging)have already been discussed with regard to customer value, product quality(e.g., Humphreys and Williams 1996; Menon, Jaworski, and Kohli 1997) andservice quality (Homburg and Garbe 1999; McMurrian and Wilson 1996;Parasuraman and Grewal 2000) are seen as critical for customer value in busi-ness-to-business relationships by most authors. Thus for the purposes of thispaper, we focus on the role of two major quality dimensions–product and ser-vice quality.

Product Quality. Product Quality is defined as the extent to which a deliv-ered product meets the customer’s requirements (cf. Garvin 1988; Zeithaml1988). It has been suggested that product quality is critical for delivering cus-tomer value (Menon, Jaworski, and Kohli 1997). In business-to-business rela-tionships, the quality of the supplier’s product has a critical impact on thecustomer’s own product output, and thus the success of the customer’s com-pany (Dodds, Monroe, and Grewal 1991; Fornell et al. 1996). Organizationstypically are unwilling to compromise on the quality level of the incomingproducts and consider product quality to be a key criterion to qualify potentialvendors (Dertouzos, Lester, and Solow 1989). To even be included in a buyingfirm’s consideration set, suppliers must demonstrate the ability to deliver a


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requisite level of product quality. Thus we conclude that product quality has apositive impact on the customer’s perception of core benefits.

Manufacturing high quality products requires systems and processes thatensure the desired level of quality. The increased level of resources deployedto assure high quality outputs adds to the supplier’s overall operating costs.Superior quality products require superior component parts and raw materials(Phillips, Chang, and Buzzell 1983). These higher quality components orhigher-grade materials will increase the supplier’s cost of goods sold. Addi-tionally, business customers, utilizing their own self-reference criteria, areaware that quality control processes come at a cost and that it increases thesupplier’s operations cost. These increased costs are traditionally recoupedthrough the price charged for the product. As such, the business customer an-ticipates (and are often prepared to pay) a higher purchase price for productsthat have superior quality. Hence we conclude that higher product quality willbe reflected in a higher price of the product.

Quality of components and raw materials will have drastic effects on acompany’s operations. When the customer perceives high product quality lev-els, it does not have to establish costly processes to ensure that the inspectionand monitoring processes are effective in weeding out products of unaccept-able quality levels. When the level of quality supplied is reliable, there is noneed for additional mechanisms (or processes) for a higher level of coordina-tion between itself and the supplier’s firm to ensure that the order is fulfilled inthe required specifications. Ravald and Grönroos (1996) argue that “a reliablelong-term quality in all episodes eliminates . . . supplier relationship costs”(p. 26). On the other hand, an erratic quality supply source can force the cus-tomer to “hoard up” required products and thus increasing its inventory andprocessing costs. Taken together, the level of product quality has a negativeimpact on the customer’s acquisition costs.

A firm that purchases lower quality materials will have a higher manufac-turing cost due to rework, downtime, or scrap (Cannon and Homburg 1998).Failures in the manufacturing process create uncertainty and problems that arelikely to increase internal coordination costs (e.g., between manufacturing,R&D, sales, and purchasing). Thus we suggest that a supplier’s product qual-ity will have a negative impact on the customer’s operations costs.

Therefore, we expect that:

H3a: The greater the quality of the supplier’s product, the greater the per-ceived core benefits.

H3b: The greater the quality of the supplier’s product, the greater the pur-chase price.


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H3c: The greater the quality of the supplier’s product, the lower the acqui-sition costs.

H3d: The greater the quality of the supplier’s product, the lower the opera-tions costs.

Service Quality. Service Quality is a measure of how well the deliveredtechnical and business process service matches customer expectations re-garding the structure, the process and the outcome of the service (cf.Donabedian 1980; Zeithaml, Berry, and Parasuraman 1996). Service Qualityrefers to the knowledge and competence of the supplier’s service staff and tothe ability of the supplier to address issues related to the product purchased inan expedient manner. Industrial services include pre-purchase services such asengineering, services delivered in conjunction with the purchase such as train-ing of the operations staff, and after sales services such as technical mainte-nance (Homburg and Garbe 1999). Increasingly, business customers aremoving away from the purchase of individual goods to the purchase of entirebundles that include the tangible good and all the accompanying services.There is ample evidence in business practice that customer service is becom-ing more critical in business-to-business contexts (Homburg and Garbe 1999)and is increasingly required by business customers (Lambert and Harrington1989). In business markets, the service capabilities of a vendor are a more ex-plicit consideration in purchase decisions than is commonly seen in consumermarkets. A supplier’s service quality becomes an integral part of the vendorselection criteria. We therefore assume that service quality of the supplier hasa positive impact on the customer’s perception of core benefits.

Providing superior level service requires investment in people, processesand systems. Training and retention of high quality service personnel is partic-ularly cost intensive. In addition, the infrastructure systems needed to facili-tate quick and efficient customer service require substantial investments. Weanticipate these costs to be reflected in a higher price charged to the customer.Hence we conclude that higher levels of service quality of the supplier lead tohigher purchase prices.

Prompt responses and accurate solutions to resolve customer problems willreduce costs resulting from downtime due to the delay in getting a correctiveaction from the supplier. Such downtimes, in turn, require coordination be-tween the various functional units of a company thus increasing internal coor-dination costs. We therefore argue that a high level of service quality willreduce the customer’s operations costs.

Therefore, we propose the following hypotheses:


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H4a: The greater the quality of the supplier’s service, the greater the per-ceived core benefits.

H4b: The greater the quality of the supplier’s service, the greater the pur-chase price.

H4c: The greater the quality of the supplier’s service, the lower the opera-tions costs.

