Buyer Purchase Criteria for the firm

Applying these fundamentals of buyer value to a particular indus­ try results in the identification of buyer purchase criteria— specific attributes of a firm that create actual or perceived value for the buyer. Buyer purchase criteria can be divided into two types:

  • Use criteria. Purchase criteria that stem from the way in which a supplier affects actual  buyer  value through  lowering buyer cost or raising buyer    Use criteria might  include such factors as product quality, product features, delivery time, and applications engineering support.
  • Signaling Purchase criteria that stem from signals of value, or means used by the buyer to infer or judge what a supplier’s actual  value is. Signaling criteria might  include fac­ tors such as advertising, the attractiveness of facilities, and reputation.

Use criteria are specific measures of what creates buyer  value. Signaling criteria are measures   of   how   buyers   perceive   the   pres­ ence of value. While use criteria tend  to be more  oriented  to a sup­ plier’s product, outbound  logistics and  service activities, signaling criteria often stem from marketing  activities. Nonetheless, every functional department of a firm (and  most  every value activity) can affect both.

The  price premium  a firm   can   command  will be a function of its uniqueness in meeting both  use   and   signaling criteria.   Addressing use criteria without  also meeting signaling criteria, a common  error, will undermine a buyer’s perception of a firm’s value. Addressing sig­ naling criteria without meeting use criteria will also usually not succeed because buyers will eventually realize that their substantive needs have gone unmet.

The distinctions among  use and  signaling criteria are often com­ plex, since many of a firm’s activities contribute  to meeting use criteria as well as serve as signals of value. A polished sales force, for example, may both signal value and be a valuable source of applications knowl­ edge that will lower the buyer’s cost. Similarly, brand  reputation  may be valuable to a buyer  because   it   removes any   blame  if a supplier does not perform (“ How  can you blame  me for selecting IBM?”). Despite such situations, however, it is vital to separate use and signaling criteria and the   firm’s activities   that  contribute  to   both,  since only use criteria represent  true  sources of buyer  value. Buyers do not pay for signals o f value per se. A firm m ust understand how well it meets use criteria and the value created in order to determine an appropriate price premium. The value of meeting signaling criteria is measured differently. The value of a signaling criterion  is how much it contributes to the buyer perceiving the value created in meeting use criteria.


Use criteria   grow   out  of links between   a firm’s value chain   and its buyer’s value chain, as described earlier. Because these links are numerous, there are often many use criteria that go well beyond charac­ teristics of the physical product. Use criteria can encompass the actual product (e.g., D r Pepper’s taste difference from Coca-Cola  and Pepsi), or the system by which a firm delivers and  supports  its product,  even if the physical product  is undifferentiated. While  the distinction be­ tween a product and other value activities may only be a m atter of degree, it remains an important one since other value activities often provide more dimensions on which to differentiate than  the physical product. Other  value activities besides those associated with the prod­ uct can represent an important source of differentiation because many firms tend to be preoccupied  with   the physical product.  Use criteria can also include both  the specifications achieved   by   a firm’s product (or other value activities) as well as the   consistency   with   which   it meets those specifications (conformance). Conformance may be as im­ portant as or more  im portant  than  specifications, although  it too is often overlooked as a differentiating factor.

Use criteria   can also   include intangibles   such   as style,   prestige, perceived status, and brand connotation  (e.g., designer jeans), particu­ larly in consumer goods. Intangible use criteria often stem from pur­ chase motivations that are not economic in the narrow sense. Smirnoff Vodka’s ability to achieve a premium price for a product that is essen­ tially a commodity  stems largely from the social context  in which much drinking takes place. Buyers want to be seen consuming sophisti­ cated vodka or to serve vodka perceived as such by their guests. While intangible   use   criteria   are   usually   associated   with   consumers,  they can be equally im portant  with   other  buyers.   Owning  a Gulfstream III business jet  can lead to considerable  prestige for executives with their peers,   for example.   Intangible  use   criteria   are   most  important in industrial, commercial,  or institutional products where the real buyer is an individual with considerable discretion in purchasing.

