Hurting for Demand

By Rudolf Burkhard and Patrick Hoefsmit

Demand is down all over. The stock market is at its lowest for many years. Confidence is flagging, so demand in all sectors is probably at risk. Profits are going to be hard to come by. Every business is looking for ways to minimise the damage. Cost reduction is de rigueur again – not helping consumer confidence and consumer demand.

Cost reduction is a valid response in such situations, but how much of an impact can it have. Most of a business’ cost is fixed so that not much can be saved. In recent years there have been many articles about the dangers of corporate anorexia. Businesses cannot expect very much from this strategy or end up with more problems than they bargained for.

It’s almost certain that prices will be under pressure as businesses try to gain or just maintain their volumes (or market share). It seems a crazy thing to do when the whole world knows that price competition doesn’t work[1] – it only makes everyone less profitable and even more vulnerable. Price competition can come only from 2 things – desperation (a dearth of ideas how to compete) or a real competitive advantage (and even then, why use price to compete with?)

Demand may be down, but even in sectors like telecommunications demand is still enough to more than fill every telecommunications company’s capacity. Not all of them, but certainly any one individually. If every company is losing volume as much as all its competitors, then no one has a competitive advantage. Every competitor, in the eyes of the market, is the same. Despite all the talk, hype and marketing efforts most companies in an industry are pretty much the same. At least in the majority of industries.

What a business needs is a difference. Something that makes them stand out from their competitors and that makes more and more customers want to buy from them. If they are all perceived as the same, nothing will change. Businesses need to find out how to make a difference; how to make their market want to buy from them. Easy to say, but how do you do it? – especially now.

Profits are down now! No business has the time to wait for a major marketing campaign. Nor do they have the time to wait for a new ‘miracle’ product or process. Solutions are needed now. Even if a market campaign or a new product could be developed in a very short space of time, today’s pressures on cost would probably prevent or stall such a programme for a long time. Businesses need a solution now, and it has to cost practically nothing. Is there such a thing?

There is another way to create demand. Think about taking away or dealing with your customers’ problems - those that worry him, that he thinks about continuously. If you can, somehow, solve his problems, won’t he show his gratitude by buying more from you? Of course he will, but only if the offering is unique – if your competitors are unable (or unwilling) to match it. For your offer to be that unique you must ‘change the game’ – offer something that goes against common practice in your industry or market. If it flouts common practice, then it is probably ignoring a deeply ingrained policy – something your competitors will find quite difficult to copy. Difficult to copy because corporations all have inertia. Not difficult because of the change itself, it is likely to be quite simple. You will be able to increase your market share, but you also have to be ready with your ‘next thing’. Competition will eventually wake up.

The criteria for gaining business are:

1. Understand your customer’s business and the problems he worries about.
2. Find a way to solve or significantly reduce some of these problems through an extension of your offering using your strengths, or by using some capacity you have excess of.
3. The solution must be significant for your customer(s) and inexpensive for your business.
4. You should be able to implement your idea quickly.
5. Your idea must be difficult to copy by your competition (often because industry-wide practice does not ‘allow’ such an offer).
6. Invent small changes that enhance the customer’s perception of value. Like pre-washed lettuce at supermarkets – a higher price for less product. Or yoghurt drinks that are something like half the product at almost double the price. Or an older true story – a while ago 3M visited TIM, an office supplies distributor, proposing the new sticky ‘Post-It’ notes. The buyer’s reaction: ‘you can buy paper and sticky tape for much less if you really want to stick notes to your desk.” The rest is history.

Think about distributing office supplies to businesses. For a business managing all these small items is a costly headache that irritates both managers and personnel. Material is often not available when needed. Employees help themselves for home use and for their kids at school. The supply cupboard(s) are a mess of non-moving or missing items. And, the bill every year is too high. Internal distribution and administration costs are about equal to the total value of annual supplies purchases – the real cost is effectively double whatever the purchase prices are. An unwelcome headache for the manager responsible! Wouldn’t it be nice if someone would take this headache off my hands!

