With downward price auctions becoming a reality, suppliers can’t simply sit back and hope that this trend will go away. Instead, they have to seriously start redesigning their business processes to meet these new marketplace realities.
During recent weeks, I have received several e-mails from packaging industry executives who have expressed concerns about the emergence of “downward price” auctions, in which suppliers continue to lower their prices until the auction is closed. As one B2B e-marketplace describes it, “Buyers watch as prices fall in real-time, before their very eyes.”
Most of these executives I’ve heard from work for companies that have traditionally differentiated themselves by providing value-added service(s), just-in-time (JIT) delivery, warehousing, next-day deliveries, special runs, design and testing. Naturally they are extremely disappointed as their key customers who have had long-term relationships with them suddenly tell them they expect to see them on a B2B e-marketplace for all future business deals.
New realities
Their disappointment is not surprising to me since we all have been made to believe that if you served your customers in the best possible manner, you would be rewarded with their business for a long time and there would be no incentive for customers to switch their suppliers. Looking at some recent developments, however, it seems there is little that can be done about it since the Internet has made possible a new paradigm.
While we have always heard the expression “Customer is king,” now is the first time that we can truly say it has become a reality. The reason this is so painful to us is that it is not a result of mistreating our customers. No, the customers have made this happen, and we were simply not prepared for it.
Customer segmentation
Since downward price auctions are now a reality, there is no point in hoping that this is going to go away. Instead, we have to seriously start redesigning our business processes to meet these new marketplace realities.
The first thing that companies need to do is to re-segment their customer base. The situation will, of course, be unique for each company, but customers can essentially be split into the following three groups:
• Connoisseurs - These are the ones committed to using only the best materials in their products. Of course, they would like to pay the lowest price but not at the cost of compromising product quality. The goal should be to keep the connoisseurs you already have and try to find more of them. The best channel to serve them is through direct sales.
• Realists - These are those customers that understand what they need to do in order to succeed in the marketplace. They supply products that barely meet the needs of their customers, and as such, they seek exactly what they need at the most competitive price. These customers are most likely to embrace the e-marketplace-type models. You have to recognize the needs of this group and serve them accordingly.
• Penny-pinchers - These are the least desirable group of customers for any supplier. They are driven by price only, and quality is the last thing on their mind. Try to get rid of them as soon as possible or serve them only through a low-cost-to-serve channel like an online ordering system.
The 20-60 rule
The final goal should be to have at least 20% connoisseurs and 60% realists. Whether you like it or not, you will always have some penny-pinchers. The secret to success lies in identifying what each customer cluster values and then serving it through the most cost-effective channel.
If you have no connoisseurs in your customer base, it is probably a good time to rethink your business practices and completely eliminate value-added components from your product portfolio. Another alternative is to spin-off the value-added services group as a separate unit and sell these only to those customers who want these on a “pay-as-you-use” basis.
The popularity of downward price auctions has been boosted by pricing pressures that are the norm today in almost all end-use segments of the packaging industry. Accordingly, there is a trend to treat products as undifferentiated commodities and thus ideal for purchasing through an auction. In my assessment, this is a trend that is not going away. Therefore, rather than denying it or continuing to believe that you are not a supplier of commodity products, my recommendation is to move fast and change as the market realities change.
At the end of the day, you have to provide what your customers want, and there is no way a company can survive without recognizing this simple truth.