In an article excerpted from a recent edition of Harvard Business Review by Das Narayandas, a HBS professor, we find the following:
Turning switchers into valuable customers
In most business markets, customers don’t show up in the shape desired by vendors. Companies can develop profitable relationships by investing time and money to migrate customers from one category to another. As the case of the $3.7 billion electrical parts distributor Wesco Distribution demonstrates, businesses need discipline to do that. When Wesco analyzed its OEM customer base, it found that most of the companies in it were commodity buyers. They shopped for the lowest price and played vendors against each other. Wesco was willing to offer low prices as well as a full range of products, but it wanted customers to make long-term purchase commitments. Few OEMs were willing to do so; they wanted to see the benefits of building a relationship with Wesco before they made any promises. Wesco took the plunge and made investments that allowed it to provide services such as inventory management and energy audits, which trimmed customers’ costs of procuring components and operating electrical systems. Naturally, Wesco’s costs rose, and since customers were still cherry-picking products from its portfolio, they became underperformers.
Most companies would have given up at this stage, but Wesco persisted with its strategy. Over the next twelve months, several customers noticed that Wesco had invested in building relationships with them and that their costs had fallen. They also realized that by integrating their procurement and supply chain processes with Wesco’s systems, they could reduce costs even further. The buyers’ focus was no longer on purchase (or product) costs, but on the costs of ownership (or procurement). Customers started buying greater volumes from Wesco, and Wesco’s costs began to drop because of scale economies, predictable demand patterns, and lower inventory costs. When the benefits became large enough, the supplier even passed on some of its savings to customers. Because Wesco realized that it takes time to shift customers to a new category, the company eventually succeeded in turning a group of commodity buyers into valuable customers.
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Few companies try to build relationships with individual customers, because that approach differs entirely from current practice and, more important, requires considerable discipline in planning and execution. For instance, many companies believe that because they sell solutions rather than products, they have gone beyond offering features. But most suppliers continue to base solutions on preconceived notions of customer wants instead of tailoring products and services to meet each customer’s needs and processes. As a result, they push the features of their solutions packages rather than offering benefits that customers really want. State-of-the-art customer relationship management systems focus entirely on companies’ interactions with customers; that is a step toward managing customers, but it is only a small beginning. Companies still have a long way to go before they can say they manage individual customers in business markets. The silver lining is that this approach requires neither big ad budgets nor software programs; all it demands is a return to the basics of marketing.
If you go back and read what I wrote about Rockwell’s new branding strategy, and how they are working with customers from a service and support view, they are tapping exactly what Wesco found out.
What do YOU think?