Finally, use criteria also may encompass the characteristics of distribution channels, or downstream value. Since channels  can con­ tribute to   differentiation,   use criteria  must  reflect these   in areas such as channel-provided service, and credit provided by channels. In addi­tion, channels will have their own use criteria that  measure  sources of value in a firm’s dealings with them. For  example, channels  will often want  credit,   responsiveness   to   inquiries,   or   technical   support that the end buyer may not notice at all.

Since the performance  of a firm in meeting use criteria may also be affected by how the buyer actually uses a product, part of a firm’s challenge is to ensure that its product is actually used in a way that allows it to perform  to its capabilities. This can be influenced by prod­ uct design, packaging, and training.  Flow   control  valves,   for   ex­ ample, are often designed so they cannot be overtorqued. Factors that improve the chances that a product is used as intended often become use criteria in their own right. They may be potential bases for dif­ ferentiation since firms often assume that their products are used as intended.


Signaling criteria reflect the signals of  value that  influence the buyer’s perception  of the firm’s ability to meet its use criteria. Activities a firm performs, as well as other attributes, can be signaling criteria. Signaling criteria may help a particular  supplier  to be considered and/or may play an im portant role in the buyer’s final purchase deci­ sion. Typical signaling criteria include:

  • reputation or image
  • cumulative advertising
  • weight or outward appearance of the product
  • packaging and labels
  • appearance and size of facilities
  • time in business
  • installed base
  • customer list
  • market share
  • price (where price connotes quality)
  • parent company  identity (size, financial stability, )
  • visibility to top management of the buying firm

Often signaling criteria can be quite   subtle.   For  example,   the paint  job on a medical   instrument  may  have an   im portant  impact on the buyer’s perception of its quality even though the paint job has little or no impact  on the instrum ent’s performance.  Similarly, Arm & Ham m er’s brand  extension into detergents has been perceived as differentiated in part because a box of it is heavier than competitors’ products even though it yields the same number of washes.

Signaling criteria are the most  im portant  when buyers have a difficult time measuring a firm’s performance, they purchase the prod­ uct infrequently, or   the   product  is produced  to buyer  specifications and hence past history with other  buyers  is an   incomplete  indication of the future. In professional   services,   for   example,   signaling   criteria are extremely important. Services are typically customized and actually performed only after the buyer has purchased  them. As a result, suc­ cessful professional service firms pay very close attention  to such things as office decor and the appearance  of employees. Another  industry where signaling criteria are im portant  is pianos,   where   many  buyers are not sophisticated or secure enough to judge quality very accurately. Steinway, the differentiated producer,  has recognized the use of pianos by concert pianists as a powerful signaling criterion.   Steinway main­ tains a “ piano bank” of grand pianos all over the United States that approved artists can use for concerts at a nominal cost.9 As a result, Steinway has developed excellent artist relationships, and a large per­ centage of concerts are performed on Steinway pianos.

Signaling criteria also grow out of the need to reinforce the buyer’s perception of a firm even after the purchase  of the product.  Buyers often need continued reassurance that they made a good decision in choosing the   firm   and   the   product.  They  may   also   need education to help them evaluate  the extent to which  a product is meeting their use criteria. This  is because buyers  often   remain  unable  to discern how well a product  has met their  use   criteria   even   after   purchase, and may have insufficient data  or may not  pay enough  attention  to notice   product  performance.  Regular  communication  that  describes a firm’s contribution  for its buyers  can often   have a m ajor  impact on differentiation.

