Innovation for Customer Cost Reduction

Two “Customers”

Capsule: There are two customers in many industries. The first is the Intermediary customer who specifies, or sells, the product. The second is the Final customer who makes the ultimate buying decision. A product and service innovation program should consider both customer types but emphasize the one with the greatest influence on future sales.

The word “customer” may assume several guises. A “customer” is any person in the chain of decision-makers who can make a choice among more than one potential supplier. For example, Unilever is a single customer in some definitions. Using our definition, Unilever is many customers, encompassing every location, and each person at that location who has the power to choose a supplier other than your Company.

Many industries serve two entirely separate types of customers:
Intermediary customers and Final customers.

Intermediary customers are commonly termed “channel” customers and include wholesalers, retailers, brokers, and occasionally, consultants. These Intermediary customers see that the product is sold and delivered to a Final customer.

Examples of Intermediary Customers »

A Final customer is either an end-user or a product installer. Consumers are end-users, as are organizations that make the final purchase decision, such as companies and government entities. The installer Final customer includes both contractors, who serve the ultimate end-user, as well as original equipment manufacturers that buy products to install in their own products.

Examples of Final Customers »

The needs of Intermediary customers differ from the needs of the Final customers. An innovation program should consider both customer types where they both exist. You might emphasize innovation for one customer type more than another, however. As industries mature, the customer type with the greater influence on who supplies the product changes. (See Symptom: “Some competitors have formed partnership services with their channels of distribution.”)

In newer industries, the Final customer dominates because differences in product function and price are great. In more mature industries, the intermediaries assume increasing influence as industry function and price differences among competitors decline in importance in favor of differences in Reliability and Convenience. Your innovation program should emphasize cost reductions for the customer types with the greatest influence on your future volume of sales.

Two “Customers” Questions
  • Who are the final customers for the Company’s products?
  • Does the Company have intermediary customers for its products? If so, are there various types of the intermediary customers?
  • Which customer type, intermediary or final, has the greatest influence on the change in the Company’s sales volume today?
  • How has the influence of each of the two customer types changed over the last five years? Will these trends continue?

Basic Strategy Guide Users Return to: Step 16

Summary Points Next: Customer Cost Systems