Relational Characteristics

The relationship between exchange partners has been the focus of a sub-stantial number of research in the late 1980s and throughout the 1990s (e.g.,Dwyer, Schurr, and Oh 1987; Doney and Cannon 1997; Morgan and Hunt1994). The extant literature points to the growing relevance of managing at-tributes of the relationship as a means of enhancing relationship value (e.g.,Gassenheimer, Houston, and Davies 1998; Lapierre 1997). In this paper, wefocus on two such relational characteristics–trust and joint working betweenthe buyer and the seller. Trust has been found to be an integral part of businessrelationships (see Doney and Cannon 1997). In business marketing with theemerging model of closer alignment of buyer and seller organizations toachieve relationship goals, joint working arrangements have gained increas-ing prominence as a valuable business model (Heide and John 1990; Osbornand Hagedoorn 1997; Sriram, Krapfel, and Spekman 1992). Other relationalcharacteristics that are discussed in the relevant literature as, e.g., image, soli-darity, communication, reputation, tolerance or flexibility are implicitly con-sidered within our conceptualization and operationalization of trust, jointworking and the supplier characteristics (commitment and supplier flexibil-ity). In the following we focus on the influence of the relational characteristicstrust and joint working on customer value.

Trust. Defined as the perceived credibility and benevolence of the supplieras viewed by the customer (cf. Doney and Cannon 1997; Ganesan 1994;Kumar, Scheer, and Steenkamp 1995), trust has assumed a central role ininter-organizational relationships (Dwyer, Schurr, and Oh 1987; Morgan andHunt, 1994) and is a key characteristic of long-term commercial relationships(Ganesan 1994). Trust among parties in inter-organizational relationships en-ables each entity in the relationship to focus on the long-term benefits of therelationship (Ganesan 1994). Research suggests that trust enhances open com-munications and problem solving (Morgan and Hunt 1994), reduces conflict(Anderson and Narus 1990) and increases satisfaction (Anderson and Narus1990). Frazier et al. (1994) suggest trust between a buyer and seller allows for


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more open sharing of information and ideas that would be beneficial to bothparties. In business-to-business settings sharing of costs, profits, long-termgoals, and objectives, in order to improve the quality of the transaction tobetter suit the needs of the parties, is risky and therefore requires a high levelof trust. Trust-based relationships with suppliers are central to a firm’s abilityto compete effectively in today’s highly competitive marketplace. The abovediscussion leads us to the conclusion that trust has a positive impact on corebenefits.

In a competitive marketplace, when time and effort required to evaluate andqualify vendors is critical to the success of the firm, a trusted vendor affordsreduced acquisition costs. Since trust is the belief that a supplier will performin a manner that has the customer’s interest in mind, firms will rely on a trust-worthy vendor for its needs rather than embark on a time-consuming and ex-pensive search for new vendors. Research suggests that trust reduces theperception of risk associated with opportunistic behavior, reduces transactioncosts and increases confidence in the supplier (Ganesan 1994). Thus, a cus-tomer who trusts a supplier is likely to have lower costs associated with moni-toring supplier performance and carrying inventory, which in turn reduces thecustomer’s acquisition costs.

Therefore, we propose:

H5a: The greater the trust in the supplier, the greater the perceived corebenefits.

H5b: The greater the trust in the supplier, the lower the acquisition costs.

Joint Working. Joint Working refers to the parties in a relationship engag-ing in combined decision-making and problem solving (cf. Mohr andSpekman 1994; Nielson 1997). The literature in purchasing managementpoints to a strong relationship between joint working and lower total costs(e.g., Landeros and Monczka 1989; Larson 1994; Philling and Zhang 1992).In the business-to-business setting, joint working arrangements can occur overa large set of issues, for example, product design and development, value anal-ysis and target costing, quality control, and logistics and delivery systems (cf.Anderson and Narus 1990; Nielson 1997; Trelevan 1987).

Anderson, Lodish, and Weitz (1987) and Dwyer and Oh (1988) suggest thatwhen parties in a relationship participate and make joint decisions about goalsand plans affecting the outcome of the relationship, the relationship is typi-cally successful. Specifically with respect to relationship outcomes, Mohr andSpekman (1994) found that partnerships that have higher levels of joint work-ing arrangements tend to yield higher sales. In addition, Heide and John


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(1990) argue that joint actions are a signal that the two parties acknowledgethat the relationship is important to each other. Drawing on these previousstudies, we argue that the supplier’s ability and willingness to work jointly onissues related to the transaction will be an added point of differentiation.While they are not often considered to be a necessary condition, joint workingarrangements are useful conditions that help a customer firm select a supplierfrom among competing vendors. In summary, we conclude that joint workingis positively related to the perceived add-on benefits.

Joint working reduces vendor monitoring costs as a result of the closenessbetween buyers and suppliers. Sriram, Krapfel, and Spekman (1992) concludethat collaborative efforts between exchange partners reduce the probabilitythat any one of the exchange partners will behave opportunistically and thuswill reduce transaction costs (p. 309). In addition, the higher level of commu-nication between the companies resulting from the joint working arrange-ments provide for a better understanding of the needs, requirements, andexpectations of each party (cf. Mohr, Fisher, and Nevin 1996). Joint workingarrangements will therefore allow the supplier to anticipate the customer’sneeds better and deliver products to the customers in appropriate quantitiesand specifications thus reducing the customer’s inventory and delivery-relatedcosts. Following the above discussion, we argue that joint working arrange-ments will reduce the customer’s acquisition costs.

When the buyer and the seller work jointly (e.g., in product development),there are several opportunities to ensure that the specifications needed for pro-ducing the customer’s end product are met (Larson 1994). This reduces thechance for misspecified products reaching the customer’s factory floor (cf.Schonberger 1982). Since the incoming component parts or materials are ofthe required specifications, the customer’s downtime due to faulty parts is re-duced, if not eliminated (Shetty 1986; Mohr and Spekman 1994). In addition,collaboration with suppliers in R&D provides opportunities for reducing costsas a result of sharing knowledge and thus reducing costly corrective actions(cf. Anderson and Narus 1990; Heide and John 1990). Thus, when the cus-tomer and the supplier work jointly, the customer’s operations costs will be re-duced. In summary, we propose the following hypotheses which are to ourknowledge new in the context of the customer value discussion:

H6a: The greater the joint working the greater, the perceived add-on bene-fits.

H6b: The greater the joint working, the lower the acquisition costs.

H6c: The greater the joint working, the lower the operations costs.


