As in athletics, success for a leader in one kind of business does not automatically equate to success in another without a study of the game and some retooling of the playbook. The proper coaching can also be a big help. Unfortunately, B2B leaders often find it hard to obtain guidance on how to play their game. The most common sources of information—business books and conferences—typically showcase executives from high profile B2C companies. But B2B leaders can’t simply adopt and apply lessons and approaches from B2C companies because it is a completely different experience for both the customer and the provider. Their needs are just different.
Living 50 miles up the road from consumer package goods (CPG) powerhouse Procter & Gamble and the thousands of employees who work there, the point of different games was driven home to me by a B2B CEO who once told me, “Never be the one who first hires someone out of P&G.” Why wouldn’t you? P&G produces professional managers who are smart, articulate, well-trained, and process-driven. They live and breathe the formula for success that has kept the company at the top of its game for decades. Why wouldn’t any company welcome this experience and skill into their organization?
If you are a B2C company whose livelihood is built on a well-positioned brand and product that is preferred by a large share of the consumer market, you should be the first to snatch up an ex-P&G’er. He or she is a master of the B2C game and can bring P&G best practices to your organization. If you are a B2B company, however, that same job candidate may not be such a great hire. You should be looking for a professional who knows how to play the B2B game because the playbook for your success is very different. How often is that considered, though?
It’s not. Think of how many times heralded executives from high profile B2C companies are snatched up to rescue floundering B2B companies. Because of their reputations and the caché of the companies they come from, these executives are almost always granted more authority (and budget) than normal. Emboldened by their previous B2C successes, these saviors almost invariably exercise their new clout promptly and with the utmost confidence by implementing the strategies that worked so well at their previous employer. Just as invariably, a train wreck ensues.
Does this mean that B2B companies should only hire B2B executives? Absolutely not. But whoever is hired must clearly understand the following three realities that distinguish the B2B world from the B2C world and use them to shape the company’s playbook.
Reality #1: The Fate of a B2B Company Rests in the Hands of Relatively Few Customer Companies
When we first meet leaders at B2B companies, they tend to be very uncomfortable about sharing how many active customers they have. That’s because there are thousands of B2B companies in which three or fewer customers account for 60 percent or more of total sales.
In many B2B companies, the loss of their biggest customer would put them out of business entirely. Many more could survive the loss, but would only recover after years of hard times. Think of the many automotive parts and services suppliers that sell to only one or two car makers. There used to be thousands of these companies who made a great living serving the Big Three automakers. But look at what happened to them with the consolidation and failure of the U.S. automotive industry. Today, in 10 minutes, I can drive by millions of square feet of vacant industrial space where the suppliers to General Motors, Ford, and Chrysler once had thriving businesses.
You could argue that the shakeout in the automotive industry is a lesson in the need for diversification along many lines. However, many of the suppliers who sought out foreign manufacturers are gone too. So are many suppliers who were experts in processes such as injection plastic molding that could be ported to other industries. Why? Their customer base was too small to handle the downside risk of losing even one big customer, and they never created a playbook that accommodated that reality.
A Tale of Two Companies
The significance of the much smaller customer base at B2B companies is best illustrated by a simple example that compares the number of customers and revenue at two leading companies.
A simple calculation tells the story. When you divide the revenues of each company by its customer base, you’ll see that Company A receives $125 of revenue per customer, while Company B earns $70 million per customer. Clearly each and every customer at Company B has an immediate and direct impact on the health of the company. That fact alone should race the heartbeat of Company B executives.
But wait. Like every good tale, this one has a twist. Company B’s customers are not created equal. In fact, there is a super-Pareto effect at work: In most cases the top 10 percent (just 10) of Company B customers generate more than 90 percent of total sales. On average, each of these 10 customers contributes $630 million (as opposed to straight-lined $70 million) to Company B’s coffers. Revenue is not distributed equally per customer, so if one of these customers were to leave, the company would be drastically compromised. This is indeed a cautionary tale!
By the way, these are real companies. Company A is Starbucks, and Company B is Celestica, a Canadian supply chain services outsourcer. Exhibit 2-1 summarizes their respective revenue concentrations.
Exhibit 2-1: Revenue Concentration, Starbucks vs. Celestica
Starbucks and Celestica are not outliers. Exhibit 2-2 shows the revenue concentrations of a select group of other well-known B2C and B2B firms. In total, the B2C companies in this analysis derive $620 in revenue per customer, while the B2B companies derive almost $8.7 million in revenue per customer! It’s also worth noting that the Pareto Principle holds true for the B2B companies listed: the top 20 percent of their customers generate more than 80 percent of their total sales.
Exhibit 2-2: Selected Revenue Concentrations, B2C vs. B2B
What does this concentration of revenue mean for a B2B company? Imagine Celestica losing two of its top 10 customers. Their loss of just these two top customers would result in a devastating 15 to 30 percent decline in annual revenue. Since many B2B companies have multi-year contracts with their customers, there would be a compounding effect year-over-year that would increase the decline. Conversely, Starbucks probably wouldn’t know if it lost 1,000 of its top customers. In fact, no matter how many venti, nonfat, cinnamon-sprinkled, decaf lattes Starbucks’ top 1,000 customers buy, if they all decided to switch to McDonald’s McLattes, it wouldn’t dent the company’s revenues.
A few years ago when Tom Webster took over as CEO at Intesource, a B2B provider of spend management solutions based in Phoenix, Arizona, he discovered that 80 percent of the company’s revenue came from just six customers. “The fact that only 6 customers controlled our fate was a major issue we needed to immediately address,” Webster recalls. “Now we’ve got 12 customers who make up 80 percent of our revenue, which provides a much more sound and secure spread of revenue risk. But the reality of our business will always be that very few customers play a significant role in the health of our company.” Even for $3.3 billion India-based HCL, more than 80 percent of their revenue comes from less than 100 accounts.
High revenue concentrations are a harsh reality in B2B, regardless of a company’s size. Further, when the fate of a B2B lies in the hands of just a few customers, the power of these customers is enormous. “Once we realized that we only needed to secure a few dozen large customers in order to dominate our market, it changed the game for us,” says Richard Hearn, the CEO of Crown Partners,