Board of Directors
Basic Strategy Guide
Diagnose
Improve
Tools
Blog

SELF TEST #11: Customer Objectives and Categories

Test #1:

What are the three categories of customer profitability?

Answer:

Core: A customer whose pricing and cost-to-serve requirements will allow the company to earn at least its cost of capital on sales made to the customer through the business cycle.

Near-core: A customer whose pricing and cost-to-serve characteristics enable the company to earn a positive return on net capital employed, but a return below its total cost of capital, on sales made to the customer through the business cycle.

Non-core: A customer whose pricing and cost-to-serve characteristics allow the company to realize a positive cash flow, but a negative return on net capital employed, on the sales made to the customer through the business cycle.

Test #2:

What objectives are available for each customer?

Answer:

There are five objectives:

  • Stay-In, where the company would like to maintain its current proportion of the customer's purchases and avoid any negative volatility.

  • Get-In, where the company would like to enter the customer relationship, especially in a Primary or Secondary role.

  • Increase Use, where the company would like to increase its current penetration of the customer and avoid any negative volatility.

  • Opportunistic, where the company will serve the customer on the company's terms while there is excess capacity available.

  • Get-Out, where the company plans to leave the customer relationship and use that customer's volume for more profitable customers.

Test #3:

What objectives would we expect the company to have for a Core customer?

Answer:

There are three objectives the company might have with the Core customer: Stay-In, Get-In or Increase Use.

Test #4:

What objectives would we expect the company to have for a Near-core customer?

Answer:

Near-core customers are Opportunistic customers. The company serves them when the company has excess capacity. While the company is in the relationship with the Near-core customer, it would normally develop plans to convert that customer into a Core customer, by raising the customer's price, increasing its sales volume or by reducing the cost-to-serve the customer.

Test #5:

What objective would the company normally have for a Non-core customer?

Answer:

The company serves a Non-core customer only during periods of excess capacity, when the company has the opportunity to use some of that excess capacity to generate additional cash from its operations. Such a customer can not support the full cost of serving him, so the company would never add capacity to support a Non-core customer. Instead, as its excess capacity gradually declines through the growth of Core customer sales, the company would normally Get-Out of the Non-core customer relationships.

Test #6:

Would we normally expect that the objectives for all the customers in a Size/Role segment would be the same?

Answer:

No, the prices paid within a Size/Role segment can be quite different from one customer to another. These segments also have relatively wide variations in sales volume. In addition, some customers demand more expensive service levels than others. So, the expected profitability of a company within a Size/Role segment might be quite different than that of the average company. As a result, the customers in a Size/Role segment may be assigned to different profitability categories and hence have different objectives.

Test #7:

What is the industry leader effect and why is it important?

Answer:

The industry leader effect is an increase in sales volume that the company receives from smaller customers because of the good reputation the company acquires in serving the industry's few leading customers. This concept is important when we assess the likely profitability and objectives for the industry's top customers. If the industry leader effect works in the industry, then the profitability of the Very Large customer must be combined with that of the smaller customers that it brings with its relationship in order to assess the profitability of the Very Large customer relationship and its assignment to one of the customer profitability categories. In shorter terms, you evaluate the profitability of the combination of the leading customer relationship, as well as the follower customer relationships, to assign the industry leading customer to a profitability category.

Return to Self Test #11