In my recent post about determining a customer's true value, I covered four criteria companies could use in order to determine the true value of a customer. These four criteria included, 1) how much the customer spends, 2) the products the customer purchases, 3) the customer’s payment habits and 4) whether the customer helps to increase the company’s inventory turnover rates. The company would apply a grade to each of these criteria and then use a weighted average score to determine the customer’s true value. The focus of this post is how a company can move customers up the value scale.
Defining a Customer's Value
There are four possible grades for a customer. The highest of these grades is “business build”, the second highest is “core customer”, next is “convenient sale” and finally, the least important and most costly customer to service is the “operational drain”. The purpose of the exercise was to help a company identify which customers were valuable versus which were too costly to service, and consequently, which were draining the company’s internal resources.
This exercise focuses on the strategies sales can use to move customers up the value scale. In this case, it's about improving customer retention by growing customers with the most potential, keeping the customers with the highest value, and segregating those customers with the lowest value. Here’s a summary of the various categories that define a customer's value.
- Business Build: These customers represent the building blocks for the company and should therefore be its highest priority.
- Core Customer: These customers have the potential to become a business build customer and are considered core to the company’s growth.
- Convenient Sale: These customers represent a steady source of revenue and provide solid market data on pricing, but they should not be considered a priority for sales or operations.
- Operational Drain: These customers continually drain the company’s resources and operations and a plan must be enacted to move them forward, or segregate them entirely.
The table below outlines all the questions that must be answered in order to define a customer's grade and their appropriate designation. The table is from the post: Sample Customer Scorecard Excel Sheet: Grading Your Customer’s Value. The article allows you to come up with your own grading system as defined below.
Retaining “Business Build” Customers: Your “business build” customers are ones that respect their contractual agreements on supply, take the inventory allocated to them, rarely make decisions on price and price alone, pay their bills and are the main reason why your company has high inventory turnover rates. In fact, an argument can easily be made that these customers are the main reason you have inventory in the first place! These customers must be your main focus. Give them the best pricing, the first shot at new product introductions and do everything possible to retain their business with aggressive compensation programs.
Growing “Core Customers”: Your core customers will vastly outnumber your business build customers. However, this shouldn’t diminish the value of these customers by any means. They may have scored extremely high on three out of four criteria, only to be hit by a low score in one area. As such, this shouldn’t change how your company services them. Isolate the cause of the low score. For instance, if they scored low on payment habits, could this score be improved if you provided them with incentives to pay sooner, such as net-10 day terms 1% discount? If they scored low on amount spent, could your sales to this customer increase with a customer reward program? Identify why their score was low and put a plan in motion to grow this account.
Understanding “Convenient Sale” Customers: When thinking of these customers, think of the 80/20 Pareto principle and how 80% of a company’s revenue often comes from the top 20% of its customer base. The top 20% can be viewed as the first two customers listed above (business build & core customer). This third value (“convenient sale”) likely represents the remaining 80% of your customer base. Much like the name implies, these customers are the ultimate convenient sale. They buy on price – which allows you to gather market data on pricing, but also means you might enter some price wars. To compensate for this, focus on those customers who have the potential to move up the value scale. What must your company do to grow these customer accounts? Itemize the steps needed to move these accounts forward.
Segregating “Operational Drain” Customers: These customers use your company’s pricing against you to lower competitive bids. They continually demand more, while giving less and less in return. The question you must answer is whether your strategy must be to segregate these customers or use their own strategies against them. If they are poor payers, then remove their credit and force them to prepay. If they base decisions on price and price alone, then use the “trial close or pre-sell technique” and force them to give you pricing first. If they promise to take inventory and don’t, then stop allocating inventory for them. It’s simply a matter of choice and it becomes much easier when you see just how low they score and consequently, how much it costs to service them.
I've included the above video to help you defend your position as the incumbent supplier against overseas competitors or competitors in general. You can read more about defending business by going here.
The focus in B2B customer management should always be on moving customers up the value scale. Success means your entire organization will be able to immediately determine a customer’s value based on its overall grade. When your sales team needs to move a customer up the value scale, they’ll be able to provide justification based on the customer’s score. The ultimate purpose is to provide your entire organization with the ability to immediately decipher the true value of a customer’s account.
This is a tool that can be used throughout your entire organization. It can be used from sales & customer service to accounting and shipping. It’s something your entire operations must be cognizant of. In the end, it will help every employee better manage individual customers based on their score and value to your enterprise.
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