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Supplier Characteristics

When examining supplier characteristics, we include supplier flexibilityand supplier commitment in our discussion. Each of these constructs has a richhistory in the relationship marketing literature and has been found to be impor-tant for business relationships (Anderson and Narus 1998; Claycomb andFrankwick 1997; Kale and Barnes 1992). Nevertheless there are other suppliercharacteristics such as advertising activities, problem solving capability, andsupplier trustworthiness that are discussed as possible drivers of customervalue (cf. Humpreys and Williams 1996; Ravald and Grönroos 1996;Zeithaml 1988). However, these characteristics are either more relevant in aconsumer context (advertising activities) or aspects that are considered withinthe conceptualization and operationalization of the relational characteristics(trust and joint working).

Flexibility of the Supplier. Flexibility of the Supplier refers to the extent towhich the supplier is willing and able to make adaptations to accommodatethe customer’s changing needs (Cannon and Homburg 1998; Noordewier,John, and Nevin 1990). Typically, such accommodation takes the form ofquick responses to sudden, often unanticipated customer needs. A flexiblesupplier may apply rules and policies loosely to accommodate a particularcustomer’s request (Cannon and Homburg 1998).

Adjusting to the changing needs of the customer is considered to be a suc-cess factor in relationship management (Kale and Barnes 1992). While manysuppliers offer quality goods and services, a supplier who is willing to accom-modate a customer’s unique business needs makes “life easier” for the cus-tomer. The opportunity to work with a supplier who is accommodatingreduces anxiety stemming from market demands or economic demands. Aflexible supplier, therefore, affords a useful convenience for the buyer. Theseconveniences offered by the supplier make it easier for the customer to dobusiness with the supplier, and in turn help the customer distinguish betweenvendors who offer similar tangible products or service products. The flexibil-ity demonstrated by the supplier therefore becomes the winning element in thebuyer’s decision criteria. We therefore expect flexibility to influence add-onbenefits positively.

Suppliers making short-term adjustments to delivery schedules and quanti-ties provide a useful benefit that is discretionary and yet beneficial. Flexiblesuppliers afford customers the opportunity to reduce inventory costs. Whenthe supplier is flexible to accommodate the customer’s volume need, the cus-tomer does not have to maintain a high level of product inventory (Cannon andHomburg 1998). Also, knowing that the supplier is willing to fulfill unantici-pated raw material or component needs reduce the cost associated with identi-


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fying and securing additional qualified suppliers. Thus we expect thatflexibility will influence acquisition costs negatively.

In addition, supplier flexibility can help the customer reduce operationscosts by avoiding lengthy factory downtime resulting from unexpected spikein demand (cf. Noordewier, John, and Nevin 1990). If the supplier is not ableto accommodate these unexpected spikes in demand, the customer can incurhigher operating cost resulting from downtime. This leads us to the conclusionthat flexibility has a negative impact on operations costs.

Following the above discussion, we propose the following hypotheses:

H7a: The greater the flexibility of the supplier, the greater the perceivedadd-on benefits.

H7b: The greater the flexibility of the supplier, the lower the acquisitioncosts.

H7c: The greater the flexibility of the supplier, the lower the operationscosts.

Commitment of the Supplier. Commitment of the Supplier is defined as anenduring desire and effort on the part of the supplier to maintain a valuedrelationship with the customer (cf. Moorman, Zaltman, and Deshpandé 1992,p. 316; Morgan and Hunt 1994, p. 23). As credible commitments increase inmagnitude and symmetry, social norms arise. Social norms reinforce the at-tachments to one another over time through increased investment intentions.

Our conceptualization of supplier commitment takes into account the sup-plier’s willingness to make short-term sacrifices, invest in a relationship, andbe tolerant of the buyer’s mistakes (for example, mistakes in ordering or out-lining product specifications). Since commitment is a behavioral trait thattakes into account both transaction specific behavior and also social traits (dis-play of patience, willingness to defend the customer, etc.), we view commit-ment to be a desirable attribute in a vendor as opposed to a mandatedrequirement leading us to argue that such attributes tend to be relationshipwinners. A higher commitment of one supplier, however, can serve as a choicecriterion that qualifies this one supplier over other potential vendors (Doneyand Cannon 1997). This is not to suggest that supplier commitment by itself,without qualifying attributes of product quality, etc., will help the potentialvendor get selected as a supplier (Fontenot et al. 1997). Therefore, we proposethe commitment of the supplier to increase the add-on benefits to a customer ina relationship.


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Supplier commitment suggests that the supplier is willing to deploy thenecessary resources to help the customer firm succeed and that the welfare ofthe customer is often considered in the supplier’s actions. It can be argued thatthese considerations by the supplier will help reduce the customer’s opera-tions costs (Morgan and Hunt 1994). During times of manufacturing problemshighly committed suppliers will be willing to infuse their own resources tohelp resolve the problem thus preventing increased operations costs. Suppli-ers, convinced of the long-term benefits accruing from a relationship with thecustomer, are highly motivated to reduce downtime and solve other problemsthat might arise in the customers’ operations. Also, highly committed suppli-ers having a long-term orientation towards the relationship will deploy theirown resources towards the product development initiatives of the customerthus reducing the customer’s R&D costs. We therefore expect that suppliercommitment will decrease a customer’s operations costs.

Considering the potential influence of commitment, we suggest that:

H8a: The greater the commitment of the supplier, the greater the perceivedadd-on benefits.

H8b: The greater the commitment of the supplier, the lower the operationscosts.

METHODOLOGY

Sample and Data Collection

Collecting data in more than one country increases the generalizability offindings. Until now most empirical studies have focused on a single country(e.g., Grewal, Monroe, and Krishnan 1998; Sinha and deSarbo 1998; Walter,Ritter, and Gemünden 2001). In contrast to this approach we have conducted amultiple country study. Data for the study was collected in the US and in Ger-many. In the US, 2,500 members of the National Purchasing Manager’s Asso-ciation were taken from the association’s membership database. Similarly inGermany, 2,500 purchasing managers were identified from the listing main-tained by a commercial provider. In identifying possible respondents, westratified across different company size categories and three different indus-tries (the chemical, mechanical, and electrical industries–SIC 28-38) withidentical stratification procedures across countries. Each of the possible re-spondents was mailed a cover letter, questionnaire, and postage paid return en-velope. Each of the respondents was asked to consider the most recent


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relationship with a supplier for a product the company purchases frequently.Furthermore we asked the respondent to classify the underlying product intoone of three categories (production material, component part or raw material).In our data we find an almost equal distribution between the three product cat-egories in both countries. Due to duplicate, incomplete, or missing addresses atotal of 4,775 questionnaires were sent out (2,475 in Germany and 2,300 in theUS). Four weeks later, each non-respondent received a reminder letter and an-other copy of the questionnaire. The process described above yielded 528completed questionnaires in Germany (giving a response rate of 22%) and 453completed questionnaires in the US (giving a response rate of 20%), combin-ing for an overall response rate of 21%.

