What Is The Buy-Sell Hierarchy And Why It Matters In Business

The buy-sell hierarchy is a visual representation of an increasingly strategic business to customer relationship. The buy-sell hierarchy was developed by consultants Robert Miller and Stephen Heiman in a 2005 book about large account management. Miller and Heiman argued that in business markets, the business (supplier) to customer relationship was the primary determinant of success. To that end, the buy-sell hierarchy was developed so that businesses could objectively assess their interactions with customers and create more value to increase market differentiation.

Aspect	Explanation
Definition	The Buy-Sell Hierarchy is a structured approach to managing business ownership transitions, especially in family-owned or closely-held companies. It outlines a clear sequence of who has the right to buy or sell ownership stakes in the business, typically triggered by specific events like an owner’s retirement, death, or desire to sell. This hierarchy helps maintain stability and control within the company while facilitating smooth ownership transitions.
Key Concepts	– Ownership Transition: The hierarchy specifies the order in which owners or stakeholders can buy or sell ownership interests. – Fair Valuation: It often includes mechanisms for determining fair market value when ownership is transferred. – Continuity: The Buy-Sell Hierarchy aims to ensure business continuity during ownership changes. – Rights and Restrictions: It outlines the rights and restrictions of owners regarding buying or selling shares. – Triggering Events: Specific events, such as retirement or death, trigger the buy-sell process.
Characteristics	– Sequential Process: The hierarchy defines a step-by-step process for ownership transfers. – Predefined Terms: It includes predefined terms and conditions for buy-sell transactions. – Protection of Control: Helps prevent unwanted outside ownership or control of the business. – Customization: Buy-Sell Agreements can be customized to suit the specific needs of the company and its owners. – Legal Framework: Often, these agreements have a legal basis and enforceability.
Implications	– Ownership Control: The hierarchy determines who can have control or ownership stakes in the business. – Valuation Methods: Specifies how ownership interests are valued during buy-sell transactions. – Conflict Resolution: Helps prevent disputes among owners by providing a structured process. – Business Continuity: Ensures that the business can continue operations smoothly during ownership transitions. – Exit Planning: Promotes thoughtful exit planning for business owners.
Advantages	– Control Preservation: Owners can maintain control by ensuring shares are sold within the existing ownership group. – Stability: Reduces the risk of external parties gaining ownership, which can disrupt business operations. – Fair Valuation: Establishes fair processes for valuing ownership stakes. – Conflict Avoidance: Helps prevent conflicts and disputes during ownership changes. – Succession Planning: Facilitates succession planning and the orderly transfer of ownership.
Drawbacks	– Complexity: The Buy-Sell Hierarchy can be complex and require legal documentation. – Valuation Challenges: Determining fair market value may be challenging and lead to disagreements. – Lack of Flexibility: May limit the ability to bring in outside investors or partners. – Costs: Legal and administrative costs can be associated with implementing and enforcing the hierarchy. – Ownership Control: Can lead to limitations on who can become an owner, potentially limiting growth opportunities.
Applications	– Family-Owned Businesses: Commonly used in family-owned businesses to manage transitions between generations. – Closely-Held Companies: Applicable to closely-held companies with a limited number of stakeholders. – Partnerships: Used in partnership agreements to outline ownership transfer rules. – Succession Planning: Critical for businesses planning for leadership and ownership succession. – Estate Planning: Supports estate planning by providing mechanisms for asset distribution.

Table of Contents

The five levels of the buy-sell hierarchy

With these insights, a business will also understand how its customers perceive them. Indeed, Miller and Heiman make mention of the fact that it is the customer who decides which level the relationship occupies – not the business itself.

The buy-sell hierarchy is represented by five levels. As a business moves through each level of the hierarchy, it moves from selling a product to making an important strategic contribution to customer business operations.

Progressing through the levels of the hierarchy, other variables decrease, including:

Price sensitivity, or the tendency to seek the best price.
Competition.
The relative importance of product or service features.

Here is a more detailed look at each level.

Level 1 – Delivers a commodity that meets specifications

On the first level, the customer considers a business to be one of many they purchase from. Businesses who offer non-specific consumer goods and staples occupy this level, as their products or services do not vary significantly from the offerings of competitors.

As a result, there is little to no relationship between business and customer. Price and availability are likely to be the biggest determinants in whether the arrangement continues.

Level 2 – Delivers good products and services

Here, customers view a business as a supplier of good (without being great) products. Businesses have gone some way to understanding customer needs by selling products that deliver real benefits.

However, good products are easily imitated by competitors and in abundance, good products simply become the industry standard. Without constant innovation, the relationship runs the risk of falling back to the first level.

Level 3 – Provides dedicated service and support

On level three, a business has earned the right to be seen as the provider of excellent products or services by going the extra mile for consumers.

A classic example can be seen in hosting providers. At level 2, the hosting provider may provide a shared hosting plan with email support. At level 3 however, the company may offer a faster server with 24/7 phone support and a dedicated customer service representative.

