Analysis 30: Returns By Size/Role Segment

PURPOSE: This analysis projects the Net Present Value of establishing a new customer relationship with a customer on which the company has little information. The company uses these classifications in developing its marketing and customer calling programs. The company also uses this analysis to evaluate the improvement in Return on Investment it would realize from a more favorable customer mix in its sales. It would use these estimates for all Get In customers where better information is not available. However, it would use specific information about any Get In customer where it can obtain more accurate data about the customer.

APPROACH: The analysis uses average results by position from its survey of the marketplace. This analysis estimates the attractiveness, for the company, of the average customer relationship on the customer size/role segmentation matrix. The company estimates the average price, volume available, and cost-to-serve for the average customer in each position of the size/role segmentation matrix.

In order to calculate a Net Present Value of each prospective customer relationship, the company estimates the years the relationship with the customer will last by using the experience of the marketplace to date in each Size/Role segment. It calculates its initial investment in establishing the relationship and then the profitability of each relationship over the years that it will be in the relationship. It then discounts these cash flows at the company's internal hurdle rate, or by its cost of capital, to arrive at a Net Present Value.

The company then makes a preliminary classification of each segment on the matrix. Any segment that offers a positive Net Present Value is a potential Core customer segment for the company. If the Net Present Value of any segment is negative, the company must make a further determination of whether the average segment is a Near-Core or Non-Core type of relationship. It then classifies Near-Core customers into potential target customers and Non-Core customer positions into Opportunistic customers.

Elimination of Unattractive Customers Examples »

• Self Test #26: Identify the Profit Increase from the Improvement of the Mix of Customers

• Worksheet #26: Identify the Profit Increase from the Improvement of the Mix of Customers

Return to Diagnose Costs: Increasing Margins by Improving Customer Mix

Analyses:

• Analysis 26: Sources of Company Share Change

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

• Analysis 28: Company Volatility Compared to Industry Volatility

• Analysis 29: Index Comparison of Company and Industry Volatility on the Customer Size/Role Matrix

• Analysis 31: Using the Analyses to Support a Marketing and Customer Calling Program for Target Customers

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

• Large customers are getting higher discounts

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

• Distribution channels are undergoing a shakeout

• Competitors are upgrading their channels of distribution

• Industry customers are forming buying groups

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

• "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)

• "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. (1998)

• "The Real Reason Market Share Matters"
  Market share does count, but for more than the reasons thought previously. (1991)

• "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)