Kellogg World Alumni Magazine, Winter 2001Kellogg School of Management
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Research: James Anderson, Marketing

When spending more makes cents

Kellogg Professor James Anderson researches how to market superior-value products at the prices they deserve

You’re introducing a superior product to the marketplace. It will help your customers be more efficient and productive. It will also save them money over the long haul.

But it’s more expensive than what they’re now using, and they’re not inclined to make a change. How do you persuade them to purchase your product?

James Anderson, the William L. Ford Distinguished Professor of Marketing and Wholesale Distribution, has been researching this perennial marketing question. It’s one being asked with increasing urgency by companies in today’s technology-driven marketplace.

Convincing customers to purchase higher-priced, higher-value products can be a tough sell, Anderson acknowledges. “Sometimes, purchasing managers just buy the cheapest item, even if their firms would be better off with the more expensive ones,” says the Kellogg professor. “As long as it meets their requirements, they just want to pay the lowest price possible.”

But Anderson has found that certain approaches seem to bear more fruit than others. What’s most important, he says, is that suppliers know the full value of their product offering -- the economic, technical, service and social benefits customers receive in exchange for their purchase.

“It’s easy to give value away, but the challenge is, how do you get an equitable return for your firm?” Anderson asks. “If you can document the value created -- better performance, lower costs -- the bigger the share you can capture for your company.”

To gain insight into how to convince firms in business markets to purchase a better but pricier product, Anderson and his co-researchers, Finn Wynstra, a professor at Eindhoven University of Technology in the Netherlands, and James B.L. Thomson, a researcher at The Economist Group in Cambridge, Mass., focused on a single part -- a 10-horsepower motor -- that was being marketed to manufacturing companies.

The researchers chose the motor because it is replaced often, used in significant quantities and employed in various kinds of equipment. This particular model was being billed as a superior product that would have a measurable impact on energy consumption and maintenance costs. However, it was more expensive than the motors already in place at the plants.

What would convince these companies to buy this part? Much seemed to hinge on the level of responsibility borne by the person making the decision, Anderson says. A plant maintenance manager responsible for the overall cost of operations was more likely to OK a slightly more expensive purchase to reduce long-term costs. A purchasing manager rewarded strictly for meeting his or her budget was less likely to do so, even if the transaction would save money in the long run.

Supplying the customer with a list of respected competitors that have tried the new product and found it worth the extra cost also seemed to influence managers favorably, Anderson says. Involving the customer in pilot programs to test the product was another approach that seemed to undercut the reluctance to switch to a more expensive motor.

What didn’t seem to work? Guarantees, Anderson says. Assurances to replace the item if it did not generate the promised cost savings seemed, if anything, to prime customers’ risk aversion by conjuring up notions of failure.

Regardless of the approach, companies must be able to explain why their products are worth the extra cost, Anderson says. This documentation can involve a fair amount of money and time to perform the customer value research. But companies that do not do so risk losing more down the road.

-- Rebecca Lindell

©2001 Kellogg School of Management, Northwestern University