Customer stratification is essential for distilling the overwhelming volume and breadth of customer data into easier-to-manage chunks. Moreover, insights from customer stratification can align objectives across every functional area of distribution (sales, purchasing, operations, logistics, HR, finance, etc.). In 2021, customer stratification can be a core foundation from which you develop and hone your analytics maturity.
Customer stratification is an exercise in “bucketing” customers according to their relative value and importance to a distributor. Analogous to the 80-20 rule, customer stratification helps you identify and better serve the small percentage of customers that drive the bulk of your sales and profitability – your “core” customers.
On the flip side, it helps you identify and reshape your relationship with the 60% to 80% of your customers who generate a small percentage of sales and profitability while draining your time and energy – your “marginal” customers.
Further, it helps you see which customers cost more to serve than they provide in value and which stand to offer more value if cultivated properly.
To perform customer stratification, a distributor evaluates the relative performance of each customer across multiple top-line-focused factors and multiple profitability factors. By standardizing and applying appropriate weights to these factors, a distributor can produce composite scores for each customer. Once scored, customers can be plotted into four distinct quadrants or buckets.
For those familiar with American football, customer stratification effectively applies the “quarterback passer rating” concept to customers. Rather than trying to understand relative customer performance across 16 metrics in a spreadsheet, sorting and re-sorting metrics with a different customer rising to the top each time, customer stratification quickly distills that performance into composite scores and simple buckets.
Distributors can serve up to thousands of customers. Without customer stratification, managing them can feel like playing Whac-a-Mole: Customer interaction and sales management are reactive at best, reactions are too late to produce positive results, and the loudest, marginal customers often get more attention than your most valuable core customers.
Alternatively, understanding and drilling into customer stratification buckets can drive everything from designing customer incentives, prioritizing customer outreach, and developing customized, customer-specific game plans to attack growth opportunities and shore up emerging risks.
What Analytics Maturity Looks Like in 2021
Customer stratification used to reside in spreadsheets. This served as a good starting point for executives and finance professionals, but a static snapshot-in-time of a distributor’s customer base, sent around by email, didn’t naturally lend itself to day-to-day sales force usage and buy-in.
Today, you can greatly expand customer stratification’s power – and gain sales force adoption – with dashboards that dynamically capture your mix of customers and convey how that mix is changing. Your dashboards around customer stratification should:
- Display key insights as seen through different lenses: a salesperson lens, a sales management lens and a senior management lens.
- Drill down into performance by salesperson, customer segment and product category to better understand strategic and tactical shortcomings.
- Cross into other functional departments outside of sales.
- Allow you to visualize both current snapshot performance and trend-based performance.
- Offer key insights about customers as they migrate between customer stratification performance quadrants from one period to the next.
With the right dashboards, customer stratification is game-changing. It can pinpoint key opportunities to drive profitable growth and influence performance throughout your organization.
It’s the ideal analytical initiative to help you evolve from old-school spreadsheet analyses to today’s data visualization tools.
Game-Changing Benefits of Customer Stratification for Distributors
When done right, the benefits of sophisticated customer analytics touch every aspect of your business and operations. Let’s walk through some of the key applications of customer stratification and examine how to make customer insights sing through a few other simple dashboarding tips.
Focus Energy Where It Counts Most
It’s been proven that multitasking doesn’t work. Productivity experts like Gary Keller and Jay Papasan, authors of “The One Thing,” emphasize that you get more done and work more effectively when you narrow your focus.
Bucketing customers based on their relative value and importance with customer stratification helps you narrow your focus to core customers and prioritize accordingly.
For instance, if core customers are at risk of churn or are losing traction in a certain product category, solving those issues will have a greater impact than catering to marginal customers.
Customer stratification is the ultimate drill-down diagnostic tool to help you prioritize and execute. The key is to have diagnostic dashboards that convey trends at a high level, then allow you to drill down into “list view” dashboards of customer segments, salespeople, customers, etc.
These dashboards will help you understand who (or what) contributes most to a given trend and help pinpoint and prioritize where you should place your immediate attention. Designing dashboards this way could, for example, allow you to identify a particular sales territory in which core customers are exhibiting the greatest margin erosion.
