Malcolm McDonald on value propositions – How to develop them, how to quantify them

This book review of “Malcolm McDonald on value propositions – How to develop them, how to quantify them” appeared in the April 2019 edition of Professional Marketing magazine.

Like much of Malcolm McDonald’s superb work, this isn’t an easy read as the proposed approach is thorough and analytical. It will, however, appeal to those amongst us who crave greater financial discipline in marketing, It will also be a precious resource for more experienced marketers – especially those seeing procurement professionals demand financially-quantified value propositions in tenders and more sophistication in key account management (KAM) programmes.

There has long been a need for expert guidance on this most fundamental idea – value propositions – and McDonald and Oliver have filled the gap. Completely. The authors deal with pricing issues right up front, recognise the importance of irrational emotions in decision-making and insist on customer profitability analysis. PSFs should heed the comment “One of the quickest ways to become indistinguishable from your competitors when times are hard is to resort to cost-cutting”.

It is satisfying to see that the authors approach value propositions, as I do, on multiple levels: for the business, for segments and for major customers. The customer portfolio Is referred to throughout the book.

The book starts with two basic questions which will probably floor PSFs. The authors observe that most businesses try to answer with product responses and conduct a merciless annihilation of the majority of commercial web site copy.

  1. What are your key target markets, in order of priority?
  2. In each, what are your organisation’s sources of differential advantage?

It was pleasing to see so many familiar marketing planning concepts – Porter’s value chain, brand valuation, STEP, SWOT, needs-based segmentation, KAM (the authors suggest that you cannot have more than 20 key accounts) and decision making – adopted wholeheartedly by the authors and used in an integrated way.

The value proposition development process is simple to summarise yet fiendishly hard to implement properly:

  1. Define the target market
  2. Identify buyers
  3. Added value analysis
  4. Categorise
  5. Financial quantification
  6. Communication to target customers/markets

The book isn’t focused on professional services and so it is often hard to translate the ideas to our environment, but much will resonate. The familiar matrix of segments verses services takes centre stage with the advice that value propositions are required for each cell of the matrix.

The authors tackle the topic in a strange order. You have to hold on for some key ideas and refer back and forth on occasion. It felt a bit like being inside the head of a seasoned consultant and observing him or her applying a tried and tested methodology.

A financially quantified value proposition is defined as:

  1. The added value
  2. Cost reduction
  3. Cost avoidance
  4. Emotional contribution

Each of these components is examined in detail although I often found myself wondering how to apply the ideas to services rather than products.

The authors say that the strategic marketing plan should “spell out your key target markets, why customers should buy from you rather than from someone with something similar and with what financial returns”. Succinct.

There’s surprisingly little on competitor analysis but an interesting worked example of value propositions for independent schools.  I liked the status, star and streamline approach to classifying key accounts. And the chapter on key account analysis (nine step business partnership process) was so thorough it almost hurt.

The authors are almost dismissive of the time it would take to complete all the “painstaking” analyses – assuming, of course, you can obtain the data. After 150 pages of main content, there are 50 pages of case studies (transport, engineering bearings and equipment manufacturing) and a final chapter on financial analysis.

There are diagrams, examples and step-by-step instructions throughout. As you would expect it’s big on market and customer analysis – and segmentation, so there are many references to McDonald’s other books on planning and segmentation.

The authors bring rigour and discipline to the marketing, sales and account management processes. Whilst I wholeheartedly support the proposed approach (beautifully, thoroughly and practically illustrated step-by-step) I fear that apart from the largest and most sophisticated businesses marketers will not be allocated sufficient time and resources to do so. And whilst valuable, from what I could see there would need to be substantial changes to apply many of the ideas to PSFs.

Book contents: 

  1. How financially quantified value propositions will make you richer
  2. Quantifying the emotional elements of value propositions
  3. What exactly is a financially quantified value proposition?
  4. An overview of the value proposition process – where to start?
  5. Why it is critical o understand how key buying decisions are made
  6. Which key accounts should you develop value propositions for?
  7. Which segments should you develop value propositions for?
  8. Understanding key account and segment needs before building a value proposition
  9. Understanding our own asset base and capabilities
  10. Developing value propositions
  11. Creating and financially quantifying value propositions
  12. Developing and presenting value propositions that resonate wit customers
  13. Value-celling: how to maximise value creation in supply chains
  14. Financial analysis, value quantification tools and financial dashboards
  15. Summary of the value proposition process

Key quotes and statistics:

  • Price has the biggest impact on the bottom line, followed in second place by costs and in third place by sales
  • Sales velocity (how much you sell) is a function of the number of leads, closure rates, average deal sizes and sales cycle length
  • 90% of the buying cycle today is carried out by buyers before speaking to suppliers – such is the power of the Internet
  • In the USA, tangible assets account for only 27% of total corporate value, while in the UK it is 36%
  • Suppliers do not sell to organisations, they sell to people in organisations
  • Shareholder value added (SVA), first proposed by Alfred Rappaport in 1986,,,today is better known as economic added value
  • Cooperative KAM is the most frequently encountered type of relationship that we have found in our 20 years of research at Cranfield University School of Management’s KAM Best Practice Research Club
  • The two most frequent reasons (for relationships going sour) are a lack of skills on the part of the key account manager and breach of trust
  • At very high levels of customer service, customers don’t really notice and take it for granted. This is a classic way to increase costs for little or no return.
  • Companies that employ a good value-based pricing strategy are 20% more profitable than those that have weak execution on value pricing and 35% more profitable that those that are good at executing a cost or market share driven strategy.
  • 60% of a typical (B2B) purchasing decision in researching solutions, ranking options, setting requirements, benchmarking pricing and so forth before they even talked to a supplier.
  • Kraljic matrix of procurement: nuisance, security, leverage and strategic
  • Companies that had a structured way to buy on best value were 35% more profitable than companies that had no structured methodology for measuring and understanding value

Others posts on value propositions: