Customers are always right – but only if they pay for the privilege

Originally Published: Inside Small Business, October 1, 2018

I admire the airline industry. But before you tell me all the ways they’ve given you a headache, let me explain. I admire the airline industry because they understand net margin better than any other industry I’ve seen. They know exactly what it costs to run their business and how to price fare options for their services accordingly.

Consider the options available to book a flight from Sydney to Adelaide. On any given day, travellers can buy one of five different fares, with prices ranging from $150-$850. The different prices and levels of service for each fare are clearly explained under a heading called “fare inclusions,” so travellers know exactly what they’re entitled to.

This is what the airline industry does so well. They have refined how to offer their services to customers in a way that ensures both sides are operating from the same set of rules, with surcharges clearly outlined, and any service “wriggle-room” removed. No one pays for economy and gets to fly business, even if those seats remain free on the plane once you are in the air.

So, if you decide at the last minute to jump from economy to business-class, you are entitled to do so – but you will pay for the privilege!

This disciplined approach to the supplier-customer service relationship has allowed the airline industry to teach its customers how they can expect to be treated, which in turn has impacted over time how its customers treat them. It has instilled desired customer behavior, generated genuine incremental revenue and drastically reduced the provision of discretionary “free upgrades” being handed out by their frontline staff.

In my experience, this is worlds apart from how B2B suppliers respond to their customers on a daily basis when they arrive “late at the counter”, and attempt to negotiate (contract) changes with staff.

The real world

B2B suppliers routinely sign and seal contracts with customers based on the fact that quantities are roughly estimated, the selling price is clearly defined and that the method for annual price increase is understood.

What isn’t made clear, is the equivalent of “fare conditions”. B2B “fare conditions” equate to the specific service levels that ought to be clearly identified in line with goods or services being provided at the nominated price. As a result, if you dive deep enough into your business you may well find that many of your customers are enjoying a first-class experience, despite having purchased a discount fare.

What often happens is that customers consistently ask for “add-ons” or adjustments to their services when face to face with the different company functions. These can come in the form of order changes, cancellations at the last minute, requests for delivery after hours, inaccurate customer purchasing forecasts, (unreasonable) increases in quality KPIs, etc. These costs are routinely absorbed in supplier overheads, resulting in the true cost to serve the customer – and the resulting margin erosion – not being correctly measured and reported.

Suppliers rarely identify when and what customer requests are falling outside of overall service contracts. Many staff are plain unaware of the detail in these contracts so follow their instincts and do what they have discretion to do to keep the customer happy, or “right”. This is unlike the airline industry, which has learnt how to let passengers operate outside their original “fare conditions”, only if they are willing to pay a surcharge for the privilege.

How about your business?

Paul Allen, supplier margin expert, Margin Partners