Former GE and Walmart marketer, Caltech Exec Ed Leader, Impact Partner and creator of “thinking tools” that demystify marketing strategy
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The membership retailer Costco convinces many suppliers — makers of the top brands in the world — to compete against themselves. Some agree to create an as-good or better version of their own product to be private-labeled as Costco’s Kirkland brand — at a 15-20% discount to their branded offer!
Adam Keesling wrote about this in an article for Napkin Math, a newsletter that provides simple analytical breakdowns of business cases. He shows how and why this makes business sense to some consumer package goods organizations.
Most B2Bs’ reactions to a similar proposition would range from “no” to “hell no” to something I can’t write in this friendly forum. But the Napkin Math article reports that many leading manufacturers actually take this kind of deal from Costco.
It’s important to understand why they willingly seem to cannibalize themselves because, believe it or not, you will be facing a similar choice soon if you haven’t already, and your organization needs to be ready. Let me explain.
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B2B platforms are in a rapid growth spurt.
The trend forcing you to consider these strategies is the rapid emergence of platforms. Amazon is one of the original technology-based platforms. Google, eBay, Airbnb, Facebook, YouTube, Alibaba and PayPal are examples of others. And while Costco is not strictly defined as such, its market power causes suppliers to have a platform-like strategy.
Platforms provide underlying technologies that multiple suppliers can use to build their own businesses. Though most of the above-listed platforms have a B2C slant, B2B-oriented platforms are in your current or immediate future. According to Digital Commerce 360, the number of vertical B2B marketplaces has more than tripled in the past 24 months.
Some of you should be considering forming a B2B platform. But that’s a subject for another day. Every B2B should be considering whether or not to sell on an industry platform. That’s the subject for today.
Understanding three critical tradeoffs now will help you formulate a well-considered B2B platform strategy that avoids cannibalizing your existing sales and is instead additive to revenues and profits.
1. The first critical consideration comes from deciding to participate on B2B platforms at all.
For context, it’s instructive to look at how Costco gets suppliers to take the deal described at the beginning of this article. Costco brings its 100 million members directly to its suppliers’ products — at a sales and marketing cost to the supplier of almost zero. The average sales and marketing costs for a B2B organization are typically 20-24% of revenues. Now you start to see why some of the shrewdest operators in the world take Costco’s deal!
As B2B platforms continue to grow, these same types of high volume/low-cost opportunities will present themselves to you. Many of you will, wisely, take advantage.
2. The second strategic consideration involves your platform value proposition strategy.
This is where the self-cannibalization risk comes into play. The platform will, quite literally, “rack and stack” your products and services against competitors for easy comparison. To be competitive, you’ll have to price more aggressively than in your traditional sales channels.
If you market the exact same brands, products and services on the platform as in your traditional channels — but at a lower price — you will be creating two self-cannibalizing situations.
One problematic situation is that you will create conflict between the platform and traditional selling channels. Your salesforce won’t be happy, because their customers will wonder why they can’t get the lower platform prices from them.
This may tempt you to create the second self-cannibalizing situation: If you decide to simply lower prices in both platform and traditional channels, you will lower your overall profit margins. To avoid both issues, you will need to differentiate your platform offer from your traditional, off-platform package.
For example, one chemical supplier differentiated its platform offer of industrial chemicals by reducing the number of the different packaging and delivery options it offered on its base product, eliminating some typically free services, lowering its price, and utilizing a different brand name. It worked. The aggressively priced platform brand sold well in that environment. The traditional sales channel had a different, more feature-rich brand and value proposition to sell, and so they were happy. Platform sales were additive to revenues and profits, not cannibalizing.
It’s this use of a different pricing structure and brand name that allows Costco suppliers to largely eliminate a self-cannibalizing effect. Kirkland products are only available on Costco’s “platform.” Outside of Costco, the suppliers’ branded products still sell at full price, with significant advertising support.
3. A third critical consideration is that the platform will own key customer data that you typically gather through traditional channels.
You will have fewer buyer data and lose important “cues” that help you expand relationships. In other words, platforms will make future sales, up-selling and cross-selling harder to accomplish. You will want to build platform post-sales strategies that incentivize buyers to reveal more of their needs to you because this is the foundation upon which long-term relationships are built.
A popular current strategy is for suppliers to ask their platform buyers to interact with them directly in order to activate a warranty. During this interaction, suppliers gather some important information that forms the basis for future direct discussions, which can occur outside the platform.
In closing: Costco’s ability to get highly successful brands to create a platform-specific value proposition is a testament to the power of a strong platform. To ensure that your platform sales are additive and not cannibalizing to revenues and sales, take a page out of the book of some of the world’s leading CPG manufacturers.
Differentiate your platform-specific distribution strategies, your marketing value proposition strategies, and your customer relationship strategies from those of your existing sales channels. This will give you the best chance to be successful in this emerging new business environment.
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Author: Tom Spitale, Forbes Councils Member
