By George F. Brown, Jr. and David G. Hartman, Special for US Daily Review.
One of our clients in a business-to-business manufacturing firm, an individual who probably still aspires to write the great American novel, gave the following description of his firm’s lot in life: “We walk into our customer’s headquarters building, through the same entrance where they take their own customers. It is lavish, right out of the designer magazines. The pictures on the wall and in the brochures in the seating area are aspirational. You look at them and say ‘I could live like that’, and implicitly think ‘I’d pay just about any price for their product’. Then they escort us down the hall and through a door hidden out of view, off to the side. As the door closes, we notice we’ve entered a part of their building where it’s dark and damp. The floor is dirt, and the walls are unfinished, and you occasionally see the skeletal remains of other suppliers off to the side. The people there are out of some B-grade movie about the dark ages, and voices keep saying ‘We need you to cut your price’.”
While evoking memories of reading Paradise Lost in high school, is description is far too frequently one that we hear from business suppliers, organizations that serve direct customers who produce high-end, high-priced products, but whose relationships with suppliers are constantly focused on price. Life on the bulls-eye, targeted by competitors and purchasing executives alike, is a reality for many business suppliers, and there are tools for managing that situation when it is inevitable. But in general, situations like the one described by the executive above, in which the customer is selling a premium-priced product but treats their suppliers as commodity providers, are the relationships that drive suppliers crazy.
Suppliers in this situation look at the end markets served by their direct customers, where price is of relatively low importance, and detest the contrast with their own situation, where their direct customers are battling for every last nickel at contract negotiation time – and often at unexpected off-cycle times. They see their direct customer’s healthy margins, and contrast them with their own always-under-pressure margins. Statements about injustice in the world (and far less flattering comments) are commonplace from executives in such supplier organizations.
The question that such suppliers constantly ask is “How did we get into a situation where the only thing that seems to matter to our customers is price?” It’s an important question, and one where the unfortunate answer often is, in the words of Jimmy Buffett, “It’s my own damn fault”.
Misaligned Customer Chains
Understanding the factors that drive purchase decisions, and the relative importance of price vis-à-vis other factors like product, technology, service, and brand, can be a critical ingredient in shaping a winning growth strategy. Many business markets involve long, complex customer chains, with the relative importance of product features, services, price, and other factors differing in importance at each stage of the customer chain. In some instances, there is alignment, with all of the customer chain participants sharing roughly similar priorities. All of the customers may be price buyers, or they may all look for state-of-the-art technology and features. In some regards, these are the easiest customer chain structures for a supplier to understand and serve, in that if they can be responsive to that “common decision driver”, their odds of success are great.
In other customer chains, however, the factors that drive purchase decisions may differ considerably from one stage of the customer chain to the next, as the quotation earlier about the sharp contrast between the lavish customer center and the supplier’s dungeon suggested. At one stage of the customer chain, the purchase decisions may be driven by price, while at another stage product or service considerations may be of greatest importance. Such unaligned customer chains pose tremendous challenges to suppliers. This challenge can be met, as numerous case studies attest, but doing so requires creativity and a carefully-blended mix of the elements of Go-to-Market Strategy.
One version of such an unaligned customer chain is common in business markets. It involves a customer chain in which a supplier’s direct customer’s purchase decisions are driven mostly by price, while the end customers at the later stages of the customer chain focus more on product and service elements, with price being a less-important factor. This is the customer chain structure described earlier by the executive that we quoted. It is the structure that drives suppliers crazy and that provokes questions about how the suppliers got into that situation and what they can do about it.
There are, of course, some instances in which the reason for the lack of alignment is obvious. Suppliers of salt used to melt the snow in the parking lot of a direct customer that manufactures a luxury product for end customers, for example, most likely understand that they and their salt are for all practical purposes totally unconnected to their direct customer’s product or its end customers.
There are many such instances in which unaligned customer chains make sense, most typically when the product or service the supplier provides does not provide end customer value or is invisible to the end customer. Capital equipment, factors of production that aren’t end product ingredients, and services often fall into this category. Does the end customer care which conveyers are used to move the product through the factory? Does the end customer care which electricity supplier powers the plant? Does the end customer care which plant watering services keep the direct customer’s office attractive? In such instances, the responsibility for avoiding price-based purchase decisions rests almost entirely on the supplier’s ability to convince their direct customer of the differentiated value they provide, with success in this regard usually involving reasons that aren’t associated with the direct customer’s end markets. Suppliers in this situation can avoid becoming trapped in a vicious cycle of price-based competition and suffering endless pressures from procurement managers, but they can’t rely on the purchase decision priorities of end customers to do so. The responsibility for differentiation and the ability to gain a price premium is in their own hands, and depends on their ability to deliver value to their direct customers.
But beyond such instances in which the lack of alignment is basically a result of a lack of real connections along the customer chain, what we have observed over and over are situations in which the supplier has to conclude “It’s my own damn fault”. Such situations are sad indeed, in that they could have been avoided and the supplier could have participated in a positive relationship with their direct customer, enjoying shared successes and attractive margins. Instead, those suppliers create an environment in which the focus of their relationship with their customer is price, and the world in which they operate is one of constant pressures and shrinking margins.
The examples that follow in the second part of this article describe suppliers that got into a situation – through their own damn fault – in which their customers focus mostly on price can help other firms to avoid such unhappy situations in the future. Three specific suggestions as to how firms can avoid such fates and avoid situations where relationships are unnecessarily centered on price are drawn from these case studies. In the final section of Part 2, we will provide some insights as to the ways in which best-in-class firms incorporate pricing strategy into their long-term growth plans.
George F. Brown, Jr. is the CEO and cofounder of Blue Canyon Partners, Inc., a strategy consulting firm working with leading business suppliers on growth strategy. Along with Atlee Valentine Pope, he is also the author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, published by Greenleaf Book Group Press of Austin, TX.
David G. Hartman is Blue Canyon Partners’ China Practice Director. He has previously served on the faculty of Harvard University and as executive director of the National Bureau of Economic Research. He has been an active participant in China’s markets for over twenty years, speaks Mandarin, and resides in Beijing. His clients include a roster of Fortune 500 firms and Chinese companies.