Abstract
Abstract
The literature on referencing takes a firm stance on the value that vendors derive from marketing customer references. What the literature lacks, however, is empirical work that supports our current understanding of the value of customer references to the potential customer. The present exploratory research aims to demonstrate the value of customer references from the perspective of the potential customer. This goal will be achieved by considering a single case study that provides evidence for the value of customer references to potential customers in business markets. Three theoretical propositions emerge as key conceptual contributions: (a) customer references allow buying companies to establish their suppliers’ competence, assess the buying decision risk and forecast return on investment; (b) customer references deliver value by helping potential customers to identify new business needs and (c) potential customers benefit from being exposed to customer references insofar as they are sources of organizational learning. This work concludes by presenting recommendations for practitioners who wish to reap the full benefits of customer references.
Introduction
The purpose of this work is to illustrate and provide evidence for the value of customer references from the perspective of the potential customer. Jalkala and Salminen (2010) define customer references as ‘the customer relationships and related value-creation activities that a firm leverages externally or internally in its marketing efforts’.
Customer references play an important role in the successful sale of business solutions (Anderson, Kumar & Narus, 2007) as they increase the credibility of the vendor’s value proposition (Anderson & Narus, 1998, 1999; Anderson, Narus & Rossum, 2006). As such, customer references are deeply related to the value creation process. In particular, they are often adopted as a critical element of the value-based approach (Eades, 2004; Töytäri & Rajala, 2016, pp. 100–101) insofar as they influence customers by demonstrating value creation opportunities.
Both scholars and practitioners use the expressions ‘value’ and ‘value creation’ without defining them clearly (Kabadayi, 2017). According to Mahajan (2016, p. 17), ‘value creation’ refers to the act of creating ‘value’ for customers and stakeholders. He sheds light on the topic by clarifying the concept of ‘value’, suggesting that ‘value’ is intrinsically connected to the gains or benefits derived by customers. Hence, a transaction of some sort must take place ex ante for ‘value’ to exist. A business transaction requires a minimum of two actors: a buyer and a seller. A triadic relationship can sometimes take place, involving more than two actors. This is the case in complex distribution channels, but it can also be the case in reference businesses (Ruokolainen & Mäkelä, 2007) where a third actor comes into play, the referencing customer, who contributes to the relationship network by serving as a reference. The three different actors involved in this reference triad are therefore the supplier, the reference customer and the potential customer.
Are suppliers’ customer references able to create value for their actual and potential customers? The literature on referencing takes a firm stance on the value that vendors derive from marketing customer references (Godes, 2012; Kilian, Greuling & Hennigs, 2013; Kumar, Petersen & Leone, 2013; Ruokolainen & Aarikka-Stenroos, 2015; Terho & Jalkala, 2017). What is lacking in the literature, however, is empirical work that supports our current understanding of the value of customer references to the potential customer. As a means of developing a theoretical basis for this research, the following study will showcase literature that features the phenomenon of customer references in an industrial business setting.
Literature Review
The literature on customer referencing is problematic in the sense that it lacks evidence for the benefits that potential customers receive from supplier’s customer references. This research replicates Jalkala and Salminen’s work (2010), with a revised focus on the perspective of the potential customer. The authors recommend shifting the focus of research into customer referencing away from the seller and towards the perspectives of potential customers and reference customers. Similarly, Kilian et al. (2013) recommend that investigations focus on the effects of references on potential customers, namely, by understanding how references are handled in buying centres. These authors also recommended that researchers conduct further empirical studies in different industrial settings. They claim that it is possible to glean valuable insights by studying the actual effects of references on potential customers. To achieve this end, they propose that interviews be conducted with the aim of identifying ‘the actual procedures that were followed by purchasing departments to compare reference descriptions’ (Kilian et al., 2013).
Customer referencing has been the focus of several scholarly studies. Nevertheless, this topic is yet to become a mainstream research subject due to the small number of published peer-reviewed articles devoted to it. Scientific publication on this topic has spanned two decades, peaking in 2008. Table 1 provides an overview of the existing articles in peer-reviewed journals that contribute to the body of knowledge on customer referencing in the context of organizational buying behaviour.
