Increase Revenue Through Strategic Coupling
Our best customers are often our current customers. And for this reason, we should always treat our current buyers with special care. Unless you’ve done something to make them unhappy, the fact is, people buying from you today are typically going to buy from you tomorrow. For evidence, look at your favorite food store, vehicle dealership, or online retailer. In some instances this is simply brand loyalty. However, customer loyalty is increasingly noticeable the more and more your products are unique and complex. If you were to look at this from the perspective of the strategist Michael Porter and his Five Forces, you would conclude that customers of specialized products have fewer alternatives and are therefore more dependent on their suppliers.
Just recently, I saw an example of a sales strategy in the aircraft industry. This is an industry in which parts are often highly specialized to a given customer application. After a firm’s products are approved to enter airline service, being displaced by a competitor becomes a very expensive and time consuming task. Consequently, once a supplier is on an aircraft platform they’re typically on it for life. In Porter’s Five Forces vernacular, aerospace customers heavily depend on their suppliers.
In this situation, a customer and supplier have a long history and fairly good relationship. The customer made their concerns known for several months, and finally approached the supplier for assistance to reduce cost. The customer went so far as saying they were struggling to meet their profitability needs, and needed the supplier’s help. Given that the customer has limited ability to seek an alternate source of supply without incurring tremendous cost, the supplier has the upper hand. It turns out that the supplier has already implemented their own cost reduction initiatives and had increased their current margin on the product.
Simultaneously, a new project was recently announced and is being solicited for bidding. Therefore, in response to the customer’s cost reduction request, the supplier expressed support and willingness to reduce prices in exchange for exclusive bidding and sole-source contract rights. We can call this strategic coupling and a win-win if it works out. The supplier in this case will be able to grow their existing business with the customer and secure years of new business. In contrast, the customer will be able to reduce their current costs and increase their profitability. Time will tell if this approach will work as negotiations remained in the works last I heard.
Though the context of this example is relatively simple, the strategic aspect of this situation reminds us that we must consider the relative position our firms in relation our customer. Our current customers are buying from us for a reason, so it’s worth continuing to give them a reason. Further, by finding ways to capitalize on the value we provide we can strengthen our relationships for future business.
NOTE: The simple analysis here refers to Porter’s Five Forces. If you’re looking for more on this topic, Robert Grant goes into this at length in Contemporary Strategy Analysis. He describes the various ways the using Porter’s Five Forces can be used to evaluate positioning of your firm in relation to your suppliers, customers and competitors.