Customer Loyalty Case Study in the Chemical Industry

Customers frequently have significantly different needs or requirements from their suppliers, and these needs are related to specific aspects of the product or service.  This divergence in needs generates market segments which the competitors in the market must recognize.

Loyalty Research Center (LRC) worked with a chemical manufacturer, which will be identified as Company ABC.  Company ABC supplied the paper products industry with a chemical that served as a substitute for wood pulp.  Because this product was chemically identical to those offered by its competitors serving the same market, Company ABC found itself trying to profitably market a commodity product.  While its competitors attempted to differentiate themselves on the bases of price and logistics, Company ABC chose to differentiate itself by building its business model around customized versions of the standard product.

SITUATION

Specifically, Company ABC’s R&D staff developed and patented chemical alternatives for a range of specific paper applications including pizza boxes, newspaper stock, and shipping containers.  These specialized products worked far better for the applications for which they were engineered then did the commodity version of the chemical.  However, the customized products required a more knowledgeable sales team to explain the benefits to the customer and a technical support team to work closely with the customer to illustrate what the custom chemicals had to offer.  These circumstances along with the overhead of the previous and current development research, contributed to a higher cost structure and higher prices for these customized products.

Company ABC used customer surveys in the past to track the relationships it had with its customers and found the strength of these relationships would best be categorized as moderate.  The Loyalty Research Center was asked to conduct the next wave of customer satisfaction surveys and provide updated results.  From an overall perspective, the company’s Top-2 Value evaluation was 53%, which is about average for a business-to-business company.  Company ABC executives were disappointed with the results, believing the scores should have been higher, given their personal experiences with their customers. 

IMPLEMENTATION

The Loyalty Research Center, having anticipated this need, segmented Company ABC’s customer base by product need and found that there were significant differences among the resulting customer segments.

The findings were as follows:

Those customers that fit Company ABC’s business model of desiring a Customized Product, had a far higher Overall Value and Quality evaluation compared to those customers that simply wanted a Commodity Product.

Note that the Commodity Product is what the other competitors in the industry offered.  The value of the Commodity Product business model was that it offered a low price and short order cycle times.  The competing manufacturers of the Commodity Product had a substantial inventory of their product available at all times.  With all the manufacturers of the commodity product having ample supply, low pricing and short order cycle times were expected by the customers. 

The Commodity Product segment of customers represented roughly 40% of Company ABC’s total customer base in terms of the number of customers, but they produced less than 20% of the annual sales volume.  Additionally, these customers used multiple suppliers, buying some of their product from Company ABC and some of their product from other sources.  Relationships with these customers were weak, with most falling into the vulnerable segment of the loyalty profile.

The company focused more on the Customized Product segment that produced more sales and had a higher rate of loyalty.  By shifting more attention away from the Commodity Product segment, Company ABC was able to differentiate itself from competitors and build a stronger customer base.

KEY FINDINGS

• Customers frequently have individualized needs and develop a greater sense of loyalty to a supplier that recognizes and serves those needs. 
• In a competitive market where competitors construct different product/service models to serve the segments of the market, an organization has to recognize that selling to all customers will frequently create unhappy, vulnerable customers that cannot be adequately served by their business model.