Following Armstrong and Overton (1977) we tested non-response bias bycomparing early versus late respondents. More than half of the sample had an-swered after receiving the reminder. All indicator variables as well as demo-graphic variables (e.g., size of firm, number of employees, product category,industry) were tested for differences. No significant differences were foundbetween early and late respondents suggesting that non-response bias is not aproblem with this data set.

Measure Development and Assessment

Measure Development. All of the constructs in our study were measured us-ing multi-item scales (with the exception of purchasing price). Items weregenerated based on interviews with selected members of buying centers and areview of the extant literature. The questionnaire was first designed in Eng-lish. To ensure translation equivalence the questionnaire was translated intoGerman and back translated into English by a second person as proposed byDouglas and Craig (1983). The original and back-translated versions werethen compared for conceptual equivalence and translation errors and refinedwhere necessary. The resulting version was pre-tested and further refined onthe basis of comments from purchasing managers in the United States andGermany.

Operationalization of Scales. There exist alternative ways to operationalizeconstructs according to measurement theory (Bollen 1984; Cohen 1990).Some constructs have only a very limited and specific focus and can there-fore be measured using a single item (e.g., purchasing price in this study).Latent variables with multiple items can be operationalized either in a reflec-tive or formative way. When measures of a construct present unique aspects,the construct can be viewed as a composite or a sum (Bagozzi 1994). If a la-tent construct reflects such a total across different sources, formative oper-ationalizations are required to measure such a construct effectively (Howell


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1987). Following Cannon and Homburg (1998) we operationalized acquisi-tion and operations costs using formative measures as items of these costsneed not be correlated, measuring a particular type of cost, but still contributeto the total costs. Formative scales cannot be analyzed with respect to reliabil-ity and validity since there exists no standardized statistical techniques for do-ing so (Cohen 1990).

Configural and Metric Invariance. Following Steenkamp and Baumgartner(1998), the first step in our analysis was to ensure configural and metricinvariance of the two samples. Configural invariance implies that the factorialstructure underlying a set of observed measures is the same across groups.Furthermore we tested if metric invariance was supported. This stronger testof invariance implies that the units of measurement or scale intervals areequivalent across groups. We analyzed the measurement invariance across thetwo different countries by means of multiple-group confirmatory factor analy-sis with LISREL VIII (Jöreskog and Sörbom 1993). We found the constructsto display full configural invariance and full metric equivalence. Also, wefound the reliabilities to be about the same in both countries. In summary,given these findings, pooling the data from the two countries is appropriate.

Assessment of Measures. A complete list of the measures and the itemreliabilities are available in the appendix. Some measures were taken fromprevious research and modified to be appropriate within the context of ourstudy. However, many of the measures were developed uniquely for this re-search. The summary statistics (means, standard errors, ranges and variances)for the measurement scales of the sample is found in Table 1. The results re-veal that respondents used the full range of possible answers with reasonablevariance.

Statistical procedures used to validate the reflective measures included as-sessments of item and scale reliability, unidimensionality, and convergent va-lidity (Anderson and Gerbing 1988). In order to assess measurement validity,confirmatory factor analyses were run with LISREL VIII (Jöreskog andSörbom 1993). Analyses were conducted separately for each construct as wellas for the whole measurement model consisting of all constructs.

The coefficient alpha values range from .69 for core benefits to .93 for flex-ibility exceeding the threshold value of .70 recommended by Nunnally (1978)with the exception of core benefits. Generally, a composite reliability of atleast .60 is considered desirable (Bagozzi and Yi 1988, p. 82). The encoun-tered composite reliability values range from .80 for the core benefits to .94 fortrust. Usually, the average variance extracted of a construct should exceed .50according to Bagozzi and Yi (1988) which is seen in our model with valuesranging from .58 for core benefits to .80 for flexibility. The item reliabilitiesdisplayed in the appendix are high as well.


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Discriminant Validity. With regard to discriminant validity, we did a seriesof model tests to explore differences when constraining the correlation be-tween a pair of constructs to 1.0. The chi-square difference between the con-strained model proved to be statistically significant from the unrestrainedmodel for all constructs thus indicating discriminant validity. We also used thetest suggested by Fornell and Larcker (1981) by comparing the average vari-ance extracted to the squared correlation between all pairs of latent constructsto ensure discriminant validity. Again, results indicated discriminant validitybetween the constructs.

RESULTS

Figure 1 provides an overview of the hypothesized main effects. The hy-pothesized model was estimated by structural equation modeling usingLISREL VIII (Jöreskog and Sörbom 1993). We assumed a reliability of .85(equivalent to an error variance of .15 times the variance) for the formativescales for the purpose of model estimation as suggested by Jöreskog andSörbom (1993).


TABLE 1. Summary Statistics for Measurement Scales

number average

of reliability variance

Construct Name items mean/SD rangea (a/r)b extracted

Customer Value 4 5.06/1.22 1.00/7.00 .87/.90 .68

Core Benefits 3 5.94/1.02 1.00/7.00 .69/.80 .58

Add-On Benefits 6 4.77/1.33 1.00/7.00 .88/.90 .60

Purchasing Price c 1 3.58/1.25 1.00/7.00 --/-- --

Acquisition Costs c 5 3.43/0.89 1.00/7.00 --/-- --

Operations Costs c 4 3.45/0.87 1.00/7.00 --/-- --

Product Quality 3 5.91/1.01 1.00/7.00 .70/.82 61

Service Quality 8 5.68/0.96 1.75/7.00 .91/.93 66

Flexibility of the Supplier 4 5.37/1.24 1.00/7.00 .93/.94 80

Trust 7 5.63/1.05 1.14/7.00 .92/.94 69

Joint Working 5 4.48/1.55 1.00/7.00 .84/.91 67

Commitment of the Supplier 6 5.42/1.00 1.50/7.00 .88/.91 63

a The possible range for all measures was 1 through 7.b Reports coefficient alpha and composite reliability.c Reliability and average variance extracted are not applicable for single-item measures and formative scales.