If it’s really important you have an even higher chance of being out of stock.

Pete[2] had the opportunity to buy up a bankrupt office supplies distributor for 1€. He knew that he had to make drastic changes if he was to make money with his new acquisition. He new the market was shrinking by 2-4% every year, that no competitor had more than 10% of the market and that the industry was very, very price competitive. Because he bought a bankrupt company he had little money for investment and his suppliers were not exactly friendly or accommodating. They probably expected him to fail very quickly. He developed an offering something like this:

“We will maintain supplies cupboards (1 for every 25 people) in your offices and restock them every week. The quantities in the cupboard will be financed by us (the distributor) and you pay only for whatever has been consumed – whatever we replenish every week. We will provide monthly reports on article consumption rates allowing you to compare departments and divisions. If there are any anomalies you will see them in these reports. We will limit the stock levels of items that are not truly an office supply – like school notebooks, scissors, Scotch tape. These will either not be stocked at a// or in such small quantities that the start of the school year or Christmas periods do not become peak demand (and cost) months!

The benefit to you will be a much lower annual cost, 100% availability of those items truly needed for business, no investment and the ability to control office supplies consumption and their cost.”Pete called this ‘The Never Ending Store?’. His offer certainly looks like a good one for the customer. He can focus on more important business issues and easily maintain control. The customer has absolutely no investment in office supplies – just the expense of what is consumed from day to day for the work of his employees. Stock ‘shrinkage’ is prevented by the control reports and by analysis of when ‘shrinkage’ occurs. Office supplies become hassle free and even cost less than before.

The offer is good for the customer, but was it good for Pete? It looks like an expensive proposition for our friend – did he go directly to another bankruptcy? He did not. Here are some of the reasons why not:

1.    Many companies struggle with their office supplies – so it did not take him long to line up new customers. More volume helped him distribute his fixed costs – profit per item went up. In fact Pete’s gross margin went up 6% in the first year.

2.   Competition did not dare to copy his offer. Such an offer was highly unusual in this business – because it looks so costly in distribution expense and capital intensity. Pete’s solution was difficult for competition to copy – their policies and business practices prevented them from doing so. In fact competition was correct – distribution expenses did go up by 50% - raising them from 2 to 3% of sales!

3.   Pete did not have to discount prices to gain share – because of his offer he was able to realise higher prices than his competitors.

4.   Did it cost him a lot in inventory carrying costs? Not really. Because he used the Theory of Constraints’ distribution solution he knew how to minimise stock levels at his customers and in his own warehouse.

5.   Because customers had already consumed materials when he replenished stocks in the cupboards he was able to get them to pay immediately – within days – of stock replenishment. An alternative is to make a similar arrangement you probably have for water or electricity – regular monthly payments corrected at 6-month intervals.

6.   He was able to implement his offer very quickly after each sale. Once he was entrenched at a customer, competition could no longer move him out. Even worse for his competition was the fact that customers were no longer interested in that worn out tactic – lower price.

But there are risks you might say. Let’s look at some of them:

1. The purchasing agent responsible for office supplies might refuse the system because he is afraid of losing his job (or the jobs of those reporting to him). The purchasing agent may not be the right partner for you to negotiate with. As mentioned earlier, the cost of managing office supplies about doubles the cost of supplies themselves. Any more senior manager would love to outsource this hassle – especially if the cost of managing supplies drops by 80%. Coupled with guaranteed availability no manager can refuse. In reality most customers had plenty of other work for their purchasing agent – and those who didn’t well Pete hired them to manage the cabinets. A win all around.
2. Pete’s CFO was convinced the offer would sink them financially. He warned that all this extra stock would cost a fortune in working capital and interest expense. Pete solved part of the problem with customers by getting them to pay a standard monthly amount based on estimated consumption. Every 6 months he issued a reconciling invoice to actual consumption. In effect Pete was paid within 30 days instead of the more common practice of 60 and more days payment terms. Suppliers were approached with the offer of having their products in the cupboards of customers. To get their products at the ‘point of sale’ Pete got them to own their stock – until the actual sale was made – when Pete’s people checked cupboard stocks and reported consumption. The suppliers were happy – they had their products at the front line – where the final customer consumed them. Pete’s CFO was happy because inventory was financed by suppliers. A great deal!
3. Pete anticipated such problems and brought them into the open when selling to the customer, his own people or the supplier. In every case he and the other stakeholders in the business found satisfactory solutions to the risks such problems represented.

