Avoid Becoming a Commodity

[Editor's Note:In a recent conversation, the leader of a company explained that his was a commoditized business - just like many others in his industry. I asked him why anyone would choose to buy from him  unless he offered the absolute lowest price. He looked a bit bewildered by my comment and then responded that fighting price competition was his company's biggest issue. It made me think of an article about differentiation. I hope you find it useful.                                    -dpm] 

 

All products become commodities. All industries become mature.

You wake up one morning and realize that your products have become commodities. Your competitors all have basically the same "stuff" to sell and your sales people are constantly pressured to lower prices. Margins are being squeezed. You can't believe the price that a competitor just quoted to lure one of your customers. You know all of the competitors - they are not in any better position than you. This just isn't fun anymore!

 

Welcome to life in a maturing industry where growth is slowing - or may even be declining, all of the competitors and customers are known, and customers change suppliers or products for a lower price. Maturity comes to all industries - materials, products, or services. Whether you provide concrete or steel, or develop and sell software, your industry matures and your product sooner or later becomes a commodity. In today's environment, the path to market maturity is much faster than ever before.

 

Good News. Your customers know the answer.

There is some good news. There is big money to be made in mature markets. Some companies in mature industries command premium prices, have low customer attrition, make excellent margins, and continue to grow. But, it requires some different thinking about your customers, products, and markets.

 

Don't look for the answer inside your company. Creating services and solutions around products is not the answer if you are not pointed in the right direction. Get to know your best customers better (that is, your most profitable customers on a net profit basis). Ask them about their business, their problems, their pain. Survey and interview customers. Go to their facilities. Meet with their top managers. Listen and Observe. What are they really buying? Where do they need help?

 

When is a product more than a product.

Years ago, one of our clients was selling sophisticated diagnostic scopes to physicians, but technological advances slowed and it was difficult to expand the market. Pricing became very competitive. It was difficult to convince physicians to make a big capital purchase. The company interviewed dozens and dozens of physicians and office managers and discovered an interesting issue. Since the scope had to be sterilized between patients and the sterilization procedure for scopes is lengthy, physicians and their staffs continually had a problem having a sterilized scope available. The company decided not to sell scopes to physicians, but to offer a fee-based service - providing clean, sterilized scopes to physicians. They wrapped a product with a service and solved the real problem for physicians. Margins soared. Pricing was no longer an issue...they were selling more than a scope.

 

Do things your customer doesn't do well or want to do.

A client in the industrial distribution business found that some of its customers were having difficulties hiring and retaining qualified welders, and there were safety concerns with their customers' painting and welding production environments. The client offered to begin to deliver "finished" components (cut to size, fabricated, welded, and painted) right to the final assembly line. Revenue and profits increased. What is even more significant is that the customer now has an indispensable relationship with the supplier.

 

Change the way your product is packaged, managed, delivered, or used.

Another manufacturing/distribution client found that their customers were poor planners. Routinely the customer would show up at their warehouse in the morning to pick-up product and materials for the day's job. By the time they arrived at the job site, it was after 10:00 am. The client offered two services to help: An early morning pick-up - any order that arrives by voice mail, fax, or email by 11:00 pm is staged and ready for pick-up by 6:00 am. They also offer a project management service. The distributor manages the delivery of materials according to a job project schedule which the distributor continuously monitors for the construction customer. This ensures that the right materials are delivered to the right site at the right time. The distributor cannot command a significant premium for these services, but doing business in this manner actually saves them money and builds customer loyalty.  

 

Can technology change things up?  

Another company produced capital equipment which provided a static diagnostic testing for their customers in the power industry, The problem - it required that the customer's equipment be turned off during the diagnostic test. The company came up with a means to add sensors to their customer's equipment and to provide a continuous monitoring service for a monthly fee. Margins and market size both increased dramatically. Customers were ecstatic about not losing productive time on their equipment   

 

Your Customers may hold the key to differentiating your commodity product or service

• Determine what the CUSTOMER is buying? Survey and interview the customers - Listen to their pain and their needs in their business

• Change the way your product is packaged, managed, delivered, or used

• See how technology might change the economics or competitive environment

• Perform some of the processes and/or functions now performed by your customers

• Make the product more than a product

  

What are your thoughts about these key points? Share your reactions.