Drilling down further can help pinpoint the customer segments in which margins are under pressure within that territory, potentially signaling either mispricing or competitive poaching. It can ultimately lead you to a prioritized list of specific core customers you ought to approach within that segment to probe for feedback and prevent further erosion.
Empower Salespeople to Shift the Dynamic
While many analytics efforts introduce complexity, which threatens end-user adoption, customer stratification offers simplicity. It summarizes data, making it easy to understand at all levels of the organization and easy to explain to customers – which is critical for gaining buy-in from salespeople.
Salespeople understand the 80-20 rule. They intuitively know they spend 80% of their time with clients that deliver 20% of their commission paycheck (and vice versa). When you help them effectively visualize this through customer stratification, they clearly see that some customers are wildly profitable, and others are profit (and time) drainers.
You might, for example, provide them with the “4-Quadrant” dashboard, a classic visualization for customer stratification. This dashboard plots customers into the quadrants associated with each of the four stratification segments according to their composite top-line and profitability scores.
Most importantly, it visually captures how close a given customer is to moving from an under-performing segment to a high-performing segment.
When salespeople can visually see the breakdown of their customer base and identify which ones have higher and lower potential, they will actively seek opportunities to shift the dynamic. They might:
- Encourage unprofitable customers to order online.
- Make it more difficult for less-profitable customers to lobby for a price break unless tied to greater sales volume.
- Hold firm on minimum order size requirements, restrictions on expedited deliveries or restrictions on late orders.
- Spend more time cultivating opportunities with high potential customers.
- Relentlessly provide high-quality service to core customers to protect against churn.
Align Every Department Around the Same Goals
When you identify core customers and narrow your focus, you can integrate those insights across every department so they can shift their focus in kind. Each department ought to be channeling efforts toward core customer needs, where performance impact will almost always be greater.
Key examples of sharing customer stratification metrics with other functional areas outside of sales include:
- Integrating core customer penetration metrics in dashboards to help the purchasing department decide which brands to cut or replace when performing product category reviews.
- Sharing customer stratification status between sales and purchasing to help coordinate the appropriate allocation of scarce product when facing a supply chain disruption (as experienced quite often during the height of the COVID-19 pandemic).
- Incorporating changes in core customer purchasing patterns into inventory dashboards to help tweak safety stock levels, adjust reorder points, and adjust stock/non-stock inventory decisions.
- Conveying stratification status and related metrics to logistics to incorporate into shipping option decisions and related charges.
- Reorganizing or outsourcing shipping routes as determined by core customer demand.
- Prioritizing which customers warrant consideration for extension of credit by the finance department.
Make Core Customer Metrics the Standard and Develop Incentives Accordingly
Core customers are top performers and provide consistent value, so it makes sense to develop customer incentives and policies with them in mind. In that sense, core customer performance really serves as a benchmark for other customers when it comes to performance.
Benchmarking is essential for dashboarding in 2021. Display benchmarks in performance graphs whenever possible. They provide unambiguous, instructive feedback to salespeople and customers while establishing clear targets for future performance. You can then use these benchmark-related targets to create incentives for customers who achieve them or show progress toward them.
For example, you can tie discount policies, rebate programs or free shipping to core customer benchmarks. You can offer dedicated sales coverage to customers upon reaching a core customer sales threshold. You can entertain bringing on new vendors or new products at the recommendation of core customers. And you can invite core customers to special customer appreciation events.
The other key benefit to formalizing incentives and policies around core customers’ behavior is that it removes any perception of subjectivity or favoritism in non-core customers’ eyes. All customers have an equal opportunity to reach a certain status in order to receive benefits.
A Natural Path to Analytics Maturity
Most analytics endeavors are overly ambitious and begin with high expectations, which unsurprisingly often ends with underwhelming results. The reason analytics efforts often fall short of expectations is the sheer number of moving parts.
In contrast, customer stratification comes with all the ingredients and appropriate sequencing for delivering a successful analytics project as a company. And getting a mark in the win column in using analytics is something your whole company can build from. We could call it training wheels, but that would belittle how valuable customer stratification can be in introducing your company to a world beyond spreadsheets.
Brent Johnstone is co-founder and managing director of ActVantage. Contact him at firstname.lastname@example.org or visit actvantage.com.