Inside Your Customer’s Head
In this excerpt from his new book, The Wholesale Distribution Customer Speaks, author Mark Dancer identifies what customers are looking for from their customer-support relationship and how distributors can meet those needs. In Chapter Three: “Customers rate distributors,” Dancer begins with six key observations and conclusions gleaned from 230 interviews and 425 mail surveys with customers on the current state of their relationships with distributors. The interviews were conducted with two key distributor trends in mind: e-commerce and fee-based services. Here are some of Dancer’s findings:
A relationship paradox exists. Customers gave distributors high marks overall, but cracks emerged when we asked drill-down questions.
• Distributors are not talking to customers about new buying alternatives. Some progress has been made for buying online, but the services dialogue has not yet begun.
• Costs rule. As you focus on the solutions that your online or service initiatives are going to offer your customers, your chances for success will be improved if you can identify, quantify and communicate your ability to take costs out of the customer’s hands.
• There is plenty of room to become a sophisticated marketer. Our findings show that benefits, barriers and adoption rates vary from one customer to another according to their business model, size and buying habits. It’s complex and dynamic, but there are opportunities to be had.
• Buying online is a bona fide trend. If you aren’t moving forward, you will soon be playing catch-up.
• The selling of services by distributors, on the other hand, is not established. Distributors need to plead their case and overcome economic barriers, but the potential to offer customers real gains is itself real.
Relationship Paradox: Context and Consequences
Each customer’s company has established a set of priorities, based on the products or services it delivers and the nature of competition in its industry. In turn, these factors help to drive specific shopping and buying dynamics. We looked at three variables in our survey: the number of suppliers shopped, the mix of products purchased and the overall buying objectives of the customer. We have turned all of this into a segmentation of customers based on buying behavior.
Some companies, and the individual customers within them, need to deal with more suppliers than others. In part that’s a function of the company’s size and the product or services it delivers. It can also be a function of the buyers’ job titles. Buyers are aggregators of orders and deal with more suppliers than an engineering or manufacturing manager. The number of suppliers can also be a function of consolidation among distributors and manufacturers or a function of the manufacturer’s channel policies. Do they sell direct or indirect to distributors? Is the distribution policy open, selective or exclusive? How far and wide must the customer roam in order to get access to the needed products and ensure that enough competition is introduced so that prices are fair?
Most of our surveys indicated that the customers polled buy, or are otherwise involved in, purchases of all types — capital equipment, MRO (consumable products purchased for maintenance, repair and operation) and OEM products (components purchased from original equipment manufacturers). Contractors and institutions told us they bought capital equipment (lift trucks and diagnostic equipment, for example) but also felt that they bought OEM components. We defined OEM products as “component products purchased for inclusion in your company’s end product or services.” For a construction contractor, this might be the branded siding purchased and installed. For educational institutions, this would include books. OEM products are considered central to the customer’s mission. MRO products keep their operations humming. Capital equipment includes machines and devices that will be depreciated over their useful life.
Of course, the number of suppliers and the types of products purchased are only two inputs that would shape a customer’s buying preferences. Here are some other questions you might ask of each customer when beginning your own interviews:
- How many people and job titles are involved in the total buying process for your products?
- What are the roles and decision-making criteria of each position?
- What is the interplay between buyers with roles such as specifier, user, buyer, decision-maker, influencer, etc.?
- How much risk is involved in purchases of your products? Does it vary by product?
- What percentage of purchases are made through my distributorship?
- Are the products you buy through my business “mission critical” to your company’s success?
- What are your standardization objectives with respect to products and sources?
- Do you ever let your suppliers make the product decision? When and why?
- Do you ever let your suppliers make the brand decision? When and why?
- How do you allocate the kind of product you buy from my business across suppliers?
- Do you ever conduct a vendor review? How often do you drop suppliers? Why?
- Do the products you buy from my business get more or less attention than other products you buy?
- What price differential is enough for you to switch suppliers?
- If a distributor switched the brand carried for a particular product, would you stay with the distributor, or would you go to another supplier that offered the original brand?
- Is it important that I be able to document cost savings?
Each market is unique, as are the buying behaviors associated with individual products within those markets. There is also, however, some commonality. It is very common to find that customers can be sorted into segments based on four primary buying motivations.
Product/brand loyalty. Obtaining a high-quality or unique product is the paramount objective.
Source loyalty. Rather than the product, buying from a credible, reliable, value-added supplier is the best approach for meeting business objectives.
Pure price. These customers will do almost anything to get the lowest possible price. Purchases go out for bid. Multiple vendors and suppliers are solicited.
Cost reduction. These customers are focused on the total cost of ownership (TCO). They know that price is part of the equation, but their sourcing costs, the productivity of their operations and other factors come into play.
We asked customers to rank the relative importance of each of the buying priorities across all of the purchases they made. You will want to ask the same question for the product line you represent and also for some of the individual products on your total line card. You should pick the product categories you examine based on their strategic importance to your business, their contribution to your total sales profitability or by the pace of change of buying behavior among customers buying those same products.
Customers see distributors first and foremost a source of products. Customers need to buy products to run their business, and distributors are one place where they get them.
Source loyalty was the second priority in three of four segments, underscoring a traditional basis for competition among suppliers: “If you want the product, I have it. I know you can get it elsewhere, but you should buy it from me because I am a good supplier. Just look at my service levels and all the added value I provide.”