Although theoretical work on customer referencing is conceptually valuable, empirical work supporting a comprehensive theory of customer referencing remains scarce. Table 1 shows the disparity in number between articles that situate the supplier as the unit of empirical observation and those that situate the reference customer or the potential customer as their focus.
Two research works that do focus on the potential customer are worthy of specific mention. The first is a work by Aarikka-Stenroos and Makkonen (2014). This is an interesting study as it isolates the potential customer as the single unit of analysis. The authors argue that ‘instead of learning only from mere customer references, suppliers also need to employ other means in order to reveal more relevant experience-based information’ (Aarikka-Stenroos & Makkonen, 2014, p. 351). This research deals with three different concepts at the same time, bundling them under the term ‘experience-based information’: customer references, referrals and word of mouth. Unfortunately, this study does not provide a comprehensive understanding of the role played by customer references in buying decisions. This is because it deals with these three elements simultaneously. Although the authors claim to make a contribution by empirically examining references from the buyer’s perspective, the work does not offer an explanation of how customer referencing influences buying decisions. By combining three dimensions under the same umbrella, Aarikka-Stenroos & Makkonen’s research prevents the reader from isolating the contributions of each to the resolution of the presented ‘complex buying decisions’.
The second exception is a work by Morgado and de Castro (2016). The authors studied the impact of customer references on buying decisions by introducing a case study featuring a power plant. This study does not contribute to our understanding of the phenomenon under study because ‘[e]mpirical evidence for the existence of a reference relationship was not found’ (Morgado & de Castro, 2016, p. 258).
Scientific Articles on Customer Referencing (2001–2017)
Relationships emerging from reference networks are worthy of study because they contribute to our understanding of customer referencing practice. Salminen and Möller (2006) recommend the creation of case studies featuring companies that represent best practices in referencing behaviour as a way to gain deeper knowledge in this area. According to these authors, this research should be done from the IMP’s industrial networks perspective. They also emphasize the need for additional empirical research in this area.
From the IMP’s perspective, it is suggested that the use of references allows firms to secure more favourable trading positions. Håkansson and Snehota (1995, p. 18) state, for instance, that ‘[o]ne of the most common ways of evaluating a new partner is through references, that is, by investigating how it has handled earlier relationships’. According to Holma (2009), the triadic approach to business relationships is relevant where the three actors are directly connected to each other, which is the case with customer referencing. Holma also states that only a few studies take a full triadic approach. This is due to its difficult application in research practice. The triads investigated in customer referencing research are reference triads. Helm and Salminen (2010) assert that the concept of a reference triad is based on the idea that interaction takes place between three key actors: the vendor, the buyer and the reference customer.
Methodology
The purpose of this exploratory work is to provide evidence for the value of customer references from the potential customer’s point of view. It will achieve this goal by considering a case study that documents the value provided by customer referencing. The case of Redes Energéticas Nacionais (REN) allows the reader to observe a concrete transaction where value emerges from the customer referencing process.
The present research features a single case study (Gummesson, 2007; Halinen & Törnroos, 2005; Patton & Appelbaum, 2003; Stake, 1995; Woodside & Wilson, 2003). The selected case showcases an energy business which has the features of a reference business (Morgado & de Castro, 2016). Numerous scholars (Ruokolainen & Mäkelä, 2007; Salminen & Möller, 2004, 2006) recommend case studies as valuable tools for learning more about customer referencing.
This research adopts an inductive approach. Among other things, it contributes three theoretical propositions to the literature on customer referencing. In addition, the study follows a methodological framework for data analysis which includes recommendations provided by Miles and Huberman (1994), Eisenhardt (1989), Yin (2009), Stake (1995) and Dul and Hak (2007). Fieldwork was carried out from the buyer’s perspective insofar as the potential customer is a unique resource in data collection. In brief, this work selects the buying behaviour of the potential customer as its unit of empirical observation. Primary data for the case-creation process were gathered in semi-structured interviews that followed a predefined outline (case protocol).
This work comprises six interviews with (a) a procurement director, (b) a procurement manager, (c) a head of investment, (d) a dispatch centre manager and (e) two operational managers from the engineering department. A total of 10 hours and 34 minutes of recorded interviews were transcribed and coded for further analysis. On average, the length of each interview was 1 hour and 46 minutes.
Side comments and relevant elements provided by respondents such as web pages, reference material and brochures were also collected as sources of primary data. The additional collected data were manually edited and classified.