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The results of the LISREL analysis are shown in Table 2. Each of the over-all fit-measures (c2/df, GFI, AGFI, CFI, and RMSEA) compare favorably tostandards suggested in the literature (Bagozzi and Yi 1988; Baumgartner andHomburg 1996; Bentler 1990). It is also worth noting that the explained vari-ance with respect to perceived customer value in our model is 69%, indicatingthat our conceptualization of the benefits and sacrifices captures the essence ofthe customer value construct.


TABLE 2. Results of LISREL Estimation (Standardized coefficients)

Dependent Variables

CoreBenefits

Add-onBenefits

PurchasingPrice

AcquisitionCosts

OperationsCosts

CustomerValue

Antecedents

Product Characteristics

Product Quality .20a .23a .19a�.03

Service Quality .10b�.47a .02

RelationshipCharacteristics

Trust .51a�.26a

Joint Working .13a�.11a

�.14a

Supplier Characteristics

Flexibility of the Supplier .08a�.38a

�.28a

Commitmentof the Supplier

.51a�.27a

Determinants

Benefits

Core Benefits .23a

Add-On Benefits .57a

Sacrifices

Purchasing Price �.19a

Acquisition Costs �.02

Operations Costs �.15a

Fit statistics: χ2 (1,094 d.f.) = 2,290.17 (p < .01); GFI = .99; AGFI = .99, CFI = .99, RMSEA = .037a P < .01b P < .10

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Effects of Benefits and Sacrifices on Customer Value

Our first set of hypotheses dealt with the impact of benefits and sacrificeson customer value in a business-to-business relationship. Customers activelystrive to increase the value they receive from a relationship by seeking to in-crease the benefits received while reducing the sacrifices made. We thereforeargued that benefits increase the perceived customer value whereas sacrifices(price and costs) lower the perceived customer value. Hypothesis H1a statesthat the greater the perceived core benefits, the greater the perceived cus-tomer value. Our results supports this hypothesis (b61 = .23, p < .01). Simi-larly, our results support hypothesis H1b which states that the greater theperceived add-on benefits, the greater the perceived customer value (b62 =.57, p < .01).

H2a, stating that the greater the purchasing price, the lower perceived cus-tomer value, is also supported (b63 = �.19, p < .01). With respect to H2b, weproposed the greater the acquisition cost, the lower the perceived customervalue. Our results do not support this hypothesis (b64 = �.02, p = ns). Finally,H2c states that the greater the operations costs, the lower the perceived cus-tomer value. We found support for H2c (b65 = �.15, p < .01).

Effects of the Antecedents of Benefits and Sacrifices

Our second set of hypotheses dealt with the impact of product, relational,and supplier characteristics on benefits and sacrifices.

Product Characteristics. Regarding product characteristics, we examinedthe impact of product quality and service quality. Hypothesis H3a states thegreater the quality of the supplier’s product, the greater the perceived corebenefits. Our results support this hypothesis (g11 = .20, p < .01). HypothesisH3b argues that the greater the quality of the supplier’s product, the greaterthe purchase price. This hypothesis was supported by our results (g31 = .23,p < .01). On the other hand H3c, which predicted that the greater the quality ofthe supplier’s product, the lower the customer’s acquisition costs, was notsupported (g41 = .19, p < .01). Similarly, H3d predicted that the greater thequality of the supplier’s product, the lower the customer’s operations costs.Our results did not support this hypothesis (g51 = �.03, p = ns).

We formulated three hypotheses that examined the impact of service qual-ity on benefits and sacrifices. Specifically, H4a states that the greater the ser-vice quality, the greater the perceived core benefits. Our results do not supportthis hypothesis on the conventional 5% significance level (g12 = .10, p < .06).


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However, we do find significance on the 6% level. H4b states that the greaterthe quality of the supplier’s service, the greater the purchase price. We foundsignificant support for this hypothesis (g32 = �.47, p < .01). Finally, H4c statesthat the greater the quality of the supplier’s service, the lower the customer’soperations costs. Our results indicate that service quality does not have a sig-nificant effect on the operations costs (g52 = .02, p = ns).

Relational Characteristics. With respect to relational characteristics, recallthat we examined the effects of trust and joint working arrangements on bene-fits and sacrifices. H5a states that the greater the trust, the greater the per-ceived core benefits. Our results strongly support this hypothesis (g13 = .51,p < .01). H5b indicates that the greater the trust, the lower the acquisitioncosts. Our results support this hypothesis (g43 = �.26, p < .01).

With respect to joint working, we argued that joint working arrangementsin a relationship have a positive effect on perceived add-on benefits. More for-mally, H6a states that the greater the joint working, the greater the perceivedadd-on benefits. Our results support this hypothesis (g24 = .13, p < .01). H6bstates that the greater the joint working, the lower the acquisition costs. Wefind support for this hypothesis in our results (g44 = �.11, p < .01). Similarly,our last hypothesis in this set, H6c, states that the greater the joint working, thelower the operations costs. We find support for this hypothesis (g54 = �.14, p <.01).

Supplier Characteristics. Our final set of hypotheses examines the impactof supplier characteristics on benefits and sacrifices. Specifically, we investi-gate the effects of supplier flexibility and supplier commitment on benefitsand sacrifices. H7a states that the greater the flexibility of the supplier, thegreater the perceived add-on benefits. Our results support this hypothesis(g25 = .08, p < .01). However, though statistically significant on the .01 level,the antecedent flexibility of the supplier in comparison to joint working andcommitment of the supplier has a much lower influence on add-on benefits. Inaddition, we state in H7b that the greater the flexibility of the supplier, thelower the acquisition costs. This hypothesis is also supported in our results(g45 = �.38, p < .01). Finally, in H7c we state that the greater the flexibility ofthe supplier, the lower the customer’s operations costs. Again, our results sup-port this hypothesis (g55 = �.28, p < .01).

