August 18, 2017


















Article 1.5

REORGANIZE AROUND THE CUSTOMER

 

What is the lifetime, discounted cash flow, net present value (NPV) of our customer portfolio? How could we improve it significantly? Because the internet has already started to shift informational power to the end-users in distribution channels, now might be a good time for distributors to re-think their businesses in terms of Customer NPV. Instead of executing another annual cycle of product promotional activity to too many customers in 1998, maybe we should consider the following line of thinking:     

 

WHAT IF:

1)      The top 20% of our active customers, on a profit ranking report, generated between 120 to 140% of 1997’s profits before taxes?[1]

2)      But, the bottom 5% of our customers had generated large losses by giving us many small orders for which the transactional costs greatly exceeded the gross margin dollars? Could we show these customers that they were also killing themselves with purchasing transaction costs, stock outs and emergency buying costs? Could we co-create new, win-win, purchasing patterns with some of these customers? For the rest, would we have the courage to re-price them for profitability knowing that they probably will leave for a competitor?

3)      The next 45% from the bottom were all modest losers on average; many were infrequent and small buyers. Could they become the account basis for a new telemarketing and direct mail profit center? With new pricing, new terms and a lower, different cost to serve, could these customers become profitable? Would the new division be able to find new, profitable accounts? How many old customers would stay and how many would leave to paralyze our competitors?

4)      If some accounts consolidated orders and others took their empty, negative activity elsewhere, what would we do with our new slack in order fulfillment capacity?

 

DOWNSIZE, UPGRADE AND REVITALIZE

1)      We could lay-off some of our least productive employees, if we had any. The expense savings would exceed the lost margin dollars of the former accounts, profits would go up and headaches would go down. It should be easier to acquire a few new, targeted and profitable accounts with a better team of people and better profits. Sales might take one step back to take three good steps forward. Profits would be better from the start.

2)      If all employees were keepers, then our excess capability would naturally flow into better service for the remaining customers. If our fewer, better customers found themselves experiencing more random acts of service kindness, would they:  buy a little more, stay with us longer, give us last look and a little bit more on the price? Would they consider consolidating their supply needs with us because we were the most reliable? All of these responses would increase customer NPV.

3)      But, why improve service evenly for all? Aren’t the top 10% and targets like them the ones with the highest NPVs of all? Isn’t it time that we turned the slogan of “know the customer” into an actual science? Why not interview the top 10 most profitable customers to find out: why they buy from us, what we have done that has bugged them the most and what their biggest frustrations are? Then find the solutions that they would reward the most. How would they rank the relative value of each of our service elements? Is there any pattern amongst these customers; do they all fall into one or more customer niches? What are their total informational needs beyond the traditional, product-centric information that we have provided? Could we use interactive web tools to serve all information needs better? How does our product and service fit into their value-added chain? Can we take over more of their value-chain needs by selling them extra services for un-bundled fees? Services for fees could become important to most distributors over the next five

years. How many of us will see and fill these opportunities profitably?

Article 1.5

 

4)      Redefining our service offering for each niche of customer and then calibrating the richness for each selling level within a niche is the easy part; making the service happen is the tough part. Will our employees be able to cross-train and participate in redesigning service processes to deliver what the customer wants? How can everyone instantly know the high NPV customers so that we can make breakthrough service happen spontaneously whenever an opportunity arises? Does everyone know by heart, at each branch, the top 10 NPV customers who are franchise critical? Do computer screens and coded paperwork remind the employees who should get special treatment when needed?

5)      How do we track and improve on our retention and development (R&D) of positive NPV customers? Do we have reports that track the NPV of each level of customer within each target niche that we pursue? Do we have part-time R&D managers for each customer segment? Wouldn’t this type of focus help us find ever better ways to grow the NPV of our customer portfolio?

6)      Could we identify new-for-stock products that core customers are already buying from other miscellaneous suppliers? What if our customers buy the bulk of their goods from us and perhaps 1 or 2 other direct competitors, but they buy 10% of their goods from lots of little, miscellaneous suppliers? If two or more of our top accounts buy the same miscellaneous items because their common business niche conditions require them too, then why couldn’t we become a “consolidating supplier” for those items? The customers could get rid of a lot of purchasing costs, and we might get a service edge over the competitors who still define themselves by the manufacturers that show up at our annual channel meetings.

