DOW CORNING B2B Segmentation

Dow Corning, in 2000, despite a 40% worldwide market share in

silicones, was facing many low cost competitors that were undercutting

the firms prices. Rather than try to match their prices and lose the price

premium across its entire volume, Dow Corning decided to research

what customers truly value.

http://thinkers50.com/blog/two-biggest-lies-marketing/

Customer Segments

They uncovered the following four customer segments:

1. Customers Seeking to Innovate Customers inventing state-of-the-art

products, creating advanced technologies, or developing new markets.

Innovation-focused customers were committed to being first-to-market

with new applications and revolutionary products.

2. Customers Seeking Productivity Increase Customers seeking off-the-

shelf products with proven performance. They needed help with

improving the acquisition, use, and disposal of products.

3. Customers Seeking to Reduce Total Cost Customers seeking supply

chain optimization for cost reduction or customer service improvement.

Other areas of support included vendor-managed inventory, custom

packaging, cost-in-use studies, and supply-chain analysis.

4. Customers Seeking Better Prices Customers in mature industries

wanted materials and services at the best price they could get. They

bought mature products in large quantities and did not require service

but instead sought quality, reliability, and low prices to make them more

cost-effective.

This customer research led to the insight that the last segment did not

value the supplementary services that Dow Corning offered. However,

since the supplementary services were bundled with the product and

provided free to all customers and their costs had to be recovered, it

made the naked solution too expensive for the last segment.

Understandably, this segment refused to pay for the services they did

not value and put pressure for lower prices. But lowering prices for this

segment without changing the fundamental market offer was problematic

because then the customers from the other three segments, which truly

valued the supplementary services, would also demand the same lower

prices.

The Xiameter Value Proposition

In 2002, to serve this low price-seeking segment, Dow Corning launched

a wholly-owned subsidiary called Xiameter. Xiameter realized they

needed to cut their prices by 15-20 percent, which was very significant in

the business markets they were serving. This could only be done

profitably, though, if the costs to serve the customer were also reduced

by a proportionate amount. Furthermore, it had to be launched in such a

manner that it did not just cannibalize existing sales in the other three

segments. The result: Xiameter was targeted to price-driven

convenience buyers of mature silicone-based products that spend over

$50,000/p.a. on silicone materials. To be both cost efficient and

attractive only to price buyers, the market offering and value proposition

were tightly defined in the following manner:

Instead of Dow Cornings fast delivery promise, Xiameter promised a

shipping date 7-20 days from date of order. This allowed Xiameter to slot

orders when there was spare capacity at Dow Corning.

No technical service. This meant Xiameter did not have to invest in an

expensive service capability.

No order size flexibility for the customer. Depending on the product,

customers must order full truck, tank, or pallet loads. This enabled

Xiameter to run efficient logistics.

Customers could enter their own orders on the website, but if they

wished to send the order by email or phone, there was a $250 charge

per order. This reduced customer interface costs.

The shipping date, once set, could not be changed unless the customer

was willing to pay a 5% surcharge. A rush order incurred a 10%

surcharge penalty, while the order cancellation fee was 5%. All of this

made production planning more predictable.

The credit terms were very tight 30 day net, 18%. This reduced

required working capital.

Product variety available was limited to 350 mature products in contrast

to the 7000 products available through Dow Corning. This limited

cannibalization as only mature products were offered, where Dow

Corning faced price competition from low cost players.

Product returns were accepted only if the goods were damaged.

The worldwide pricing was only in six major currencies so that the

currency risk and exchange was limited.

The Two Biggest Marketing Lies

To emphasize what was identical, Xiameter provided certificates of

chemical equivalency for customers to demonstrate that its newly

branded products were equivalent to the Dow Corning products. But

when this was proposed, the sales people said all Dow would do is

cannibalize sales for the full-service option. By arguing this, salespeople

revealed the two biggest lies that marketers are often trapped into:

First, despite all the power point presentations on segmentation, when

pushed, the salespeople did not believe that four segments existed. If

cannibalization was going to be such a large problem, then clearly there

is only one segment and all it cares about is price.

Second, that despite spending millions on providing so many

supplementary services to customers that marketers call value-added

services, if push comes to shove, the customer would trade them all off

for cheaper prices. If companies themselves do not believe in the value-

added nature of the services they provide for free to customers, then

customers can hardly be blamed for seeing them as simply additional

costs loaded on by suppliers into the price.

What is fascinating about the Xiameter example is that the core product

is an exact commodity. It is in the supplementary services that the

variation in tailoring the market offering is being delivered. The results for

Xiameter were excellent. The cannibalization in the first year after

launch was half of what they had projected. While the prices were 15-

20% lower, by having a web only model, they had eliminated several

cost factors like technical service, sales force and inventory costs, and

optimized other costs like logistics and production. In addition, the

working capital requirements were low as the accounts receivable are

lower and inventory is minimal. Taken together, these cost savings

yielded an attractive return on assets. Furthermore, by using the spare

capacity of the Dow Corning production lines, Xiameter also made Dow

Corning operations more efficient.

4. Read the article "B2B-segmentation-Dow Corning" Which branding approach did they use: "house of brands" or "umbrella branding"? What are the advantages associated with the approach they used? [5 points]