An analysis of distributor data often identifies a dozen or more variables, or markers, that segment customers in certain ways. The video below is a discussion between Jonathan Bein and Randy MacLean regarding identification of markers that can help point to the top 3 or 4 key markers that are the best predictors of:
- where to sell more to existing customers, or
- how to find prospects that can turn into profitable customers.
Below the video is a transcript of the video.
RANDY MacLEAN: Hi. I’m Randy MacLean from WayPoint Analytics. And I have Jonathan Bein here from Distribution Strategy Group.
Jonathan and I are old friends, and we’ve had a great morning discussing some of the finer details of how you drive profitability, what you do with marketing, how companies are changing. And we thought we’d take some time and capture some of it, so you could share in the discussions.
So, Jonathan, we were talking about ‑‑ about what your firm does. And Distribution Strategy Group actually is not just a marketing firm in the sense that you make advertising or help people set up their websites. What you do is a lot more than that. And the amount of work we’ve done together over the years and with the amount of work that we’ve seen you do in our client accounts, you’ve done some incredible things in helping them identify different segments of their customer base and different places they can get to.
And you also helped them create the demand programs that helped them move their companies into the market segments that they want to be in. And we’ve seen some terrific improvements in profit when your company has been through. So my hat’s off to you.
And I always admire what you do, and I wanted to talk a little bit about the segmentation aspect. We’ve been doing work with segmentation. A lot of people have been talking about segmentation. And when I first started, some of the companies that put more effort into this kind of thing would ‑‑ might get the benefit of grouping their customers into the various categories, so that they can target marketing programs and sales programs and product programs and whatnot in each of those categories.
And when I first started this, people were looking at the size of the account and what industry they were in, their zip code, and that kind of thing. Is that ‑‑ is that what people are still doing?
JONATHAN BEIN: It’s part of what people are still doing; but, you know, we’re in an age of analytics and there’s a lot more information available about companies. So when we look at what are the best and most profitable segments and that have the highest likelihood of conversion, we look actually at a number of markers. And we try to boil it down to three or four markers that for that particular distributor, for that particular customer base are the best predictors of where to sell more to existing customers or where to go get more customers to have a good chance of being profitable.
RANDY MacLEAN: Oh. So what ‑‑ what are the new dividing lines that people are using these days to ‑‑ to discover the ‑‑ to build what you call a profile?
JONATHAN BEIN: Yeah. In the customer profile, we look at least a dozen markers in any analysis that we do. Just to mention a couple that have been interesting in certain cases. By the way, it is very customer‑base specific. So what is relevant for one customer base may be completely irrelevant for another customer base.
RANDY MacLEAN: Jonathan, I should ‑‑ I should add that this year WayPoint has been doing a great deal of work on segmentation. And we decided to look at the value of customer in terms of what they contributed in cash flow profitability to an account. And we found some very, very interesting profit or value‑base segmentation that we’ve been working on where we’re looking at high‑leverage accounts that produce more profit per revenue dollar. We’re looking at high‑efficiency accounts that produce profitability with a lower infrastructure consumption cost in the relationship. And we’ve been looking at high potential accounts that provide above‑average cash flow but are not yet getting to their profit potential. We’ve been looking at profit‑drain accounts, which are accounts that provide above‑average cash flow but actually lose money. And then we’ve began to rate the low cash flow producing customers, the small ‑‑ people refer to as small accounts into money‑making and money‑losing.
And those six segments are turning out to be incredible tools for understanding the profit potential in these groups.
So, Jonathan, when we’re talking about how we’re looking at the value segments that we see in WayPoint, your company actually takes that to the next level and you start looking at demographics that could be correlated back to these ‑‑ to these different categories or segments that we have. And some of the things that you shared with me have been real eye‑openers and, in fact, quite surprising.
So would you mind sharing a few of the things that ‑‑ that your firm looks at when you’re trying to identify what accounts are likely to fall into these categories.
JONATHAN BEIN: Absolutely. Just a caveat. Not each marker is going to be relevant for every customer base. So what works for you may be different for what works for a different distributor. So what we try to do is we try to find the handful of markers that are the most relevant for you.
