How to keep your best customer from becoming your worst enemy
Self-discipline starts with self-awareness.
They were both in a sweet spot: an S&P 500 company and its biggest customer -- each with a 30% plus market share in a lucrative market. They had worked together for decades and reaped lavish profits, staying in their own lane and sharing their market intelligence.
Until one day, when everything changed.
I had seen it coming after I joined my client for a meeting at their customer’s office.
The customer wowed us with a demonstration of systems and processes they had developed to calculate market metrics that weren’t even on our radar. They had figured out how to blend our product with our competitors’ products in order to just barely hit all their minimum industry standards, consistently and profitably.
They were leaving nothing on the table. They were getting full value for their products, and they had designed reliable ways of making sure of it.
They knew exactly how much and how little they needed us.
But it didn’t stop there. They also told us that the market was changing in ways we knew nothing about. There were new quality standards coming down the pike, and if we didn’t focus on them we would be left behind.
My team thanked them and wished them well, and we shook hands and left the meeting. But I was scared. I walked out feeling queasy.
I knew we hadn’t done any of the homework it would take to keep up with them. My client was coasting on its decades-old reputation while its customer was busy adapting to a rapidly changing world.
As a marketing manager, I was all too happy to hire marketers who were smarter than me. I liked having smarter people around me calling me out and covering my blind spots.
But I couldn’t say the same thing about customers. You want your customer to succeed, but you never want your customer to be smarter than you. Customers who are smarter than you are dangerous. They figure out shortcuts around you.
Everything came crashing down when my client’s customer, Company A, announced it was buying one of its much smaller competitors, Company B. Company B just happened to be another one of my client’s customers. But it was more of a niche player, specializing in a small, underserved market segment with high volatility, high prices, and potentially juicy profits.
That’s when the phone started ringing.
Company A was furious when they opened Company B’s books and found out that Company B had been paying much lower prices for my client’s products for years! “That’s how you reward our loyalty? By overcharging us?” they fumed.
The jig was up, and they wanted answers.
Normally, a company offers some kind of discount for buying in bulk. You pay less per unit when you buy more, and you pay more per unit when you buy less. So, all things being equal, a big customer should pay less for the same products than a small customer would pay. It’s a basic marketing concept called pricing discipline.
You see the same principle all the time at your local supermarket. A five-pound bag of rice doesn’t usually cost five times what a one-pound bag costs. Instead, it’s maybe three or four times the price. In other words, you get a discount for buying more.
But my client had completely fumbled the concept, and they scrambled for cover. They came up with sloppy, half-baked justifications for their lack of pricing discipline. Like...we were just trying to help Company B through a rough patch. Or...it was because of an old handshake deal between our former CEOs, who were golfing buddies.
But it all rang hollow to Company A. They felt sabotaged. Betrayed.
As my client’s story kept changing and evolving, the real truth came to light. It wasn’t that they were intentionally trying to hurt their top customer’s business. It’s that they had no idea they were doing so. The most embarrassing thing wasn’t that they were caught overcharging. It’s that they were caught not knowing how they were running their own business.
Despite their reputation as an industry leader, my client didn’t have basic systems and processes in place for inspecting their own behavior. No dashboard, no frame of reference, no strategy, no game plan.
The customer eventually simmered down, but not because they had been soothed by anything my client told them. Instead, they channeled their outrage into building a strategy to overcome my client’s shortcomings. They figured just because our supplier is going to be incompetent doesn’t mean we have to be.
A failure in pricing discipline is a failure in management.
A year went by.
My client announced a friendly takeover bid for one of its biggest competitors in the market. A relative newcomer, this competitor had been growing its business consistently year after year by marketing its superior product quality.
For a cool $250 million, my client planned to double its market share and solve its nagging product quality issues in one fell swoop.
But it wasn’t meant to be.
Like David and Goliath, Company A stunned the market by making a superior tender offer -- $350 million. Even though it had only one-tenth of the market capitalization of my client, it was going to vertically integrate itself into my client’s core business and cut my client out of the picture entirely.
Overnight, my client’s biggest customer became its biggest competitor.
My client had gained maybe $250,000 in incremental profit over the years by overcharging its customer, but now it stood to lose out on a deal worth 1,000 times that -- and miss out on a once-in-a-lifetime chance to consolidate one of its most profitable markets -- all because it took its eye off the ball.
So what can you do to make sure your best customer doesn’t do that to you? Three things.
1. Trust but verify.
My client entrusted their market intelligence to one very experienced, opinionated salesman. He had spent decades in the market, and he knew who all the players were, so they trusted his feelings and hunches instead of putting in place a dashboard that would have helped them objectively detect and analyze issues like their bad pricing.
2. Don’t be greedy.
Greed is good, or so says the old Gordon Gekko mantra. Except when it’s not.
If you’re complacent about anything -- your pricing, your market share, your customers’ loyalty, or your product quality -- you’re basically just sending an open invitation to your disruptor.
3. Never underestimate your customers.
They’re smarter than you, even if you wish they weren’t.
It doesn’t matter whether you’ve been meeting for lunch every week for the past twenty years, or you bought them tickets to the big game. With one slight move, they can become your competitor overnight.
That’s because they’re constantly getting signals from other suppliers and their own customers that give them a jump on how the market may be changing, faster than you can recognize. Especially if you’re bigger and more siloed.
They can turn on a dime, but you can’t.
Ultimately, pricing discipline -- or any kind of discipline -- isn’t about controlling others.
It’s about knowing your limits, then developing systems and processes for expanding them.
Pricing discipline starts with self-discipline.
And self-discipline starts with self-awareness.
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