  __________________________ 

 

We help clients think differently. If you would like to discuss how we might help you and your company accelerate the process of adding value and moving your company to the next level of performance, please contact us. 

DIFFERENTIATING CUSTOMER SERVICE: GIVING EACH CUSTOMER WHAT THEY NEED CAN LEAD TO GREATER PROFITS

[Editor's Note: Recently there has been much dialogue about the bankruptcy of Michael Porter's Monitor Group (See"What Killed Michael Porter's Monitor Group?" ) It has occurred to me that the downfall of this firm was not flawed strategy, but not only a failure to understand and respond to customer needs, but also perhaps even an arrogance about the importance of customers. It brought to mind an earlier article on the importance of meeting individual customers' needs. I hope you find it useful. - DPM]

DIFFERENTIATING CUSTOMER SERVICE: GIVING EACH CUSTOMER WHAT THEY NEED CAN LEAD TO GREATER PROFITS¹

What do you do when you're waiting for a slow elevator?

A number of years ago, a company that had just built a major building realized their elevators were intolerably slow. What to do? It was too expensive to reengineer the elevators. After thinking about the problem for a while, mirrors were installed in the lobby and elevators. It turns out that people will tolerate a much longer wait if they can see themselves in a mirror.

Today, most tall buildings have mirrors or polished metal surfaces in their lobbies and elevators.

Disney World has a similar problem. The waiting lines for attractions are often very long, and children are impatient. So are adults. The customer service group at Disney studied this problem at great length, and made the field into a science. They now know exactly how long people will wait before they need to be distracted. Consequently, when you queue up for Pirates of the Caribbean or other top attractions, you are likely to be engaged at carefully predetermined intervals by wandering characters, videos, and mirrors. Also, lines are laid out in a serpentine manner, providing a feeling of constant progress. Recently Disney announced the MyMagic+ program offering advance reservations and providing waiting customers with "buzzers" that will notify them when the ride is ready - notify them at one of the restaurants, no less.

Here's how one top hotel, which differentiates itself through its reputation for great service, handles customer service. Every employee is empowered to spend up to a few hundred dollars without approvals to rectify customer service errors. If laundry is late, it arrives with a bottle of wine. In this way, the hotel turns lemons into lemonade. By the way, Southwest Airlines has a similar policy. The front-line employees are empowered to "bend the rules" to meet customer needs. It is no coincidence that Southwest is perceived as one of the leading airlines in customer service, even though it is a low-fare carrier.

When you do a good job of fixing a customer service problem, you often earn more customer loyalty than if there had been no problem. This is when you can show your worth, and earn your customer's trust.

What is customer service?  Perception is Reality!
This raises a critical question: Exactly what is customer service? Nearly every company has numerous customer service measures, but how many of these really produce the right results?

Is customer service what the customer experiences? Not exactly. Customer service is what the customer perceives and remembers. The acid test of customer service is the customer's future behavior. If Disney World had managed to shorten its wait time by 20 percent, but had no distractions, customer service complaints would have gone through the roof.

Consider the following customer service measure. A copier company has a policy that when a customer calls for repairs, a repair tech will arrive on the scene in two hours, 95 percent of the time. Sound good? Think about the following issues.

This policy treats all service calls the same. Some service calls are prompted by machine failure, while others may be caused by cosmetic issues, like a loose faceplate. The policy also treats all customers and customer situations the same. One call might be for a non-functional machine that happens to be the only copier on the executive floor of a major account, while another call might be for one of the eight copiers in the company's administrative department.