Some signaling criteria are associated with particular  use criteria, while others are more  generalized signals that  a supplier will provide value to the buyer. Advertising may emphasize product characteristics, for example, while a firm’s reputation may imply to some buyers that many of their criteria will be satisfied. It is im portant  to attempt  to draw the connections between signals of value and the particular use criteria they are signaling. This will both help in identifying additional signals of value, and help the firm understand  exactly those attributes its   signaling   should  convey.   If a   firm   recognizes   that  its customer list is a signal   of service   reliability,   for   example,   it can   present the list in a form that emphasizes this.

2. Identifying   Purchase  Criteria

Identification of purchase  criteria  begins by identifying the deci­ sion maker for a firm’s product and the other individuals that influence the decision maker. The channels  may be an intermediate buyer that must be analyzed as well. Use criteria should be identified first, because they measure the sources of buyer  value and also often determine signaling criteria. A number of parallel approaches should  be employed to identify use criteria. Internal knowledge of the buyer’s needs consti­ tutes an initial source of use criteria. However,  conventional  wisdom may color internal  perception  of use criteria; an internal  analysis alone is insufficient. No analysis of buyer purchase criteria should ever be accepted unless it includes some direct  contact  with the buyer. How­ ever, even talking to buyers, as essential as it is, is insufficient because buyers often do   not  fully understand  all the   ways in   which a firm can affect their cost or performance  and they may also not  tell the truth.  In any serious effort to understand  buyer  purchase  criteria, then, a firm m ust identify the buyer’s value chain and perform a system­ atic analysis of all existing and potential  linkages between   a firm’s value chain and its buyer’s chain. This sort of analysis can not  only uncover unrecognized use criteria, but also show how to assess the relative weight of well-known use criteria.

Use criteria must be identified precisely in order to be meaningful for developing differentiation strategy. M any firms speak of their buy­ ers’ use criteria in vague terms  such as “ high quality”  or “ delivery.” At  this level of generality, a firm cannot  begin   to calculate the value of meeting a use criterion to   the buyer,   nor  can   the firm   know   how to change its behavior  to increase buyer  value. Quality could mean higher specifications or better conformance, for example. For McDon­ ald’s, consistency   of   hamburger  and   french   fry   quality   over   time and across locations is important as is taste and portion size. Improving these two things involves   very   different   actions   by   a   firm.   Service can also mean many things, including backing of claims, repair capabil­ ity, response time to service requests, and delivery time.

Good performance in meeting each use criteria should  be quanti­fied if possible.   For  example,   the quality of a food ingredient  might be measured in terms  of the particle count  of extraneous  material  or the percentage of fat content.11 Quantification not only forces careful thinking to determine what precisely the buyer values, but also allows the measurement and tracking of firm performance against a use crite­ rion—this often   yields   m ajor  improvements  in   performance  in and of itself. Quantification also allows a firm to assess its position against competitors in meeting   important  criteria.   The  firm   can   then   study the practices that underlie competitors’ performance.

A firm can calculate the value of meeting each use criterion by estimating how it affects the buyer’s cost or performance.  Such calcula­ tions inevitably involve judgments, but are an indispensable tool in choosing a sustainable differentiation strategy.12 Determining the buyer value in meeting each use criterion  will allow them to be ranked  in order of importance. For  some use criteria a firm must only meet a threshold value to satisfy the buyer’s need, while for others  more performance against them is always better. If a TV set warms  up in two seconds, for example, there   is little   additional  benefit if the   time is reduced to one second. Nearly  all use criteria will reach a point of diminishing returns, however, after which further  improvement  is not valuable or will actually reduce buyer  value. Meeting some use criteria may also involve tradeoffs with others. Calculating  the buyer value from meeting each use criterion will illuminate the relevant thresholds, tradeoffs, and buyer value that accrues to additional im­ provement in meeting it. A firm can only make  its own assessments of the balance between the value of differentiation and its cost if it understands these things. The ranking of use criteria in terms of the buyer value of meeting them will often contradict conventional wisdom.

