Any time a consumer is required to purchase a product or service with greater capacity than is needed, that consumer is being asked to pay extra for something that will never be utilized. But as we transition to a pull economy, the tolerance for over-supply is being eliminated.
Historically, goods and services have been pushed into the stream of commerce, with consumers having little say in the configuration of those products and services. In a series of potentially self-serving configurations controlled by the vendor, the consumer has always had to choose the configuration that appears to be the closest to matching its needs.
Oftentimes, back when access to information was more restricted, a customer would be forced to rely on a salesperson’s advice to determine what was needed. In these circumstances, the seller had more control than the buyer, and may have used it to his/her advantage. This is because salespeople are generally motivated by compensation and their employers might slant compensation plans toward the sale of products best-suited to achieving the company’s goals rather than those of their customers.
So long as there’s competition for a product or service, suppliers walk a fine line between the temptation to exploit customers and the threat of eventually losing business (and perhaps damaging its reputation) to a competitor that doesn’t. It is the existence of competition and the threat of losing customers that are expected to keep the system honest. But despite the competition, it’s still possible for elements of exploitation to creep into the overall value proposition.
There are two key elements businesses focus on in the business cycle:
- Customer acquisition is affected by how well customers understand and need the value proposition that›s being offered, and whether it represents good value for the money.
- Customer retention is most-often affected by the level of satisfaction a customer experiences with the product or service purchased and whether it fulfills their expectations.
In order to meet its business objectives, the supplier’s initial offer must be attractive, and the value proposition clearly understood by its target customers. Historically, the salesperson has played a significant role in this process.
Smaller, less-sophisticated companies tend to offer less-complicated value propositions—they’re simple for customers to understand and adopt. But as a result, the companies offering them are exposed to competition that puts pressure on their prices and, usually, on their profits. Furthermore, the less complex the value proposition, the less opportunity there is for entangling their services with the customer, and the less difficult and less costly it becomes for customers to switch their suppliers. This explains why smaller businesses tend to experience higher customer churn rates than larger businesses.
Usually, there is a strong inverse relationship between the complexity of the value proposition and the customer retention rate—the greater the underlying complexity, the higher the retention, and vice versa.
Larger companies have the ability and resources to develop complex solutions that maximize long-term retention rates. They also have the foresight to implement these solutions in a series of steps that simplify the adoption process and don’t overwhelm customers. Dealers and distributors can then be trained to sell these solutions into local markets, maximizing customer acquisition rates.
The larger, more-sophisticated companies generally try to make their propositions as attractive and simple as possible to maximize customer acquisition rates. They will then work on their retention strategies, focusing on up-sell and cross-sell opportunities designed to create long-term relationships with their customers. This approach typically ensures high retention rates because it increases the costs a customer must consider before switching to an alternative supplier. Adding to that, the indirect costs of making a switch further incents customers to stay with their current suppliers.
That is, until a customer decides it’s worth going through the pain of making a change.
However, even this retention-risk can be headed off by looking for customer feedback signals about the value proposition. Long before a customer reaches the threshold for switching suppliers, it’s likely to send signals—direct or indirect—about an increasing level of dissatisfaction. A clever supplier will be acutely aware of these signals and adjust its value proposition to head off the ultimate danger of a customer loss.
Selling a copier machine or printer without bundled services does not represent a “sticky” sale. It’s simple for a customer to compare the proposed transaction with proposals from alternative suppliers and to negotiate a better deal. Understandably, manufacturers and resellers don’t like this scenario and avoid being boxed into this corner because they know there’s always someone prepared to accept lower margins and cut them out of a deal.
This has led to manufacturers creating “ecosystems” which, over time, become deeply embedded in customer operations. These ecosystems include equipment, supplies, service and repair, plus software to help manage workflows and improve efficiency—all bundled together for a monthly fee. As a result, it becomes more difficult for customers to compare competing solutions because each has its own nuances and features that carry different values.
Furthermore, users become hesitant to change once they’re accustomed to a particular system—especially considering the hidden costs associated with making that change. At this stage of the business cycle, the supplier has achieved its objective and positioned itself to maximize profits.
However, the reality is that this scenario no longer describes a stable business model. Market participants who comfort themselves with past stability and ignore the significance of changes already underway will be rudely awakened.
Despite “sticky” ecosystems that users have become familiar with suppliers count on for managing churn, there are forces for change that will overwhelm these barriers and turn the industry on its head.
The direction of change is being driven by:
- Consumers who have access to information that guides informed decisions; they can sidestep potentially biased salespeople from promoting items they’re incentivized to sell
Consumers are driving the change away from a push economy toward a pull economy. They will no longer tolerate restrictions or additional costs that result from goods and services that don’t match their requirements. Instead, they will simply seek out alternatives that do.
The direction of change is being facilitated by:
- The progressive manufacturer who doesn’t have anything to lose when disrupting the status quo;
- Technology that disrupts the total cost of ownership (TCO) model; and
- The reduced need for printed output.
The pace of change is being held up by:
- The legacy manufacturer who cannot compete as lower-cost alternatives become available.
- The reseller who fears the impact of change on its legacy business model.
These holdouts are the elements clinging to the push economy, either unwilling or unable to adapt to changing market conditions.
Conclusions
- None of the change forces will be stopped or reversed. In fact, the pace of change is almost certain to accelerate. Those prepared to embrace and adapt will come out ahead, and those who continue to cling to the past will fall.
- As the economy converts from push to pull, consumers will increasingly reject solutions that result in excess capacity. Consequently, as “pushed-supply” is replaced by “pulled-demand,” legacy suppliers will no longer be able to configure products and services in a way that force customers to buy more than they need.
- Elimination of excess translates to lower costs for consumers. Lower costs for consumers mean lower revenues for suppliers. If a shrinking market wasn’t enough of a problem, the traditional barriers to high churn rates will no longer be enough to slow the decline. Churn, along with market shrink, will accelerate the impact of revenue decline. This will have profound implications for both the legacy manufacturers and the legacy resellers.
