Suppliers strive for customer loyalty

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A few years ago, when the economy was surging, suppliers could get away with hanging their shingles out and doing little else to drum up business. But times have changed, and suppliers now need a strategy for encouraging loyalty—read, repeat business from current customers.

At issue is a shift in how customers have begun to source materials. Recently, a team of Mc-Kinsey & Co. experts identified so-called sourcers—sophisticated professional purchasers that force suppliers into bargain-basement price contracts. Sourcers, McKinsey said, do their homework: They learn from their own organizations, other suppliers, trade magazines, a supplier’s customers and industry experts.

Total value focus

According to "Fighting for your price," an article in the McKinsey Quarterly: "The key to success is to understand the sourcers’ approach, which focuses on total value rather than lowest price, and to prepare the organization for a new kind of selling. In this way, a supplier can restore the balance of power with its buyers and give them greater value while not threatening its own viability."

McKinsey’s advice was two-fold. For most basic-materials suppliers, it suggested first re-balancing the scales by understanding the economics of the companies that the sourcers work for and, secondly, retraining the supplier’s organization to sell not just volume but value.

Measuring loyalty

In the early 1990s, companies began measuring customer behavior, an improvement over measuring customer satisfaction. Today, 14% of companies use a loyalty metric, according to a May 2002 survey by the Strategic Account Management Association, Chicago.

"In the last two years, there is clear evidence that, with the increase in revenue pressures, there has been a forced decrease in costs," said Vic Hunter, president of Hunter Business Group, L.L.C., a Milwaukee-based b-to-b marketing consulting firm. "Marketing and sales costs have been shrunk to produce an increase in market share, not revenue. As market share increases, there is a shift from transaction management to relationship management."

So far, Hunter doesn’t see b-to-b marketers learning how to form these relationships. Continuity programs that resemble the frequency programs common in the b-to-c space are not the answer, he said. Continuity programs, such as the frequent flier programs run by airlines, reward a customer’s current behavior, doling out points or discounts to keep purchase activity consistent.

But in the b-to-b arena, continuity programs lead to the dilution of margin, Hunter said. Loyalty programs for b-to-b companies need to measure leading indicators of desired behavior. (Loyalty programs differ from continuity programs in that they set incremental customer behaviors as a goal and reward improved behaviors, not current ones.)

In general, product-focused companies that long have employed price-based retention strategies have a hard time recognizing the weaknesses in points-for-purchase programs and accomplishing corporate culture change, he said. Service industries such as finance and insurance have a leg up in this regard.

"The best loyalty programs I have seen increase the service level to best customers," Hunter said. "They have accelerated the problem-solving process available to best customers."

Dell Computer Corp., for example, develops customized procurement portals called Premier Pages for its best corporate accounts. Their rewards for loyalty are an easier way to purchase from Dell, to manage technology assets and receive product support from Dell.

Hunter’s research found that clients that see exceptional value delivered through, for instance, a call center will report an increase in face-to-face contacts, even when these visits actually decline. It appears that when the overall communication with the supplier improves, the customer perceives greater value.

Understanding the attributes critical to loyalty and aligning service promotes customer growth. "It’s entirely different from giving them a trinket," Hunter said.

"On the consumer side, it can get kind of gimmicky on what customer relationships are about," agreed Jeff Marr, VP-people and product development at Walker Information Inc., an Indianapolis-based research firm. "We see far less of that in b-to-b," he said. "In most cases, business-to-business is better at relationship marketing."

However, gauging loyalty is not as simple as tracking repeat customers. "That’s only half the equation," Marr said. "The other is the attitudinal commitment to the supplier."

Across industries, Walker Information finds consistency in the segmentation of customer bases. About 50% of customers represent "true" loyalty—those who express their satisfaction attitudinally and behavorially. Another third of customers are "trapped" by contracts but not happy with the supplier. The remaining 17% of customers fall into two categories. A "high-risk" category includes those who don’t approve of the supplier’s repurchase incentives or its service level. An "accessible" category consists of those that play the field, staying open to competitors that may deliver newer or better products or services and resisting contractual arrangements, despite their perception that the current supplier services them well.

Heeding satisfaction surveys

Satisfaction surveys alert companies to the individual corporate attributes that affect customer loyalty and should result in reshuffling of operational investments to reflect greater sensitivity to the customer. This is "the essence of being customer-centric," Marr said.

IBM Corp., for example, delivers business resources and rewards through PartnerWorld, a worldwide community of resellers and distributors that represent one-third of the company’s revenue. Partners are independent businesspeople, often representing several manufacturers, and are stroked lovingly with PartnerWorld perks such as special events, sales-prospect databases, a frequency program that charts partners’ sales levels and a dedicated Web site featuring new product information, relationship management tools, marketing materials and sales support.

This massive market center focuses communications and business processes from across IBM functions on the company’s most valuable customers.

"PartnerWorld’s goal is to act as a lightning rod and advocate internally for our 90,000 business partners, while driving revenue growth and profitability for IBM and our partners," said Michael Rowinski, spokesman for IBM’s Global Business Partners organization, New York.

Every year, the program gains hundreds of new partners—independent service vendors, consultants and integrators.

"IBM is committed to increasing its network of influencers to gain greater market share in key growth markets, such as small and medium business, and in emerging growth opportunities, from wireless and Linux to pervasive computing and security," Rowinski said. "PartnerWorld makes all this happen."

To make PartnerWorld work, IBM tracks sales, surveys members and conducts focus groups and roundtables with partners to understand their needs.

There are three fundamentals to customer loyalty, according to Jeff Zornitsky, exec VP of Exchange Solutions Inc., Boston, which specializes in customer value management services. First, he said, there are metrics based on the economics of customer relationships; second, an understanding of the interplay between customer relationships and profitability; and third, an experience manufactured to drive customer behavior, achieving the marketer’s desired results while meeting customer’s needs.

Loyalty itself does not generate profit; loyalty and profitability must be managed simultaneously, he said.

"We want to engage customers in a give and a get," Zornitsky said. "The more a company gives, the more it should get."

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