In previous articles on customer analytics and what to do with accounts that cost you money, we discussed how Distributors can benefit from segmenting their customers based on net profits and ease of working with them. For the best customers, Distributors can devote resources to maximizing the business relationship, while for less profitable and less efficient customers, Distributors can find ways to lower cost-to-serve and increase dollars per transaction. For most Distributors, the overwhelming majority of customers – so-called “Regular Customers” — are relatively small in terms of number of orders per customer and size of orders. As a group, the total sales revenue from regular customers may equal or even exceed the total revenue from the best customers, but the bottom-line net profit may nominal or negative. While these smaller customers may require more thought and more work, they nonetheless can be managed to generate significant net profits for the Distributor, depending on the tactics used.
We can still segment Regular Customers based on their profitability after analyzing their revenue potential and accounting for the true costs of fulfilling their orders and supporting them. To begin with, we can use analytics to divide customers into profitable (“Regular+”) and unprofitable (“Regular-“) based on their business transactions. Other issues that may affect the profitability and efficiency of smaller accounts include how they are handled by field sales, inside sales, online systems, and other resources. We typically see that the profitability of smaller customers is simply due to a lack of focus on them and a lack of consistent ways to market to them and engage them.
Return on Focus
Regular accounts should provide higher prices and higher margins than other accounts and they represent an opportunity for discount management, strategic pricing and other tactics. We have seen that smaller customers represent quick opportunities for double-digit growth within short timeframes of six months or less when they become a focus for the Distributor and when the right types of marketing campaigns are used together with the right sales resources and online systems.
Segmentation based on profitability empowers Distributors to utilize “the right tool for the right job”. For example, we can reduce the load on Field Sales by having them concentrate on managing the best customers and finding more customer that are like them. We can leverage inside sales resources for the majority of customers at a lower cost, and we can invest in systems, processes, and resources that optimize profitability. Lastly, we can prioritize marketing programs and activities to grow the business by focusing on the ideal customer segments. Stay tuned for more articles about how to use the results of analytics to move into taking actions within marketing, sales, customer support and operations to get the most out of your business by acquiring and keeping the best customers and doing business with them efficiently and profitably.
Robert Kelley is Partner with Distribution Strategy Group. He’s had an extensive career as a technology leader with high-growth companies from high-technology startups to large public corporations. Using quantitative analytics models and software applications, Rob now helps distributors optimize pricing, quantify economic value, analyze the competition, and build customer profiles and market segmentation. Reach out to Rob today to take a data-driven approach to your business problems:
rkelley@distributionstrategy.com.