The Ties That Bind: Creating Lasting Competitive Advantage with Key Customers

13 May 2011

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[With this post, Sales Management Matters introudces a new recurring series of articles called Inside the Academy. Inside the Academy posts will summarize recent academic research in the field of sales and sales management. -ed.]

Differentiate with Meaning

Differentiation can come in many forms, even when the product itself is largely undifferentiated from competitive offerings. So we attempt to differentiate ourselves through superior service, bigger selection, stronger personal relationships, loyalty programs, and other means. Frequently, though, these kinds of differentiation are used by all competitors and are seen through the buyer’s eyes as rhetorical, rather than meaningful.

Differentiation serves two roles, depending on whether you are an incumbent supplier or a meddling competitor. The competitor wants differentiation to be so great that the buyer will give up the relationship they have with their current supplier and move over the business. For the incumbent, differentiation is designed to make the switching costs for a customer high enough that they will stay with the current vendor, even if they can get a slightly better deal from a competitor. But in most cases, competitors can match whatever competitive advantage a current supplier may hold. Products can be improved. Relationships can be built. Value can be added.

Recent research suggests that one way to raise switching costs is to create ties that transcend the product or service alone. Researchers Kapil R. Tuli, Sundar G. Baradwaj and Ajay K. Kohli explored the impact of multiple, extra-sales relationships with a customer on their incumbent supplier’s sales growth and volatility. In their paper Ties that Bind: The Impact of Multiple Types of Ties with a Customer on Sales Growth and Sales Volatility,1 they posit that the more non-sales ties a company can forge with a key customer, the less likely it is that the customer will defect. Moreover, it is highly likely that more product or services will be sold, purchase levels will likely remain steady, and pricing pressure from that customer will ease. The researchers call this relationship multiplexity,? and they claim that it can be used as a market-based asset by analysts to assess the potential growth and volatility in the sales of a firm.2

The Research and Findings

Using SEC filings and business ratio databases, the researchers explored the connections between multiple, non-sales relationships with a customer (number of different types of relationships between a supplier company and a customer company) and sales growth and volatility (variability of purchasing and pricing pressure). They found that there is a positive correlation between sales growth and the number of multiplex relationships between a seller and buyer, and they found a negative correlation between the number of such relationships and sales volatility. In other words:

More connections = more sales growth + less sales volatility

Fewer connections = less sales growth + more sales volatility

One reason for this is perhaps that these multiplex relationships help the supplier gain access to private information about the customer, which in turn enables it to serve the customer better. Another possibility is that the rich relationship helps the supplier develop offerings that meet the customer’s unique requirements, which provides an economic incentive for the customer to buy more from the supplier.

In short, a portfolio of diverse ties between a seller and a buyer creates a competitive advantage that is difficult or impossible to substitute. This therefore makes it difficult or impossible for a new entrant to the market to dislodge the incumbent supplier.

Lessons We Can Use

Selling products to a key customer is not enough to ensure that sales will continue to increase or that sales to that customer will be less volatile. Companies are discovering that a more in-depth and varied set of relationships will help on both fronts. These multiplex relationships can take the form of joint research and development projects, cross-equity stakes in each other, cross-membership on boards of directors, and other areas.

In order to increase the barriers for competitors, seek out and develop multiple relationships with top customers to strengthen the ties between you. Offer a board seat to a key customer’s chairman or president. Suggest joint R&D projects to provide both you and your customer a competitive leg-up. Put a customer service facility or distribution operation in unused space at a key customer’s site. Tie in data systems to allow for better communications and to drive costs out of doing business together.

The list can go on and on, limited only by your imagination. Start small and gradually ratchet up the multiplexity of the relationship, and you will secure a competitive advantage that will be very difficult for another supplier to beat.

Pete Peterson is Managing Partner of SaleMetrix, LLC, and an?Advisory Board Member of the University Sales Education Foundation.

Notes:

1Tuli, Kapil R., Bharadwaj, Sundar G., Kohli, Ajay K., 2010, Ties that Bind: The Impact of Multiple Types of Ties with a Customer on Sales Growth and Sales Volatility, Journal of Marketing Research, Vol. XLVII (February 2010) 36 – 50.

2Srivastava, R., Shervani, T., and Fahey, L. 1998, Market-Based Assets and Shareholder Value: A Framework for Analysis, Journal of Marketing 62, (January), 2 ? 18.

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