The final relationship of interest to us in this paper was the impact of sup-plier commitment on benefits and sacrifices. We proposed that supplier com-mitment would have a positive impact on perceived add-on benefits. Inparticular, H8a stated that the greater the commitment of the supplier, thegreater the perceived add-on benefits. We found strong support for this hy-


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pothesis (g26 = .51, p < .01). Compared to the other two antecedents of add-onbenefits (flexibility and joint working) the practical significance of commit-ment of the supplier is much higher (.51 vs. .13 and .08). Finally, we state inH8b that greater the commitment of the supplier, the lower the operationscosts. Again, our results support this hypothesis (g46 = �.27, p < .01).

DISCUSSION

Effective business market management requires a clear assessment of cus-tomer value in the marketplace. It has been argued that business marketingmust have as its cornerstone the concept of customer value (Anderson andNarus 1999). Indeed, for customer value to become the cornerstone of busi-ness marketing, managers and academic researchers must have a detailed un-derstanding of the components of customer value. The purpose of this study isto provide a precise conceptualization of customer value in business-to-busi-ness relationships.

In this paper, we agree with the contemporary conceptualization of cus-tomer value that views benefit and sacrifice as determinants of customervalue. However, in a departure from previous treatment of the value construct,we argue that benefits should be categorized to include “core benefits” and“add-on benefits” and that, a more precise view of sacrifice needs to include acomprehensive set of costs. So as to provide a complete view of sacrifice in abusiness relationship, we include “acquisition costs” and “operations costs.”in addition to the basic “purchase price.” By adopting a comprehensive viewof both benefit and sacrifice, we put forth a more robust conceptualization ofcustomer value in business-to-business relationships. Finally, we examine aselected set of variables that demonstrate the impact of product, relational andsupplier characteristics on the evaluation of benefits and sacrifices. Several in-teresting and important findings emerge from this study. We discuss themnext.

One interesting finding is the significant influence of add-on benefits oncustomer value. Add-on benefits, recall, refer to those attributes that influencebuyers in their selection of a supplier from among qualified vendors. Our re-sults suggest that add-on benefits have a stronger influence on customer per-ceived value than core benefits. A reason for this finding could be that whilecore benefits are influential drivers of customer value, it is a criterion on whichall qualified vendors perform well. Customers appear to view add-on benefitsto be the differentiator for customer value among providers of equal core ben-efits. Therefore, issues such as supplier flexibility, supplier commitment, and


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joint working arrangements that influence add-on benefits become increas-ingly critical in shaping customer value in business-to-business marketing.

A second finding of importance is the stronger overall impact of benefits(both core and add-on) on perceived customer value relative to the impact ofsacrifices on perceived customer value. This finding suggests that when as-sessing value in business relationships, customers tend to focus more on theoverall benefits that accrue from the relationship and less on the sacrifices in-volved.

A third interesting finding is the similar influence of price and operationscost on perceived customer value. Our results indicate that operations costs arejust as important and influential in determining perceived customer value, as ispurchasing price. We did not find a significant impact of acquisition costs onperceived customer value. This could be due to the transparent nature of pur-chase price and operations costs relative to acquisition costs. In addition, itcould be that acquisition costs are less significant in magnitude relative to op-erations costs and thus tend not to be monitored easily.

A fourth finding in our study is that trust is a strong driver of benefits andsacrifices. Clearly, our results indicate that trust (i.e., the customer trusting thesupplier) influences core benefits that business customers consider necessaryin business relationships. In fact, our results indicate that trust has a strongerimpact on core benefits than the product characteristics. In addition, our re-sults support our reasoning that trust will reduce acquisition costs. Indeed, ourresults provide further support for previous conclusions regarding the centralrole trust plays in buyer-seller relationships (Doney and Cannon 1997;Ganesan 1994).

Consistent with our theoretical reasoning, our results indicate a strong im-pact of supplier flexibility on costs. Our findings suggest that flexible suppli-ers help reduce a customer’s acquisition and operations costs. Similarly, ourresults supported the theory-based arguments for a strong positive impact ofproduct quality on core benefits and price.

We did, however, have some unanticipated findings in our study. For in-stance, we had argued that high product quality would reduce the supplier’sacquisition costs. However, our results indicate otherwise. One explanationfor this finding could be that superior product quality requires higher coordi-nation and greater interaction between the buyer and the supplier (cf. Menon,Jaworski, and Kohli 1997). The efforts involved in coordinating and interfac-ing with the supplier to ensure high product quality can result in the buyer’shigher acquisition costs.

In addition, we were surprised to find that neither product nor service qual-ity had a significant impact on operations costs. One possible explanation forthese non-significant findings could be that the respondents, who were pur-


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chasing managers, might not be closely aligned with the manufacturing pro-cess and as such, do not see the impact of quality on operations costs firsthand.

Finally, we had expected high service quality to increase the purchasingprice. In fact, our results indicate the opposite. One possible explanation forthis finding is that delivering superior service quality requires optimizing in-ternal processes and systems that will ultimately reduce the supplier’s servicedelivery costs. It is possible that in business arrangements, these cost savingsare shared with the customer in the form of lower prices.

Implications for Practice

Our results point to several implications for the practicing manager. First,contrary to the general belief in a cost-driven economy, our study found thatbenefits have a greater impact on perceived customer value than sacrifices(price and costs). Thus, we encourage managers to emphasize benefits accru-ing from a relationship and not focus solely on lowering the purchase price andrelated costs when managing customer value.

Second, our results highlight the importance of operations cost on per-ceived customer value. Supply firms, by optimizing their internal processesand systems, can help reduce the customer’s operations costs. Ensuringon-time delivery of components and raw materials, getting involved in thecustomer firm’s manufacturing and R&D strategy making processes, and de-ploying resources needed to ensure a smooth relationship with the customerwill help reduce the customer’s operations costs. Therefore, the supplier doesnot have to rely solely on the price dimension (although price continues to be akey determinant of perceived customer value) when managing perceived cus-tomer value.

Third, our findings highlight the importance of relational and supplier char-acteristics as determinants of benefits. Our results support and further substan-tiate the critical roles trust and commitment play in business arrangements.Based on our findings, we believe that supplier activities aimed at enhancingcustomer value should not be limited to tangible product or process related is-sues. In fact, managers must make relationship specific investments that willhelp increase customers’ trust and improve the perception of the supplier’scommitment in the mind of the customer.

