Customer Selection (Part 4-4) – Customer Migration Techniques

In his Are You Selecting Your Customers…Or Are They Selecting You?  presentation at CSIA 2010, Dean Streck, CEO of V I Engineering, offers ways to assess the value of your customers. Based on this analysis, you may reach the conclusion that some of your customers are more valuable than others. And, some, well, they just aren’t worth keeping.

Loyalty Ladder

Beyond the dollar value assigned by a Customer Lifetime Value assessment, it may be helpful to rank your customers according to the ‘Loyalty Ladder’.  The higher the position on the ladder, the more that the customer prefers and actually advocate the use of your services:

• Loyalty Ladder
• Willing to pay a premium
• Enthusiastic Advocate
• Actively seeks to expand relationship
• Invests in the relationship
• Buys a bundle of products
• Switcher – will buy if the price is right
• Skeptic – willing to be convinced
• Cynic – won’t buy at all

Customer Management Effort (CME) Matrix

You can then position the customer in a matrix comparing their loyalty position and the cost of managing that customer. The combined result obviates which customers are the ‘most’ valuable (a.k.a. partner) and well as the ‘least’ valuable (the Switcher).

Start by identifying the customer management activities required to support a relationship at each rung. Then, quantify the buyer benefits associated with each ladder rung. You can then calculate the cost incurred in moving a customer from one rung to another using a combination of historical data and account manager’s experience. And, map Customers Current Position.

You can also devise strategies for moving customers to the partner level. For instance, perform a Root Cause Analysis for a customer. Are there difficulties due to competitive effort, ineffective account management, or simply idiosyncrasies?  Based on the results, you can define activities and timelines to move the customer to a more valuable position.

Finally, you must determine how to deal with the least valuable customers. Perhaps, you can engage them in a frank conversation about how they are too difficult or expensive to retain your services any longer. If they are unwilling to help you change this situation, you may be better off ‘firing’ them and find a better customer. But, keep in mind that shifting customers and industries can be very costly and time consuming.

Conclusion

Dean concluded his presentation in much the same way he began. We have the customers that we have because we choose the orders and transactions that we take.  In the end:

Who we are -> Who we can then serve -> Who we serve -> Who we are

Customer Selection (3 of 4) – Activity-Based Costing

In his Are You Selecting Your Customers…Or Are They Selecting You?  presentation at CSIA 2010, Dean Streck, CEO of V I Engineering, encourages the use of Activity-Based Costing (ABC) to identify, describe, assign costs to, and report on operational performance. A more accurate cost management system than traditional cost accounting; ABC identifies opportunities to improve business process effectiveness and efficiency by determining the “true” cost of a product or service. ABC principles are used:

1. To focus management attention on the total cost to produce a product or service, and
2. As the basis for full and accurate cost recovery.

Support services are particularly suitable for activity-based resourcing because they produce identifiable and measurable units of output.

4 Steps to Knowing Your ABCs

Dean goes on to recommend some basic steps to implementing your Activity-based Costing system.

Identify activities—perform an in-depth analysis of the operating processes of each responsibility segment. Each process may consist of one or more activities required by outputs.

Assign resource costs to activities—this is sometimes called “tracing.” Traceability refers to tracing costs to cost objects to determine why costs were incurred.

Identify outputs—identify all of the outputs for which an activity segment performs activities and consumes resources. Outputs can be products, services, or customers.

Assign activity costs to outputs—assign activity costs to outputs using activity drivers. Activity drivers assign activity costs to outputs based on individual outputs’ consumption or demand for activities. For example, a driver may be the number of times an activity is performed (transaction driver) or the length of time an activity is performed (duration driver).

As also discussed in my project cost accounting post, this is a vital step in an integrator’s ability to maximize the profitability. It becomes impossible to run the business from macro-level – simply tracking overall receivables and payables versus the total labor cost. You must be able to account for your finances on a project-by-project basis.

Customer Lifetime Value

By performing Activity-Based Accounting, you can ultimately assign a customer lifetime value(CLV) for your accounts. The CLV is the present value of the future cash flows attributed to the customer relationship. Use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.

Customer Selection (Part 4-4) – Customer Migration Techniques

Customer Selection (Part 2 of 4) – Know Thy Customer

In his Are You Selecting Your Customers…Or Are They Selecting You?  presentation at CSIA 2010, Dean Streck, CEO of V I Engineering, Dean starts with recommendation to ‘Know Thyself.’  You must first figure out who you are as a company today and the company that you want to be. Then, you can be proactive about selecting the customers that will help you achieve your goals.  In part 2, he then describes methods to ‘Know Thy Customer.”

The 80/20 Rule

The role 80-20 rule, also known as the Pareto principle applies. Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population. It is a common rule of thumb in business: 80% of your sales come from 20% of your clients.

Whale of a Tale

Dean goes further to show that your top 20% of your business actually generates 180% of the profits. The middle 60% of your business is basically breakeven. And bottom 20% of your business loses the 80% of potential profits.

So What Then Must We Do

The revelation that 20% of your customers generate the bulk of your profit and the ‘other’ 20 percent cost you most of that profit, then raises the question. What should I do about it? Should I just focus on the top 20%? Should I fire the rest? What about everyone in between. In the next couple of posts, we will look at techniques to deal with these issues.

Customer Selection (3 of 4) – Activity-Based Costing

Customer Selection – Part 1 of 4

Continuing with my series of my favorite CSIA presentations from 2010, I very much enjoyed the Are You Selecting Your Customers…Or Are They Selecting You? by Dean Streck, CEO of V I Engineering who is an NI Select Alliance Partner.  In his presentation, he astutely illustrates that customer selection defines everything about your company from how you quote and the prices you can charge, to your process model and how you work, to the people you hire and the skills they need, and ultimately to your profitability and your ability to control the destiny of your company. Dean offers a fresh perspective on your customers and offers advice on your selection process, so you can truly understand your customer contributions to your business.

Know Thyself

Dean starts with the premise that it is hard to pick your customers if you don’t first clearly understand who you are. He recommends several tools that can guide you in this self-evaluation including some methods already mentioned in this blog.

Porters’s Five Forces – a look at the most common factors that affect your business.: Your buyers Your suppliers, Your Rivals, Substitutes, and Barriers .

Where You Play – what is your competitive position and how are you choosing a unique point on the Productivity Frontier.

OAS Statement – What are you Objectives (ends), Advantages (means), and Scope (domain). The OAS statement is basically your business strategy. Check out these tips for your annual planning process.

Strategy Map – is a visual representation of the strategy of an organization. It illustrates how your organization plans to achieve its mission and vision by means of a linked chain of continuous improvements.

Balanced scorecard (BSC) – is a strategic performance management tool – a semi-standard structured report supported by proven design methods and automation tools that you can use to keep track of the execution of activities by your staff within their control and monitor the consequences arising from these actions.

Your Customer Selection Process – who in your organization is responsible for your customer selection. That starts with the CEO who develops and communicates the customer selection criteria. It then falls to marketing and sales to identify the accounts and create the opportunities that fit the criterion. Then, the rest of the operations on both the technical and business side must work to meet the needs of those clients.

Looking Into the Mirror

As you can see, customer selection is as much about you as it is the customer. You must first figure out who you are as a company today and the company that you want to be. Then, you can be proactive about selecting the customers that will help you achieve your goals.

Customer Selection (Part 2 of 4) – Know Thy Customer