Pete’s story is just one example of an offer made to customers that help them solve their problems. The offer is of low cost to Pete and of great value to customers. Of course the added market share Pete captured was of very great value to him. He gained share against his competitors without ever resorting to price – as mentioned before, his prices were higher than competition’s.

This is just one success story. You can probably easily imagine others – just think about the customer’s issues – the things the customer worries about and is annoyed about. Air travel looks like an opportunity.

Airlines offer all sorts of things they think are desirable for the customer, while at the same time imposing restrictions on these services where they might have the most impact. They seem to provide extra services on long-haul flights with high prices, while restricting these services when it comes to short flights and especially internal flights. There is no logic to airline practice. In fact in the current price wars and service confusion is so great that no one understands anymore – not even those who sell the tickets. (Have things changed since 2005, when I first wrote this?)

We are convinced that with clear market segmentation an airline can attract not only more business, but at better prices too. Here are some assumptions airlines have made that should be checked against what the customer’s concerns really are.

1. We mentioned the service differential between short- and long-haul flights. Most businessmen may very well need lounges much more within Europe than for intercontinental flights.
2. On short flights no one needs food – it is a waste, and is the quality is not worth it?
3. Internet booking is already done, why not make it truly easy and reflect the lower costs. This is now standard!
4. Why not develop a chargeable menu of services that don’t cost much but are of great value to customers like:

• Express treatment from curb to airplane and airplane to hotel. For too many trips the before and after takes way too long – especially inside Europe. By spreading ‘demand’ on check-in desks and security control points airlines and airports could develop an operational advantage.
• Low cost options that allow the airline to check some passengers in very early – spreading the load between low cost and express customers.
• Legroom options (I need that)– seat configurations are flexible?
• Option for connectors to charge your laptop and do your e-mail. Done!
• Good ‘office’ conditions in airplanes or lounges. Many of us get more done away from colleagues – where we can’t be disturbed.

These are ideas based on customers’ needs and concerns. They are not some feature dreamt up somewhere that bears little or no resemblance to what a customer really needs. They are certainly not the result of any in depth analysis, they simply reflect what an airlines marketing group might be looking at! (Today -2020- its all about price!)

Every business has the opportunity to develop a success like Pete did twice. The secret is not difficult, but it does require perseverance and the will to overcome the obstacles that will be thrown up. (One of Goldratt's tenets is, "Every situation can be substantially improved. If you can believe that, then not much stands in your way fromsearching and finding a solution!) Change is difficult because you are, in effect, creating uncertainty for your employees, suppliers and customers. You have to address their concerns and find solutions for them – as Pete did. Try it, or get an expert to coach you!

Patrick and Rudi are Theory of Constraints (TOC) experts. They apply this methodology in the area of marketing, as in this article. They also apply TOC as a holistic methodology for managing organisations and key processes like project, production and distribution management. (Solutions in operations are often enabling tactics for marketing.) You can find Patrick and Rudi at the links below.

[1] Lowering price always has a negative impact – everyone knows how to do cut price and everyone can do it quickly. It is a common tactic so that there is usually no barrier for the competitor to not copy your move. And everyone will copy – because losing market share is usually more costly to their bottom line than a somewhat lower price. Discounts are almost always counter-productive – they lower everyone’s margins and market shares do not move 

[2] In E.M. Goldratt’s book ‘It’s Not Luck’ Patrick features as the manager of a printing company who turns around his company by understanding his customers needs. This article describes his second success – so success Is Not Luck!

If you want to learn more:

Patrick Hoefsmit

Rudolf Burkhard

or write an email: [email protected] or to [email protected]