Business to business relationships

Understanding customer relationships depends on whether you are looking at a direct relationship, such as in a business to business market, or an indirect relationship such as that in a consumer market.

Managing B2B relationships is far more personal than in consumer markets and two companies may find themselves working hand in glove to fulfill the needs of end consumers.


Relationships in business markets

In business markets, relationships form the backbone of key supplier agreements for larger companies. Where a big company requires a regular delivery of parts or goods for it's production processes, it does not just look at the quality of goods or materials to be bought.

In these key supplier deals, elements such as delivery, flexibility, lead time and technical support are essential to the smooth flow of products through the production cycle. In addition there are normally technology tie-ins the form of machinery, computer software and systems and shared intellectual property (both formal IP and informal shared koowledge that comes from working together over time).

The importance of quality of supply and long-term commitment means that purchasers are looking to build strong business relationships with core suppliers.

At a contractual level this may mean signing up to Service Level Agreements (SLAs) specifying commitments and penalties or bonuses for achieving certain standards of service. However, the SLA is normally a last resort, relationships are worked out in negotiation primarily between the account manager and purchaser.

Nonetheless, because of the costs associated with maintaining a relationship, purchasers prefer to minimise the number of key suppliers they use by placing suppliers are placed into tiers according to the strategic importance of the supply. By focusing on and developing deep relationships with a few key suppliers, purchasers look to maintain continuity of supply, share development costs and minimise purchasing costs. To reduce the danger of supplier profiteering there are usually detailed and frank supplier reviews and some form of "open book" policy where the buyer can inspect costs.

In these situations maintaining a healthy and profitable relationship is vital. Being a key supplier often means that a customer will account for several percentage points of turnover (let alone profit). Knowing how well you deliver, what you need to improve and being able to manage and monitor this across a range of highly individual customers lead to the need for periodic Quality of Service Reviews with customers to determine your strategic priorities.

For less important lower tier purchases (for instance stationary) possible purchases are grouped together so they can be placed with a single supplier using bulk discounts. However, for "low interest" goods buyers often prefer to minimise relationship costs, preferring to deal on a more transaction basis and more remotely. In these situations by streamlining service a supplier may be able to cut extraneous costs to work on efficiency of delivery. Knowing what can be cut out and what adds value is a core part of conjoint analysis.

The final group of business purchases are ad hoc or project based. Separate from the mainstream operational flow of the business, projects are subject to more discretionary expenditure. These are often made on a convenience "who you know basis" rather than the customer seeking out best in class. Consequently customer awareness of your expertise, reputation and reliability are important, even if this is then just used to come to a tendering shortlist. Ad hoc purchases can be high risk to the individuals buying the service as career development, budgets and personal standing will be affected by the choice of supplier. For this reason ad hoc purchases often start small, or rely on known brands and consequently establishing positive relationships and prove of service are extremely important in winning business.

Smaller companies do not have the purchasing power of the corporates and so do not have the luxury of customised products or services. For these companies maintaining relationships may be undesirable as buyers but necessary to maintain a flow of supply and to obtain preferential treatment for finance and credit.

Understanding where you are in a customer's supplier-portfolio or roster and where your potential is determines the investment you should put into the customer relationship and how you manage your business relationships and the effort you need to put into account management. There is no point committing excessive resources to winning a small project if there is no scope for longer term business development.

For help and advice on strategic approaches to customer relationships contact info@dobney.com