buy-sell-hierarchy

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.

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.

Connected Business Concepts

Revenue Modeling

revenue-model-patterns
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

Pricing Strategies

pricing-strategies
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.

Dynamic Pricing

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Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Price Ceiling

price-ceiling
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors. 

Price Elasticity

price-elasticity
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

network-effects
network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

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