The Profit Power of Customer
Regardless of industry segment, progressive CEOs and Board of Directors are looking for the "silver bullet" to consistently deliver top-line revenue and earnings growth, as means to increase share price and shareholders' value.
Numerous articles are being published promoting the importance of customer satisfaction, and ways to improve it, or touting the needs and means to flawless execution, or the benefits of process reengineering, or of outsourcing to lower-cost regions such as China, India, Latin America or Eastern Europe.
These can, indeed, be good strategies towards better profitability. However, a much-less-publicized yet fundamental lever of higher and sustainable shareholders' returns is "customer intimacy." Customer intimacy impacts shareholders' returns for both sides: the supplier side as well as the customer side.
What is "customer intimacy"?
Customer intimacy can be defined as the formal or informal set of relationships established between supplier and customer, with a diverse array of partners, from corporate leadership to functional leadership (engineering, marketing, operations, maintenance, or service) and end-users of products or services. These dynamic relationships provide multiple points and frequency of contacts between the company and its customer, as well as multiple points of view about the relationship and its benefits to both parties.
What are the benefits of "customer intimacy"?
First, from the supplier side, customer intimacy impacts revenue growth and earnings per share, by creating long-term sustainable competitive advantage through the early identification of unsatisfied needs.
Contrary to the all-too-common syndrome of "if we can make it, they will buy it," that is prevalent in technology-driven companies; customer intimacy allows the adoption of a "customer-need-pull" strategy, as opposed to a "technology-push" strategy.
By establishing long-term relationships with key customers, representative of their targeted market segments, companies set a framework within which they can have repeated opportunities to tap into their knowledge base. Voice-of-the-customer (VOC) interviews, focus groups, and users' group meetings are well-practiced means used by marketing teams to access that knowledge base. But, much more simply, sales and service engineers can provide feedback as they are in a position to interact much more frequently with the end-users.
Establishing very close and frequent relationships with key customers allows companies to be aware of the evolution of their processes and unsatisfied needs in advance of the competition. The corollary is that the investments for research and development of new products can then be focused towards differentiated product features and away from "me-too" products, thus reducing the risk of commoditization.
Commodity products and services are essentially differentiated by their price. As a result, competitive positions must be based on lowest cost of manufacture. In the case of business-to-business dealings, commoditization is essentially driven by purchasing organizations. In order to obtain price concessions from vendors, purchasing officers tend to negotiate with vendors under the assumption that offerings from competitors are providing the same value, and that price is the deciding parameter. It is rarely the case, but, in front of weak or poorly trained sales people, this ploy allows them to obtain discounts from list prices.
In any industry, however, commoditization leads to profit erosion and destruction, rather than increase of profit that is necessary for shareholders' value. Commoditization can transform the market for a unique, branded product into a market based on undifferentiated price competition. Commodification can be an unintentional outcome that no party is actively seeking to achieve.
Fighting this trend to protect some pricing power requires market and application knowledge on one front. On another front, training and development of the workforce are required. Differentiated products and services that bring an innovative solution to recognized but unsatisfied customers' requirements are obviously easier to price and sell, on the basis of real value, thus avoiding the setting of list prices as "costs plus."
Second, from the customer side, considerable advantage can be generated when dealing with a vendor who is well aware of the details of the business and operations, its main drivers and constraints, as well as its objectives. If this vendor is willing to listen to issues with existing products and services, or to new requirements which may fall outside of their current offering, and is willing to invest in finding solutions, each of these situations corresponds to opportunities for reduced costs or increased capacity, and obviously leads to improved earnings. Key progressive customers are very willing to partner with strategic suppliers to develop unique solutions to their most tangible, high-impact problems.
The next question is how to establish or improve "customer intimacy"?
Every business has some level of customer intimacy, loosely exercised by its various customer interactions: Internet, emails, phone calls, sales and service calls, etc. Every customer interaction is an opportunity to improve customer intimacy. It requires the right attitude, and the motivation to ask the right questions.
Attitudes can be developed through communications, training and development. Motivation can be enhanced by the quality of the talent hired by the company, and by the compensation and rewarding systems. Employees, who clearly understand how their behavior in front of customers can cause increased customer intimacy and how customer intimacy relates to profitability and growth, are more likely to pay attention to their attitudes and to strive to bring value to the customers.
In summary, beyond customer satisfaction, which is essentially transactional, another layer is developed in terms of relationship between supplier and customer. Customer intimacy brings with it a virtuous circle of additional opportunities for companies to avoid the pitfalls of commoditization and "bubble-hype," secure sustainable competitive advantages, and protect pricing power and profit margins, which then in turn enables additional investments towards growth (marketing, new product developments, sales channels, etc.). All of which promotes increases for shareholders' returns.
Gerard A. Abraham is President of Process Instruments Division, a $400 million global manufacturing powerhouse, of Thermo Electron. Gerard is best known for his C-level leadership ability in global, technology-based businesses that deliver "best-in-class" returns for his company's shareholders. He is a keynote speaker at leadership conferences on how to develop intimate market knowledge, leverage top quality talent, and develop a culture of risk tolerance to avoid commoditization in manufacturing. To contact Gerard to speak at your next leadership conference or to send him your comments, email him at firstname.lastname@example.org .
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