Analysis 31: Using the Analyses to Support a Marketing and Customer Calling Program for Target Customers

• Video #68: Overview of Segments Part 3: What to Do
• Video #65: Core Customers Part 3: Developing Plans for Core Customers
• Video #54: Cost Reduction By Winners vs. Losers in Hostility

• Worksheet #11: Customer Objectives and Categories

APPROACH: The approach covers three steps: 1) customer classification by profitability; 2) volume pay-off estimation based on company objectives for each customer; and 3) program adjustment based on strength of incumbent competitors. The company must classify each customer in its marketplace by the customer’s potential profitability. These customers fall into three categories: Core, Near-core and Non-core customers. After it classifies each customer in the marketplace, the company establishes an objective for the customer (i.e., Stay In, Increase Use, Get-In, Opportunistic or Get-Out). Then the company estimates the pay-off in sales volume or contribution margins from investments and expenses to protect or gain that volume. Finally, the company adjusts its total marketing and calling program spending to emphasize devoting more effort and attention when trying to gain volume from those customers served by weak competitors and less on those customers served by strong competitors. At the same time, the company will spend more to protect relationships it shares with strong competitors and less to protect relationships shared with weaker competitors.

• Audio Tip #49: The Three Profitability Categories of Customers

Customer Classification:

Our first step in this Analysis is to classify each customer in the marketplace into one of three profitability categories: Core, Near-core or Non-core. The company estimates the profitability for each customer through a business cycle, using either expected profitability, net present value or, if necessary, gross margins. The company conducts this analysis individually for each Very Large and Large customer and uses averages and minimum/maximum rules to estimate, or set minimums for, the profitability of Medium and Small customers.

• Audio Tip #53: Setting Specific Company Objectives for Many Customers
• Audio Tip #54: Treat the Largest Customers Gingerly

Company Objectives for Customers:

The company has one of five objectives with each customer:

• Stay In
• Increase Use
• Get In
• Serve Opportunistically or
• Get Out

• Audio Tip #50: Company Objectives with the Three Profitability Categories of Customers
• Audio Tip #51: Customer Profitability and Company Objectives

Customer segmentation should increase the revenues from the current customer base and decrease the cost of competing for additional customer volume in the marketplace. Each of the five customer categories (i.e. Stay In, Increase Use, Get In, Opportunistic and Get-Out) has both different costs and different expected revenues from a marketing and calling program devoted to it. The customer segmentation effort should increase the effectiveness of the marketing and sales program by making the company’s plans more specific and quantitative.

The company’s objective with a Stay In current customer is to maintain the company’s current proportion in the customer’s relationship. This may be a sole source customer purchasing only from the company, or the customer may offer little prospect of increasing volume with the company. On the other hand, the company does not want to lose any part of the customer relationship by experiencing a Get Out or Decrease Use event.

• Audio Tip #56: The Risks of Being a Sole Supplier

With Increase Use current customers, the company attempts to increase the company’s proportion of the customer’s total purchases. The objective with the “Increase Use” customers is both to avoid negative volatility events and to increase volume with the customer.

Stay In and Increase Use target customers, because they are already current customers, require the least investment per unit of sale from the marketing and sales program.

Target customers who are not current customers, but rather potential customers, are more expensive customers from a marketing and sales perspective. These are “Get In” customers. Often, the company knows much less about these customers than it knows about a current customer. A “Get In” customer is either a new customer to the market or a customer who belongs to someone else. The company’s objective with this customer is to enter his relationship.

The Opportunistic customers would normally be Near-core or Non-core customers. The company serves these customers in periods when the company has excess capacity. Sales to these customers would provide a cash contribution. Any “opportunistic” customer in the current customer portfolio is there solely to provide this cash contribution. If any of these opportunistic current customers are Near-core customers, with the potential to become a Core customer, then the company’s objective is to improve the economic results of selling to this customer. The company can improve these economic results by increasing prices, reducing costs, or reducing investments required to support the customer.

• Audio Tip #55: Warning on Price-Based Relationship Customers

As the market recovers from overcapacity. The company may find itself with the need to withdraw from Non-core, and perhaps Near-core, relationships in order to support the growth of Core customers. This creates the fifth and final potential objective with the customer, which is to Get-Out of the relationship. Get-Out customers are those the company has been serving opportunistically or where the pricing volumes, or cost-to-serve, have changed the attractiveness of serving the customer in the future.

• Audio Tip #57: Adding Capacity for Near and Non-Core

Adjustments to the Plan:

Once the company has established specific objectives for each customer, it proceeds to adjust its plan by setting priorities and examining its overall potential in the marketplace.

The results in Analysis 25 should demonstrate that it is far more effective to pursue new Increase Use and Get-In customer volume from the customers of weak competitors than it is to pursue the same volume from the customers of strong competitors. As the company develops its marketing and sales program, it would adjust its priorities to reflect the lower cost of competing for customer volume presently served by weak competition.

Finally, the company would take an overall look at its marketing and sales program to evaluate how much of the market represents Core volume for the company and what ratio the company’s current and planned volume has to this total Core customer volume in the marketplace. If Core customer volume represents a small percentage of the market, the company is either a very small competitor or it has a problem with its cost structure or value proposition compared to other competitors. If the ratio of the company’s current and planned Core customer sales to the industry’s total Core customer volume is high, the company may need to develop new sources of growth in its industry.

• Audio Tip #58: Core Customer Volume as a Percentage of Total Industry Sales

• Self Test #11: Customer Objectives and Categories

Return to Diagnose Segments: Final Targets

Analyses:

• Analysis 26: Sources of Company Share Change
• Analysis 27: Additional Approach Information to Separate Effects of Customer Growth and Company Volatility
• Analysis 28: Company Volatility Compared to Industry Volatility
• Analysis 29: Index Comparison of Company and Industry Volatility on the Customer Size/Role Matrix
• Analysis 30: Returns By Size/Role Segment

Symptoms and Implications: Symptoms developing in the market that would suggest the need for this analysis.

• Customers are consolidating their purchases
• Customers are taking on more suppliers because shortages have appeared
• While still growing some competitors are losing share
• Fast growing competitors focus on the industry’s large customers
• Large customers are getting higher discounts

Perspectives: Conclusions we have reached as a result of our long-term study and observations.

• “Hostility in a Differentiated Market”
  A bottle of wine is surely a differentiated product. Nevertheless, the table wine industry underwent the same economic traumas faced by more traditional industries.
• 
  “The Rust Belt Revival”
  The revival of the U.S. Rust Belt in the late 1980’s holds lessons for companies who would prosper in hostile marketplaces.
• “Staying Alive in a Hostile Marketplace”
  A few companies survive and even prosper during periods of hostility. How do these companies avoid being the victims of tough market conditions?
• “Success Under Fire: Policies to Prosper in Hostile Times”
  A hostile market evolves through six predictable phases. Most companies fail, withdraw or become acquisitions before this evolution is complete. They fail because their management policies were not effective. The few who survive and prosper do so by making decisions that follow two rules: attract customers and discourage competition. Losers lose by not following the second rule.
• “Turmoil Below: Confronting Low-End Competition”
  There are four major types of competitor who offer your customers low prices. Each of them have distinct weaknesses. Your response to them depends on your answer to several tests that you would apply to your market and your competition.
• “Use Subtle Strategy in Tough Markets”
  A hostile market operates differently than a market with “normal” competitive conditions. But as difficult as a tough market can be, it can also present an astute management team with an unusual opportunity.