Customers' negative perception of service is primarily formed by their worst experiences, not by the average. For example, even if the copier company fully met the policy above, the disappointed 5 percent would have far different reactions if the wait time were four days, rather than two hours, ten minutes. Moreover, the policy focuses on when a service tech arrives, not on when the problem is fixed.

This policy reflects the cardinal error of customer service: It measures what the copier company sees, not what the customer sees. It's an operational measure, not a customer measure.

Product reliability. As you get better, the customer sees you as being worse.
Think about this one. The smart phone company develops a great quality process, and its smart phones become very reliable. What's the impact on customer service? The answer is counterintuitive. As the products become more reliable, the easy-to-fix problems go away. Those that remain are the most intractable ones, those that take the most time and are most difficult to fix. When customers focus on their bad experiences, they often perceive that customer service has degraded.

What can you do about this? Several things.

·     First, shape your customer's perception. Some companies issue report cards showing their actual service. In this context, the occasional problems are seen to be just that, occasional problems.

·    Second, get in front of the problem. Some companies have carefully analyzed the key points at which preventative maintenance makes a big difference. Others have designed machines with the capability for self-diagnosis. Some of these machines even have the capability to call for service, without human intervention, when they "sense" an impending problem.

·  Third, make the products easier to fix. Most often, the root problem behind lengthy repairs is lack of quick access to needed parts. One manufacturing client company, for example, created what they called a "wall of washers." They saw that their product design engineers were specifying unique washers for each of their products. This caused huge problems in keeping local spare parts inventories, and resulted in big delays in field repairs. To emphasize the point, one clever vice president had his staff collect every unique washer and paste them on a wall. There were over 1,000. The vice president brought the product design engineers to see the wall of washers. As a result, the engineers quickly began to redesign products to have a maximum number of common parts. The impact on service intervals, the time between when a customer calls and when the machine is fixed, was striking. And, inventory costs dropped through the floor.

Product availability
Measuring customer service is a common problem in distribution and retail. Many locations have thousands of products, and it is costly and difficult to keep them all in stock. In addition, sometimes products are present in the retail store, but not in their proper place on the store shelf. What's the right measure of product availability?

The answer is more complicated than simply whether the shelf is empty. A lot depends on the customer's need.

For example, in many retail situations, customers come into the store with a generic need such as a tape measure, a plastic container, or an inexpensive television. For these situations, most stores carry two to four products that would fit the customer's need, and the customer is largely indifferent. In this context, if one product is missing from the shelf, the customer is still perfectly satisfied.

Therefore, in these cases, the proper measure is a "substitution group." For most retailers or distributors, over 60 percent of their sales engagements fit this customer behavior profile. Yet most retailers and distributors focus on product-specific availability measures of customer service, and this causes huge inventory costs. .

The hospital industry presents another sort of customer service misunderstanding. In a typical hospital, the definition of an out-of-stock situation is one in which at least one ward and the stockroom both run out of a particular product. Yet the hospital may have a large amount of the product scattered on other wards. The problem is lack of a mechanism to locate the product once it leaves the stockroom.

This creates an important opportunity for a supplier to install a vendor-managed inventory system that includes both stockroom and wards. Here, the vendor gains great efficiencies from reducing safety stock by cross-sourcing from ward to ward. In fact, this is one of the major hidden benefits of vendor-managed inventory.

Effective customer service. Keeping your promises by meeting individual needs.

In earlier eLetters we have written about the importance of differentiating between customers. Customer service differentiation is the key to getting out of the vicious cycle of building inventories because service is poor, then cutting inventories because costs are high, then building inventories again because service is poor again....

The key is to understand that great customer service means keeping your promises to customers, but that these promises, the service intervals or order cycles, can and should be different from customer to customer and product to product. For nearly all customers, the most important need is to get what they plan on and expect. This is much more important than the cycle time, per se.

Many leading companies are moving beyond tactical definitions of customer service to find powerful ways to make their customers more profitable. Customer service is the starting point and ending point for any effective account relationship. The key to success is clear thinking about what it feels like to walk in the customer's shoes.