Analysis 27: Additional Approach Information to Separate Effects of Customer Growth and Company Volatility

Definition of Situations:

SI (Stay In): In a Stay In situation, the customer does not change his supplier relationships throughout the period. Stay In volume also includes the proportion of customer volume remaining after a Decrease Use or beginning, before an Increase Use.

GI (Get In): In a Get In situation, the customer takes on a new supplier who was not in his relationship at the beginning of the period.

IU (Increase Use): In the Increase Use situation, a customer buys a greater proportion of his total volume from one or more of the suppliers the customer was using at the beginning of the period.

GO (Get Out):In a Get Out situation, a customer replaces entirely one of the suppliers who was supplying him at the beginning of the period.

DU (Decrease Use): A Decrease Use situation occurs when a customer reduces the proportion of his total volume he was buying from one or more of his suppliers at the beginning of the period.

EXAMPLE: We are going to assume that there are 14 customers. Ten of those customers make no changes in their customer-supplier relationships and four make a change in their suppliers' relationships. We assume that each customer buys 100 units annually at the beginning of the period. The period lasts one year. Each of the customers has an impact on the company's total growth in sales, which, in the example below, totals 90.5 units.

EXHIBITS:

Situation	Stay In	Get In	Increase Use	Get Out	Decrease Use
Customer No.	1-10	11	12	13	14
Sales: Beginning of Period (S1)	2000	100	100	100	100
Growth Rate in Sales (%)	10	15	5	20	10
Sales: End of Period (S2)	2200	115	105	120	110
Co. % of Relationship Beginning of Period (P1)	50%	0%	10%	50%	50%
Co. Share of Relationship End of Period (P2)	50%	50%	20%	0%	20%
Co. Sales to Customer Beginning Period	1000	0	10	50	50
Co. Sales to Customer End Period	1100	57.5	21	0	22
Diff. in Co. Sales End Period Less Beginning Period	+100	+57.5	+11	-50	-28
					90.5

The next step is to perform an analysis to divide the total change in sales into that which was due to the growth of the customer and that which was due to the effect of net volatility. The analysis does not track the timing of the occurrence of a volatility event. The analysis assumes that all positive volatility happened at the beginning of the period and all negative volatility happened at the end. Using these assumptions, the change in the company's volume, that is due partly to growth and partly to volatility would be equally divided between volatility and growth.

The example company's sales are a function of the customer's sales, labeled S in the table above, and the company's proportion of the customer's sales, labeled P in the table above. Sales at the end of the period are labeled S2 while S1 is the sales at the beginning of the period. P2 is the company's proportion of the customer's total purchases at the end of the period, and P1 is the proportion of the customer sales at the beginning of the period.

Volume change due to growth is equal to the differences in sales from Period 1 to Period 2 times the proportion of sales the company had in Period 1. The volume difference due to volatility is equal to the sales in Period 1 times the difference in the company's proportions of the customers' sales from Period 1 to Period 2. However, this does not cover all of the volume change. There is a part of the volume change that is due both to the change in volatility and to the change in growth. That proportion is the differences in sales from Period 1 to Period 2 times the difference in the company's proportion of the customer's purchases from Period 1 to Period 2.

We use the following formulas to calculate the amount of volume change due to growth and to volatility:

Volume due to growth = (S2 – S1) * P1 + 1/2 [(S2 – S1)(P2 – P1)]
Volume change due to volatility = (P2 – P1) * S1 + 1/2 [(S2 – S1)(P2 – P1)]

Allocation of the volume change during the period into the customer growth and net volatility components:

Customer No.	Change Due to Customer Growth	Change Due to Volatility	Total Company Growth
1 to 10	100.00	0.00	100.0
11	3.75	53.75	57.5
12	0.75	10.25	11.0
13	5.00	-55.00	-50.0
14	3.50	-31.50	-28.0
Total	113.00	-22.50	90.5

Return to Diagnose Segments: Company Share Change and Volatility

Recommended Reading

For a greater overall perspective on this subject, we recommend the following related items:

Analyses:

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

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

"Failure Shifts More Share Than Success"
For a company trying to gain share in a mature market, nothing succeeds like failure – the failure of a competitor. (1991)
"Finding the Open Door"
Volatility is the movement of volume from one supplier to another. A company can not gain volume unless customers are willing to make a change in suppliers. Volatility has special rules in hostile markets. (1995)
"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)