Tape recordings and field note extracts from the interviews were transcribed, edited and converted into text for formal analysis. The data were disassembled by being formally coded (Yin, 2011, p. 186). The data were then coded by using the software MAXQDA 12 (release 12.1.0).1 The collected data served to build the case narrative showcased in the present study. Once completed, the case was sent for review and approval by the formal interface of the firm.
The Case of REN
REN is the Portuguese Transmission System Operator (TSO) and, as such, operates the transmission of electrical power. The firm manages fixed assets with an estimated total value of approximately 5 billion euros, including transformers. Since 2010, REN has had a centralized procurement department, which is in charge of the acquisition of goods and services. Before 2010, the operational departments were responsible for buying capital goods.
The implementation of the present procurement model did not garner much consensus as operational areas were highly concerned with the weight given to price, which can often reach 90 per cent. Operational areas claimed that price should not carry this amount of weight when it comes to purchasing ‘strategic’ equipment because this will result in the acquisition of lower-quality equipment, which could jeopardize the firm’s mission. One technical manager asserts that:
REN has changed a lot. In the past we had a different sort of liaison with our suppliers. (…) We were bounded by a common mission. Nowadays, all has come into price, and nothing else. (…) We are currently working with vendors that in the past we would not even bother to consider as an option.
The procurement department was recently in charge of purchasing two 170 MVA (220 V/60 kV) transformer units. This acquisition was approved by the investment committee because it was part of a bigger expenditure for the renovation of two substations. In this case, the company opted to split the initial overall contract into smaller parts. Although in some cases operational departments prefer to buy ‘turnkey’ solutions for the substations (since they are easier to manage), according to the procurement director the company opted for unbundling since it increases the chances of a ‘better’ procurement process. Operational areas made an effort to maintain the status quo during the supplier qualification process by promoting incumbent vendors: Efacec and Asea Brown Boveri (ABB).
Electrical transformer technology is characterized by long innovation cycles, and it is therefore conservative. REN’s procurement director argues that in this business context it is harder for new entrants (e.g., Chinese players) to acquire new accounts. Nevertheless, in the business of selling transformers, players distort competition due to the geographic nature of the business. The Portuguese manufacturer Efacec is a typical example of this phenomenon, since in the past it was uncommon for Portuguese firms to buy transformers from other vendors. An exception to the acquisition of Efacec transformers was the acquisition of ABB’s transformers, which were almost residual. Due to the high cost of transport and logistics, Efacec was able to sell transformers in Portugal at a cheaper cost than its competitors, albeit with higher margins. At that point, REN had not yet acquired Siemens transformers.
Following the initial approval, the buying process took 4 months to complete. The planning and engineering department defined the equipment specifications, and negotiations were managed by the procurement department. This equipment is built to order (rather than built to stock) insofar as the transformer will be built according to REN’s specifications. The delivery is expected to take 1 year.
The executive committee was also involved because this purchase dealt with economic figures that required its guidance and approval. The planning and engineering department reported to the chief operational officer, and the procurement department reported to the chief financial officer. Both the chief operational officer and the chief financial officer were members of the firm’s executive committee. Taken together, these elements constituted the buying decision unit.
The list of qualified vendors for the supply of the two transformer units included: (a) Alstom; (b) Efacec; (c) Hyundai Heavy Industries; (d) Shandong Electric Power Equipment Co.; and (e) Siemens. The procurement director argues that suppliers wishing to sell to a new customer usually start by contacting the purchasing service (using it as an entry point), while current vendors strive to consolidate relationships they already have with operational areas. Purchasing services make good points of entry as they value increasing rivalry among competing suppliers.
The winning bid was made by Siemens and featured a price of approximately 2.5 million euros. The second bid was approximately 100,000 euros more. As a criterion of proposal assessment, price was weighted at 90 per cent, and the remaining 10 per cent was largely taken up by the length of the guarantee and technical parameters (e.g., equipment losses and efficiency). Siemens decided to manufacture the transformers in a factory that it owned in China. This decision allowed Siemens to offer a highly competitive price, which led to it winning the contract. The procurement director argues that Siemens’s pricing decision was strongly influenced by the fact that it was competing with other Asian firms. Nevertheless, Siemens’s choice to manufacture the transformers in a Chinese factory caused some degree of anxiety for the operational teams, which was later overcome with the support of the procurement department. In the words of the head of investment:
We have a budget to manage. (…) Siemens won the tender because from all the qualified vendors it offered the best price.
