Each of your customers brings value to your business. Some already provide a considerably high value that your business relies on, while others have significant potential that you haven’t fully tapped. Then there are the customers who cost more to serve than they provide in value. The question is: Do you know which customer is which? And are you adjusting your approach accordingly?
Understanding the answers to those questions is especially relevant today. To help, we have developed a playbook to reprioritize and reshape your interactions with customers. We have broken the playbook into five steps: Segment, Understand, Refine, Generate and Empower, or SURGE.
Segment your customers into distinct groups according to their value. Customer stratification places them into the following categories:
- Core: These customers are vital to your existence.
- Opportunistic: These customers order from you when their primary supplier (your competitor) is out of stock.
- Service Drain: High-volume customers who demand high service levels and low prices.
- Marginal: Low-volume, infrequent customers who expect high service levels and the best price.
Understand customer needs and requirements by your defined customer segments. Determine which bucket each customer goes into by ranking them in two key areas:
- Customer Lifetime Value: Note how much they purchase from you and how frequently. Analyze trends in their purchases to see if they align with your offerings.
- Net Profit: Examine the margins of their orders and rank their profitability. Calculate the investment you make in them versus their value to your business.
Those customers with high Customer Lifetime Value and high Net Profit fall into your Core category. Those customers with high Customer Lifetime Value and low Net Profit likely fall into your Service Drain category.
Refine your value proposition by customer segment. Create a set of questions for each segment and actively listen to your customers’ needs. Account for ways you can adjust each segment’s value proposition, improve relationships and move customers into higher-value segments.
Generate a list of three to five specific, actionable tactics and strategies within each segment based on each segment’s value proposition. The goal is to provide incentives and rewards specific to each customer segment to drive revenue growth, decrease expenses and improve asset utilization. For instance, you may choose to assign specific outside sales reps to core customers while providing inside sales support for marginal customers. You may offer considerably more flexible payment terms to core customers than marginal customers.
Empower your sales managers and teams through education and training. With a more in-depth understanding of individual customer value, you will find that there is an art to the sales process. Providing the right coaching (will- and skill-based) and tools will help your teams take action and maximize profitability across the board.
Distributors and Customer Stratification Today — SURGE Playbook in Action
Our book, Customer Stratification: Best Practices for Boosting Profitability, published by NAW, is a guide based on research from 68 wholesaler-distributors that put customer stratification into practice. In speaking with distributors today, we’ve found that customer stratification has been incredibly helpful in mitigating the impacts of the COVID-19 pandemic:
- Conversations with customers have been data-driven, rather than simply instinct-driven, and therefore more productive.
- Even technology-averse salespeople have embraced the practice because they have benefited from having customer information in front of them during customer interactions.
- Salespeople have been more creative problem-solvers when connecting with customers through a segmentation lens.
- Goal setting — optimistic, realistic and even pessimistic scenarios — has been more accurately framed (and far easier) when broken down by customer segment.
- Sales managers have been better aligned in communications and strategies with their teams when using common segmentation terminology (e.g., referring to customers as “core” or “opportunistic”).
- Sales resources have been allocated more appropriately, with dedicated salespeople focusing more on core customers while customer service reps focus on non-core.
- With better segment alignment, larger customers (core and certain service drain) have been more willing to share forecasts, resulting in better stocking decisions and increased fill-rates.
- Customer segmentation has helped protect and prioritize inventory for core customers by establishing more clear-cut, objective rules for inventory allocation.
The benefits of customer stratification are many, but following the proper framework is key to making the most of your efforts, especially in today’s environment. In our book, Customer Stratification, we discuss this framework and real-world examples in detail, so that you can walk away with an effective strategy to improve your customers’ value contribution and boost profitability.