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"Customer stratification" may sound like an odd idea in a climate where any paying customer is a good customer. Still, the sales force has at least two issues to deal with: First, who do I call on that will give me an order and pay for it? Second, who should I be calling on, it's one thing to get an order and be paid for it, but has the company made money? Customer stratification answers these questions and many other ones. Customer stratification measures how much business a customer does with us (sales), how profitable they are in gross margins, how loyal they are, and how costly they are to serve (to protect net margins). Each of these dimensions has a bearing on the sales force's questions. Without the right analysis, the sales force can make decisions about who to spend time with and give services based on their perspective of the customer relationship. This Customer Stratification Webinar video is from the Proformative webainar "Using Customer Stratification and Cost to Serve Information in Your Sales Efforts to Maximize Profits" held on October 9, 2012. The webinar features presentations from F. Barry Lawrence, Ph.D., Program Director, Industrial Distribution Program, Texas A&M University and John Mansfield, Vice President Business Development, Graybar Electric.
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THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS
Dr. Barry Lawrence PhD, Texas A&MJohn Mansfield, Vice President Business Development, Graybar
Using Customer Stratification and Cost to Serve Information in Your Sales Efforts to Maximize Profits
© 2012 Proformative. Proprietary and confidential
Welcome to Proformative
Proformative is the largest and fastest growing online resource for senior level corporate finance, treasury, and accounting professionals.
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Direct subject-matter-expert advice
Valuable Features and Resources
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© 2012 Proformative. Proprietary and confidential
Learning Objectives
After attending this webinar you will be able to:
• Define how customer stratification can identify your most profitable customers
• Define how customer stratification can help improve customer relationships
• Define how to move marginal and opportunistic customers to become more profitable customers
© 2012 Proformative. Proprietary and confidential
USING CUSTOMER STRATIFICATION AND COST
© 2012 Proformative. Proprietary and confidential
Industrial Distribution (ID) Program Overview
5
© 2012 Proformative. Proprietary and confidential
Customer Stratification
6
• High Profitability• No Relationship• Low Cost to Serve• Low Volume
Opportunistic Customers
• High Profitability• Sustained Relationship• Low Cost to Serve• High Volume
Core Customers
• Low Profitability• No Relationship• High Cost to Serve• Low Volume
Marginal Customers
• Low Profitability• Sustained Relationship• High Cost to Serve• High Volume
Service Drain Customers
Customer Life (Loyalty)
Gro
ss M
argi
n
Sales Volume
Cost To Serve (CTS)
© 2012 Proformative. Proprietary and confidential
How to define the business “we want to do”?
7
© 2010 All Rights Reserved Texas A&M University Supply Chain Systems Lab
Core Customer Profile
Revenue $ 74,207
GM $ $ 18,722
GM % 25.2%
Days to pay 33
# of lines 8
Order size $ 1,532
Returns 11%
Quote conversion 72%
InventoryA & B Items 79%
C & D Items 21%Strategic Suppliers
(Top 70%-80 of Spend)
Supplier – 01 40%
Supplier – 02 30%
Supplier – 03 18%
Supplier – 04 12%
8
Non-Strategic Suppliers (Top 5% of Spend)
Supplier – 07 3%
Supplier – 08 2%
© 2010 All Rights Reserved Texas A&M University Supply Chain Systems Lab
Service Drain Customer Profile
Revenue $ 42,389
GM $ $ 8,194
GM % 19.3%
Days to pay 53
# of lines 4
Order size $ 882
Returns 32%
Quote conversion 22%
InventoryA & B Items 56%
C & D Items 44% Strategic Suppliers (Top 70%-80 of Spend)
Supplier – 01 35%
Supplier – 02 25%
Supplier – 03 20%
Supplier – 04 20%
9
Non-Strategic Suppliers (Top 5% of Spend)
Supplier – 07 20%
Supplier – 08 15%
© 2010 All Rights Reserved Texas A&M University Supply Chain Systems Lab 10
© 2012 Proformative. Proprietary and confidential
Life Cycle of a Core Customer
11
© 2012 Proformative. Proprietary and confidential
Service Innovation – Extend Life of Core Customer
12
Innovation
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Profiling the Core Customer
13
© 2012 Proformative. Proprietary and confidential
Resources
14
Release Date: August 2012
http://www.naw.org
© 2010 All Rights Reserved Texas A&M University Supply Chain Systems Lab
Thank You!
