Page 223 - Marketing Management

200 PART 3 CONNECTING WITH CUSTOMERS

Marketers can counter requests for a lower price in a number of ways. They may be able to show
evidence that the total cost of ownership, that is, the life-cycle cost of using their product, is lower
than for competitors’ products. They can cite the value of the services the buyer now receives, espe-
cially if they are superior to those offered by competitors. Research shows that service support and
personal interactions, as well as a supplier’s know-how and ability to improve customers’ time to
market, can be useful differentiators in achieving key-supplier status. 45
Improving productivity helps alleviate price pressures. Burlington Northern Santa Fe Railway
has tied 30 percent of employee bonuses to improvements in the number of railcars shipped per
46
mile. Some firms are using technology to devise novel customer solutions. With Web technology
and tools, Vistaprint printers can offer professional printing to small businesses that previously
could not afford it. 47
Some companies handle price-oriented buyers by setting a lower price but establishing restrictive
conditions: (1) limited quantities, (2) no refunds, (3) no adjustments, and (4) no services. 48
• Cardinal Health set up a bonus-dollars plan and gave points according to how
much the customer purchased. The points could be turned in for extra goods or free
consulting.
• GE is installing diagnostic sensors in its airline engines and railroad engines. It is now compen-
sated for hours of flight or railroad travel.
• IBM is now more of a “service company aided by products”than a “product company aided by
services.” It can sell computer power on demand (like video on demand) as an alternative to
selling computers.
Solution selling can also alleviate price pressure and comes in different forms. Here are three
examples. 49

• Solutions to Enhance Customer Revenues. Hendrix UTD has used its sales consultants to help
farmers deliver an incremental animal weight gain of 5 percent to 10 percent over competitors.
• Solutions to Decrease Customer Risks. ICI Explosives formulated a safer way to ship explosives
for quarries.
• Solutions to Reduce Customer Costs. W.W. Grainger employees work at large customer facil-
ities to reduce materials-management costs.
More firms are seeking solutions that increase benefits and reduce costs enough to overcome
any low-price concerns. Consider the following example.

Lincoln Electric Lincoln Electric Lincoln Electric has a decades-long tradition of working
with its customers to reduce costs through its Guaranteed Cost Reduction Program. When a
customer insists that a Lincoln distributor lower prices to match competitors, the company and
the distributor may guarantee that, during the coming year, they will find cost reductions in the
customer’s plant that meet or exceed the price difference between Lincoln’s products and the
competition’s. The Holland Binkley Company, a major manufacturer of components for tractor trailers, had
been purchasing Lincoln Electric welding wire for years. When Binkley began to shop around for a better
price on wire, Lincoln Electric developed a package of reducing costs and working together that called for a
$10,000 savings but eventually led to a six-figure savings, a growth in business, and a strong, long-term
partnership between customer and supplier. 50

Risk and gain sharing can offset price reductions that customers request. Suppose Medline, a
hospital supplier, signs an agreement with Highland Park Hospital promising $350,000 in savings
over the first 18 months in exchange for getting a tenfold increase in the hospital’s share of supplies.
If Medline achieves less than this promised savings, it will make up the difference. If Medline
achieves substantially more than promised, it participates in the extra savings. To make such
arrangements work, the supplier must be willing to help the customer build a historical database,
reach an agreement for measuring benefits and costs, and devise a dispute resolution mechanism.
NUMBER OF SUPPLIERS Companies are increasingly reducing the number of their suppliers.
Ford, Motorola, and Honeywell have cut their number of suppliers 20 percent to 80 percent. These
companies want their chosen suppliers to be responsible for a larger component system, they want