It is very natural to treat all our clients in a similar way… as if they were all the same… This is an important mistake because among our clients we have "angels" and "demons". We have “angel” clients that allow us high margins, with relatively low commercial costs, with high consumption… and yet we have “demon” clients who buy little, generate many problems for us, negotiate to the last euro…
Typically, even if we have "demons" with whom money is lost, the "angels" compensate us and in the end our income statement is positive… but what if we turned all the "demons" into "angels"? What would be the impact on the income statement?
Although obviously the answer to this question depends on each individual case, the impact is very important, being able to achieve many points of improvement in the income statement only by rethinking the company's customer strategy. In a practical case of one of our clients, we found these data:
|
Number of clients |
% of total turnover |
% Contribution benefits |
|
two |
19.04% |
49.42% |
|
10 |
20.31% |
37.12% |
|
80 |
41.38% |
17.2% |
|
83 |
11.29% |
5.83% |
|
301 |
7.85% |
-9.2% |
In which we clearly see how the greatest contribution to the company's profits (and to a large extent of the turnover) is given by 12 clients (approximately 3.5% of the total number of clients), while 301 clients with the lowest turnover they lose profitability (9.2%).
Does it seem logical that we dedicate the same resources to the 12 clients that represent almost 40% of the turnover as the 384 that represent 19%? If we think about the structure of a company - and we will see it more clearly if we have an activity-based cost system - there are many processes and threads that are independent of the size of the order or client, so they will be very profitable for large orders / clients and very little otherwise. Examples of these threads are from a business visit, some internal logistics costs, or sales administration costs.
If we agree that almost all the elements of our organizations - from product development to price, through distribution or competitive positioning - depend to a greater or lesser extent on our clients and the level at which we manage to cover their expectations… So why not make more efforts to know and segment our clients?
Clearly, it is often difficult to manage clients as individuals and more in cases with more than 10,000 clients - especially in cases of retail sales - and therefore the concept of segmentation appears. Segmentation consists of grouping customers based on their needs or characteristics that condition their purchase. Segmentation can be very simple based on elements such as billing, geographical area or distribution channel, or it can be more or less complex based on customer behavior. It is common to make segmentations as simple as the one shown in the following table:
|
Client type |
Potential billing range |
|
TO |
> € 100,000 |
|
B |
> € 30,000 and <€ 100,000 |
|
C |
> € 6,000 and <€ 30,000 |
|
D |
But this segmentation profile - although it is a good start - is ineffective in an environment as complex as the current one. For example, in a customer in the chemical sector, we defined a segmentation model based on customer needs similar to the following:
- Convenience seekers, that is, buyers who buy from different suppliers and whose main concern is service. Price mercenaries, that is, buyers whose main purchase motivation is price. They can be important customers and have a high frequency of purchase, although they have high loss rates due to the entry of a competitor for a better price. It is an especially interesting client for organizations with cost differentiation strategies. Brand buyers, that is, buyers where the brand is a main inducer of purchase. Indispensable quality, that is, buyers where quality is its basic parameter.. Relationship seekers, that is, clients who seek to have few suppliers and with a high level of relationship and loyalty.This customer profile normally has a high acquisition cost but also has a low loss rate.
Although the previously defined segmentation model can serve as a starting model, the specific segments of each particular case should be identified. To validate a segmentation model, other parameters such as customer profitability, customer satisfaction, purchase frequency, average order size, etc. must always be taken into account. and it can be crossed with some customer scoring system such as RFM (Recency Frequency Monetary) and the like.
Continuing with the concept of profitability, an element as important as price sensitivity and therefore profitability is directly related to the segment (this case is from a particular case, so its extrapolation will not always be direct):
In addition, segmentation serves us for other elements such as personalized direct marketing, resource allocation, customer relationship management, customer value proposition, etc.
In conclusion, all of our clients have many "angels" but also some "demons", so having an appropriate methodology in place to identify and manage them properly will go a long way towards the profitability of the company.