For more info please visit:http://supplychain.tamu.edu
“Total Solutions For Industrial Distributors and Manufacturers”
15
© 2012 Proformative. Proprietary and confidential
CUSTOMER STRATIFICATION AT GRAYBAR
John Mansfield, Vice President Business Development
© 2012 Proformative. Proprietary and confidential
Agenda
• Introduce Graybar
• Overview of Customer Stratification Project
• Customer Analytics Co-Innovation
• Pilot Results
• Questions & Discussion
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• Wholesale Distributor– Electrical, Communications,
Data Networking, Services
• $5.3 Billion Sales
• 239 locations – (208 US, 30 CA, 1 PR)
• ~7,400 Employees – (2,900 Customer Facing
Roles)
• 1 million products, 4,100 suppliers
– ~75K stocked items– ~50% from top 25 suppliers– ~56% from stock
Graybar
© 2012 Proformative. Proprietary and confidential
Graybar Customers
• ~117,000 Customers
• Diverse Markets– Construction– Commercial– Industrial– Utility– Government
© 2012 Proformative. Proprietary and confidential
Customer Stratification Model
Paradox: a statement, proposition, or situation that seems to be absurd or contradictory, but in fact is true
© 2012 Proformative. Proprietary and confidential
NAW/Texas A&M Research
© 2012 Proformative. Proprietary and confidential
Key Findings
“…EBITDA of 5.2% could improve to 11.4% by implementing best practices…”
“Customer stratification, in particular, drove EBITDA improvement, which affected other critical processes such as marketing and pricing.”
© 2012 Proformative. Proprietary and confidential
Benefits
• More Accurate Sales Force Deployment
• Improved Negotiations
• New Growth Opportunities
• Pricing Optimization
• Better Inventory Management
• Better Marketing Communications
• Targeted Sales Force Compensation
© 2012 Proformative. Proprietary and confidential
Mission
• Leverage Best Practices
• Build Graybar Model
– Relevant– Reliable– Quantifiable, Available Data
• Boosts Profitability
© 2012 Proformative. Proprietary and confidential
John Mansfield VP Business
Development
Dennis Shaw Director Financial Analysis
Susan Reale Director Operations
Najam Chohan Area Financial Manager
Mark Rog Branch Manager
Byron Bennett Sr. Business Technology
Analyst
Asa Goldkamp Marketing Specialist
Dream Team
Dream Team
© 2012 Proformative. Proprietary and confidential
CS Practices Levels
Common
Good
Best
Time
Perf
orm
ance
© 2012 Proformative. Proprietary and confidential
CS Framework
Core, Opportunistic, Service Drain,
Marginal
Customer Lifetime
Value
Customer Buying Power
Sales $, Product Line Penetration
Loyalty
Hits, Trend, Order pattern
Net Profit
Cost To Serve (CTS)
7 Factors
Profitability
GM% and GM$
Customer Stratification: Best Practices for Boosting Profitability, F. Barry Lawrence, Ph.D., Pradip Krishnadevarajan, Senthil Gunasekaran, Copyright 2011 by the NAW Institute for Distribution Excellence
© 2012 Proformative. Proprietary and confidential
Customer Stratification Summary
Factor Weight
Days to Pay 25%
Order Size 21%
No. Lines 18%
Returns 11%
C & D items 14%
Will Call 4%
Delivery 7%
Factor Weight
Sales $ 50%
Product Lines 25%
# Items 25%
Factor Weight
Orders 35%
Consistency 35%
Trend 30%
Factor Weight
GM $ 50%
GM % 50%
BUYING POWER
COST TO SERVE (CTS)
CUSTOMER LOYALTY
PROFITABILITY
Customer Lifetime Value
Net Profit50% 50%
50% 50%
50%
50%
Customer Stratification: Best Practices for Boosting Profitability, F. Barry Lawrence, Ph.D., Pradip Krishnadevarajan, Senthil Gunasekaran, Copyright 2011 by the NAW Institute for Distribution Excellence
© 2012 Proformative. Proprietary and confidential
Customer Type Matrix
Customer Lifetime Value
Net
Pro
fit
D C B A
DC
BA DA CA BA AA
DB CB BB AB
DC CC BC AC
DD CD BD AD
Opportunistic Core
Marginal Service Drain
© 2012 Proformative. Proprietary and confidential
• 7 Locations
• “Typical” Branch
• Different Markets
• Different Sales Teams
• ~$141 million Total Annual Sales
• ~40 Sales People
• ~21 Managers (Sales, Finance, Operations)
Pilot Locations to Test Graybar Model
© 2012 Proformative. Proprietary and confidential
Tested Graybar Model on Pilot Locations
© 2012 Proformative. Proprietary and confidentialBroaden Our Reach.
