SOI 2012 - Client Analysis: Segment Now!
It Seems Like It Would Be Every Distributor's Dream To Land A Household Brand-Name Client
It seems like it would be every distributor's dream to land a household brand-name client. But how much do the Procter & Gambles of the world really mean to a company's bottom line?
Sometimes, not much, says Richard Lukesh, managing partner of Your Part-Time HR Manager, LLC, a human resource and business consultancy based in Exton, PA. He had one client who was ecstatic to land Kraft Foods, until he realized that the food giant was actually diminishing his profits.
"I said, 'You could end your relationship with Kraft today and put about $200,000 net in your bottom line,'" Lukesh recalls telling his client. "The guy's jaw hit the floor." In another instance, a cookie company went from a $10 million outfit to a $5 million firm simply because it agreed to Wal-Mart's pricing terms, Lukesh says.
It wasn't until Lukesh's clients segmented their customers and analyzed their value to their companies that they realized which clients were really valuable to the bottom line.
Counselor's State of the Industry survey shows that many distributors are falling into the same trap as Lukesh's clients by not analyzing their customer base through the prism of segments. When asked to describe various ways in which they perform client analyses, only 23% of distributors say they segment their clients and offer enhanced services to certain segments. Even worse, the number of companies that do segmentation analyses of their customers is dwindling: Just five years ago it was 28%. The result? An increasing number of distributors may be holding onto customers that are doing them more harm than good. More importantly, they may not be focusing on the clients that could boost their bottom line, or marketing effectively to the ones that are.
The number of ways to segment customers can be endless, business experts admit – and likely daunting for a distributor who's never taken on the task. At a minimum, Lukesh says, distributors should segment customers by gross sales and profitability minus fixed costs, something that should be easy to do with any basic accounting program.
"From my experience, when you ask the executives of a firm to prioritize their customers and products by profitability, they are wrong 90% of the time," Lukesh says. "Most of these executives mistakenly assume that the customers with the highest volumes are the most profitable. The number of companies that accept special deals with clients just to be able to brag about having a marquee customer such as Wal-Mart is staggering."
That doesn't mean distributors should slam the door on big box retailers. But it does mean they should take steps to better analyze their customers. For starters, distributors should take an inventory of all clients. Then, either through their own efforts or those of a low-cost survey firm (SurveyMonkey, for example, is free), gather information about customers – everything from their location, to how many products they order, to their company statistics.
Matching that data with their own sales figures, distributors should create "three to five personas and five to seven predictors that make up their best customer profiles," says Darren Drewitz, co-founder and account director for MindEcology, a data-driven marketing firm based in Austin, TX. Examples of different personas might include "heavy hitters," those that order big-ticket items; "middle managers," companies that order regularly, perhaps, but not in large quantities; and "tiny guys," those that order a few items and not very often.
Then it's helpful to "measure the level of business you currently have received from your target client in reference to your overall sales," says Brent Lang, an associate portfolio manager at Pacifica Partners Inc. Capital Management, a wealth management firm in Surrey, British Columbia. It's also important, Lang says, to "figure out how much of their total business you are capturing versus competitors. How much potential is out there?"
Gut reactions to segmentation can be enlightening, experts say, but the key is to look further than just initial sales figures. A client that buys $1,000 worth of products a year may not seem like a high-value customer, says Adrian Miller, a business growth advisor and founder of Adrian Miller Sales Training in Port Washington, NY. But that customer "may be spending $10,000 with someone else," Miller says.
Which is precisely why it's crucial to segment customers by potential income – something distributors may have to ask current clients directly, if they can't determine how much customers are spending with their competitors.
Finally, distributors should put different customers into various marketing "buckets," says Miller, so that they can direct specific marketing messages to appropriate clients. The key, experts say, is to have a variety of customer demographics to focus on, so that marketing and sales efforts can be targeted appropriately. Ensuring profitability and making sure margins are in line with goals are important results of segmenting.
But, experts say, the even more valuable result can be the growth achieved by correctly focusing marketing campaigns to the clients that are more likely to be receptive. Then, those cold calls that have felt ice cold for so long can become a little warmer.