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REORGANIZE AROUND THE
CUSTOMER
What is the lifetime, discounted cash flow, net present
value (NPV) of our customer portfolio? How could we improve it significantly?
Because the internet has already started to shift informational power to the end-users
in distribution channels, now might be a good time for distributors to re-think
their businesses in terms of Customer NPV. Instead of executing another annual
cycle of product promotional activity to too many customers in 1998, maybe we
should consider the following line of thinking:
WHAT IF:
1)
The
top 20% of our active customers, on a profit ranking report, generated between
120 to 140% of 1997’s profits before taxes?
2)
But,
the bottom 5% of our customers had generated large losses by giving us many
small orders for which the transactional costs greatly exceeded the gross
margin dollars? Could we show these customers that they were also killing
themselves with purchasing transaction costs, stock outs and emergency buying
costs? Could we co-create new, win-win, purchasing patterns with some of these
customers? For the rest, would we have the courage to re-price them for
profitability knowing that they probably will leave for a competitor?
3)
The
next 45% from the bottom were all modest losers on average; many were
infrequent and small buyers. Could they become the account basis for a new
telemarketing and direct mail profit center? With new pricing, new terms and a
lower, different cost to serve, could these customers become profitable? Would
the new division be able to find new, profitable accounts? How many old
customers would stay and how many would leave to paralyze our competitors?
4)
If
some accounts consolidated orders and others took their empty, negative
activity elsewhere, what would we do with our new slack in order fulfillment
capacity?
DOWNSIZE, UPGRADE AND REVITALIZE
1)
We
could lay-off some of our least productive employees, if we had any. The
expense savings would exceed the lost margin dollars of the former accounts,
profits would go up and headaches would go down. It should be easier to acquire
a few new, targeted and profitable accounts with a better team of people and
better profits. Sales might take one step back to take three good steps
forward. Profits would be better from the start.
2)
If
all employees were keepers, then our excess capability would naturally flow
into better service for the remaining customers. If our fewer, better customers
found themselves experiencing more random acts of service kindness, would they: buy a little more, stay with us longer, give
us last look and a little bit more on the price? Would they consider
consolidating their supply needs with us because we were the most reliable? All
of these responses would increase customer NPV.
3)
But,
why improve service evenly for all? Aren’t the top 10% and targets like them
the ones with the highest NPVs of all? Isn’t it time that we turned the slogan
of “know the customer” into an actual science? Why not interview the top 10
most profitable customers to find out: why they buy from us, what we have done
that has bugged them the most and what their biggest frustrations are? Then
find the solutions that they would reward the most. How would they rank the
relative value of each of our service elements? Is there any pattern amongst
these customers; do they all fall into one or more customer niches? What are
their total informational needs beyond the traditional, product-centric
information that we have provided? Could we use interactive web tools to serve
all information needs better? How does our product and service fit into their
value-added chain? Can we take over more of their value-chain needs by selling
them extra services for un-bundled fees? Services for fees could become
important to most distributors over the next five
years. How many of us will see and fill these
opportunities profitably?
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4)
Redefining
our service offering for each niche of customer and then calibrating the
richness for each selling level within a niche is the easy part; making the
service happen is the tough part. Will our employees be able to cross-train and
participate in redesigning service processes to deliver what the customer
wants? How can everyone instantly know the high NPV customers so that we can
make breakthrough service happen spontaneously whenever an opportunity arises?
Does everyone know by heart, at each branch, the top 10 NPV customers who are
franchise critical? Do computer screens and coded paperwork remind the
employees who should get special treatment when needed?
5)
How
do we track and improve on our retention and development (R&D) of positive
NPV customers? Do we have reports that track the NPV of each level of customer
within each target niche that we pursue? Do we have part-time R&D managers
for each customer segment? Wouldn’t this type of focus help us find ever better
ways to grow the NPV of our customer portfolio?
