Which Customers Should You Keep?

Over the years that IRN has been surveying suppliers on their interactions with customers around the issue of price reductions, there has always been a wide range of responses.

Over the years that IRN has been surveying suppliers on their interactions with customers around the issue of price reductions, there has always been a wide range of responses. The decisions that companies make when they are preparing their quotes and when they are in the midst of the give-and-take of negotiations reflect the differences in their perspective and their market position. Consider these comments we heard in our 2010 survey from suppliers who conceded to their
customers’ expectations of a price reduction:

•    “Customer expects its suppliers to ‘pay to play,’ i.e., they want money up front or you will not get sourced business.”
•    “Still too much capacity in the supply base to have any power in negotiations.”
•    “We agreed [to a price reduction request] because we are trying to win back business that they re-sourced to a competitor and we felt that if we did not agree, more business would be re-sourced.”
•    “This reduction insured that we would be the single source for our product in certain geographic areas.”

The survey responses also included feedback from companies that declined to make the requested price concessions. Their reasons imply a real (or perceived) differentiation and/or more freedom to make decisions that are beneficial to them with less concern about trade-offs:

•    “We make proprietary parts. Our relative strength makes it easier to reject decreases.”
•    “We just said no. We have our breakeven to a point that we do not need to take every piece of business anymore.”
•    “We have never offered or submitted to automatic price downs. If we have a direct cost savings, we offer to split it. No renegotiation of contract. No lost business due to our hard line.”
•    “Customer pressing for a price down, but given the weakness of our competitors, it has very little opportunity to re-source the business.”

It must be noted that this range of responses does not do justice to the high degree of complexity underlying any supplier’s position on the spectrum of compliance with customer demands. How you decide to handle any given request may vary depending on the product, the customer, other things going on with your business, etc. The consistent advice that we have given to suppliers over the years in weaving through that thicket of factors has been to “Be deliberate.” An example of what we mean by being deliberate is to create a context in which these decisions will be made. An annual process of rating your customers and determining where they fit into your long-term strategic goals provides a valuable framework for decisions that come up throughout the year. Some of the criteria on which to rate a customer are the amount of business potential that it represents, the level of profitability you can achieve with this customer, payment terms, the amount of work required to service the company, etc. This analysis typically reveals that some customers are more trouble than they are worth, or to put it more tactfully, less attractive than others.

While we have seen companies get into trouble by moving too aggressively to prune their customer list, it is entirely appropriate to set an objective of working toward replacing a problem customer in three years, for example. As Kim Korth, president of IRN, said at the presentation of IRN’s 2010 survey results, “This is hard to do, because the giant sucking sound you hear is the dysfunctional customer that is getting the most attention.” Focusing that energy on customers that provide something to the bottom line is more rewarding in the long term, but it can be difficult to bear that in mind on a day to day basis unless you have made it easy for your personnel to “Be deliberate” by having a clear plan.

Being deliberate can also save you from a different kind of error. As Laurie Harbour of Harbour Results, Inc. noted in her participation at the IRN presentation, companies also get into trouble when they do not make data-based decisions. They can move too quickly to fire a customer, rather than taking the time to figure out why they are not making money. Harbour cited instances where suppliers were going back to their customers with data to support price increases, and getting them.

Given the choice, every supplier would undoubtedly prefer to be among those who can make decisions about price reduction requests based strictly on what’s in it for them. Realistically, however, most suppliers will remain in the realm of needing to balance their interests with competitive dynamics and market conditions. Developing an uncompromising commitment to good data and a long-term customer strategy will allow you to refine your handling of the requests by telling you which customers are worth accommodating and which should be eased out of the portfolio.