Pilot Location Results
>=$10k
25.1%
<$10k8.5%
<$1k42.8%
© 2010 All Rights Reserved Texas A&M University Supply Chain Systems Lab
Insanity:Doing the same thing over and over again and expecting different results.–Albert Einstein
© 2012 Proformative. Proprietary and confidential
Strategies
“…what we can achieve depends less on the amount of time we possess than on the use we make of our time.”John S. Mill (1806-1873);British philosopher
© 2012 Proformative. Proprietary and confidential
Paradox: Complex, Yet Simple
© 2012 Proformative. Proprietary and confidential
Utilizing Customer Stratification
• Sales Force Deployment
• Pricing
• Service
• Inventory Deployment
• Financial
• Marketing
© 2012 Proformative. Proprietary and confidential
Typical Sales Person
© 2012 Proformative. Proprietary and confidential
TIME is Money12
39
6
Core
Opportunistic
ServiceDrain
Marginal
$$
© 2012 Proformative. Proprietary and confidential
Strategies Playbook
39
© 2012 Proformative. Proprietary and confidential
57 Strategies
Customer Type
Sales Team
Pricing Service Invento
ryFinancia
lMarketi
ng
Core 4 2 3 2 5 3
Opportunistic 3 1 2 2 3 3
Service Drain 2 2 2 2 2 3
Marginal 2 2 2 1 1 3
© 2012 Proformative. Proprietary and confidential
Data versus Information
© 2012 Proformative. Proprietary and confidential
Dashboard Conceptualization
© 2012 Proformative. Proprietary and confidential
Dashboard Results – By Profit Center
© 2012 Proformative. Proprietary and confidential
Dashboard Results – by Sales Person
© 2012 Proformative. Proprietary and confidential
Money Page
© 2012 Proformative. Proprietary and confidential
PILOT RESULTS
© 2012 Proformative. Proprietary and confidential
• Objective
– Financial Results versus Control Group– Factor Values
• Subjective
– Weekly Blog Posts
Measurement of Success
© 2012 Proformative. Proprietary and confidential
“After looking at one of my core accounts, I realized we were not writing <Supplier Name> business as we had in the past. By working with the supplier and customer I was able to pinpoint the level we need to be at in order to capture business from customer and lead them away from competitor. As a result, I recently wrote a $13,000 order at a very profitable rate.”
Outside Sales Rep, AKOH
Core Customer Testimonial
© 2012 Proformative. Proprietary and confidential
“Using the CS system I have identified a few Opportunistic customers that I am going to target. One customer in particular was already on my list of target customers but now seeing their “report card” in CS it has given me even more motivation to make them a Core Customer. Overall their customer lifetime value is a C and their net profit is a B but I am confident that they can become an A customer. According to the CS board there are 6 product lines that we have penetrated with them; those lines brings us healthy orders but not day to day business. Seeing that we have only penetrated 6 lines was an eye opener because they have a huge facility that needs/uses most products that Graybar sells not just the 6.
Going forward- I have scheduled a discussion with the head of their purchasing department as well IT in order to get a better understanding of their business and ordering processes. I have also already met with one of our manufacture rep to discuss the account.”
Account Rep, KCMO
Opportunistic Testimonial
© 2012 Proformative. Proprietary and confidential
“Customer Stratification has the power to enable us to transform our company from being product-driven to customer-driven. It has helped me understand my customers in greater detail that I call on a daily basis. I started working on my Service Drain customers first. <Customer> was very surprised that the average order only had four lines items out of 287 orders in 2011.”
Outside Sales Rep, KCMO
Service Drain Testimonial
© 2012 Proformative. Proprietary and confidential
“I think Customer Stratification is fantastic. It has been well-studied and mathematically proven to work. Customer Stratification is a roadmap for success. Yes, there will always be exceptions to the rule and you may find the “diamond-in-the-rough” - the Marginal customer who miraculously sends you $100,000 order, but that is not the norm. That’s when it comes to “knowing your customer”. We are here to KNOW our customers and that is what Customer Stratification is about.”
Inside Sales Rep, OMNE
Marginal Customer Testimonial
© 2012 Proformative. Proprietary and confidential
Thank You
© 2012 Proformative. Proprietary and confidential
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