Article
Expanding Margins: The Right Way to Grow
Increasing sales in a way that also increases margins is not easy for business-to-business (B2B) companies. Often business suppliers find their margins are far lower than their customer-facing counterparts. And at the 100,000-foot level, where CEOs are looking to examine the financial outcomes of their actions, B2B companies struggle to expand margins even as their sales increase.
B2B clients, unlike retail consumers, often have leverage on pricing. Many B2B clients are larger in size than their suppliers, and purchasing departments can exert substantial pressure when negotiating contracts. The ability of a B2B client to lock prices can also limit a company’s opportunities to expand margins. Inflationary pressures can compound this effect.
A disadvantage on pricing is one of the reasons many B2B suppliers find themselves stuck in the “value trap.” Feeling pressure to improve product performance by adding more and new features, B2B companies see their costs increase. But because of their clients’ leverage on pricing, they are unable to pass on the rising costs, and their margins erode.
What if you could increase margins without having to load your products and services with costly new features? You can, and the solution is overall customer satisfaction.
A Customer-Based Margin Expansion Solution
Overall customer satisfaction lends itself to many benefits that help a firm increase margins. As overall customer satisfaction increases, customers are:
- Less likely to shop for competitive offers
- Less price sensitive
- More likely to continue using existing products/services
- More likely to recommend products/services to others
- Less likely to file complaints or request customer service
All these outcomes reduce a business’ operating costs, lower the pressure to compete on price, and expand a company’s base of high-quality customers. As a result, a B2B firm with higher customer satisfaction is likely to experience higher margins.
While this hypothesis may seem apparent, BrandExtract research partner, CUBES®, has tested it using data specific to B2B firms and shown precisely what companies can expect to happen to margins as customer satisfaction increases.
Overall Customer Satisfaction and Margins
Using the described methodology, our team was able to answer several critical questions about the relationship between customer satisfaction and margins. In Figure 1, margins are represented in millions of dollars on the Y-axis. The X-axis shows the overall customer satisfaction scale. Key conclusions from the relationship include:
- For a company, margins are 17% lower among dissatisfied clients than clients who are somewhat satisfied.
- When clients go from “extremely dissatisfied” to “extremely satisfied,” margins nearly double from $7.4 billion to $14.8 billion.
- When clients go from “neither satisfied nor dissatisfied” to “extremely satisfied,” sales jump from $10.4 billion to $14.8 billion for the average firm in our sample, a nearly 39% margin increase.
Figure 1. Margin Expansion with Customer Satisfaction
Figure 2 shows margin expansion for a select group of firms in different B2B sectors. For Oracle Corp., the increase in margins amounts to $538 million. Margins for Boeing would increase by $1.47 billion if its customer satisfaction moved from “very satisfied” to “extremely satisfied.”
Figure 2. Margin Increase When Customers Move from "Very" to "Extremely" Satisfied
What’s Next?
At the 100,000-foot level, B2B CEOs are responsible for delivering healthy margins and expanding them. Shareholders demand it, and company board members expect it. One of the best ways to expand margins is to focus on increasing overall customer satisfaction. As documented, overall customer satisfaction also increases sales.
The next question is, "Can increased customer satisfaction have other beneficial consequences relevant to a CEO?" Our team intends to address this in a future brief.
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