It is customary for customer references to be requested by the procurement department during the supplier qualification process. According to the procurement director, customer references constitute a major component of this process and are the most relevant dimension in a vendor assessment. They allow for the assessment of a vendor’s competence, associated risk, degree of innovation, know-how and experience. A vendor that does not produce customer references is not qualified. In the words of the procurement director:
Customer references are requested in the supplier qualification process. A lot of the qualification of suppliers is based on customer references. It is one of the most important issues to qualify suppliers. A supplier without customer references is not qualified.
One operational manager states:
The qualification of suppliers is a responsibility of the purchasing department (…) they are more proactive on checking customer references. (…) We [technical areas] do not proceed to a confirmation of customer references, but rather to an analysis of them, to confirm their consistency. If this consistency is not present, we request clarification from the vendor, for example asking them to complete the list of customer references. The supplier sometimes completes the list of customer references and also sends statements of good supply and customer satisfaction for those customers already served.
REN’s procurement director argues that it is common for conversations featuring references to take place during seminars, events and summits, where electrical industry purchasing professionals are gathered. In addition, it is also common for electrical industry-purchasing professionals to exchange emails and phone calls to the same end, in addition, for example, to relating experiences and spreading awareness of novelty and best practice. The procurement director claims that, in general, a special understanding exists among purchasing professionals. Within this group, they only reveal that they have a relationship with a supplier or, alternatively, that a given relationship is bad. There is no middle option. One should not expect a customer to say good things about a supplier. According to this source, purchasing professionals expect their present suppliers to perform according to their expectations; otherwise, they would not contract them. Being a good supplier (and nothing less) is what is expected from the procurement department’s point of view. The procurement director also reveals that operational teams have communication channels through which they are able to verify customer references. Nevertheless, the procurement department is more active in this practice since it is responsible for driving the supplier qualification process.
Beyond the scope of the supplier qualification process, REN encourages encounters where suppliers present new products and technologies. In this environment, it is common for vendors to communicate customer references in the form of business cases. These cases outline solutions that were provided to address a customer need and to exhibit the delivered business benefit, such as cost savings. In the past, similar cases led to the identification of several buying needs. Nevertheless, REN always takes the presented figures into consideration and adapts them to reflect their own situation. By adopting this procedure, the firm is able to build its own business case, for example, to deploy a new solution. In short, the procurement director of REN acknowledges the importance of customer references. She defends them as an important vehicle for learning and bringing knowledge into the firm. In addition, she also argues that these meetings are very useful to the procurement department as they help it to deal with the (technical) dogmas to which operational departments are committed. These gatherings are attended by both operational areas and the procurement department. As stated by the procurement director during one of the interviews:
Contact with technology providers is very important. This is how the areas learn. It is knowledge that is being granted to us. (…) It is with suppliers that we [the procurement department] learn to deal with the arguments of the internal areas and to discard their dogmatic view of reality.
References were requested as part of the call for tender in the acquisition of the two transformer units. These references needed to detail the number of units sold and the customers to whom they were sold, and bidding firms were asked to make their respective contacts available. Hyundai’s account team provided a complete portfolio of references, including detailed reports on similar projects, such as photographs.
The procurement director of REN contacted her counterpart at a Spanish TSO with the aim of confirming the references provided by Hyundai Heavy Industries. This contact was made during Hyundai’s qualification process. REN’s procurement director posed questions such as ‘what is Hyundai sourcing to you?’ and ‘how is it going?’ The Spanish purchasing director acknowledged that it took him a long time to convince his operational department colleagues to put Hyundai on the supplier shortlist. He also added that, as of the date of the phone call, all was going well in the relationship with Hyundai and the supplied equipment. He also shared former Hyundai references that he had checked in the past. All this information was given in an informal context—that is to say, no written statement was given to REN. As he stated:
When things go well no one talks … there is talking about vendors to say yes I have done business with this or that supplier; or to say very badly about them. There are no special comments if they are excellent or fantastic because that’s what everyone expects them to be. The language between CPOs has its own linguistic codes.