6)
Could
we identify new-for-stock products that core customers are already buying from
other miscellaneous suppliers? What if our customers buy the bulk of their
goods from us and perhaps 1 or 2 other direct competitors, but they buy 10% of
their goods from lots of little, miscellaneous suppliers? If two or more of our
top accounts buy the same miscellaneous items because their common business
niche conditions require them too, then why couldn’t we become a “consolidating
supplier” for those items? The customers could get rid of a lot of purchasing
costs, and we might get a service edge over the competitors who still define
themselves by the manufacturers that show up at our annual channel meetings.
7)
If
manufacturers want us to stock the “full line” and sell their “great new
items”, should we? If we have an exclusive franchise with a manufacturer that
is quite profitable, then we should do whatever they request. Otherwise, we
should let the core customers tell us what they will buy and, therefore, what
new items to stock.
8)
If
we start consulting our core customers on new products, why don’t we invite 3
to 5 of our customers who personify the heart of our #1 niche to be on a formal
“advisory board”. We could have one board per branch to help co-create true,
total value for the customer niche on an on-going basis? The boards could meet
2 to 4 times per year and each member might receive a fee. We could visit
customers expensively one-at-a-time, or we could get economies of schmoozing
and learning at a board meeting. Why not share those savings with them (fee);
make them feel important (which they are); and create a continuous reality
check mechanism for all of us?
9)
What
if every branch identified 5 to 10 most profitable accounts to defend and 5 to
10 best, target accounts to crack? Then scheduled team selling calls that
included top management, buyers, inside sales people, etc? The goals would be
to accelerate the forging of multiple, appropriate links that bind as well as
identify a maximum number of extra service opportunities for the sales team to
pursue. One distributor that did this experiment grew its core accounts in
which it “had all of the business” 48% the first year. The target group grew
“only” 18%, but the industry and economy were up only 4% for the year.
10)
The
second year was better because the target accounts were also “gazelles.” These
are accounts that are so well run themselves that they are growing 2 to 5 times
faster than their industry and can pay on time because they make and reinvest
good profits. The holdover gazelle targets were up another 32% in year two for
two reasons. The distributor had increased their share of the accounts total
purchases which in turn had grown an estimated 15% while the industry was
growing 3%. Pursue, crack, grow and partner the gazelles because then they will
grow us faster than the industry. These accounts have the highest NPVs of all
by definition. What criteria should we use for selecting such accounts?
OTHER CONSIDERATIONS:
The 10 points above are a start to
rethinking our business around customers instead of trying to push more
products to too many customers. There are additional issues to consider:
1)
If
we grow faster and more profitably than our industry by acquiring, developing
and retaining best customers at a greater rate, the suppliers will love our
superior sales growth and fast pay. But, will they work with us on niche, best
customer centric programs or will they persist with product promotions to the
planet?
2)
How
much of our total marketing expense should we allocate to the acquisition,
development and retention cost areas for each customer sub-group within our
target niches? (Imagine a budget grid.) Wouldn’t this drive significant
rethinking of much of our current sales force activity?
3)
If
we team focus on a niche’s total needs, can we document our discoveries and
teach our people to use these new insights to offer truly valuable, extended
service value-added to all customers within that niche including services for
fees? How much could this superior “intellectual capital” be worth? Could we be
an innovator and a rule-maker in our niche(s) instead of a rule-taker?
4)
If
we achieve 60 to 80% + of a customer niche, what are the hidden economies that
will be achieved even though we might have a minority share of a traditionally
defined product/volume market?
5)
If
we partner and learn with our best customers, shouldn’t we be able to design
the best electronic commerce solutions with them? Wouldn’t our technology
investments be sufficient and timely instead of huge, early and misapplied?
6)
How
many distributors can win the channel cost, re-engineering race to become the
low-cost seller of commodities? How many can win the contest to dominate a
customer niche and then, if necessary, be a physical reseller or virtual
reseller of the commodities to that niche? Which strategy should we pursue?
Which one has the highest NPV? Can we do both?
As interactive web commerce shifts ever more power to the
end-user, they will demand and get significant channel changes. Shouldn’t we
pursue a customer-centric re-organization of our business instead of
fine-tuning our product pushing past? If you have any strong reactions to these
ideas, comments or questions about this article, check into the “forum” at http://www.merrifield.com.
ÓMerrifield Consulting Group, Inc.
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