In the last year, two companies have announced the loss of a major customer. First it was Sigma Pharmaceuticals announcing the loss of Chemist Warehouse and then it was Wagners announcing the loss of Boral as a customer. The loss of revenue and profit for both firms were significant. While I lack the specific details to comment on each of these cases, I’d like to explore with you, the general circumstances where such a loss occurs.
The initial reaction to such a loss would be negative, with the business struggling to replace the sales and profits in the short term. However, in the longer term, it may be an opportunity to remake the business and pursue a different strategy leading to greater returns.
In considering the impact of such a loss, several issues arise of interest to all businesses. These include:
- The value of incumbency (that is, being the current supplier)
- The managing of important relationships
- Positioning your business and its products and services from the customer’s perspective.
- The execution of contracts to build revenue and enhance relationships.
Being the incumbent supplier provides several advantages that are often not recognised. The first is the costs of shifting from a known supplier to a new one. Depending on the depth and spread of the relationship these costs can be significant. A key strategy to prevent loss of a customer, would be to increase the costs of switching by embedding your business deep in your customer. Providing logistics, analytics, continuous improvement, customisation and shared R&D (research and development) are a few examples. The deeper the relationship, the greater the switching costs will be.
There is also the reputational cost associated with changing suppliers. In Australia, many markets have only two or three suppliers of scale to provide the required products and services; e.g. airlines and banks. If the decision is made to switch, then it would damage reputations to switch back if the new arrangements do not work out. This is especially so during the initial handover when the learning curve is steepest. Those who have promoted the change are most vulnerable at this point.
Each long-term contract has a relationship at its centre. The relationship may not be spelled out in contractual terms, but it is there nonetheless. The implementation of the contract is the vehicle to enhance the relationship if it already exits and build one where it doesn’t. The secret here is regular conversations between the key people on both sides of the relationship. If you only contact them when there is a problem or an opportunity, trust levels will be low. You need to show a genuine interest in their business and them as individuals.
Most products become commodities over time. Think personal computers, televisions and cars. In these markets the differences between the key suppliers are small and inconsequential to most buyers. The decision-making then becomes price, not features based. On the other hand services are harder to differentiate and moving to a service model or product plus bundle of services (App Store, Apple Music, iCloud) make it more difficult to compare and to switch.
If the making of an agreement has been difficult and contentious, this does not bode well for the implementation of the agreement. In a complex and ever-changing environment customers and suppliers need to see themselves on the same side – collaborating to solve difficult problems, rather that assigning blame or risk. Collaboration is what is required, not conflict over the spoils.
A crisis is often an opportunity for reflection and growth- loss of a major customer is one of these moments.