Level 4 – Contributes to business issues

Miller and Heiman suggest that the difficulty in moving from level three to level four is akin to “crossing a chasm.”

At this point, customers make an explicit connection between their success and the products or services a supplier offers. This is only possible when a business takes the time to build trust through a deep understanding of customer problems. Ultimately, the business is rewarded since consumers at this level are unlikely to purchase from a competitor.

Level 5 – Contributes to organizational issues

At level 5, the business is an expert in its industry and can accurately anticipate customer problems before they occur. In some cases, the supplier may assist in developing corporate strategy while simultaneously improving its position in the industry.

The business provides strategic value to the customer in addition to the more obvious financial value, and a partnership may develop as a result. With the mutually beneficial relationship in place, the transactional value of the arrangement is less important so long as the relationship is in the customer’s best interests.

Key takeaways:

The buy-sell hierarchy is a visual means of assessing the strength of the business (supplier) to customer relationship.
The buy-sell hierarchy was developed for applications in large account management to enable suppliers to strengthen customer relationships and develop a competitive advantage.
The buy-sell hierarchy features five levels. As businesses move through the hierarchy, relationships built on trust and collaboration take precedence over exact pricing and product features.

Key Highlights:

Definition of Buy-Sell Hierarchy: The buy-sell hierarchy is a model that represents the evolving strategic relationship between a business and its customer. It was developed by consultants Robert Miller and Stephen Heiman to help businesses objectively evaluate their interactions with customers and create more value to enhance market differentiation.
Five Levels of the Buy-Sell Hierarchy:
- Level 1 – Delivers a Commodity: The business provides a commodity that meets specifications. Customers view the business as one of many suppliers, and price and availability are key determinants.
- Level 2 – Delivers Good Products and Services: The business is seen as a supplier of good products. However, without constant innovation, the relationship risks reverting to Level 1.
- Level 3 – Provides Dedicated Service and Support: The business goes the extra mile to provide excellent products or services. It earns a reputation for delivering quality and dedicated support.
- Level 4 – Contributes to Business Issues: The business becomes integral to customer success by understanding their problems deeply. The connection between customer success and the supplier’s offerings is explicit.
- Level 5 – Contributes to Organizational Issues: The business becomes an industry expert, anticipates customer problems, and contributes to their organizational strategy. The relationship becomes a partnership focused on mutual benefits beyond transactional value.
Customer’s Perception: Customers determine the level of the relationship, not the business itself. The progression through the levels signifies a shift from transactional to strategic contributions.
Benefits and Implications:
- As businesses move up the hierarchy, price sensitivity, competition, and product/service features become less significant factors.
- Strong relationships built on trust and collaboration enhance customer loyalty and competitive advantage.
- Businesses that reach higher levels offer strategic value to customers and may assist in developing corporate strategies.

Related Business Concepts

Business Development

Business development comprises a set of strategies and actions to grow a business via a mixture of sales, marketing, and distribution. While marketing usually relies on automation to reach a wider audience, and sales typically leverage a one-to-one approach. The business development’s role is that of generating distribution.

Sales vs. Marketing

The more you move from consumers to enterprise clients, the more you’ll need a sales force able to manage complex sales. As a rule of thumb, a more expensive product, in B2B or Enterprise, will require an organizational structure around sales. An inexpensive product to be offered to consumers will leverage on marketing.

Sales Cycle

A sales cycle is the process that your company takes to sell your services and products. In simple words, it’s a series of steps that your sales reps need to go through with prospects that lead up to a closed sale.

RevOps

RevOps – short for Revenue Operations – is a framework that aims to maximize the revenue potential of an organization. RevOps seeks to align these departments by giving them access to the same data and tools. With shared information, each then understands their role in the sales funnel and can work collaboratively to increase revenue.

BATNA

In negotiation theory, BATNA stands for “Best Alternative To a Negotiated Agreement,” and it’s one of the key tenets of negotiation theory. Indeed, it describes the best course of action a party can take if negotiations fail to reach an agreement. This simple strategy can help improve the negotiation as each party is (in theory) willing to take the best course of action, as otherwise, an agreement won’t be reached.

WATNA

In negotiation, WATNA stands for “worst alternative to a negotiated agreement,” representing one of several alternative options if a resolution cannot be reached. This is a useful technique to help understand what might be a negotiation outcome, that even if negative is still better than a WATNA, making the deal still feasible.

ZOPA

The ZOPA (zone of possible agreement) describes an area in which two negotiation parties may find common ground. Indeed, ZOPA is critical to explore the deals where the parties get a mutually beneficial outcome to prevent the risk of a win-lose, or lose-win scenario. And therefore get to the point of a win-win negotiation outcome.

Revenue Modeling

Revenue modeling is a process of incorporating a sustainable financial model for revenue generation within a business model design. Revenue modeling can help to understand what options make more sense in creating a digital business from scratch; alternatively, it can help in analyzing existing digital businesses and reverse engineer them.

