It’s not just about closing that all-important first order with a new business-to-business (B2B) customer. All you’ve done in this case is get your foot in the door. Ultimately, you have to find a way to incentivize that customer to purchase again and again. Growing market share and increasing revenues is all about customer retention. If you can keep more customers than your competitors, then you’ll win the day. Unfortunately, in today’s highly competitive marketplace, increasing customer retention is a difficult proposition, or is it?
The Difficulty of Capturing Competitor Pricing Data in B2B Markets
It’s difficult to secure real-time, up-to-the-minute pricing and competitive data in a B2B market. After all, it’s not as if companies advertise their pricing and offers on TV. Their deals are made in private, behind closed doors and in relative obscurity. In fact, most companies focus on keeping their pricing closely guarded due to the fear that their customers will use that pricing to lower their competitor’s offer. It’s a pricing game and one that corporate buyers know how to win.
Granted, there are times when customers share valuable competitor data. However, there will always be questions as to the validity of that data, whether your customer is sincere, or whether they’re simply playing that aforementioned price game. So what kind of strategy can you adopt that forces your customer to come back to you whenever they’ve been approached by a competitor of yours? Better yet, what kind of strategy can you run that not only provides you with that timely data but ultimately forces your customer to keep buying from you? The answer lies in borrowing a simple and straightforward retention strategy from consumer markets.
Borrowing Customer Retention Strategies from Consumer Markets
Think about how a business-to-consumer (B2C) market operates and what each company must do to retain its customers. We’ve all seen those rebate and reward programs. We’ve all been part of a loyalty program where accrued points go towards a free purchase or future discount. So, if this strategy works in consumer markets, what’s to stop it from working in B2B markets? Does it even make sense to try, and if so, what would such a program look like?
Answering these aforementioned questions comes down to using a reward program. This is a simple plan where your customer accrues a credit or discount for every purchase they make. In this case, you’re borrowing a strategy that has worked extensively in consumer markets, ones where customers only get their reward at the end of a given period, or when they’ve attained a predetermined volume.
You set up the plan in much the same way. You advise your customer that they will accrue a credit on every unit they order. Once they’ve attained an agreed upon volume, their account has credited the total of the rebate they’ve accrued. So, how does this feed your company with up-to-the-minute B2B pricing data on competitor offers?
Answering this aforementioned is fairly easy. As their credit builds up in their account, they’ll be forced to contact you once they receive a lower competitive bid. In fact, they’ll contact you as soon as they receive that bid. Why would the customer do this? Simply put, they want to keep their credit and get that new lower price. However, they know that if they just switch vendors, they’ll lose the rebate. Therefore, it’s a decision they make based on how much they can save with that new competitive bid relative to how much you hold in their account.
If you run enough of these programs with your customers in a given market, then you’ll start to notice pricing trends and B2B market fluctuations. That input of data will allow you to ascertain whether these competitive bids are real, or whether or not your customer is merely trying to get you to capitulate to their price demands. More importantly, you’ll be better positioned to match that bid, match a portion of the bid, or hold firm on pricing simply because you’ll know exactly how much the customer would be giving up from their plan if they decided to switch.
This a plan that builds customer retention provides incentives for customers to purchase and gives you the final go/no-go decision on matching the lower price. If you choose not to match, and your customer opts to purchase from your competitor, then you keep the credit on your account and your gross profit margins on sales increase.
A Customer Retention Plan
|Week||Volume||Price||COGS||Gross Profit (Without Customer Credit)||Gross Profit % (Without Customer Credit)||Widget Credit||Customer’s Credit per Order||Accrued Credit||Gross Profit % (With Customer Credit)||Gross Profit (With Customer Credit)|
|Total Rebate End of Week 15||$1,875.00|
The above table outlines a retention plan for a given customer. The table outlines the volumes, prices, costs of goods sold (COGS), gross profit per widget and the gross profit percentage before the credit is applied. In addition, it includes the credit for each widget, the customer’s total credit for every order of 100 widgets, the accrued credit from week-to-week, and finally, both the gross profit percentage and gross profit on each unit after the credit is applied.
In this example, the company has told its customer that it will receive a credit of $1.25 for each widget it purchases every time it orders 100 units a week. The customer and the company have agreed that the plan will run for 15 consecutive weeks. Ultimately, this is a plan that could be run weekly, monthly and or quarterly.
Each week the customer builds up their credit amount based on that week’s purchase, which is added to the previous week’s total. A good strategy is to provide this balance to the customer on a weekly or monthly basis so that the customer is always cognizant of their credit amount.
What Happens if the Customer Receives a Competitive Bid?
Let’s assume that your customer receives a competitive bid in the 8 Th and 12 the week of the retention plan. In the 8 the week, your competitor offers your customer a price of $53.50 per unit. Your pricing at the time of the competitor offer is $55.00. Now, you could match that competitive bid or you could use your customer’s accrued credit to your advantage. So, instead of merely matching your competitor’s, you offer $54.00, thereby keeping some gross profit for your company.
Your customer now has to decide whether to purchase from your competitor or stay within the plan. The table below outlines the consequences of opting out of the plan. If your customer switches in the 8th week, they actually end up losing $600.00 because they give up their accrued credit of $1,000.00 in order to save $400.00 in the coming weeks. It simply doesn’t make any sense for the customer to switch.
The same scenario repeats itself in the 12 th week. Instead of matching the competitive bid of $52.00, your company simply offers $53.00. If the customer switches, they end up losing $1,100.00
|Week Number||Competitive Offer||Accrued credit (Time of Competitive Offer)||Variance in Offer||Volume Remaining||If Customer Takes Competitive Offer||Net loss for Customer|
In the end, your customer must contact you when a competitor makes an offer. This puts you squarely in the driver’s seat. You can match the bid, match a portion of the bid, or do nothing and keep your pricing as is. If you don’t change your pricing, and your customer opts out of the plan, then you keep their credit and protect your margins on sales. Ultimately, you want to run multiple plans on different products with all your customers. The more plans your run, the more likely you’ll be able to differentiate between real changes in market pricing versus a single customer using a veiled threat. In the end, it means you’ll incentivize your customers to return to your business.