Signaling criteria   can be identified by understanding  the process the buyer uses to form judgments  about  a firm’s potential  ability to meet use criteria, as well as how well it is actually meeting them. Examining each use criteria to determine  possible signals is a good place to start. If a key use criterion is reliability of delivery, for example, past delivery record and customer  testimonials  might  be signals of value. Two other  analytical  steps can also provide insight into signals of value. By carefully analyzing the process by which the buyer pur-chases, including the information sources consulted, the testing or inspection procedures carried out, and  the steps in reaching  the deci­ sion, signals of value may become apparent.  This  sort of analysis will yield indications about what a buyer  consults or notices, including channels. A related way of identifying signaling criteria is to identify significant points o f contact between a firm and the buyer both  before and after purchase, including the channels, trade shows, accounting department, and others. Every point of contact represents an opportu­ nity to influence the buyer’s perception of a firm and thus is a possible signaling criterion.

Like use criteria, signaling criteria  should  be defined as precisely and operationally   as possible in order  to   guide differentiation strategy. In a bank, for example, the appearance  of facilities can signal value through its order, permanence,  and security. For  a designer clothing store, other dimensions of appearance would be more  appropriate. Signaling criteria vary in importance,  and a firm must  rank  them in terms of their impact on buyer  perception  in order  to make choices about how much to spend on them. Calculating the contribution of signaling criteria   to   realized   price is often difficult, but  focus groups and interviews may be helpful. As with use criteria, meeting signaling criteria can reach   the   point of diminishing  returns.  Opulent  offices, for example, may disillusion a buyer by making a firm appear wasteful or unprofessional.

The process of identifying buyer  purchase  criteria should   result in a ranking   and   sorting   of purchase  criteria   such   as that  in   Figure 4 -4 , which illustrates purchase criteria for a chocolate confection product. Price should be included in the list corresponding  to the ranking the buyer places on   it.   Use and   signaling criteria   that  derive from the end user and the channel should be separated,  to highlight  the different entities involved and   to clarify the actions required   to meet each criterion. Use criteria for both  end users and channels  can be usefully divided   into   those   factors   that  lower buyer  cost and  those that raise buyer performance. While meeting a use criterion can some­ times both lower cost and raise performance,  often one or the other modes of value creation is predom inant— in the chocolate confection example taste relates to buyer performance while availability is predom­ inantly   a   measure  of buyer  shopping   cost.   Then  use   criteria   can be further  divided into   those   that  are   easy   to   measure  and   those that are difficult for the buyer to perceive an d /o r quantify (see Figure 4-5).

Figure 4 – 4 .     Ranked Buyer Purchase Criteria for a Chocolate Confection

Figure 4 – 5 .    The Relationship Between Use Criteria and Buyer Value

Recognizing   the differences   in   use criteria   represented  in   Figure 4 -5 can be im portant for a number  of reasons. Differentiation that lowers buyer  cost provides a more  persuasive justification for paying a sustained price premium with some  buyers than  differentiation that raises performance. Financial pressures on buyers (such as in a down­ turn) often mean  that  buyers are willing to pay a premium  only to firms that can demonstrate persuasively that they lower buyers’ cost. Differentiation with a   readily   measurable  connection  to   buyer  value is also frequently more translatable into a price premium than differen­ tiation that creates value in ways that are hard to perceive or measure.

Differentiation that  is difficult to measure  tends  to translate  into a price premium  primarily  in situations  where the buyer  perceives a great deal to be at   stake,   such   as in   top   level consulting  or where the buyer is seeking to meet status  needs. Differentiation on the right- hand side of Figure  4 – 5 tends to be expensive to explain, requiring high levels of investment in signaling. Increasing  buyer sophistication tends to threaten  difficult-to-measure forms  of differentiation that may have been accepted at face value in the past.

Each individual buyer to which an industry  sells may have a different set of use and signaling criteria or may rank among  them differently. Clustering  of buyers into groups  based on similarities in their purchase  criteria   is one   basis   of   buyer segments,   to   which   I will return in Chapter 7.

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

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