Are you familiar with customer stratification programs? To answer this question, consider the following: Imagine a situation where your company operated in a growing market, one where it was the envy of other industries, and one where the market was highly regarded as a technological marvel in terms of its ability to continually turn out new and innovative product offerings. Imagine the importance of being able to service and sell to the most important customers in this industry and what that would mean to your enterprise’s long-term future.
Now imagine a situation where you were unable to take part in that growth because of the type of customers you serviced, ones that drained your company’s internal resources, ones that occupied too much of your sales and customer service capabilities, and ones that simply made it too difficult to bring on additional business with those largest of customers.
Customer Stratification Programs
In essence, your existing customer base isn’t in tune with your market’s growth. They aren’t seen as companies leading the market. While every customer should be important, you also know that your current client list is too expensive to service. So, what do you do when you need to move away from existing business and replace it with a stronger customer base? Simply put, you employ a customer stratification program, one designed to transition these customers away from your enterprise, while at the same time focusing on penetrating those all-important market leaders.
When thinking of stratification programs, think along the lines of vendor consolidation and product stratification. In terms of vendor consolidation, companies aim to reduce their purchasing costs by amalgamating purchasing volumes across a select few vendors, ones who not only reduce the price for parts, raw materials and finished goods, but ones who help to reduce freight costs due to their close proximity to the company’s warehouse. In terms of product stratification, think of how companies eliminate lesser performing product lines. Think of how this helps them achieve significant cost reductions by increasing volumes on stronger product lines.
The same strategy is used in customer stratification programs. However, there are instances where a stratification program simply won’t work. We’ll review what makes such a strategy work, and when it should be avoided altogether. Afterwards, we’ll review five strategies on how a company could make its stratification program work so that the company doesn’t lose market share in-between its transition from its current client base, to what amounts to an upgraded client list.
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When Stratification Programs Work
For the most part, these customer programs should be run in markets that are growing. A market in decline implies the company must retain every one of its customers in order to solidify its existing business volumes and future revenue sources. However, an argument can be made that a company can adopt this program to wind down its participation in their industry - if and only if - the company is operating in other markets. Therefore, when employing this strategy, be sure to identify your market’s current growth patterns in addition to its long-term growth curve, or lack thereof. What are the current market conditions? What is your competition doing and whom are they selling to? Does your market have the potential for growth, and if so, will this growth be dominated by a number of high value customers, ones your company needs to sell to in the future?
Surprisingly, these aforementioned questions aren’t difficult to answer. However, they are an essential aspect of knowing how and when to implement a stratification program. Companies in declining markets need revenue wherever they can get it. This is because a declining market correlates to a declining customer base and consequently, declining revenues. In this instance, there’s no need to speed up that decline by turning away business. Therefore, the predominant rule is to reduce the customer base in markets that are growing, one where a company is held hostage by smaller customers whose costs to serve are simply too high.
How Should a Stratification Program Work?
The focus is to gradually dissuade customers from purchasing from your company. Now, the intention isn’t to cut them off entirely. Instead, a company can use a number of simple, but extremely effective strategies to accomplish this end-goal. Some are focused on retaining business volumes, while others focus on moving those volumes to distributors and value-added resellers, or VARS. Both of these can reduce the company’s costs to serve, while freeing up valuable internal resources. Here are five strategies a company might want to employ in terms of its customer stratification program.
Customer Stratification Strategies
1. Using Distribution Channels to Market: Choosing a distribution channel to market will not only reduce the company’s cost to serve, but it will actually increase the company’s gross profit on sales. The focus is on using a distributor to service a given territory or location. Instead of shipping small volumes of product to multiple customers, the company would instead ship one lump sum of product to the distributor, and the distributor would then service those clients directly. Shipping one large volume of product allows the company to reduce its service costs, while lowering its per-unit costs on freight. In addition, sales and customer service resources will be freed up, thereby allowing the company to not only increase gross profit on sales, but divert those sales efforts to those larger customers deemed essential to the stratification program’s success. In this case, distributors are a solid resource.
2. Using Price Increases: While not an ideal strategy, a company could opt to increase prices to its existing customer base. This strategy is especially effective when companies have decided to move away from their less than desirable customers. If customers accept the price increase, then the company has effectively increased its gross profit on sales. These price increases could be combined with minimum order quantities. Those minimum quantities would ensure that the company not only increases its gross profit through price increases, but that it also increases that profit with higher volumes.
3. Lengthening Lead Times: A strategy that can be used in conjunction with the second is that of increasing lead times on delivery. This is yet another subtle way to move customers away by forcing them to pursue alternative supply. However, don’t just provide them with longer lead times. Instead, come up with valid reasons why these lead times are increasing.
4. Using Value-Added Resellers (VARS): A value added reseller distinguishes their product offering with excellence in customer service and technical support. Much like a distributor, a VAR is a reseller, one that provides technical assistance to a company’s existing customer base. This can be seen as a service upgrade for the company. The company can divert its less than desirable business to the VAR, while upgrading its service capabilities through the services offered through the value-added reseller.
5. Online Order Fulfillment: One stratification strategy worth pursuing is to divert existing business through a revamped online order fulfillment system. This is especially effective for customers who continually place small volume orders, ones that can easily be handled online. This will also improve resource allocation in sales and customer service.
Customer stratification programs aim to provide a roadmap to growth by isolating a market’s most important customers and providing companies with the impetus to pursue those customers. This requires a sales and customer service department that is up to the task and has the time to close new business. Every company goes through a growth curve. At some point, that company must decide between maintaining course, or moving forward with a plan that secures its long-term future. If your company sees its current customer base as needing an upgrade, and if you feel that your company’s viability is only secured with those aforementioned market leaders, then pursuing a customer stratification program is perhaps your best course of action.
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