Dow Corning and Xiameter

As a noteworthy case in tailoring market offerings, consider Dow Corning. In 2000, it was serving its
customers with seven thousand different products that were bundled with all kinds of supplementary
services. Despite a leading 40 percent worldwide market share in silicones, Dow Corning was facing a
number of low-cost competitors that were undercutting its prices. Rather than try to match
competitors’ prices and lose the price premium across its entire volume, Dow Corning decided to fight
back. And it all began with research to assess what customers truly value.

A careful study of customers 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. They
sought advances, even breakthroughs, in the creation of technical or market positions that did
not exist.

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. Form order tracking and materials handling to processing assistance and
troubleshooting, they wanted dependable supply, minimal downtime, and turnkey solutions
around the world.

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

4. Customers seeking to better prices – customers in mature industries that 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 from more
effective.

The 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 products and those cost had to be recovered, the naked solution was too expensive for
the last segment. Understandably, this segment refused to pay for the services it did not value
and pressured 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 need for tailored market offerings was obvious.
 In 2002, to serve this low-price-seeking segment, Dow Corning launched a wholly owned
subsidiary called Xiameter. Xiameter realized it needed to cut its prices by 15-20 percent, which
was very significant in the business markets it was 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 simply 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. [per year]
on silicone materials.” To be both costs efficient and attractive only to price buyers, the market
offering and value proposition were defined in the following manner:

 Instead of Dow Corning’s fast-delivery promise, Xiameter promises a shipping date

seven to twenty days from the date of order. This allows Xiameter to slot orders when
there is spare capacity at Dow Corning.

 Xiameter offers no technical service. This means Xiameter does not have to invest in an
expensive service capability.

 Xiameter provided no order-size flexibility for the customer. Depending on the product,
customers must order full truck, tank, or pallet loads. This enables Xiameter to run
efficient logistics.

 Customers can enter their own orders on Xiameter’s website, but if they wish to send
the order by e-mail or phone, there is a $250 charge per order. This reduces customer
interface costs.

 The shipping date, once set, may not be changed unless the customer is willing to pay a
5 percent surcharge. A rush order incurs a 10 percent penalty, while the order
cancelation fee is 5 percent. All of this makes production planning more predictable.

 The credit terms are very tight-thirty days net, 18 percent. This reduces the working
capital required.

 The product variety available is limited to 350 mature products in contrast to the 7,000
products available through Dow Corning. This limits cannibalization and focuses on
those products where Dow Corning faces price competition from low-cost players.

 Product returns are accepted only if the goods are damaged.

 The worldwide pricing is available in only six major currencies so that the currency risk
and exchange is limited.
 To emphasize what is the same, Xiameter provides certificates of chemical equivalency for
customers to demonstrate that its newly branded products are equivalent to the Dow Corning products.
Thus, the core product is an exact commodity. It is the supplementary services that vary.

The results for Xiameter have been excellent. The cannibalization in the first year after launch
was half of what the company had projected. While its prices are 15-20 percent lower, by having a web-
only model, it has eliminated several cost factors – like technical service, a sales force, and inventory
costs – and optimized other costs, like a logistics and production . In addition, the working capital
requirements are low because the accounts receivable are low and inventory is minimal. Taken
together, these cost savings yield an attractive return on assets. Furthermore, by using the spare
capacity of the Dow Corning production lines, Xiameter also makes Dow Corning operations more
efficient.

Since its launch, Xiameter has significantly contributed to Dow Corning’s increase in sales – from
$2.4 billion in 2001 to $3.9 billion in 2005. During the same period, Dow Corning went from a loss of $28
million to a profit of $500 million – quite a turnaround. In addition to this vastly improved financial
performance, the dual-brand strategy of Dow Corning and Xiameter has helped customers more clearly
see the value that Dow Corning brings with its market offerings. Customers observe the contrasting
value propositions and offerings for each brand, resulting in their making more-informed decisions on
how they want to purchase. Thus, tailoring Dow Corning’s market offerings to be responsive to
customers with varying requirements and preferences certainly has paid off for the company and its
customers.

Source: Value Merchants