#3: Leverage Financial Strengths

Reenvision Your Value Chain as a Capital and Pricing Chain

Foster innovations that target the shifting financial strength of customers and suppliers.

Meeting customers’ needs is fundamental to growing your margins in both good times and bad. The best companies understand how the economic crisis is shifting customer needs and values, and are transforming their offerings through product and service innovations to address what’s most important to their customers now. Currently, that includes helping them reduce costs and free up cash. Consider these ways to capture sustainable margins:

• “Bite-Size” Offers Consumers in developed countries have long paid more up front for products in bulk (e.g., laundry detergent), saving on unit costs over time. In contrast, consumers in developing countries buy these products in the single-use sizes they can afford. Benefit from the coming shift as consumers in developed countries seek lower up-front costs, paying more per unit to buy less at one time—even if they buy the same amount across the year.
• Terms of Purchase In the airline industry after 9/11, winning suppliers found innovative ways to help their customers continue to buy from them. For example, GE Capital provided liquidity to airlines by purchasing their planes and leasing them back. Look to your relative financial strengths to free cash for customers.

On the supplier side, you can use healthy balance sheets to create win-win deal terms in return for better prices or guaranteed availability of critical supply. Look for opportunities across your value chain by bringing different supplier-facing functions to the table to understand how today’s financial conditions are impacting critical suppliers. With this full picture, companies can position themselves at a distinct advantage with critical suppliers.

Use the crisis to price for the true value of intangibles that customers under-appreciate.

Price discussions now are focusing on whether it’s possible to sustain gains achieved by passing on commodity-cost spikes to customers. This battle isn’t worth fighting too hard, however, as those price increases don’t reflect underlying value and could invite customer backlash. You should take this opportunity, though, to more accurately price elements of your offer that customers typically undervalue—especially elements with “insurance” value such as guaranteed supply, security, or reliability. Moments of crisis make these offer components much more tangible since customers who have paid for them can achieve significant benefits over those that haven’t.

• For example, in the wake of Hurricane Hugo, guaranteed supply contracts separated winners from losers in the property insurance industry. A small set of property insurers exited Hurricane Hugo with claims 30% lower than their peers. The reason? For years, these insurers had paid extra for guaranteed plywood supply, which they were able to use to protect property from post-hurricane rain damage long after local supplies were gone.