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Business to business firms are facing a shift in the industry, brought on by new competition, technological advances, customer changes, and other factors. This makes growing the bottom line much more difficult, and sometimes it seems a company is left with only two choices: Either strip more costs from the organization to become the lowest-cost producer (likely accelerating industry commoditization) or exit the business altogether.

Take the case of Standard Industrial Lubrication (SIL), an illustrative composite of several B2B clients with whom we are working.

An Apocryphal History

In May 1943, Fowler Pritchard, a foreman at the Blue Bell overall factory in Greensboro, N.C., and an amateur inventor, stumbled upon an industrial use for an oily concoction he'd been tinkering with in his basement. Facing a production slowdown due to high-speed sewing needles that got too hot and broke threads, Pritchard tried coating yarn in the factory with his mixture, and, as if by magic, the needles stayed cool. In fact, the giant sewing machines ran better and faster than ever. Impressed by the production improvements and significant decrease in downtime and material waste, Blue Bell asked Pritchard to make enough to supply all the machines, so Pritchard began mass producing SIL Lube.

Over the next several decades, SIL built on Pritchard's original invention and continued to expand into new markets and industries. SIL's researchers developed new applications for industrial lubricants, and demand grew at a rapid pace. Beginning in the 1960s, the company made several key acquisitions and gradually expanded into the sealant and adhesive industry, as well as into European and Asian markets. It also built a capability in metal working fluids to tap into an expanding market for precision metal components and invested heavily in developing engineering and technical expertise in industrial fluid management. By 2000, SIL had become one of the largest suppliers of industrial fluids in the world, servicing thousands of companies in industries ranging from underground mining to pharmaceutical manufacturing.

But by 2000, SIL was contemplating its continued participation in the industrial lubricants market. As technologies improved and manufacturing processes grew faster, many of SIL's customers began reducing the number of production facilities. As manufacturing processes grew more complex, performance requirements for lubricants increased dramatically. At the same time, more stringent regulations of industrial fluids in the workplace required suppliers to reevaluate ingredients and, in some cases, reformulate products. To control costs, the vast majority of SIL's customers had started fluid management and recycling programs, so they required less from suppliers on an annual basis. According to SIL's sales force, most customers expected better deals each year and often threatened to switch suppliers, in search of better prices.

To meet the demand for low prices and increasing pressure from local competitors, SIL had focused heavily on stripping costs out of the business to maintain profitability. But even after deep cuts, SIL's lubricants division was not meeting its 2001 financial objectives. It seemed the company might have to exit the lubricants business, which represented less than 25% of sales and profits. Indeed this is exactly the recommendation made to top management by a major management consulting firm: "Get out of the business—it's a commodity."

Perception vs. Reality

An industry may give every indication that it has commoditized and that brand, service, and other product attributes mean nothing to customers who make buying decisions based purely on price. Managers must determine, however, if commoditization is an absolute market reality or just an internal perception before making a critical decision, such as pulling out of an industry entirely.

First of all, where is the information about customer obsession with price coming from? Has the sales force actually asked customers what they want from a supplier? Has the company done any quantitative research? We've found again and again that companies that rely on the sales force for market research get little more than anecdotal information.

Customers may appear to regard price as their primary purchase consideration, but is price the only consideration? Or are customers simply responding to how suppliers approach them? If all a company offers is a low price, then customers have no other choice but to buy based on price. Perhaps, if given the opportunity, they'll make a purchase because of something else.

If customer satisfaction studies indicate that buyers in the aggregate don't see much difference among suppliers, perhaps this is because suppliers are all offering the same thing. What does research say about how different customers rate the brand? Does the brand rate highly among customers looking for high quality? How about exceptional service? In SIL's case, the brand rated highly with customers looking for a supplier who cared about their needs and was willing to go the extra mile to meet those needs.

If there's evidence that a group of customers perceives the brand as superior, then is there an opportunity here? Who are these customers? How many of them are there? What are their needs, problems, and pains (i.e., their motivations)? What kind of value might they place on products and services that address them? In other words, might there be another way to drive the buying decision? Maybe there is a way to avoid commodity status after all.

The only way to answer these lingering questions is to start talking to customers. In SIL's case, we worked with the company to launch an in-depth investigation of industrial lubricant customers. We interviewed more than 500 decision makers responsible for purchasing industrial lubricants from SIL and its competitors to assess their needs, problems, and motivations.

Initial analysis quickly revealed that there were two sides to the industrial lubricants market. As many SIL executives had suspected, perceptually it looked like a commodity, but behaviorally was clearly branded. Buyers indicated that they had a good relationship with their suppliers and were not switching wantonly in search of a better deal. Though decision makers reported being open to changing suppliers, fewer than 10% of new contracts were likely to involve a switch of suppliers.

Price was not as universally important as previously thought—many buyers wanted services and guarantees from suppliers that went beyond cost. In fact, one buyer out of three was willing to pay more to get the quality and service they wanted. This wasn't to say that price was unimportant, but it was just one aspect of the purchase decision.

