Improved market access can drive long-term growth in both a distributor’s profitability and its market share. But it requires an analytical look at customers and opportunities.
This article is the final installment in our series on customer profitability analytics.
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Market access is the key to unlocking a distributor’s true potential. Think of the ridges and gaps on a key as your company’s sales and marketing resources, and the pins on a lock as the needs of the market. When the key and the lock pins line up, everything works. High-growth distributors have learned how to provide just the right level of services, neither overserving nor underserving their customers.
Here are three steps for achieving alignment.
Step 1: Segment Customers Based on Their Needs, Not Yours
Your customers don’t care about how much they cost you; they care about the value you provide them. And your customers are the ones with the money. If we can solve their problems more economically than anyone else, we can sustain high profitability for a long time. If we don’t, we may be able to temporarily gain higher margins through trickery or deception, but sooner or later customers will recognize the disconnect between cost and value.
This doesn’t mean that we need to become Apple or invent some new service no one else has thought of. It simply means we tailor our offerings to customers based on what they value – in other words, what they are willing to pay for.
This is where many profitability projects get the problem backward. Instead of figuring out how customers want to be served and using this insight to improve profitability, they categorize customers based on current profitability and use these categories to design their customer services. This approach is dangerous and provides zero insight into how to maximize lifetime customer value. It represents narrow, internal thinking at its most toxic. Knowing that an account bought a million dollars from you last year tells you exactly nothing about how to maximize its profitability. Instead, knowing that you have a 10 percent share of the customer’s total spend, that it uses centralized procurement and that its location managers are measured on asset utilization tells you a great deal.
Real segmentation involves more than analyzing transactional data. It involves insight. Most distributors already possess the required knowledge about their customers; they just need to put it into the right framework. You can’t rely on what customers say or their customer survey scores, but how they act. Usually, their actions are driven by the economics of their business or their organizations’ dynamics. For example, a customer that will swap your product out for a 0.5 percent price difference is telling you that it does not care about how often your sales rep visits. If your product is a small portion of a customer’s total material cost but a large portion of their customers’ experience, they will be reluctant to risk failure with a new supplier for a small price difference.
Grouping customers based on how they act is called behavioral segmentation. And once distributors grasp the concept, the insights can be profound. The key is to let go of your sales instincts and be brutally honest about what customers really want from you.
Step 2: Prioritize Growth and Profit Opportunities
Once you have real segments, customer profitability data provide important insight on their current and potential profitability. Some customer segments will prove to be consistently, structurally unprofitable because their needs are a poor fit for your capabilities. Others may have a mixture of winners and losers. With some adjustments in how you serve them, the segments could be more consistently profitable.
Ultimately you will see that some segments value your current mix of services. These present a profit opportunity because you may be in a position to raise prices overall. Others may value a set of services that you could provide fairly easily but don’t. These present a revenue opportunity because some tweaks could help you enjoy more of their business. Finally, you will uncover segments that won’t ever be a good fit. Don’t waste time and money optimizing their cost to serve; you are playing a game you just can’t win.
As a distributor, your resources are constrained. You simply can’t afford to
invest sales and marketing into marginal customer segments because the opportunity cost is too high. You need to focus on being the No. 1 choice for some, like Cadillac is, rather than No. 4 for everyone, like Oldsmobile was.
Step 3: Match Services to Fit the Segments
With a clear understanding of your segments, you are in a position to align your services to customer needs. For example, you may want to consider Web sales and telesales for price shoppers, dedicated project management services for bid work or less frequent deliveries for customers that are labor-constrained rather than space-constrained.
Because selling costs are probably the largest part of your controllable expenses, adjusting the structure of your sales organization is likely to be a big part of this step. This is why you can’t just leave it up to the sales force. An outside rep would rather keep a low portion of a price shopper’s business than give it up to an inside rep, even if this is the right call for your company overall. In many cases you will find that you don’t have to walk away from unprofitable customers, you just need to provide them a lower cost sales channel.
A few years ago we completed a strategic plan for a distributor that sells to many small businesses. After going through the behavioral segmentation exercise, the company’s sales executives realized that some of its customers were fundamentally business people who got into the industry to make money. Others had grown up in the industry, learned to love it and then found themselves running their companies. The first group was generally bored with the details of the business but was hungry for ways to improve profitability. The second struggled to read even simple spreadsheets but enjoyed industry gossip and new trends.
As a result of this basic insight, the company revamped its entire sales structure. It stopped trying to sell business advice to the industry-oriented owners, because that’s just not what they were buying. It assigned technical sales reps to these industry-oriented owners and left them free to talk shop. It assigned its few consultative sales reps to the business-oriented owners with the mission of helping them grow. This is a classic example of aligning resources to fit the customer needs – market access at its finest.
A year after making these changes the CEO wrote, “We’ve navigated successfully through these difficult times and, in fact, are earning share. Last year our company grew almost 11 percent; profits have improved over 400 percent.”
For many distributors, the answer will involve investing more in technology and marketing, and less in classic field sales. Most high-growth distributors have become far better aligned with their markets by using more specialized selling roles than in the past. They deploy specialists, outbound Web sales and telesales, hybrid inside/outside reps, full-time marketing analysts, etc.
Looking Forward, Not Back
Customer profitability analysis helps identify tactical opportunities for growing margin and can provide critical strategic insight. But it is not a market strategy. Relying solely on numbers from your order history means that you are evaluating customers based on how you’ve chosen to serve them in the past rather than how you could capture their full potential in the future.
These are exciting times for distributors. Big data gives them the tools to understand their customers and their own businesses far better than in the past. The winners have harnessed these tools to adapt their organizations for the future. They stay ahead of the competition by understanding the real drivers of customer behavior and continuously aligning their resources to match.
Steve Deist is a partner with Indian River Consulting Group, a firm focused on market access for distributors and manufacturers. Contact him at firstname.lastname@example.org.