Finally, our results indicate that in business relationships, joint working ar-rangements will help increase the business customer’s perception of value re-ceived. Participants in our study found joint working arrangements to be anadd-on benefit and a factor that helped them differentiate potential suppliers.Therefore, managers should incorporate the buyer’s viewpoints when discuss-


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ing issues that have a direct impact on the buyer and include the buyer when-ever possible in the decision making process.

Limitations and Suggestions for Future Research

The primary objective of our paper was to put forth a conceptualization ofcustomer value that provides a deeper understanding of the construct withinthe business-to-business marketing context. In doing so, we confined our ex-amination of the drivers of benefits and sacrifices to a limited set of variables.Admittedly, further understanding of the drivers of core benefits, add-on bene-fits, purchasing price, acquisition costs, and operations costs in business-to-business marketing will require an examination of additional product, rela-tional and supplier characteristics and their interrelatedness.

Moreover, a detailed analysis of the possible relationships between the dif-ferent benefits and costs might provide further insight into the complex con-struct of customer value. With regard to the possible interdependencies onemight look at trust as a moderating variable. In this context, a dyadic view(supplier and customer view) on customer value could possibly provide fur-ther insights.

Our examination of customer value in business arrangements is based on astatic analysis of the buyer-seller relationship at a point in time. A more robustapproach to studying customer value in business-to-business relationshipswould be based on a dynamic analysis of the issues we studied. Such an analy-sis will allow managers to understand the differing impact of the product, rela-tional, and supplier characteristics on perceived customer benefits andsacrifices at various stages of the buyer-seller relationship.

We used perceptual measures of benefits, costs and customer value. Futureresearch might relate the independent variables in our study to objective mea-sures of benefits, costs, and customer value. While we do not expect such anal-ysis would lead to substantially new insights about the conceptualization ofthe value construct, it might provide more specific results on the magnitude ofimpact the different types of benefits and sacrifices will have on customervalue.

Finally, our examination of perceived customer value does not incorporate acontingency perspective. Indeed, the influence of benefits and sacrifices on cus-tomer value can and will vary under differing customers (e.g., German suppli-ers, American customers), relationship contexts (e.g., relationship networks,cooperation), and environmental situations (e.g., competitive situation). Con-sidering these factors would be worth an analysis. As such, we also believethat future examination of customer value in a relationship context shouldconsider the impact of power, customer dependency, customer size, customer


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capabilities, past experiences, and corporate culture on the relationship be-tween benefits, sacrifices and customer value. Similarly, a finer grained analy-sis of the impact of product, relational, and supplier characteristics on benefitsand sacrifices should consider potential moderator effects on the relationships.

CONCLUSION

A strong focus on customer value can have a significant impact on businessmarket management. Creating and managing customer value in business rela-tionships require a comprehensive understanding of what constitutes customervalue. The impetus for this study has been the clarion call for a better concep-tualization and understanding of the customer value construct. This paper ex-tends our understanding of the customer value construct by categorizingbenefits into core and add-on benefits. In addition, the paper takes a broaderview of sacrifices to include purchase price, acquisition costs, and operationscosts. We believe that such a categorization of benefits and sacrifices will helpmanagers to focus on the key drivers of customer value, and therefore bettermanage each component of customer value. For indeed, customer value willbe the cornerstone of business marketing in the 21st century.

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APPENDIX

Measures and Item Reliability

Scale name, response cue, and individual itemsItem

Reliabilitya

Customer value (strongly agree–strongly disagree)

For the costs incurred, we find the benefits offered by this supplier to be of high value. .76

This supplier provides the best value for us. .74

The benefit we receive from the relationship with this supplier far outweigh theprice/costs we incur.

.44

We receive high value from this supplier. .76

Core benefits (strongly agree– strongly disagree)

The relationship with this supplier meets our basic needs. .55

As a company, this supplier meets the minimum requirements we have for the consid-eration of a supplier.

.42

We are pleased with the core benefit of the relationship with this supplier. .78

Add-on benefits (strongly agree–strongly disagree)

This supplier offers useful benefits beyond our basic needs. .63

Additional benefits offered by this supplier were a reason for selecting it as a vendor. .54

The relationship with this supplier provides us value beyond a simple transaction. .67

In general, this supplier's overall offering is better than what other vendors provide inthe marketplace.

.43

The relationship with this supplier provides us much more benefit than basic benefitwe would generally expect.

.76

As a company, this supplier exceeds the requirements we have for a vendor. .59

Purchasing price (How do each of the following costs compare with the costs incurred in yourcompany's other supplier/vendor relationships? Costs much higher–much lower)a

Purchasing price.

Acquisition costs (much higher–much lower) a

Inventory carrying costs.

Ordering costs.

Delivery costs.

Costs of coordination and communication between your company and this supplier.

Administrative costs.

Operation costs (much higher–much lower) a

Manufacturing costs.

Research and development costs.

Costs of coordinating within your firm.

Costs associated with downtime.

aItem reliability cannot be calculated for formative and single-item measures.

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Scale name, response cue, and individual itemsItem

Reliability

Product quality (strongly agree–strongly disagree)

This supplier's product satisfies the basic criteria established for this product. .55

We have had no problems with this product. .45

This supplier's product meets all of our established standards. .86

Service quality (strongly agree–strongly disagree)

We find the employees of this supplier to be friendly. .56

We find the employees of this supplier to be very knowledgeable. .68

We are able to reach the employees of this supplier whenever we need them. .55

We receive prompt answers to our inquiries from this supplier's staff. .68

The advice and suggestions we get from this supplier's staff are always helpful. .68

Our problems are always quickly resolved by this supplier's staff. .74

The service employees of this supplier do high quality work. .67

The technical service provided by this supplier typically leads to the desired result. .58

Joint working (strongly agree–strongly disagree)

Our two companies jointly make many important technical decisions that might impactour relationship with each other.

.64

Our two companies jointly decide on the goals and objectives for our relationship witheach other.

.60

In many cases, our two companies mutually agree before making major technical de-cisions that might impact our relationship with each other.