Finding the One in Three

Next SIL needed to be able to distinguish the one in three less price-sensitive buyers from others. Using the same databases, we set about segmenting the market. Rather than take the tired conventional approaches to segmentation—looking at SIC codes or buyer behavior—we did something novel. We segmented the market in terms of potential profitability. We did this by answering the question: "What types of companies and which key decision- makers are willing to pay more (rather than less) for products and services that solve their problems?" This market segmentation work revealed three segments that comprised more than 75% of the profit potential for the firm.

With the segments determined, the next step was to determine how to motivate target buyers. The two companies studied different positioning opportunities that the financially optimal targets would all find motivating. The end result was a new value proposition for the business: "SIL is the superior provider of industrial lubricant solutions with the smartest, most dedicated people committed to one thing: Making our customers' business run faster, smoother, and more efficiently."
With targeting and positioning in place, the next task was to configure a product/service and pricing strategy that would appeal to the key segments and, just as important, would meet the financial objectives of the company.

Using a modified form of trade-off analysis (a.k.a. service engineering), we tested hundreds of thousands of different offers with varying prices, terms of the offering, levels of customer care, and technical assistance. Each offering had an intended or probable target segment, but could be made available at a price to any customer. The end result was a selection of product and service packages that offered varying levels of technical consulting and fluid management expertise. The price of each solutions package was not concretely fixed, allowing the sales force some flexibility to negotiate with individual customers.

The data supported the targeting, positioning, product/service configuration, and pricing decisions that we recommended. Still, SIL wanted more real-world evidence that the company was headed in the right direction—that the sales force could work with the new strategy and customers would respond to the new offers.
To test the new offerings, we accompanied senior sales and marketing managers as they visited customers and talked to them face to face about their problems and concerns. During a stop at one of SIL's larger customers, the buyer told us, "If you miss one delivery and this plant goes down because a machine burns out, it costs us millions in repair and lost production and I'd be out of a job. So really price is not foremost in my mind. SIL delivers the stuff that I order, but no one technical has ever come in here to take a look at our machines or audit how we use and manage fluids and tell us what we could do or use to run better and faster. I want to know how we could make more money here. That's what I really need."

After the buyer shared his feelings, the SIL sales rep told him about the company's new solutions packages that could help this customer reduce his costs. The customer gratefully shook the sales rep's hand. "Thank you guys for finally listening. This is exactly what I've been looking for from a supplier for years."

After the initial round of visits, we launched a beta test that targeted 100 accounts across all key markets served by the industrial lubricants. The sales force used the new solutions packages and emphasized SIL's new approach to partnering with and counseling customers. Customer response to the various offerings was used to fine-tune the strategy. At the end of the pilot, management had sufficient evidence that the approach was working and that there were, in fact, groups of customers with different needs.

Transformational Marketing

Marketplace results are a function of both strategy and implementation. Just as ineffective implementation undermines an effective strategy, skilled implementation of a weak or inappropriate strategy wastes resources. You need both.

Now that SIL had a strategy, the next step was to ensure the organization was prepared to support it fully. SIL began a major overhaul of its organizational structure. Not unlike most organizations, at SIL sales, marketing, research, engineering, customer service, and operations had all functioned with minimal interaction with each other. Following the advice of Ben Shapiro, professor emeritus at the Harvard Business School, the first order of business was to begin to pull the departments out of their functional silos and foster an environment of interdependence through improved communication and institutionalized integration of activities as they related to the customer segments. SIL also launched a training program to introduce the new sales process to all the divisions—not just sales.

The end result of the realignment process was an organization-wide understanding of the objective of the new strategy and what was required of every employee to achieve this objective. Now the organization was ready to put the strategy into play.

Some Closing Thoughts

Plenty of companies talk to customers, but it's the rare few that really listen to them and translate comments into strategy. In SIL's case, taking the time to research customers and analyze the information helped the company avoid a potentially costly mistake. While the company likely would have lost money on the sale of the industrial lubricants division, the new strategy that emerged from our work (finding financially optimal customer segments, a positioning, and a set of solution packages and prices) led to a dramatic turnaround in the industrial lubricants business. Within two years the division had become SIL's most profitable area, consistently contributing to the overall growth of the company.

The case of SIL is not a fairy tale. Real-life companies including Air Products, Deluxe Financial Services, ExxonMobil, Green Mountain Energy, IBM, and Johnson & Johnson's Ethicon business unit have all taken an approach similar to the one illustrated in this case to find the opportunity, develop the strategy, implement the plan, avoid commodity status, and subsequently transform the company. Rather than a death sentence, industry commoditization should be a wake up call to marketers to start listening—really listening—to what customers have to say.

Copernicus works with business to business marketing companies in a variety of industries. Click here for more on our approach to business to business marketing.

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