As an executive search firm we’ve dealt with powerful customers. Here are a few lessons learned that we’d like to share with you.
In a traditional market, a specialty customer prefers products with premium value at a premium price. A commodity customer chooses products with the lowest price as the most important factor.
Companies build their strategy around the customer’s specialty or commodity behavior. Individual customers do not have the volume relationship with manufacturers to demand specialty products at commodity prices.
Market channels can restrict the end user’s freedom of choice among a large number of available brands and products. If you want your product to be sold to the retailer’s customers you must satisfy the retailer’s buyer. You must sell exactly what the retailer wants to buy at exactly the price they are willing to pay.
The retailer’s buyer is a gatekeeper controlling access to the retailer and controls all aspects of the transaction – features, price, service, etc. – as the price of entry into the retailer. This is where the specialty-commodity model breaks down – the retailer’s buyer can demand specialty products at commodity prices.
If you have no competitors the retailer must buy the product you sell if there is a demand for the product. The more competitors, the more power the retailer has. This power can be used to purchase exactly the product the market wants at a price the market finds attractive. However, it is more likely that the power will be used to improve the retailer’s margins by getting a better price, better service and a better product.
If the retailer controls a very desirable market and if the competition is fierce, the retailer becomes a true commodity player; it can get the best product possible at the lowest price. It doesn’t matter that the product and service are superb, what matters is that the retailer can use price as the primary decision criteria and still end up with exactly what it wants.
You may want to ask if you really want to pursue the market that the retailer controls. Walking away from a controlled market is the easiest way to avoid having the retailer set your strategy. While this may ultimately make your company smaller, it may make your company more profitable.
If you decide to pursue the market controlled by the retailer you can try to create additional choices for the end customer. If the end customer demands choices, the retailer will be more likely to purchase on the basis of optimizing value to their end customer. In addition, you may be able to build more margin into the less popular products since most buyers focus their attention on the higher volume products.
In addition, you can try to fit the retailer’s strategy. If the retailer’s strategy is to have the product always available to customers you can ensure them that your product will be in stock reliably.
Try to outperform the competition with a competency. You can become a preferred supplier by, for example, making delivery your competency and delivering your product faster than the competition. If service is your competency you can outperform the competition with consistently superior service.
Create a brand preference that the retailer cannot ignore. When the retailer’s customer requests your brand specifically, the customer “pulls” your product through the distribution channel and the retailer will satisfy the demand.
You may want to consider just simply being a superior organization with a superior product. You may try to develop a superior product, a technological edge or superior management. It is important to not sacrifice the health of your organization competing in a market if all you will do in the end is trade profits for volume.