NOT ALL CUSTOMERS ARE CREATED EQUAL.
Do you understand each customer’s value to you?
Any management group will readily admit that some customers are more valuable to the organization then others. The question is, how do you identify and rank your customers value to your organization. Is it just everybody’s best guess or do you have a defined process to identify how valuable each customer is to your organization? Many companies simply base this critical information on the annual sales dollars for each customer assuming that a higher volume means higher profits. The fallacy in this is that volume is not always a good measure of profitability due to factors such as volume discounts. It also completely ignores factors such as incurred costs which are created by a customer requiring additional services or creating extra costs due to poor internal processes at the customer. An example of this would be a customer that is constantly changing their orders thereby creating extra work within your organization. Another point that is ignored in this process is the “Blue Ribbon Customer”. These are customers that may not be the most profitable customers on your list but are important for other reasons such as prestige, status or potential.
In order for your organization to better develop customer retention and development strategies it is imperative that you understand your customer base in terms of profitability, cost and importance. This allows your organization to work with lagging customers to improve their position and protects the more profitable customers from capacity issues. It also allows you to identify those areas that are most desirable for developing new business opportunities.
This understanding and consensus is achieved by calculating a value for each customer based on three criteria – Profitability, Cost & Importance. Once this value has been determined the customers can then be ranked by value. The ranking can also be analysed for similarities and differences between various business segments for improvement indicators. To a certain extent this is similar to a Customer Relationship Management (CRM) program but it more value focused than the standard CRM program.
While the first level of this program ranks each of your customers based on your internal measures, a second level of this initiative would look at how your current customers rank your organizational value. Each individual customer probably has their own supplier measurement program but by standardizing and consolidating information from all your customers you get a better understanding of how your customers perceive your strengths and weaknesses. As an example, one of the measures used in this second level is a Net Promoter Score. Basically this score measures how likely each customer is to recommend you to a third party. By comparing this information with the other measures of customer satisfaction you can identify areas of maximum strategic return in both customer retention and new business development.
WHAT IS THE VALUE TO YOU IN IMPLEMENTING THIS PROCESS?
- Allows you to adjust your customer retention strategies by better identifying what business areas you want to focus on growing based on higher profitability.
- Ranking of customers allows your organization to protect the more profitable customers from capacity issues created by lower ranking customers
- Identifies low ranking customers so you have the option of working with them to improve the relationship weaknesses. Alternatively you can adjust their cost structure to better reflect the relationship.
- Better understanding of how your customer’s view your organization allowing you to better identify your value adds. This can help improve both quoting and marketing initiatives.
- Identifies those services you consider as value add but customers do not will enable you to better focus on what customers considers value. (This may indicate a value add that you need to draw to customers attention.)
- Net Promoter Score gives you a definable measure of how happy your customers are with you. This information can be used when developing Customer Satisfaction Strategy.
The key to achieving value from this process is to clearly define at the start how the information provided by this initiative will be used to change existing processes.
If you would like to discuss this initiative in greater detail I would be more than happy to meet with you at your convenience. Please complete the information request below and I will contact you directly to discuss this initiative and how it can be of value to you and your organization.
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