Findings
The case of REN presents a buying situation in which customer references played an important role by delivering value to the buying firm, the potential customer. Prior to this transaction, Siemens had not sold transformers to REN (only Efacec and ABB had). Because of customer references, REN was able to make a better deal by considering Siemens as a provider of transformers. It is possible to conclude that customer references were indispensable to the buying firm in its pursuit of a good deal. Customer references were therefore of great relevance to this buying task. If they had not been used, the buying firm would have had to rely more heavily on direct experience when making its decision about where to purchase its transformers. As Siemens had not previously sold transformers to REN, the sale would have probably gone to the incumbent vendors: Efacec and ABB.
This case involved a buying centre (Webster & Wind, 1972) composed of four actors: (a) the procurement director; (b) the planning and engineering director; (c) the chief financial officer; and (d) the chief operational officer. Of these four actors, only two were exposed to reference marketing: (a) the procurement director and (b) the planning and engineering director. Both actors reported that they had positive attitudes towards reference marketing.
The case featured the acquisition of two transformer units and highlighted the buying behaviour of a TSO that was engaged in the ‘qualification of potential suppliers’. This acquisition featured a modified rebuy (Robinson, Faris & Wind, 1967). Reference marketing programmes may adopt three distinct discourses (Jalkala & Salminen, 2005, 2009). The case offered evidence for the vendor’s reference discourse based on benefits. This discourse takes place during the reunions that the firm regularly organizes with vendors. By contrast, the discourses of commitment and technological expertise were the subjects of conversations that the procurement director established with, for example, her Spanish counterpart. As these conversations were not organized by the vendor, they cannot be considered examples of vendor discourse. The vendor did not have any control over the content of the conversation. Accordingly, no evidence was found for the discourse of commitment or the discourse of technological expertise.
Salminen and Möller (2004) listed the general understanding of reference practices at play in conventional marketing manuals. The reference practices involved in the case of REN include (a) reference lists and (b) detailed descriptions of similar contracts. Reference lists were used during the vendor qualification process. They allowed REN to check references from other TSOs, although this practice is not always relied on.
The case study suggests the existence of a reference relationship adaptation (Helm & Salminen, 2010; Holma, 2009). This adaptation was observed on three different dimensions: (a) involvement, (b) catalysts and (c) motivation. With regard to the first dimension, the case reveals that both the procurement director and the planning and engineering department were available to establish conversations with reference customers. Regarding the other members of the buying centre—the chief financial officer and the chief operational officer—no evidence for their involvement with any kind of customer reference activity was found. Regarding the second dimension (catalysts), the procurement director was engaged in promoting customer reference materials within the company as a way to increase the number of potential vendors (adding more vendors to the list increases the competitiveness of the tender process). Finally, this case identifies the driving forces that inspired the procurement director and the planning and engineering department to act on reference information. Their motivation for analysing reference information—specifically, reference lists—and distributing it internally within the firm was mainly related to the supplier qualification process. In addition, the case revealed the firm’s interest in the organizational learning process and its relation to customer referencing. This case therefore provides evidence that customer references do play a role in organizational capability building.
Jalkala and Salminen (2010)72 sketched the roles and benefits of customer referencing. The case study found evidence for referencing benefits such as: (a) establishment of the supplier’s competence, (b) buying decision risk valuation, (c) the sharing of information on innovative technology and (d) return on investment forecasting. With this said, the case did not provide evidence for the following benefits: (a) establishment of the vendor’s reputation and (b) establishment of the vendor’s credibility.
The literature on customer referencing (Salminen & Möller, 2006) presents vendors as being in control of their reference activities. However, this case considers a buying situation in which the vendor has little control over what is being said about its customer relationships. The vendors described in this case do not put much effort into managing reference marketing and instead restrict their attention to elaborating reference lists and presenting success stories. In addition, vendors do not strive to adopt diversified customer referencing practices. The case involves only two types of reference practice. The positive attitude that REN displays towards customer referencing suggests that other referencing practices, for example, reference visits, could have an impact on the firm’s buying behaviour. In this case, vendors did not find it necessary to exploit these practices.
Finally, the case also suggests that reference marketing influences the buying centres of potential customers. The influence takes place at the level of identifying buying needs and by positioning vendors on the approved vendors list.
