Using Customer Stratification and Cost to Serve Information in Your Sales Efforts to Maximize Profits
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"Customer stratification" may sound like an odd idea in a climate where any paying customer is a good customer. Still, the sales force has at least two issues to deal with: First, who do I call on that will give me an order and pay for it? Second, who should I be calling on, it's one thing to get an order and be paid for it, but has the company made money? Customer stratification answers these questions and many other ones. Customer stratification measures how much business a customer does with us (sales), how profitable they are in gross margins, how loyal they are, and how costly they are to serve (to protect net margins). Each of these dimensions has a bearing on the sales force's questions. Without the right analysis, the sales force can make decisions about who to spend time with and give services based on their perspective of the customer relationship. This Customer Stratification Webinar video is from the Proformative webainar "Using Customer Stratification and Cost to Serve Information in Your Sales Efforts to Maximize Profits" held on October 9, 2012. The webinar features presentations from F. Barry Lawrence, Ph.D., Program Director, Industrial Distribution Program, Texas A&M University and John Mansfield, Vice President Business Development, Graybar Electric.
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Using Customer Stratification and Cost to Serve Information in Your Sales Efforts to Maximize Profits
- 1. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS Dr. Barry Lawrence PhD, Texas A&M John Mansfield, Vice President Business Development, Graybar
- 4. USING CUSTOMER STRATIFICATION AND COST
- 5. Industrial Distribution (ID) Program Overview
- 6. Customer Stratification Customer Life (Loyalty) • • • • High Profitability No Relationship Low Cost to Serve Low Volume Core Customers • • • • Marginal Customers • • • • Low Profitability No Relationship High Cost to Serve Low Volume High Profitability Sustained Relationship Low Cost to Serve High Volume Service Drain Customers • • • • Sales Volume Low Profitability Sustained Relationship High Cost to Serve High Volume Cost To Serve (CTS) Gross Margin Opportunistic Customers
- 7. How to define the business “we want to do”?
- 8. Core Customer Profile Revenue $ 74,207 GM $ $ 18,722 GM % 25.2% Days to pay 33 # of lines 8 Order size $ 1,532 Returns 11% Quote conversion 72% Inventory A & B Items 79% Strategic Suppliers C & D Items 21% (Top 70%-80 of Spend) Non-Strategic Suppliers (Top 5% of Spend) Supplier – 01 40% Supplier – 02 30% Supplier – 03 18% Supplier – 04 12% Supplier – 07 3% Supplier – 08 2% © 2010 All Rights Reserved Texas A&M University Supply Chain Systems Lab
- 9. Service Drain Customer Profile Revenue $ 42,389 GM $ $ 8,194 GM % 19.3% Days to pay 53 # of lines 4 Order size $ 882 Returns 32% Quote conversion 22% Inventory A & B Items 56% C & D Items 44% Strategic Suppliers (Top 70%-80 of Spend) Non-Strategic Suppliers (Top 5% of Spend) Supplier – 01 35% Supplier – 02 25% Supplier – 03 20% Supplier – 04 20% Supplier – 07 20% Supplier – 08 15% © 2010 All Rights Reserved Texas A&M University Supply Chain Systems Lab
- 10. © 2010 All Rights Reserved Texas A&M University Supply Chain Systems Lab
- 11. Life Cycle of a Core Customer
- 12. Service Innovation – Extend Life of Core Customer
- 13. Profiling the Core Customer
- 14. Resources Release Date: August 2012 http://www.naw.org 14
- 15. “Total Solutions For Industrial Distributors and Manufacturers” Thank You! For more info please visit: http://supplychain.tamu.edu © 2010 All Rights Reserved Texas A&M University Supply Chain Systems Lab 15
- 17. • • • • •
- 18. Graybar • Wholesale Distributor – Electrical, Communications, Data Networking, Services • $5.3 Billion Sales • 239 locations – (208 US, 30 CA, 1 PR) • ~7,400 Employees – (2,900 Customer Facing Roles) • 1 million products, 4,100 suppliers – ~75K stocked items – ~50% from top 25 suppliers – ~56% from stock
- 22. Key Findings
- 25. John Mansfield VP Business Development Dennis Shaw Director Financial Analysis Asa Goldkamp Marketing Specialist Byron Bennett Sr. Business Technology Analyst Dream Dream Team Team Mark Rog Branch Manager Najam Chohan Area Financial Manager Susan Reale Director Operations
