Analysis 5: Customer Size Breakdown

Customer Size: Industry Examples »

• Video #57: How Many Customers Do We Have

• Video #58: Customer Segmentation by Size

• Video #63: Core Customers Part 1: Defining Core, Near and Non-core Customers

• Video #66: Overview of Segments Part 1: How to Look

PURPOSE: This segmentation is the first segmentation by volume. It separates the customers into size categories and identifies those customers who have the most influence on sales volumes in the industry. This segmentation will form part of the basis for the determination of the company's target marketplace, especially for new customers.

• Audio Tip #5: The Importance of Customer Size Segments in Your Customer Portfolio

• Audio Tip #6: When Do We Use Segmentation by Size

• Audio Tip #7: Growth Rates Across and Within Customer-Size Segments

• Audio Tip #8: What Size Segments Should We Seek

• Worksheet #2: Segmenting Customers by Size

APPROACH: The company lists all potential customers, whether or not each is currently a customer. The company estimates the number of units each customer buys or uses yearly. If necessary, the company can use a dollar value of unit volume rather than units. The company may also do a random sample from a full list of customers if it cannot get an estimate for each customer in a timely fashion.

It is important in this analysis to count, as a customer, only the final buying location. The customer should not be listed only by company, but by each location of the company that makes the final decision to purchase the product.

The company performs this analysis for each buying location of the customer. If the customer's buying decision is centralized, there is only one location per customer. However, in the much more common case, where the customer's buying decisions are standardized, the customer has multiple buying locations. One location may qualify the company for the approved supplier list, and another location, or several other locations, determines the quantity bought, the timing of purchases and the supplier from whom purchases will be made.

The company should sort all customers by size of each customer's total purchases in the market, using the customer's final buying location as the basis for the customer's size. List the customers from largest to smallest in units or volume purchased. Starting with the largest customers, cumulate the industry sales. Break the customer list at the point at which the cumulative industry sales of all the customers in the group equal 50% of the industry sales. This group is the Very Large (VL) customer segment. Create a second group, where that group accounts for the next 30% of industry sales. These customers make up the Large (L) customer segment. The third group makes up the next 15% of industry sales, and the final group would be made up of the last 5% of industry sales. These latter two groups of customers are the Medium (M) and Small (S) customer segments, respectively.

Customer Size Segments: Industry Examples »

The objective of this analysis is to forecast the future using the experience of the past. If the past is not a good indicator of each of the Very Large and Large customers' average expected performance in the coming years, then the company should either use a different set of averages or evaluate each of those substantial customers individually.

Test Your Knowledge: Size of Customer >>

• Self Test #2: Segmenting Customers by Size

Return to Diagnose Segments: Size of Customer

Return to Basic Strategy Guide Step 2

Analyses:

• Analysis 6: Company Share Index by Customer Size

• Analysis 7: Industry Growth by Customer Size

• Analysis 8: Average Price Paid by Size of Customer

Symptoms and Implications: Symptoms developing in the market that would suggest the need for this analysis.

• The market structure is changing as shares shift in the channels of distribution

• Large customers are getting higher discounts

• Medium sized customers are under pressure from both their larger and smaller peers

• Industry customers are forming buying groups
  
  Fast growing competitors focus on the industry's large customers

Perspectives: Conclusions we have reached as a result of our long-term study and observations.

• "Which Customers Matter Most?": Average customer profitability differs dramatically in non-hostile and hostile markets. Does the relative importance of one customer versus another change as well? The answer is less evident than many business leaders believe. (1994)

• "Rare Mettle: Gold and Silver Strategies to Succeed in Hostile Markets" Managements of winning companies have common themes for success in hostile markets. They each follow five basic themes. While virtually all successful companies are aware of these themes, their implementation differs according to their market position at the onset of hostility.

• "Is Bigger Really Better?" In the average large industry, the market share leader is only slightly more likely to lead the industry than is any one of the next three competitors in the industry. Market share leaders often fail to become return leaders because they serve some customers who yield low returns and rely on size alone to create economies of scale.