October 1, 2013
All customers are not created equally and your customer service should determine what is appropriate for each type of customer.
By Joe Galassini
Are all customers created equally? This is a question that many sales managers have been faced with time and time again. We would like to think that each of our customers are unique and requires a different level of service and attention. Yet, when we look at servicing these accounts, do we really do anything different? What tools do we have at our disposal when it comes to calling on customers? Do we fall into the trap of relying on our relationships to get us that next price increase or to sell that key job?
There are numerous sales representatives throughout the industry that will tell you that the relationship is the most important sales tool available. Yet, when pushed on the definition of a relationship, many of these same sales representatives cannot truly define the concept. What differentiates a good relationship from a bad relationship? How do we measure if the relationship is truly effective and good for our organization? These two questions are of great importance to each and every company in our industry.
What is a good relationship? Is it simply one where our sales team gets the last look at a job? Is the relationship better when we get one last chance to cut the price? Or, is a good relationship one in which our customer’s extra-curricular activities match our sales representative’s outside interests? Are good relationships started on the golf course or at the hunting camp? I would argue that good relationships need much more than these characteristics to be defined as beneficial.
For most relationships, the interaction between the two parties needs to be mutually beneficial. This involves the sharing of ideas and finding ways that both parties can achieve their desired outcome. Too often, our customer relationships end up being very one-sided where the supplier is expected to cut price to help the customer out. If the only benefit that the supplier can bring to the relationship is a function of price-cutting and entertainment, then maybe we need to examine the benefit of having a sales team at all. Wouldn’t we be better off to have a fax machine, or better yet a Twitter account, that can be utilized to publish our up-to-the minute pricing?
Quantify sales costs
The aggregate industry is filled with analytical people who will spend hours identifying ways to drive pennies out of our operational costs. These individuals measure every minute detail of their operations. They know the costs of all parts of the operation and are fanatical at examining the cost benefit of any type of capital expenditure. Yet, we do not take the same disciplined approach to our sales efforts. When was the last time that you measured the return on a hunting trip? How would you go about it, even if you wanted to?
It is actually easier than you might think. If we choose to invest money in a customer relationship, we should expect some type of return. To generate a return, we need to either increase revenue or decrease costs. Revenue is a function of quantity sold and sales price. These are two easy metrics to monitor and for the sales team to control. Costs are a little more difficult; however, the sales team can greatly impact costs by what portfolio of products they choose to sell.
Are our sales teams spending the time to actually determine what they are trying to achieve through their various sales activities, or are they simply doing what they have always done? While the sales methods used 20 years ago might have been very effective then, we are now living in a time when all costs are being scrutinized, and we must spend time developing a plan of what we are trying to achieve.
Understand customer types
We must recognize that not all customers are equal and will thus require different servicing strategies. Some customers purchase lots of material from our companies, and some purchase smaller volumes. Some customers are highly profitable, and some are not at all. The first step in developing a focused sales strategy is to examine and classify each of your customers. There are a variety of classification tools available to the sales executive today and each one has its benefits and drawbacks. Over time, I have found that I tend to favor those that are simple to use and to explain to the sales team.
In examining our sales portfolio, I have asked our sales representatives to do this in two dimensions, volume and margin. With these two characteristics, our customer portfolio can be broken down into four different categories. There are no right or wrong ways to do this. The goal is to classify your customers into one of the four quadrants using quantitative methods.
A good starting point on volume is to use the 80/20 rule. Obtain a listing of all of your customers by revenue and sort it from largest to smallest. Then, determine how many customers it takes to equal 80 percent of your total revenue. Generally, it will only take 20 percent of your total number of customers to generate 80 percent of your total sales. This revenue figure now becomes the point on your Y axis to classify high-volume and low-volume customers.
Next, determine what your average margin is for your organization. This number will represent the point on your X axis that will be used to classify high-margin from low-margin customers. This part of the exercise often proves to be more difficult as the required data can be more challenging to obtain. Yet, with today’s technologies, this step has become much easier. The challenge is to assign the proper cost to each customer. It can be as easy as number of tons purchased times average inventory cost to as detailed as assigning a unique price to each individual transaction. The level of sophistication does not matter at first. Remember that the overall goal is to paint a picture of your customer portfolio. You can always refine it later.
Develop sales strategies for each customer type
This analysis will yield a lot of initial discussion which will then lead to the next critical step, planning. Based upon your findings, you can now start to develop customized sales strategies by quadrant. Should the same sales strategy be used for both high-volume, high-margin customers and low-volume, low-margin customers? Probably not. However; do not fall into the trap of thinking that some quadrants are better than others. This tool is to be used to identify where customers fall and to then aid in the sales strategy related to each of these customers.
For instance, take a look at the low-volume, high-margin customers. Personally, I think that this quadrant is filled with great customers. However; is your sales team servicing them properly? Are the sales methods that you use effective in this category? The average sales team costs approximately $100 per hour. If a sales representative spends three hours calling on one of these customers per month, what happens to the high margin? Or, what happens to the high-margin if one of these customers is taken on a major hunting trip? I suggest that sales managers need to step back and revise their plans to identify ways to increase the service to these highly valuable customers while driving down the cost of each individual interaction. Increasing the use of technology might be one way to better serve this critical part of your portfolio.
Additionally, some of your “best” customers might not fare so well in this analysis. Many might fall into the high-volume, low margin quadrant. That is OK. But, you need to be aware of it. Can you develop a plan to help move them into the high-volume, high-margin quadrant? Or do you need to decrease the level of entertainment required? Or do they need to be in your customer portfolio at all?
This tool is designed to assist the sales team in the critical analysis of its customers in a disciplined and factual way. Additionally, it will aid in the development of an overall sales strategy for each critical customer and identify those customers that you might not have known were so valuable to your business. By taking a hard look at your customer portfolio, you can begin to allocate your sales resources in different ways to achieve better results.
Joel Galassini is vice president of sales and marketing for Capitol Aggregates, a subsidiary of Zachry Construction. He is responsible for coordinating sales efforts for the cement and product lines, and developing the company’s overall marketing program. Galassini oversees key business development initiatives, including identifying, negotiating, and monitoring key customer relationships. He has a bachelor’s degree in business administration from the University of New Mexico’s Anderson School of Management and is currently pursuing his MBA through the University of Texas at San Antonio.