7)      If manufacturers want us to stock the “full line” and sell their “great new items”, should we? If we have an exclusive franchise with a manufacturer that is quite profitable, then we should do whatever they request. Otherwise, we should let the core customers tell us what they will buy and, therefore, what new items to stock.

8)      If we start consulting our core customers on new products, why don’t we invite 3 to 5 of our customers who personify the heart of our #1 niche to be on a formal “advisory board”. We could have one board per branch to help co-create true, total value for the customer niche on an on-going basis? The boards could meet 2 to 4 times per year and each member might receive a fee. We could visit customers expensively one-at-a-time, or we could get economies of schmoozing and learning at a board meeting. Why not share those savings with them (fee); make them feel important (which they are); and create a continuous reality check mechanism for all of us? 

9)      What if every branch identified 5 to 10 most profitable accounts to defend and 5 to 10 best, target accounts to crack? Then scheduled team selling calls that included top management, buyers, inside sales people, etc? The goals would be to accelerate the forging of multiple, appropriate links that bind as well as identify a maximum number of extra service opportunities for the sales team to pursue. One distributor that did this experiment grew its core accounts in which it “had all of the business” 48% the first year. The target group grew “only” 18%, but the industry and economy were up only 4% for the year.

10)   The second year was better because the target accounts were also “gazelles.” These are accounts that are so well run themselves that they are growing 2 to 5 times faster than their industry and can pay on time because they make and reinvest good profits. The holdover gazelle targets were up another 32% in year two for two reasons. The distributor had increased their share of the accounts total purchases which in turn had grown an estimated 15% while the industry was growing 3%. Pursue, crack, grow and partner the gazelles because then they will grow us faster than the industry. These accounts have the highest NPVs of all by definition. What criteria should we use for selecting such accounts? 

 

 

 

 

OTHER CONSIDERATIONS:

            The 10 points above are a start to rethinking our business around customers instead of trying to push more products to too many customers. There are additional issues to consider:

 

1)      If we grow faster and more profitably than our industry by acquiring, developing and retaining best customers at a greater rate, the suppliers will love our superior sales growth and fast pay. But, will they work with us on niche, best customer centric programs or will they persist with product promotions to the planet?

2)      How much of our total marketing expense should we allocate to the acquisition, development and retention cost areas for each customer sub-group within our target niches? (Imagine a budget grid.) Wouldn’t this drive significant rethinking of much of our current sales force activity?   

3)      If we team focus on a niche’s total needs, can we document our discoveries and teach our people to use these new insights to offer truly valuable, extended service value-added to all customers within that niche including services for fees? How much could this superior “intellectual capital” be worth? Could we be an innovator and a rule-maker in our niche(s) instead of a rule-taker?

4)      If we achieve 60 to 80% + of a customer niche, what are the hidden economies that will be achieved even though we might have a minority share of a traditionally defined product/volume market?

5)      If we partner and learn with our best customers, shouldn’t we be able to design the best electronic commerce solutions with them? Wouldn’t our technology investments be sufficient and timely instead of huge, early and misapplied?

6)      How many distributors can win the channel cost, re-engineering race to become the low-cost seller of commodities? How many can win the contest to dominate a customer niche and then, if necessary, be a physical reseller or virtual reseller of the commodities to that niche? Which strategy should we pursue? Which one has the highest NPV? Can we do both?

 

As interactive web commerce shifts ever more power to the end-user, they will demand and get significant channel changes. Shouldn’t we pursue a customer-centric re-organization of our business instead of fine-tuning our product pushing past? If you have any strong reactions to these ideas, comments or questions about this article, check into the “forum” at http://www.merrifield.com.

 

 

 

ÓMerrifield Consulting Group, Inc. Article 1.5

 



[1] See article #2.3 entitled “Measure Customer Profitability and Act” at http://www.merrifield.com