To Cut Costs, Know Your Customer

Cost-trimming initiatives at B2B companies should be guided by an understanding of what customers truly value.

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The economic disruptions caused by the ongoing pandemic are forcing myriad decisions on CEOs of B2B companies. Often, the most pressing decisions are whether and how to cut costs.

As in business downturns past, some CEOs are implementing across-the-board salary cuts and widespread furloughs, while others are taking a more piecemeal approach — renegotiating vendor contracts; trimming underperforming products, regions, and divisions; and shifting to lower-cost sales channels. Our research shows that both of these approaches can be misguided.

A more effective cost-cutting strategy should begin — and end — with customer focus.

Customer focus tends to be overlooked during cost cutting because it is usually seen as a revenue enhancement strategy. This is a mistake: B2B companies that ignore what customers value when they are cutting costs leave a lot of money on the table.

In our benchmark assessment of 626 publicly traded B2B companies and 4,105 of their customers, we found that companies with high levels of cost cutting and low levels of customer value — as measured by customer satisfaction — had the worst gross margins, while companies with high levels of both cost cutting and customer value had the highest margins.1 In other words, cost cutting that is devoid of customer value sank margins.

B2B companies can pursue cost reduction with a customer focus in three ways: by reducing value-added waste to deliver more compelling customer value, by improving the effectiveness of customer acquisition and retention, and by narrowing focus to those strategic initiatives best aligned with customer value.

Reduce Value-Added Waste

Value-added waste is produced when companies pursue value drivers that do not align with customer priorities. Innovation races that add increasingly sophisticated features (and costs) to offerings but outstrip customer needs and desires are a primary driver of value-added waste. Investments like these eat up resources but do not increase pricing power; hence, they reduce margins.

Value-added waste is rooted out by identifying and more intentionally pursuing the small set of drivers that are most instrumental in increasing overall customer value and eliminating features that are not aligned with those drivers.

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Topics

Frontiers

An MIT SMR initiative exploring how technology is reshaping the practice of management.
See All Articles in This Section

References

1. V. Mittal and S. Sridhar, “Focus: How to Lead Strategy and Improve Execution to Achieve Growth” (London: Palgrave Macmillan, forthcoming).

2. V. Mittal, K. Han, J.Y. Lee, et al., “Improving Business-to-Business Customer Satisfaction Programs: Assessment of Asymmetry, Heterogeneity, and Financial Impact,” working paper, Mays Business School, Texas A&M University, College Station, Texas, 2020.

3. L.G. Lim, K.R. Tuli, and R. Grewal, “Customer Satisfaction and Its Impact on the Future Costs of Selling,” Journal of Marketing 84, no. 4 (July 2020): 23-24.

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