As we talk to business leaders around the world, it is clear that many of them realize a fundamental shift has occurred: Power has transferred from those who create innovative products and services to Mega-Customers, who are increasingly in control of the global marketplace. Much of the failure in business today is related to this issue of customer concentration. In short, American business is dysfunctional. Companies of all sizes follow the mistaken belief that their products and services are best sold to customers with pervasive market reach: the bigger the customer, the better.
According to so many of the management “thought leaders”, consultants, and textbooks, almost everything should be approached from the perspective of meeting customer needs. A customer wants the product to be available at a certain time and place, in the correct quantity and, of course, at the right price. Far too many business leaders fail to realize – until it is too late – that the relentless pursuit of volume at all cost is not the key to long-term profits and success.
When presented with the option to push more sales through large customers, most decision-makers jump at the chance. As a result, marketing has come to resemble a relentless quest for efficiency and scale. Demands from Mega-Customers- those that are more than 10% of total revenue- in the form of discounts, deals, and incentives erode the integrity of the brand and what it originally stood for. Lower margins become the norm and cost-saving compromises on quality take over. In time, the brand suffers and, in some cases, collapses outright.
Beginning in the early 1980’s, innovative forms permitted, either consciously or subconsciously, outsiders into their companies. They allowed those outsiders to gain increasing control over sales and distribution activities. Innovative firms and the people who led them were responding to the hype about organizational transformation – emphasizing things like resources, capabilities, innovation, technology and operational effectiveness. “Total quality management,” “lean manufacturing”, and “zero defects” were just a few of the solutions preached by the business gurus to companies of all sizes. Drinking this elixir, thousands of companies that once had been in control of their innovative development began to lose interest in sales and distribution, preferring instead that big customers takeover this “business function”. It continues pretty much unabated today.
The concept of “core competencies” was provided as the justification for letting loose control after the producing firm had exercised its unique set of value-adding activities. Why manage a string of dealers if your core competency – your basis of differentiation- is in research and development or manufacturing? Taking this advice, companies divested themselves as activities that were not perceived as value added. Sales and distribution were pushed aside.
The fundamental reality of the Customer Trap is the wholesale takeover of an innovator’s business by a Mega-Customer. When the “10 Percent Rule” gets broken, control gets wrestled away and power inexorably shifts toward the reseller and distributor. The growing dependency on a single customer- or a few really big ones- dramatically reduces the ability of the innovating company to influence what happens to its products in the value chain.
Still- and this is critical- resellers, intermediaries, and distributors are not by nature hostile and to be avoided at all costs. When properly managed, resellers, intermediaries, and distributors serve critical functions in helping to build the brands of their suppliers. If a customer continues to represent 10 percent or less of a company’s total revenue – even if it is the dominant player in a given sector- the power balance remains tipped in favor of the innovator, which is the way capitalism is supposed to work. The biggest gains should go to those who take the take the biggest risks. Other partners should benefit as well if they add value. Nevertheless, the largest share of profits should go to those with the most skin in the game. The Customer Trap occurs when this principle is violated, and those who have invested little capture the lion’s share.
CDM as a Way to Avoid The Customer Trap
Chandran Sankaran is the founder and CEO of Zyme Solutions – a pioneer in the emerging field of channel data management. Sankaran recognized early on that manufacturers were more than willing to give away control over the sales and distribution of their innovations to Mega-Customers in exchange for greater volume. This, he observed, has frequently allowed the path to market become muddied and transparency to be lacking. Sankaran notes that the rise of dominant middlemen has forced companies to explore how to connect to the true customer of their product.
Sankaran recognizes the important roles that an intermediary can play, observing that few companies can become completely vertically integrated. He states: “It makes sense for there to be a shared economy. And that’s what a distribution channel is supposed to be, a shared economy for sales.”
Sankaran explains how innovators are finally waking up to the fact that data is fundamental to their businesses. And getting it from their channels is vital. Channel visibility- as he calls it- is a relatively new phenomenon for manufacturers and brand owners. In the past, on a regular basis, distributors would use various pretexts to refuse to provide sales information and visibility to their suppliers. Sankaran notes that producers are now starting to show much greater resolve in demanding this transparency.
This development is one that is gaining increasing momentum. It bodes well for the future prospects of companies to regain control over their lost innovations. And, for the much needed realignment of the American business landscape towards those who innovate.
Written by Andrew R. Thomas, University of Akron and co-author of THE CUSTOMER TRAP: HOW TO AVOID THE BIGGEST MISTAKE IN BUSINESS (Apress, 2015).