.72

Our two companies jointly solve many of our technical problems. .74

Both companies actively provide input into this product's development process. .65

Flexibility of supplier (strongly agree–strongly disagree)

This supplier is flexible enough to handle unforeseen problems. .75

This supplier handles changes well. .81

This supplier can readily adjust its inventories to meet changes in our needs. .80

This supplier is flexible in response to requests we make. .85

Trust (strongly agree–strongly disagree)

This supplier keeps promises it makes to our company. .58

We believe the information that this supplier provides to us. .67

This supplier is genuinely concerned that our business succeeds. .71

When making important decisions, this supplier considers our welfare as well as its own. .67

We trust this supplier keeps our best interests in mind. .78

This supplier is trustworthy. .83

We find it necessary to be cautious when dealing with this supplier. (R) .63

Commitment of supplier (strongly agree–strongly disagree)

This supplier defends us when others criticize us. .55

This supplier is very committed to us. .79

This supplier is willing to dedicate whatever people and resources it takes to grow oursales.

.67

This supplier is willing to make sacrifices to help us out from time to time. .66

This supplier is patient with us when we make mistakes that inconvenience it. .60

This supplier expects to be our supplier for a long time. .50

(R) Reversed-scored items.

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EXECUTIVE SUMMARY

Both in practice and in academic research, the issue of customer value hasemerged as critical for customer relationship management efforts and achiev-ing organizational goals. Customer value is considered to be an important de-terminant for creating satisfaction, and more recently as a driver of customerloyalty. Given its significance to organizational performance, an issue of keeninterest in research and practice appears to be the determinants of customervalue. It has been suggested that understanding the components of customervalue will allow firms to better manage the customer value delivery process.

In this paper, we explored the question: What are the antecedents of cus-tomer value within the context of business-to-business relationships? Morespecifically we explored the role of key constructs that determine customervalue from a consumer perspective. In this context we agree with the contem-porary conceptualization of customer value that views benefit and sacrifice asdeterminants of customer value. However, in a departure from previous treat-ment of the value construct, we argue that benefits should be categorized to in-clude “core benefits” and “add-on benefits” and that, a more precise view ofsacrifice needs to include a comprehensive set of costs. So as to provide acomplete view of sacrifice in a business relationship, we include “acquisitioncosts” and “operations costs,” in addition to the basic “purchase price.” Byadopting a comprehensive view of both benefit and sacrifice, we put forth amore robust conceptualization of customer value in business-to-business rela-tionships.

Our first set of hypotheses dealt with the impact of benefits and sacrificeson customer value in a business-to-business relationship. We hypothesizedthat benefits (core benefits and add-on benefits) increase the perceived cus-tomer value whereas sacrifices (price and costs) lower the perceived customervalue.

Finally, we examine a selected set of variables that show the impact ofproduct, relational and supplier characteristics on the evaluation of benefitsand sacrifices. Hence our second set of hypotheses dealt with the impact ofproduct, relational, and supplier characteristics on benefits and sacrifices.

In contrast to other approaches we have conducted a multiple countrystudy. Data for the study was collected in the US and in Germany. In the US,2,500 members of the National Purchasing Manager’s Association were takenfrom the association’s membership database. Similarly in Germany, 2,500purchasing managers were identified from the listing maintained by a com-mercial provider. In identifying possible respondents, we stratified across dif-ferent company size categories and three different industries (the chemical,mechanical, and electrical industries–SIC 28-38) with identical stratification


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procedures across countries. Each of the possible respondents was mailed acover letter, questionnaire, and postage paid return envelope. Due to dupli-cate, incomplete, or missing addresses a total of 4,775 questionnaires weresent out (2,475 in Germany and 2,300 in the US). Four weeks later, eachnon-respondent received a reminder letter and another copy of the question-naire. The process described above yielded 528 completed questionnaires inGermany (giving a response rate of 22%) and 453 completed questionnaires inthe US (giving a response rate of 20%), combining for an overall response rateof 21%.

On an overall basis, our empirical analyses provide support for our theoreti-cal reasoning. We essentially find support for our hypotheses. That is, weshowed that perceived core benefits and add-on benefits have a positive im-pact on the perceived customer value. Moreover we showed that add-on bene-fits have an even stronger influence on customer perceived value than corebenefits. We also showed that the purchasing price and the operations costshave a negative impact on perceived customer value. In this context we dem-onstrate the strong impact of product, relational and supplier characteristics onthe evaluation of benefits and sacrifices.

Our results point to several implications for the practicing manager. First,contrary to the general belief in a cost-driven economy, our study found thatbenefits have a greater impact on perceived customer value than sacrifices(price and costs). Thus, we encourage managers to emphasize benefits accru-ing from a relationship and not focus solely on lowering the purchase price andrelated costs when managing customer value.

Second, our results highlight the importance of operations cost on per-ceived customer value. Supply firms, by optimizing their internal processesand systems, can help reduce the customer’s operations costs. Ensuringon-time delivery of components and raw materials, getting involved in thecustomer firm’s manufacturing and R&D strategy making processes, and de-ploying resources needed to ensure a smooth relationship with the customerwill help reduce the customer’s operations costs. Therefore, the supplier doesnot have to rely solely on the price dimension (although price continues to be akey determinant of perceived customer value) when managing perceived cus-tomer value.

Third, our findings highlight the importance of relational and supplier char-acteristics as determinants of benefits. Our results support and further substan-tiate the critical roles trust and commitment play in business arrangements.Based on our findings, we believe that supplier activities aimed at enhancingcustomer value should not be limited to tangible product or process related is-sues. In fact, managers must make relationship specific investments that will


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help increase customers’ trust and improve the perception of the supplier’scommitment in the mind of the customer.

Finally, our results indicate that in business relationships, joint working ar-rangements will help increase the business customer’s perception of value re-ceived. Participants in our study found joint working arrangements to be anadd-on benefit and a factor that helped them differentiate potential suppliers.Therefore, managers should incorporate the buyer’s viewpoints when discuss-ing issues that have a direct impact on the buyer and include the buyer when-ever possible in the decision making process.


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Understanding customer value in business to business relationships

Business

Transcript of Understanding customer value in business to business relationships