Many B2B companies, with smaller customer bases than consumer-targeted businesses, find that it is impractical to apply mass modelling techniques when creating a marketing strategy.
If typical, these businesses derive the bulk of their income from a few, high-value customers, and it may not be cost-effective to manage some low value accounts at all. This presents vendors with the challenge of how to create different customer relationship management (CRM) strategies for high and low-value customers in order to gain maximum profit from each type.
Says Russell Biggart, a partner at Intelligent Customer Development (ICD) Partnership: “If a company is serious about retention and development of a customer base, they have got to pay respect to each of their customers and develop an appropriate treatment strategy.
“That can range from a complex ‘partnership’ model for top-end customers down to a common relationship with small customers, who may still want to purchase products, but don’t necessarily want an intense relationship.”
Biggart adds that, while some customers may be measured by sales volume, a ‘relational’ model is more about how companies can develop products to meet customers’ needs, rather than just sell them products.
He explains: “A lot of organisations haven’t realised that building a relationship with their customers ultimately ends up with the customers staying with them longer, buying more of their products and contributing continually to the profit of that organisation.”
Defining value
One initial problem is defining a customer’s ‘value’. While most companies segment their customers by revenue, there may be unrealised profit embedded in their small and medium-sized customers. This group may require minimal servicing, in contrast to larger customers who press for margin and special deals – with all the attendant handling costs and issues.
At the same time, many of these high-value customers may have a low opinion of their suppliers. Says one CRM consultant: “You’d be amazed how many key accounts don’t think much of their suppliers. You need to work on those ones as soon as you identify them, because they’re going to leave whenever a competitor comes along.”
Jennifer Kirkby, partner of Mutual Marketing, is an expert in business strategy and the implementation of CRM. She says: “I advise clients not to look at customers’ current value, but at their potential value. It’s not quite as simple as going for the highest value customers and not doing anything with the low value ones.
“Even people you consider low value might be profitable. You can have different strategies to at least break even on your cost to serve, like not having a key account manager or setting up an intranet which they can order over.”
When bigger isn’t better
John Matthews, research director with business analysts Infact Research, agrees that just because a customer is not the biggest spender does not mean they are unprofitable. He points out that the biggest spenders can also be the most demanding on resources and therefore only marginally profitable.
He explains: “In the past companies have confused revenue with profitability. These days shareholders would prefer to see revenue falling and profitability increasing rather than the other way around. But it’s a lot easier to measure revenue based on sales than it is to understand true profitability.”
One alternative to the conventional account management principle for high value customers is ‘partnership management’, whereby supplier and customer examine areas in their relationship where resources can be shared to reduce costs and improve efficiencies. These areas might include ordering processes, communications and training.
This approach has the added benefit to the company of entwining the customer in a more complex relationship than previously, a fact not lost on Matthews of Infact Research, who says: “Going back four or five years, companies were focused on getting new customers, because they were relatively easy to get. It was an afterthought about retaining them and getting the most value out of them.
“In the current climate, new customers are very difficult to get, but there’s not much evidence that companies know how to retain them,” he adds.
From small acorns…
As well as retaining customers, businesses need to identify which low-value accounts have the potential to be ‘upsold’. Biggart of ICD says that this involves a two-way process: “First of all, you need to understand from the customer what their buying patterns are, what they’re looking for, why they’re buying the product and why they’re not buying other products.
“Then you analyse the transactional history for buying trends and frequency. In the middle you can assess whether or not there’s any value in offering other products and find some solutions.”
In traditional CRM, the cost-to-serve – such as a field sales force, company cars and administrative support – is loaded into high value customers. Meanwhile, small and even medium-sized customers who are still buying product receive inadequate attention. This management model may be ignoring key contributors to a company’s profit.
Says Russell Biggart: “You may find that some of your small to medium-sized customers show trends of purchasing simple products which require no complicated means of support, such as interjection by a salesperson.”
ICD examined one blue chip company’s customer portfolio and found that medium-sized customers produced 40 per cent of its overall profit.
He continues: “We also found that there was competition sniffing around the small to medium-sized companies, which had identified that these customers were highly profitable and more likely to move from the company they had purchased the products from, because there was no relationship with them.”
Knowing when to quit
Ultimately some customers do not bring value to a business, and how to deal with them – or not – can be a thorny issue. Jennifer Kirkby of Mutual Marketing recommends letting them go, saying: “It’s like triage, when you know someone isn’t going to survive. You don’t kill them off, but you don’t provide any resource. Never burn your bridges, but there are some people you just cannot provide a service to.”
John Coldwell, European managing director for CRM consultants Infoquest, agrees: “There’s the old adage that you should get rid of 10 per cent of your customers every year, which is almost the opposite of CRM. There are some customers you just don’t want around, unless they have the potential to grow quickly. Most of your income comes from your big customers, and it may well be that most of your losses come from your small ones.”
While CRM owes so much of its growth to technology, there is a creeping awareness that, despite the efforts of software companies to convince otherwise, many solutions are not IT-driven.
Says Jennifer Kirkby: “A lot of companies are looking at being far more agile and adaptive to their market, and they are going to need more technology to support that. But they can’t do that without thinking through the business reasons for doing it: who exactly their customers are and what services they want to provide. Then they can go out and get the technology which supports that.”
Using not abusing technology
John Matthews of Infact Research agrees that technology is no substitute for customer insight: “You can have all the technology in the world, but if people are not using it appropriately and their skills are not up to scratch, it will just go to waste. It comes down to the quality of your people. They can amplify the capabilities of the technology to deliver the service.”
Nevertheless, technology does add cost, especially with such an enormous range of new solutions coming onto the market, so it is crucial for decision makers to understand where new technology can reduce the cost of serve and increase the service.
There may be a growing scepticism among marketing professionals that CRM is just another ‘TLA’ (three-letter acronym) in the TLA-loving database industry. Despite a huge influx of new technology solutions, as a result of both economic pressures and common sense, customer management is getting back to basics.
Says Russell Biggart of ICD: “On the one hand, technology can be a fantastic enabler. But most failures in CRM solutions are because organisations have not tackled and planned the basics. It’s been IT-driven rather than marketing or customer-driven.”
