Why do customers buy from you?

The voice of the customer is critical to achieving consistent profitability

THE FABRICATOR® MAY 2013

April 24, 2013

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If you don't know the answer to that question, you aren't listening to your customers closely enough. And that puts the entire organization at risk.

I love asking the managers of companies that I work with a very basic question: “Why do customers buy from you and not someone else?” Asking this does three extremely important things. It unifies the company around a common set of principles, derives a sharp marketing and selling message, and focuses overall improvement.

Like all simple but profound questions, this one can require a lot of thought and effort to find the correct answers. But it is so fundamental that it cannot—well, certainly should not—be ignored. Managers at successful enterprises know exactly what really drives buying decisions in their target markets and are totally focused on aligning the company to those parameters. And the alignment is from top to bottom.

Not Just Price

I know the argument that all buying decisions are based on price, but that rationale is very thin because it tells you little about what really drives the buying decision. Price is simply a market assignment of relative value to something the buyer needs. That assignment is given after the buyer has assessed the ability of the market to satisfy his fundamental needs. Those needs can be classified as:

  • Demonstrated capability to produce what’s needed.
  • Service needs, such as lead-time as well as the ability to handle changes, engineering support, and logistics.
  • Quality, which is assurance that what’s delivered by the supplier actually satisfies the functional requirements.
  • Low risk, which minimizes the probability of a failure in service, quality, or both, and therefore minimizes the attendant costs of such a failure.

These needs are the basis for evaluating competing quotes. If all suppliers in a market are more or less equally adept at satisfying the needs, then yes, the decision is made solely on price. This is generally the case for simple, low-cost, high-volume fabrications. Everybody can do them, and the only differentiator is price.

So, if you are successfully competing primarily in that segment of the marketplace, the reason customers buy from you is pretty much because you have the lowest price—and (you hope) the lowest cost. In fact, being the lowest-cost producer of simple parts is one classical and valid business strategy.

But that strategy is relatively rare. In any given geographic market there is by definition only one lowest-cost producer of the simple, high-volume stuff—and it’s probably not you. But you have business. So, why do you have business?

You have business because buyers have found that you have the lowest installed cost of whatever it is they are buying from you. The total installed cost is the cost of the part or assembly (that’s price) plus the cost of doing business with you, plus the cost of a failure to meet their service and/or quality needs. This cost can be relatively small, but generally it is not. It can be huge. The buyer knows that, and you need to know that too.

About the Welding

Consider this real-life example. One shop owner built his business in an opportunistic way by fabricating and building semicomplete and complete assemblies for a number of significant customers. He had established, long-term relationships with most of these customers—truly good stuff. But did he know why those customers were really buying from him? In one sense, yes. The company was adept at assembly, low work-in-process pull production, and just-in-time logistics. The customer valued all of this highly.

But then the need arose for expansion and further investment. This is where the rubber hits the road. The choke points had become the laser operations and welding. For welding, he hired and developed more welders and tested the waters in robot-assisted welding. His choice in lasers was a used but highly capable machine or a new automatic load/unload, all bells-and-whistles model. The latter could produce at a lower cost but also cost about $600,000 more. Still, the ROI calculations justified it.

Although he initially decided to go with a new laser, it would have been the wrong decision. Here’s why: The cost of the parts coming off the current lasers was not of any real concern to these key customers. After touring one customer plant and talking with its vice president of operations, the shop owner discovered why exactly the customer bought from him: his company’s welding capabilities, particularly in cosmetic-grade, thin stainless welds. They are virtually perfect.

This came from the voice of the customer (VoC), and he got the same answer from most of his other customers. Knowing this, the fabricator bought a used laser and diverted the $600,000 to welding capability and cost reduction. Everybody’s happy.

Where the Costs Really Are

A manufacturer needed to reduce its prices of fabricated and machined parts—not just by 15 or 20 percent, but by half. After an assessment, I concluded that, at least as determined by the accounting system, this was not possible.

So I did what I usually do in these cases: I wandered around and talked to people, in this case the customers making these price-cut demands. I asked them three basic questions. First, what was the level of the fabricator’s service performance with respect to on-time delivery? Answer: very good. Then, what is the relative value of what you buy from the supplier as compared to the entire program cost? Answer: low—less than 5 percent. Finally, what is the cost to your organization if they were often a few days late? Answer: astronomical—10 to 100 times the cost of the parts. The message: On a risk-adjusted basis, the cost of the parts was a bargain if the risk of service failure was very low.

I advised the fabricator to focus the improvements on the service aspect, to build an insurmountable advantage for what is really important to their customers. Despite some half-hearted grumbling from one of the customers, everybody’s happy.

Discover What Customers Need

These examples provide two lessons. The first is that the VoC is absolutely vital, but it is not necessarily obvious or apparent. The second is that to really establish a strong competitive position, you must align your efforts to the VoC. You can spend a lot of time and money improving things that have little real impact on your actual competitive advantage.

So how do you hear the VoC? I wish that I could say that it’s as simple as asking your customer’s purchasing contact some basic questions. It’s a start, but that’s all it is. Purchasing usually doesn’t really know the answers at the level of detail you need. Also, it is sometimes not in purchasing’s best interest to tell you what you do really well.

You have to go deeper. Visits to the customer’s production facilities are often very useful to gauge the cost of poor service or quality. So are talks with customers’ operations and quality management. Talk to the people who actually use your product in the assembly operations. Read about the customers’ value and selling propositions. What is their message to their customers? This often reveals what’s really important and how you can better position yourself to enhance your value.

A more difficult but equally revealing “voice” comes from understanding why you lose business. If it’s strictly price, then that tells you that the customer sees no difference between you and the competition except for price. But there is often a story behind the “price reason.” If it’s there, you need to find it.

Your own data can help reveal what your true competitive strengths are. Compare your job margins by operations routing as well as the amount of time and cost involved. This will give you a bottom-up view of how your customers value what you do. There is usually a significant correlation between margins and what the VoC says.

All of this is a rather simplified synopsis of the hard task of finding out why customers really buy from you. Designing a coherent VoC format takes some skill and a fair amount of experience in order to filter out the “noise” and apparent contradictions that inevitably come. But the knowledge that results is priceless.



KDC & Associates Ltd.

Dick Kallage

Consultant
KDC & Associates Ltd.
522 S. Northwest Highway, Suite UL-8
Barrington, IL, IL 60010
Phone: 847-525-6109

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The FABRICATOR® is North America's leading magazine for the metal forming and fabricating industry. The magazine delivers the news, technical articles, and case histories that enable fabricators to do their jobs more efficiently. The FABRICATOR has served the industry since 1971. Print subscriptions are free to qualified persons in North America involved in metal forming and fabricating.

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