Conclusions
The literature on referencing is clear in asserting the benefits derived by suppliers from marketing customer references. This research addresses the topic of value creation by providing evidence for the value of customer references to the potential customer. As such, the present work concludes that suppliers’ customer references create value for their potential customers. Value creation by means of customer references comes in different forms. The case under examination portrays a buying decision where a customer receives solid value from customer referencing.
Theoretical Implications
The purpose of this work is to illustrate the concept of value in the context of reference marketing—that is to say, value as it is delivered by customer references to potential customers. In addition, it builds theoretical propositions (Eisenhardt, 1989) based on empirical evidence. Its findings suggest that there are three distinct sources of value to potential purchasers who make use of customer references. Each distinct source of value derives a theoretical proposition, which can be tested by future research.
The first source of value is connected to the supplier qualification process. This significant process allows buying companies to establish their suppliers’ competence. It also allows companies to assess buying decision risks and forecast return on investment.
The second source of value lies in identifying new business needs. This often takes place during meetings promoted by vendors to introduce new technologies or business solutions which have yet to be adopted by customers. Reference marketing materials in the form of success stories allow potential customers to understand the benefits underlying such technologies and may trigger new buying needs.
The third and final source of value stems from the organizational learning process that results from being exposed to success stories. Suppliers are a key source for organizational learning and capability building. However, adopting success stories as a medium through which the learning process can take place enhances the message and its impact on the receiver.
Managerial Implications
The case suggests that customer references provide valuable benefits to purchasing companies. Those benefits are not only connected to the purchasing activity but span throughout the company on different dimensions, such as knowledge and capability building. In this sense, several practical suggestions might be adopted by managers who seek to enhance the value derived from customer references.
First, customer references can provide an opportunity to develop new internal capabilities. Sales visits are often experienced as a boring part of organizational activity. However, customers have much to gain from success stories and referencing material. When meeting suppliers, customers should request their success stories as a means of building a cooperative relationship environment. With this new perspective in mind, purchasing managers can turn sales visits in their favour by requiring that sales teams prepare their referencing materials in advance. When the content of the sales visits starts to change, purchasing teams should invite their colleagues in the company to join their meetings with sales representatives with the aim of increasing knowledge and capability building.
Second, purchasing and procurement processes must include a formal assessment of customer references. Vendors who are not able to respond to calls for tender by presenting a credible list of references should be excluded from the buying process. Customers should raise their expectations in this regard and implement new and detailed processes for assessing customer references. This practice will increase the objectivity of vendor selection while reducing buying risks.
Third, the company should define and establish an internal communication channel to disseminate and archive the knowledge derived from success stories—a lesson-learnt system. For this purpose, the company might use a previous knowledge management system or create a new one for this specific goal. Rather than remaining in the hands of the few, this valuable resource should be made available to the entire company.
Finally, companies often suffer from so-called ‘hidden pains’. Reference materials like success stories can address those pains and needs by providing solutions which have already been tested to great success in other settings. Ignoring what is taking place in the market is not a prudent approach to business. There is a lot to be learnt from suppliers who have acquired solid experience within their fields of expertise. Success stories should therefore include quantitative data and other insights that allow the buying company to make its own business case. Value calculators presented by suppliers are indispensable tools in this context, as they allow for business-case co-creation. In this way, buying companies are able to estimate the value they will derive from acquiring a certain good.
Limitations and Suggestions for Further Research
This research faces limitations concerning its statistical generalization as findings only apply to the phenomena under examination. This limitation emerges from the research method adopted in this study: the method of case study research. This sort of research allows for analytic generalization (Yin, 2009, p. 38), however, which is the approach presented in the present work. In order to overcome the statistical generalization constraint, future research should make use of quantitative methods. One immediate suggestion is to test the three propositions arrived at in this study by means of a survey. This approach will make a useful and solid contribution to the topic of customer referencing.
In addition, and within the context of the present research and its findings, it is not possible to qualify value directly associated with the act of customer referencing alone. Tangible value emerges from the interaction between the buyer and the seller, which provides insight and organizational learning in both directions. In this context, success stories arise as an innovative format that has concrete value for both organizations. Future research could expand on this topic and provide a more in-depth examination of this reference practice. Once again, adopting case study research could serve the purposes of this inquiry.