Customer Experience Map

Customer experience maps are visual representations of every encounter a customer has with a brand. On a customer experience map, interactions called touchpoints visually denote each interaction that a business has with its consumers. Typically, these include every interaction from the first contact to marketing, branding, sales, and customer support.

AIDA Model

AIDA stands for attention, interest, desire, and action. That is a model that is used in marketing to describe the potential journey a customer might go through before purchasing a product or service. The AIDA model helps organizations focus their efforts when optimizing their marketing activities based on the customers’ journeys.

Social Selling

Social selling is a process of developing trust, rapport, and a relationship with a prospect to enhance the sales cycle. It usually happens through tech platforms (like LinkedIn, Twitter, Facebook, and more), which enable salespeople to engage with potential prospects before closing the sale, thus becoming more effective.

CHAMP Methodology

The CHAMP methodology is an iteration of the BANT sales process for modern B2B applications. While budget, authority, need, and timing are important aspects of qualifying sales leads, the CHAMP methodology was developed after sales reps questioned the order in which the BANT process is followed.

BANT Sales Process

The BANT process was conceived at IBM in the 1950s as a way to quickly identify prospects most likely to make a purchase. Despite its introduction around 70 years ago, the BANT process remains relevant today and was formally adopted into IBM’s Business Agility Solution Identification Guide.

MEDDIC Sales Process

The MEDDIC sales process was developed in 1996 by Dick Dunkel at software company Parametric Technology Corporation (PTC). The MEDDIC sales process is a framework used by B2B sales teams to foster predictable and efficient growth.

STP Marketing

STP marketing simplifies the market segmentation process and is one of the most commonly used approaches in modern marketing. The core focus of STP marketing is commercial effectiveness. Marketers use the approach to select the most valuable segments from a target audience and develop a product positioning strategy and marketing mix for each.

Sales Funnels vs. Flywheels

The sales funnel is a model used in marketing to represent an ideal, potential journey that potential customers go through before becoming actual customers. As a representation, it is also often an approximation, that helps marketing and sales teams structure their processes at scale, thus building repeatable sales and marketing tactics to convert customers.

Pirate Metrics

Venture capitalist, Dave McClure, coined the acronym AARRR which is a simplified model that enables to understand what metrics and channels to look at, at each stage for the users’ path toward becoming customers and referrers of a brand.

Bootstrapping

The general concept of Bootstrapping connects to “a self-starting process that is supposed to proceed without external input.” In business, Bootstrapping means financing the growth of the company from the available cash flows produced by a viable business model. Bootstrapping requires the mastery of the key customers driving growth.

Virtuous Cycles

The virtuous cycle is a positive loop or a set of positive loops that trigger a non-linear growth. Indeed, in the context of digital platforms, virtuous cycles – also defined as flywheel models – help companies capture more market shares by accelerating growth. The classic example is Amazon’s lower prices driving more consumers, driving more sellers, thus improving variety and convenience, thus accelerating growth.

Sales Storytelling

Business storytelling is a critical part of developing a business model. Indeed, the way you frame the story of your organization will influence its brand in the long-term. That’s because your brand story is tied to your brand identity, and it enables people to identify with a company.

Enterprise Sales

Enterprise sales describes the procurement of large contracts that tend to be characterized by multiple decision-makers, complicated implementation, higher risk levels, or longer sales cycles.

Outside Sales

Outside sales occur when a salesperson meets with prospects or customers in the field. This sort of sales function is critical to acquire larger accounts, like enterprise customers, for which the acquisition process is usually longer, more complex and it requires the understanding of the target organization. Thus the outside sales will cut through the noise to acquire a large enterprise account for the organization.

Freeterprise

A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Sales Distribution Framework

Zero to One is a book by Peter Thiel. But it also represents a business mindset, more typical of tech, where building something wholly new is the default mode, rather than building something incrementally better. The core premise of Zero to One then is that it’s much more valuable to create a whole new market/product rather than starting from existing markets.

Palantir Acquire, Expand, Scale Framework

Palantir is a software company offering intelligence services from governments and institutions to large commercial organizations. The company’s two main platforms Gotham and Foundry, are integrated at enterprise-level. Its business model follows three phases: Acquire, Expand, and Scale. The company bears the pilot costs in the acquire and expand phases, and it runs at a loss. Where in the scale phase, the customers’ contribution margins become positive.

Consultative Selling

Consultative selling is a sales approach favoring relationship building and open dialogue to adequately meet the needs of a prospective customer. By building trust quickly a consultative selling approach can help the customer better meet her/his expectations and the salesperson hit her/his targets more effectively.

Unique Selling Proposition

A unique selling proposition (USP) enables a business to differentiate itself from its competitors. Importantly, a USP enables a business to stand for something that they, in turn, become known among consumers. A strong and recognizable USP is crucial to operating successfully in competitive markets.

Read: product development frameworks here.

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