Perspectives from ISB

Webinar by Professor Kiran Pedada, Assistant Professor Marketing, ISB
Date: June 5, 2020

Compiled by: Minal Agarwal, Manager, ISB-Centre for Business Markets

“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” The quote from Abraham Lincoln highlights the importance of the time that should be spent in planning, especially in the context of B2B relationships.

Key account management (KAM) has emerged as an important selling tool over the past two decades. It focuses on maintaining relationships with strategically important customers and helps organizations in achieving a competitive advantage in the marketplace.

In today’s age where the customer is well informed about a firms’ and its competitors’ products, services, and prices, it is vital for companies to offer a product or service on more than a transactional basis. Companies that will surge ahead are the ones that will offer end-to-end solutions to their customers.

A common mistake that most organizations make is to deploy a “one size fits all” approach in handling its customers. Key Account Management’s importance can be understood from the Pareto principle (also known as the 80/20 rule). In most of the B2B organizations, the majority of the business (as high as 80%!) comes from 20% of the customers. Wise organisations identify and treat their most valuable customers as key accounts.

One of the biggest challenges for key account managers is to increase the switching cost as the customer is exposed to alternatives. Based on a study done by Professor Vijay Mahajan, ex-Dean of Indian School of Business, there are three types of switching costs:
1. Loss of time and effort
2. Financial switching cost
3. Relational switching cost

Companies can overcome these challenges by applying Account Migration Strategies. There are two types of Account Migration Strategies:

1. Changing Market Offerings: Companies should have different strategies for different kinds of product offerings. For products that are of low price and do not require any maintenance or services, companies should adopt a transactional selling approach by unbundling and removing any additional services. They just need to market the core product and charge extra for any additional services.

However, for a product which is of high value, it becomes important to have a collaborative selling approach by bundling and integrating product and services. Companies should add additional services and customize the product based on the customer’s requirements.

This can be compared to the services of a buffet meal as compared to a-la-carte meal offered by a restaurant. For a buffet-meal, there is a set price whereas, for the a-la-carte offering, the price can vary depending on the customization and personalization done for the meal.

2. Changing the Nature of Relationship: After identifying their most valuable customers, companies should determine the best ways to foster and nurture strong relationships with them. They need to understand their needs and offer solutions. Both the supplier firm and customer firm should work together to strengthen collaborative and mutually beneficial relationships.

Top leaders of exemplar supplier firms are invited from time-to-time to attend board meetings of their customer firm in order to understand the challenges being faced by the latter and jointly come up with creative responses to them.
There are five vital strategies for maintaining a deep relationship with your key customer:
• Clearly articulate your customer strategy
• Demonstrate commitment to your customer support
• Do not take your eyes off from the customers even if you have lost a business
• Avoid promoting a strictly transactional approach
• Focus on Customer’s customer (end customer) wherever relevant

It is also important in the relationship to understand the overall profitability that gets accrued from that customer. The cost of relationship-building can be determined by doing Activity-Based Costing. This costing method identifies activities in an organization and assigns the cost of each activity and determines the potential revenue that is generated.

This helps in identifying customers that are underperforming from the supplier firm perspective. Underperforming customers can be identified by the following traits:
• customers serving whom the supplier firm is losing a lot of money, with no visible pathway to improve the situation
• those that are offering little or no opportunity for learning
• those that are resisting the firms’ efforts to convert the unprofitable relationship (from the perspective of the supplier firm) to a profitable one

Based on the above analysis, supplier firms can decide whether to further invest in the customer, or in extreme cases, even “fire” the customer. However, before divesting a customer from its portfolio, companies should first focus on converting them into profitable customers. The following measures can be adopted for doing so:
• remove all free services and convert them into commodity buyer
• refuse granting discounts, which will then make such customers fire themselves
• reduce/eliminate marketing and technical support

The above measures should be adopted only after having considered all other available options.

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