- 27. Core, Opportunistic, Service Drain, Marginal Customer Lifetime Value Net Profit Customer Buying Power Loyalty Cost To Serve (CTS) Profitability Sales $, Product Line Penetration Hits, Trend, Order pattern 7 Factors GM% and GM$ Customer Stratification: Best Practices for Boosting Profitability, F. Barry Lawrence, Ph.D., Pradip Krishnadevarajan, Senthil Gunasekaran, Copyright 2011 by the NAW Institute for Distribution Excellence
- 28. COST TO SERVE (CTS) PROFITABILITY Factor No. Lines Net Profit 50% 50% 50% 50% BUYING POWER Factor 50% Weight Sales $ 50% Product Lines 25% # Items 25% 50% Customer Lifetime Value 18% 11% 14% 4% Delivery GM % 50% 21% Will Call 50% 25% C & D items GM $ Days to Pay Order Size Weight Weight Returns Factor 7% CUSTOMER LOYALTY Factor Weight Orders 35% Consistency 35% Trend 30% Customer Stratification: Best Practices for Boosting Profitability, F. Barry Lawrence, Ph.D., Pradip Krishnadevarajan, Senthil Gunasekaran, Copyright 2011 by the NAW Institute for Distribution Excellence
- 29. A Customer Type Matrix DA CA BA B CB BB AB C Core DB DC CC BC AC Marginal D Net Profit Opportunistic AA Service Drain DD CD BD AD D C B A Customer Lifetime Value
- 30. Pilot Locations to Test Graybar Model • • • • • • •
- 31. Tested Graybar Model on Pilot Locations
- 33. Insanity: Doing the same thing over and over again and expecting different results. –Albert Einstein © 2010 All Rights Reserved Texas A&M University Supply Chain Systems Lab
- 35. Paradox: Complex, Yet Simple
- 40. Customer Type Sales Team Pricing Service Inventory Financial Marketing 57 Strategies Core 4 2 3 2 5 3 Opportunistic 3 1 2 2 3 3 Service Drain 2 2 2 2 2 3 Marginal 2 2 2 1 1 3
- 43. Dashboard Results – By Profit Center
- 44. Dashboard Results – by Sales Person
- 45. Money Page
- 53. Please join us at www.proformative.com to ask any additional questions you may have and to continue this conversation with your peers and the experts you heard from today.
Notas del editor
- There are many benefits that distributors experience from customer stratification, but these are some of the key gains are: Inventory – helps you maintain or increase service levels for key customers while reducing/redeploying inventoryPricing – helps you price customers based on opportunities and the cost-to-serve associated with each customersNegotiation – if a sales person has information about the characteristics of the customer with respect to other customers, they will be better positions to make judicious decisionsSales Force – sales time is scarce; knowing who the key customers are allows sales reps to better focus their time; and allows managers to make sure we have the best sales people calling on our most important customersCompensation – allows distributors to have information that could establish compensation plans that align sales force objectives with company objectivesGrowth – creates a process to guide development of strategies to identify and capture new product or end-market opportunitiesMarketing – allows allocation of marketing budgets judiciously across customer types by media type with a higher ROI
- Once we know the final Customer Lifetime Value and Net Profit rank, a ranking matrix is then used to assign a final customer type to each customer. This creates four types, with four tiers within each type, to give a total of 16 different groups.So for instance, a customer ranked A on both Net Profit and Customer Lifetime Value would be AA, a top-tier core customer, while one ranked BB would still be a core customer, but a lower-tier core customer.Each of these tiers is important, because as we present the data, it will provide more actionable information for the sales force and management. The next core customers are most likely to come from the borderline quadrants. There are 100 variables included in the final model, making it extremely comprehensive, yet relatively easy to implement within our system.Customer stratification provides Graybar a measurable scale of customer importance that is connected directly to shareholder value.
- There are numerous ways to use customer stratification to make better decisions involving customers directly or indirectly. There are six key areas that the Customer Stratification team is concentrating our efforts on as shown here.The team will develop a playbook for each customer type, with strategies around each of these areas.