Interestingly, source loyalty was outdone by total cost management in the institution segment. This finding may be supported by the fact that outsourcing has grown among these customers, and their markets (particularly health care) are often served by very large distributors who operate on very low, single-digit gross margins. Costs have been wrung from the channel through scale and customers have gained in the process. Outsourcing is an established trend in industrial markets also, where it is known as integrated supply. Large industrial distributors, however, continue to operate on fatter margins, offering a mix of products, added value and logistical efficiency.
Price buying received the highest priority in the contractor and retail segments. In the construction industry, the “three quote” process is pervasive and products are routinely shopped and put out for bid. In the retail segment, the buyer’s role is to get the best possible price from suppliers, and they are very effective. Any distributor who has seen his or her product migrate from a professional channel to The Home Depot or Wal-Mart can give you a testimonial.
A buyer in one factory is different from a buyer in another; large retail chains buy differently than small independents; doctor’s offices have different needs than hospitals. Our message: Segment your customers, know their priorities and then look for the problems you can help them solve with your online services and initiatives.
Breaking it Down
Driving one step further, we then looked at the percentage of interviews in each segment that named each buying priority as the No. 1 focus. This is a rough segmentation — that is, a distribution of customers as opposed to a prioritization of decision-making criteria used by individual buyers. By sorting customers into industrial, contractor, institutional and retail, we were able to segment them by business model. The nature of the customer’s business and the customers they serve drives his or her buying behavior. When you “peel back the onion” further and look at the actual buying preferences, another segmentation is achieved. If these were truly your customers, you would know the logic behind their buying preferences and could set strategies and make plans accordingly.
In our sample, product-loyal, source-loyal and cost-saving customers generally rule, although distribution varies a bit from industrial to contractor to institutions to retail. Customers that favor product, source or costs in their buying process would seem to offer the greatest chances for e-business or service initiatives. But don’t overlook price-seeking customers. E-business is about new solutions to old problems, and serving price-driven customers has definitely been a problem for most distributors.
Here’s how the strategy for serving the price segment goes. First, recognize that the price segment can include large, influential customers or a large number of smaller customers. Then examine buying activities across pre-sale, transaction and post-sale phases to create a detailed picture of the price customer’s buying process. Dig deeper to determine whether he or she tends to buy a certain mix of products (commodities) or a particular volume of products (bulk). These customers might buy seasonally or be driven by their industry’s ups and downs. The point is, you can serve your customers’ needs by creating an online offering built around those needs and stripping back support delivered through traditional feet-on-the-street resources. It’s important not to define your online offering to the price segment so broadly that non-price customers might migrate to the new offering. Define your offering in terms of product mix, pricing, delivery and purchase volume requirements. If you target price segment’s buying needs, other customers will continue to buy as usual.
There are two points to be underlined in this discussion.
If you define any new offering broadly to serve all your customers, you will not find that it delivers advantage to any individual customer.
If you don’t look for advantages in serving your customers, you won’t find growth in your top or bottom lines.
Beyond business model and buying preference, size is often a key predictor of customer buying behavior. Large companies have driven outsourcing and supply chain management trends in markets. Acceptance of new products, technologies and manufacturing processes frequently starts among large companies. These trends can migrate down with adjustments made to the needs of smaller customers.
In our sample, cost and price segments become more pronounced among larger customers. Large customers are sophisticated enough to understand and gain the benefits of TCO approach. They can also choose to focus on price alone and force concessions from their suppliers. Smaller customers in many markets are extremely brand loyal and/or source loyal, paying a higher price to suppliers who pay attention to their needs. Our challenge for you is the same: Do you know what your large customers are thinking of and asking for?
What Do Customers Say About Distributors?
Over the years we have heard countless distributors say that their customers view them favorably, and that their relationship is strong. We don’t dispute this view, but we would ask two questions:
How is it that the vast majority of distributors view themselves as above average?
Are you sure that you are not vulnerable if a new channel or competitor comes along, credibly serving your customers while offering them the opportunity to reach a new plateau of service, efficiency or savings?
In our survey, 36 percent of customers rated their distributor-suppliers as excellent. You might think that is a large number, but we would argue otherwise. The answers from the customers we contacted point to a potential chink in the distributor’s relationship armor. But where is the chink? What could a distributor do better? We asked a series of questions and found the answers to be both interesting and actionable.
Just over half of the customers we surveyed indicated that their distributors acted like committed partners. Some would say that’s a good start. But when we asked the next wave of more-penetrating questions, other chinks appeared. As a distributor, you are — day in and day out — on the front lines, giving your customers the products and support they need. You know their business, but can you articulate their goals? In terms of cost reductions? Growth? New products? New markets? Training? Legal defenses? Share positions? Do your people on the front lines see the right people? Do they ask the right questions?
Distributors have a great reputation built over years of service to customers. But they can nevertheless fall short on execution – this is, depth of understanding and in a willingness to flexibly serve customers.
The “new economy,” including online buying and fee-based services, is all about serving the customer better with new options. The gap uncovered by our findings suggests that if a better mousetrap can be built, some customers will migrate in large enough numbers that you will notice. For some distributors this may mean great opportunity; for others, it may mean a defensive strategy. Get your ducks in a row, know your vulnerabilities and watch to see if trends really take hold. In both cases, success lies in understanding the real benefits and barriers associated with customer adoption of online buying and services alternatives.
Mark Dancer is a principal at Frank Lynn & Associates, Chicago. He consults with wholesaler-distributors in improving their go-to-market strategies. His book, The Wholesale Distribution Customer Speaks, is available through the National Association of Wholesaler-Distributors.
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