RANDY MacLEAN: Yeah.
JONATHAN BEIN: And we look from a bunch of markers to boil it down to five. A couple off the bat that are ‑‑ that we think are interesting. One is the manufacturing status of a company from the business unit.
RANDY MacLEAN: Oh.
JONATHAN BEIN: And we saw this in the benchmark data that we worked with from you. Companies where manufacturing is happening in the business unit, at least in the benchmark data.
RANDY MacLEAN: Uh‑huh.
JONATHAN BEIN: ‑‑ had a 4 1/2 point higher
NBC than companies that didn’t have that manufacturing status.
RANDY MacLEAN: That’s quite a difference.
JONATHAN BEIN: Yeah.
And, in fact, some of the customers that we’ve worked with have seen even greater disparity. I think we saw in one customer base there was a 6 1/2 point difference for the manufacturing status.
RANDY MacLEAN: Wow.
JONATHAN BEIN: Another marker that’s been very interesting is credit risk.
RANDY MacLEAN: Uh‑huh.
JONATHAN BEIN: A lot of companies do various ratings on credit risk. And what we’ve found is that the ‑‑ at least in the benchmark data, but also with other customers of ours, there’s about a 2 1/2 point difference between high‑ and low‑risk customers in their customer base. So . . .
RANDY MacLEAN: So that’s very interesting, because it’s always a game of inches when you’re in distribution. You know, there’s no silver bullet where you just do one thing and it makes everything work.
It’s a combination of doing many, many things well. But finding groups of customers that are more likely to produce profit or, in fact, are more likely to produce more profit can be the whole game.
JONATHAN BEIN: I think that’s really a key point. Because if we identify a segment as being basically a good segment, there will no doubt be customers or accounts in that segment that are not good accounts ‑‑ they’re not good accounts to have. But probabilistically, by focusing on customers in that segment, whether they’re existing customers or prospects, you’re going to have a higher likelihood of conversion or selling more or penetrating more and you’re going to have a much higher likelihood of being profitable.
RANDY MacLEAN: Well, that’s interesting. Because one of the things that we got to in our discussion was that you don’t need a big change in the customer base in order to make a big change in your profitability. And that makes ‑‑ that follows mathematically for me. Because when I’m looking at, say, the high‑leverage account group only being, you know, 6 percent of the customer base, if you double that, you’d only be making a 6 percent change in the ‑‑ in your total customer base; and yet you’d be doubling the segment that produces probably 80 or 90 percent of the bottom line profit.
JONATHAN BEIN: Exactly. So when we ‑‑ when we look at ‑‑ let’s just take an example about how this transformation occurs. So suppose you’re a distributor with 10,000 accounts. You’ll probably lose 1500 to 3,000 of those accounts in any given year. So 15 to 30 percent churn.
RANDY MacLEAN: Uh‑huh.
JONATHAN BEIN: If I can ‑‑ but you’re also going to be acquiring another 15 to 30 percent to
offset those, to at least stay even, and maybe more if you’re growing. So if I can introduce another 3′ to 500 accounts in those new customers that have the markers of the high profitability customers, it’s huge. And you just look at it over a two‑ or three‑year period, you’ve effectively transformed your customer base.
RANDY MacLEAN: Yeah. And that’s what we’ve been seeing in our ‑‑ in our data as well; that the ‑‑ some of these areas, if you can focus in on a particular narrow area, and then make ‑‑ move the dial in that area, it really has a magnified effect on the bottom line. Some.
All right. So this has been interesting. And I like the idea that you can narrow ‑‑ narrowly focus in on ‑‑ on small but very, very important from a profit standpoint segments of the customer base and start to work to change the balance of money‑losing to money‑making customers and ‑‑ and, in turn, target some new accounts to bring in, you can target the accounts that are most likely to bring in above‑average profitability. And that really can have a great effect on the company. And certainly we’ve seen that in the work that you’ve been doing in the accounts that we monitor.
So I want to thank you for spending some time with us. This discussion is going to continue.
We have a whole series of videos that we’re doing where we’re going to carry on this discussion, and I hope you’ll join us for the others.
JONATHAN BEIN: Thanks, Randy.