extremely valuable to the companies selling to them. Consider GE Aviation, the world’s leading provider of jet engines. Its customers, which include major airlines and the military, can provide expert guidance on all aspects of the jet engines they buy. They know how the design of an engine impacts thrust, range, payload, maintenance needs, FAA compliance, financial cost/payback, and so on. In the B2B world, your customers may not be familiar with your offerings per se, but they usually know their industries better than those who supply it, and they know how to evaluate your solutions in light of their needs. They aren’t going to be swayed by marketing collateral; they will scrutinize, compare, benchmark, and test your offerings. And they will also seek out expert advice from peers and third parties for references and validation.
This goes double or triple for executive customers. Think about the domain knowledge of a CIO who has worked in the financial services sector his entire career. He is an expert in IT and his industry. He has networked and attended countless trade shows and educational events. The CIO has an unparalleled ability to cut through the sales jargon and understand the true value of solutions offered to his company. In most situations, the CIO also knows more about how to effectively deploy technology within his firm and industry than virtually all the companies seeking to sell him products and services. And when he doesn’t know something, he can simply phone a trusted peer.
To successfully serve this executive customer, a B2B company must understand his needs, priorities, requirements, and operating environment almost as well as he does. There is too much at risk in his world—asset security, the customer’s experience, privacy, government compliance, and the CIO’s reputation and career—for him to work with a company that doesn’t understand. The same holds true in every B2B industry, whether it’s oil and gas, high pressure valves, medical equipment, scientific journals, procurement services, jet engine manufacturing, media distribution services, business process outsourcing, etc.
The Impact of the B2B Realities on Margin
The reputation of a company and its brands are primary determinants of its margins. Reputation is how a company is viewed in the marketplace—what it is known for, how its culture is viewed, and, most importantly, what the market believes about the value of its offerings. These are all external perceptions, but in both B2C and B2B, they add up to a sort of capital that accrues as customers willingly pay a premium price for a company’s offerings. Only then will margins expand predictably over a sustained period of time.
What differs in B2C and B2B companies is how corporate and brand reputation is created. In the B2C world, reputation is defined by elements such as advertising, package design, and the experience of using the product. B2C companies invest millions to understand the demographic and geographical nuances of customers in order to position and manage their corporate and brand reputations in the mass markets of the consumer sector. Retailers, such as Starbucks and Target, add the look of the store and the behavior of employees to the mix.
In the B2B world, corporate and brand reputation is composed of the same elements, but in very different configurations. The priority and weighting of the elements are altered by the three realities discussed above.
As we’ve seen, the people you are selling to within your customer companies are usually industry veterans with high levels of domain expertise. Simply put, they’re living what you’re selling. These customers aren’t going to pay a premium for your offerings because you’ve got a cool logo, a catchy tagline, or a slick PowerPoint presentation. What do they respond to? Business value. And how do they determine that value exists in an offering? In addition to their own knowledge, they rely on their peers. For example, surveys of CIOs consistently find they rate peer input as the most credible and trusted source of information about products and services.
Thus, the path to a premium reputation in the B2B realm is through your current customers. It is how they perceive and describe your offerings and what they think and say about working with your company and your ability to deliver what you promise that ultimately determines your company’s reputation. And the higher these customers are on the corporate ladder, the greater the impact of their opinions and recommendations. That’s why companies that successfully attain sustainable, predictable, profitable growth, such as Oracle, seek to anchor their reputations as high as possible within their customers’ organizations. The good will of end users is important, but the good will of the person who makes the decision to buy is far more important to B2B companies that are trying to maximize their margins.
“Customers are your brand managers,” explains Tom Webster, who was a senior marketing executive at several B2B companies prior to becoming CEO at Intesource. “They establish your brand and significantly impact its perception. If you earn their support, your customers can accelerate brand growth more effectively than anything else. Nothing boosts our position like a CFO [Intesource’s primary executive customer] sharing and endorsing the benefits of our solutions or working with us. The impact of his words is unmatched, and you can measure the return financially. His peers will assume that the value and pricing has been vetted and accepted, so they have little to question when negotiating with you. Margins soar!”
Moving up the B2B Relationship Continuum
A little more than a decade ago, India-based IT services outsourcer HCL Technologies successfully broke into the U.S. market with a “low cost” value proposition, like many other Indian service providers. But after a few years that proposition became less compelling, mainly because prices equalized as competition heated up. Many U.S.-based competitors, including IBM, Hewlett-Packard, and Accenture, lowered their cost bases (often by setting up operations in India) in order to replicate the cost structure of off-shore labor providers and remove the significant price decrease as a point of differentiation.
In response, HCL beefed up its capabilities in order to provide more value to its customers. The company transformed its value proposition moving beyond commodity-like outsourcing services to acting as a problem solver and often co-engineering applications and products with its customers. But HCL has encountered a dilemma that commonly arises when a company seeks to change its positioning in the market: although its existing customers have come to understand, appreciate, and pay for the added value HCL is offering, its target market (Fortune 2000) still perceives the company as simply a low-cost labor provider.
The “perception gap” that HCL is battling has a financial impact on its revenue growth and margins. As HCL’s global CMO Krishnan Chatterjee explains, this is where and why reputation and market positioning matters. “We have the proof points which can support our desired position as problem solver and trusted advisors. My responsibility now is to close the gap between the perception in the marketplace and the reality that we are capable of delivering to IT leaders around the globe.”
The following graph (Exhibit 2-6) depicts how branding and margin collide and impact one another in B2B companies. As the B2B company improves its position with decision makers, the higher premium these decision makers are willing to pay for perceived value. If you are stuck in the position of “commodity supplier” (whether or not that is the position you think you hold), you will only be able to command commodity pricing and the low margins that come along with it. To increase the value of your brand, you must move the market’s (more precisely, collective decision makers’) perception of you towards Problem Solver and Trusted Advisor in order to secure consistently higher margins needed for profitable growth. As I show in the graph, failing to improve your position, or the market’s perception of you, leaves a tremendous loss in margin.
Exhibit 2-6: The B2B Relationship Continuum—How Brand Perception Gaps Affect Margins in the B2B Sector
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