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Gripping Decision: How Michelin Found Traction in a Crowded Commercial Market
In 2005, Michelin Industrial faced a threat from low-cost tyre makers. Cheap tyres from Korea and Japan appealed to fleet operators around the world under pressure to cut costs.
Budget brands offered procurement managers savings and the prospect of hitting their bonuses, while Michelin’s premium brand and market share were at risk.
Michelin needed a strategy to protect their position in commercial and industrial tyres, which offered higher margins than traditional consumer markets (tyres for cars).
Michelin leaders knew it was time to make a pivotal decision: should they focus on customer loyalty with a revamped sales incentive scheme, or should they reinvent their approach entirely with a new way to price tyres in the industrial market?
Crossroads for Michelin’s Industrial Tyre Division
Michelin is the French multinational that invented the removable pneumatic tyre and famous for the puffy Michelin man character. After a century, its industrial tyres were known for their durability and high performance. But by 2005, competitors like Hankook, Kumho and Toyo were flooding the industrial market with cheap alternatives.
Michelin saw two potential paths:
1. Introduce a loyalty rewards program to keep a grip on customers
Although it was early-days of web technology, loyalty cards had shown good results in the retail and aviation sectors. Thanks to improvements in IT, a large but relatively simple database would help wholesalers reward distributors and end users for their sales loyalty. Closer to tyres, loyalty programs had already worked for brands like Castrol and competitor Pirelli.
A rewards program would be built for fleet operators who could earn points for “good behaviours” in tyre purchase, maintenance, equipment upgrades, and so on. Paired with volume discounts, this program would drive repeat business and reinforce the Michelin reputation. The goal would be to encourage fleets to choose long-term value over immediate savings by providing clever incentives and a premium customer experience.
2. Turn a corner and switch to a pay-per-kilometre pricing model.
The idea would be to shift from unit pricing to a comprehensive service model for industrial tyres. Industrial fleet customers would lease tyres and get a support package rather than purchasing them outright - Michelin would handle maintenance, replacements, and performance monitoring, reducing fleet costs (including stock costs) and increasing uptime.
This was being trialled at the time by industrial giants like Caterpillar and (jet engine maker) Rolls-Royce. In fact, the term “Power-by-the-hour” is a Rolls-Royce trademark and they invented this kind of pricing plan for its business jet market 60 years ago.
If Michelin went this way, operators might like predictable and scalable expenses, and Michelin would align its success with fleet performance. This could build long-term relationships with client CEOs, based on shared operational goals and a joint interest in tyre performance and uptime.
The Choice: Loyalty or Pricing Reinvention?
To respond to the flood of cheap Japanese and Korean competitors, which path did Michelin choose for its industrial tyre division?
The Strategy Standoff
Strategy A: Inflate Loyalty with Customer Rewards
A customer loyalty scheme would make distributor and end-user purchasing behaviours sticky.
However, loyalty programs can be complex to administer and company buyers often just prefer to buy cheaper bulk inputs, especially in industrial supply chains.
Strategy B: Roll out Tyre-By-The-Hour Pricing
Transform the pricing and service model to service and leasing to make it hard for the new competition to compete on value.
This would require a dedicated service value chain to be established in an already-complex multinational – and customers may choose on price anyway as Michelin consumer brand awareness is less relevant in industrial markets.
So, Which Did They Choose?
Cast your vote to find out!
Better luck next time, Strategy B was chosen!
Good Job, Strategy B was chosen!
But how did this work out for Michelin...
Outcome: Facilitator Commentary
Matt Braithwaite-Young
Managing Partner
t +61 2 9002 3100
Tyres-by-the-Hour: Michelin Pumps New Pricing & Offer Transformation
Michelin opted for B. By creating Michelin Fleet Solutions, they introduced a tyre-by-the-hour model, transforming their relationship with industrial customers.
Rather than selling tyres outright, Michelin took responsibility for maintenance and monitoring, allowing fleet owners to pay based on usage. This shift let Michelin differentiate its offering and build long-term, recurring revenue through service contracts. Though the transition posed initial challenges in reorganisation, it aligned its interests with those of its customers, fostering a partnership based on reliability and operational success.
Michelin’s decision provides another example of companies rethinking traditional sales models to emphasise customer value. They joined other companies like Rolls-Royce, who pioneered the power-by-the-hour model for jet engines, and Caterpillar who also adopted pay-per-use models for heavy equipment, focusing on uptime and efficiency to meet customer expectations in capital intensive industries like mining.
What Goes Round
Interestingly, in July 2024, Michelin saw the same situation repeating in consumer markets, with their tyre markets distorted by a massive influx of budget tyres.
Will they decide to offer a tyres by the km service in the consumer and automotive OEM (car manufacturer) markets?
Above: Michelin sales and margin by sector (source Michelin Annual Report)
Could adopting a service model help you respond to competitive pressures in your industry?
If so, Turning Leaf can help you and your team consider your options and align on a winning path for your firm. Because we use strategy facilitation your leadership team, we cut out the expensive nonsense you get with bloated traditional consulting firms.
My wife thinks no one reads this far. I told her readers are leaders so the smart ones like you might. Email me if you do read this paragraph (matt@turning-leaf.com.au) and I’ll send the first 3 Australian responses a nice bottle of wine to reward your patience with all my bad tyre puns today. If you spot all 5 tyre puns I will make it an even nicer bottle.
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