assessing each customer’s value is not only strategically advisable, but also rationally justified.
Not All Customers Are
All-Deserving An effective customer model may not show which are the friendliest, most cooperative, or easiest to satisfy, but if constructed correctly, it should indi- cate those that have the most mone- tary value. To determine those cus- tomers that “deserve” the highest pri- orities, referring to a model is a good place to start. Prioritizing customer subsets (e.g., contractors) is not simply choosing existing customers with the highest aggregate value scores or sales vol- ume. Personal or economical contin- gencies could lead to other choices. Many customers may be highly profitable but have low sales poten- tial. Some may represent an embry- onic business sector whose potential profitability and/or sales volume are uncertain but have been forecasted to explode in growth in coming months. Still others may be rumored to have very high return rates but require sig- nificant investments in new and un- familiar technologies, services, and training for the distributor. And fi- nally, what about those long-term, faithful, dependable, and committed accounts (both large and small) that have made the distributor’s business what it is today—or a sector giant that “sometimes” places mega-orders with volumes greater than an entire year’s worth of sales of a small, devoted cus- tomer? The challenge is to determine the likelihood of sustained sales and profit growth against the threat of fail- ure or minimal ROIs of each—not an easy task. The bottom line is understanding: 1. Which customers/prospects can and will produce the greatest long- term value 2. What services and pricing levels must be provided to ensure optimal results 3. How a discriminating prioritiza- tion strategy will affect customer rela- tionships with those that fail to be deemed a priority Measuring and Analyzing Worthiness In studying and setting criteria for “priority customer” status, a series of metrics should be established and routinely measured. While extensive algorithms may be used, basic criteria should, at a minimum, include: • Sales volume • Historical profitability • Average order size • Purchase frequency • Income consistency • Share of wallet • Customer lifetime value While the old business adage “You can’t manage what you don’t mea- sure” has some validity, it’s important that only pertinent and the most im- portant data is measured. That is, measure only what really matters. In addition to capturing current customer/category statistics, track- ing meaningful data over time can prove to be extraordinarily useful to assessing future customer value. Being aware of principal categories’ vector changes may signal impend- ing downturns or burgeoning growth opportunities and necessitate closer monitoring and analysis. Although such leading indicators may be short- lived or applicable to a single cus- tomer vs. the entire sector, not being cognizant of shifting strategic trend lines can be costly. Cain noted that, over the years, his company has tried several different methods to identify its highest-valued customers, including activity-based costing, number of invoices, and fre- quency of deliveries. “But the most important metric is gross profit dol- lars,” he said. He agreed that having reliable met- rics is important but added, “It’s been my experience that almost every time, they [metrics] affirm what we already knew anyway. You tend to know who
SPECIAL REPOR T /
“WHAT, IF ANY, OF THE FOLLOWING VALUE-ADDED SERVICES DO YOU OFFER
AT NO CHARGE TO YOUR ‘A’ CUSTOMERS?”
Source: Q2 2017 Baird Electrical Distribution Survey, in partnership with “tED” magazine. Respondent profile:
75 respondents, $10+ billion aggregate annual revenue.
On-site inventory storage