The strategic planning review meeting started on a downbeat note. “We just lost Acme, our biggest customer. How could this happen?” Fred, the CEO of what I’ll call Precision Manufacturing, was more sad than angry. “Acme always gave us a positive review in our annual survey. We visit them at least monthly. How could this possibly happen?”
Since there are only four reasons an established, satisfied customer will switch vendors, I said, “Let’s see if we can figure it out.”
Reason one – failure to deliver on your promise
The first way to lose a customer is failure to deliver on your promise, with no expectation on the customer’s part that you will correct the problems anytime soon. The failure could be:
- Product consistently fails to meet specifications or agreed-upon quality standards.
- Product delivered incomplete or to the wrong location.
- Product delivered late.
- Product issues not communicated to the client in time for them to make adjustments.
- Product unavailable in the timeframe the client requires.
From the customer’s viewpoint, it doesn’t matter how attractive the product’s price might be if they can’t get it when they need it or it doesn’t work when they do get it. Customers understand an occasional glitch and will cut an established vendor some slack as long as they see problems addressed and root causes corrected quickly. Once they lose confidence that problems will be fixed soon, they will find another vendor they can count on.
While there had been occasional delivery issues in the past, Precision had dealt with them quickly, so this wasn’t the reason Acme switched.
Reason two – unavailability of a required feature
A customer may require a new product, product feature, or change in the relationship. If a vendor is unable or unwilling to meet that requirement in the client’s timeframe, the client will be forced to take on a new vendor. Scenarios might include the following:
- A customer may face stiff competition because the part they purchase from you is over-qualified and competitors are using a cheaper part that better matches their needs. (Smart companies can provide multiple price points for the same product based on how it’s used – i.e., how much value it adds to their customer’s products.)
- When the vendor adds the capability to sell directly to their customers’ customers, a customer may worry that their vendor plans to compete with them and poach their customers.) If the vendor can’t or won’t provide assurance that they won’t compete with the customer, the customer may switch to a vendor who will.
- Your customer’s customer may require a certification you don’t yet have, like ISO 9000.
Again, this was not Acme’s issue with Precision.
Reason three – your product’s price is non-competitive
A competitive price is one where the premium over the lowest available price is less than the perceived extra value the customer receives from the vendor. For example, in IBM’s heyday, a datacenter manager wouldn’t consider a competitor’s equivalent product unless it was at least 25% cheaper, because the IBM brand promise was so valuable.
The team agreed that Precision’s prices were competitive, so pricing was not what drove Acme to leave.
Reason four – the customer doesn’t believe you will be able to meet their future needs
Maintaining relationships requires resources, especially time devoted to establishing trust, understanding a vendor’s strengths and weaknesses, and sustaining an ongoing dialogue. There is room for only a few key relationships. As in dating, you don’t want to devote your time and attention to building a relationship with someone you don’t see a future with.
- Is the vendor financially strong enough to remain viable? A company can’t risk having one of their major suppliers go bankrupt.
- Is the vendor investing in developing the new products and capabilities the customer thinks they’ll require in the future?
- Will the vendor be able to handle the volume of future demand, or be able to support the customer’s geographic expansion?
- Will the vendor grow the volume of their business to continue to keep their product competitive? Will they have the financial resources to invest in new, lower-cost production?
Several years earlier, a Precision salesman promised Acme a new product that the company was only researching at the time. Precision’s product development group responded by instituting a policy of absolute secrecy. Under no circumstances would they share with the sales department any details of what they were working on. That way, they would never be embarrassed again when a customer asked why they weren’t able to deliver some new feature an over-eager salesperson had promised. The unintended consequence of this policy was that Acme assumed that Precision wasn’t developing the products and capabilities they anticipated they would need in a few years. When they lost faith that Precision would be there for them in the future, they started listening to Precision’s competitors, who were sharing their future plans with them.
Losing a customer for this reason is the most frustrating experience. Precision’s account rep lamented, “We’re meeting their current needs for quality, cost-effective products. How could they take the risk of changing vendors for some as-yet-unavailable product they may never need?”
The answer is that the value of a relationship is the net present value of all the projected future transactions. When Acme started questioning the value of future transactions, they felt it was strategic to change vendors today rather than wait.
How to respond
To prevent future client defections, Precision initiated a strategic plan to change the status quo and formalize their account management.
- They continued to demand operational excellence from production regarding quality, on-time delivery, and delivery cycles. (For some products they built up inventory to be able to guarantee delivery on short notice, thus increasing value for their customers.)
- They increased their sales force’s ability to discuss Precision’s future plans without inadvertently making commitments that couldn’t be met.
- They instituted a quarterly review of their prices to identify products where the premium no longer matched customer perception of their value added. In some cases they simply reduced the selling price consistent with their lowered production costs. In others, they invested in more efficient production processes to maintain their traditional margins at a lower selling price. In some cases they increased their prices to reflect the increased value their customers were realizing from their products.
- They instituted an annual briefing for major customers, when they shared their insights about the industry’s direction and what new capabilities they expected customers like Acme might require. They provided a disciplined look at what Precision was researching and the types of new products they anticipated providing in the future. The meetings also provided useful customer feedback on market and technology assumptions.
There is a big difference between making a sale and having a customer. A customer is someone who buys from you on a regular basis. Customers are the heart of a business. Companies don’t grow due to one-time sales. Companies grow because they have customers who buy from them on a regular basis.
Every company’s first priority is retaining existing customers. There is never an acceptable excuse for losing a major customer.