"We don't need marketing now because today it's a seller's market."

That was the message communicated by a large foreign producer of commodities to its distributor in China. The producer therefore demanded a huge cut in the commissions paid to the distributor. This message of course is not good news for the distributor. Since the managing director of the distributor is my EMBA student, he asked me for some advice or ideas on how to respond to the producer.

In order to design a proper response to the producer, the first question we need to consider is as follows: Does the producer make sense? Does he have a good point? Is he right that marketing is not necessary in a seller's market? Is it wise, when demand exceeds supply, to turn sales and distribution into mere order taking? In my experience, many managers indeed do assume that marketing is not necessary, or less necessary, during periods where there are supply shortages.

But the assumption is deadly wrong. It ignores the most fundamental truth in business: the true value of a company lies with its customers. Marketing and finance disagree on many things, but on this issue they agree: The value of a company is not a function of assets on a balance sheet, the value of a company is a function of the cash the company will earn in the future from its customers.

To judge the value of companies, we need to compare not (only) the quality of their products, we need to compare also the quality of their customers. Manufacturing produces products. Marketing produces customers. Higher quality products offer competitive advantage, so do higher quality customers.

In industrial markets for commodities, maybe the products are the same, but definitely the customers are not the same. Some customers are more competitive in their industry, are more financially sound, are more likely to survive in the longer run, have higher growth rates than their industry, offer more stable demand, serve as better references, involve lower cost for servicing, etc.

The same thing holds true, by the way, in consumer markets. What is the value of market share in the fast growing Chinese consumer markets when compared to market share in the slow growing or declining Japanese consumer markets? What is the value of a customer who buys from you continuously, compared to a customer who switches in and out, always looking for a better bargain? If your customers are all seventy years old and my customers are twenty years old, does not my future look brighter than your future?

So do we need marketing when demand exceeds supply? Absolutely. When demand exceeds supply we are given a great opportunity to enhance the quality of our customer portfolio, to increase the quality and value of our most important asset determining the true value of all our other assets and of our total company. If we are selling raw materials (or any other product) to companies, let us take this opportunity now to identify the companies that are most competitive in their industry, that are most financially sound, that are growing most rapidly, that cost least to serve, that are the least price sensitive, and so on.

To make this point more clear, consider the following example. Imagine two competing companies: A and B. A sells to anyone willing to pay the price. B works hard and romances the best customers of A and signs them up for long term contracts, and reduces or stops delivery to its own less attractive customers. Those less attractive customers naturally now go to A. The marketing manager of A is happy because he finds that whenever one old customer leaves him a new customer quickly shows up to replace the old customer. In one or two years B has exchanged its least desirable customers for A's most desirable customers.

Over time, inevitably, the market turns into a buyer's market again. New capacity comes on line. New companies enter. Perhaps the new companies steal 20% of B's customers. Fortunately for B, it spent effort on finding the best customers possible. As a result, B's customers are growing at 20% a year on average. As a result, even when 20% of B's customers leave, B still produces and sells at 100% capacity simply because of demand growth from existing customers.

Suppose A, with its customers who are more price sensitive, financially weaker, with less or negative growth, also loses 20% of customers. Then A needs to go find new customers. Company A needs to find new customers just when this is most difficult, when the market has become a buyer's market. They will need to offer discounts, to sell at prices less than the market average, in order to get customers to switch. Company A will end up with less attractive customers paying lower prices.

Company B captures its customers in a seller's market, company A searches for customers in a buyer's market. It is hardly surprising that the result will be that company B will need to spend less effort while also finishing up with better customers.

One could say that in the competition between A and B, company B has a better strategy for getting and keeping customers than company A. But it is more accurate to say that company B is the company with strategy, while A is the company without strategy. Company A loses the game, not because it does not play the game well. Company A loses the game because it does not play the game at all, because it does not even know that a game is on. Company A loses the competition for better customers because they do not know such competition exists. Ignorance is a dangerous thing.

I am not surprised by the way that a raw materials producer should think marketing unnecessary, at least during times of raw material shortages. It is quite easy to forget about marketing in an industry where the products are very much the same, or even exactly identical. It seems intuitive that marketing can not help in an industry where there is no opportunity to differentiate the product from competitors.

But this intuition is wrong. Even when product differentiation is not possible, 'customer differentiation' (market segmentation) is always possible. When product differentiation is not possible, customer segmentation becomes especially important. Maybe your product is the same as my product, but I will still be the stronger competitor when my customers are better than your customers.

Some managers might object and say "But all that counts in our industry is price, nothing else." That may be true. But that does not mean that customer quality does not count. On the contrary, when my customers pay more quickly, switch supplier less often, grow more, cost less to serve¡­that is when I can win price competition because my customer quality gives me a cost advantage.

Put simply, when your product does not give you advantage, only your customers can give you advantage. The message to the foreign producer of commodities is clear. Do not cut distributor commissions, do not encourage or obligate the distributor to cut marketing effort. Instead relate the commissions for the distributor to the quality of new customers the distributor can and should now bring in.