We first assume that you already have relationships with some accounts you are thinking about making "strategic." Start your analysis by scheduling a meeting—ideally face-to-face—with representatives from various divisions and departments whose people directly interface with your targeted accounts. Focus on no more than two or three customers, depending on the complexity of the relationships. Consider this meeting a pilot for an ongoing value-determination process, which you can usually customize to your firm's particular needs. Send the six questions below in advance to meeting participants. The questions will form the meeting agenda. Answering them can start to give you a reliable handle on which customers are generating—and which customers are bleeding—net revenue.
Two Years Ago
Year After Next
Subtract Direct Cost
Subtract Indirect Cost
Equals Net Revenue
How much total revenue has each location of the targeted strategic accounts generated over the last three years? What is your revenue projection for these locations over the next two years? If you have a sophisticated and centralized financial system, answering this first question may take no more than a few keystrokes. But if your organization and systems are at all decentralized, this can be a particularly valuable exercise.
What does it cost annually to serve these customers? Estimate costs for the last three years and the next two.
The regional people should have a good handle on the direct costs of serving these targeted accounts. But traditional accounting tends to allocate its overhead costs into its margin numbers based on sales volume. This means that, if the customer is generating 50 percent of a supplier's revenue, the supplier allocates 50 percent of its overhead costs to that customer. The challenge here is that some of these allocated overhead costs (such as corporate office rent) are not directly related to managing customer relationships. And some costs tend to be excluded from traditional margin calculation— indirect costs such as extraordinary-warranty or customer-service costs. Here we are looking for these special costs—extraordinary handholding, unbudgeted project management, unscheduled line runs, unplanned IT costs—anything that might have slipped by traditional costing in the last three years. Such inclusions and exclusions can dramatically skew true margins. Then estimate costs in dollars to serve those three accounts for the next two years.
This can be a particularly interesting question to address. One supplier told us that this question "told us more about our customers than we really wanted to know." Another, after factoring in an estimated margin percentage, quickly learned that its number-two revenue producer was, in fact, unprofitable (they'd suspected it for years). Other disturbing issues can arise. At one high-tech firm the salespeople were "throwing in" the maintenance contract free to get the sale. That contract, the operations people patiently explained, was the high-tech firm's single most profitable offering. In several cases, to get the order, the salespeople had given away hundreds of thousands of dollars in repeatable future cash flow to the account. No one had explained to them the impact of doing this; they were compensated for revenue, not profit.
When a supplier starts rolling up costs to serve, eyes can widen and previously uncaptured costs quickly multiply. These numbers are still estimates, but in this case, estimates will usually give the supplier a much better handle on which customers/ divisions provide real value and therefore deserve to be served strategically.
Subtract estimated costs from estimated revenues for each account to get a margin estimate for the last three and the next two years.
The estimates here will be enlightening—occasionally shocking—because so few firms have attempted this exercise.
What is the growth potential of these accounts? How long would it take to realize that growth?
Here is where business intelligence can make or save you a great deal of money. If you can identify which customers or which customer divisions offer dramatic growth opportunities, you can select and invest in pilot strategic accounts that offer the greatest potential payback. This cross-functional meeting is an excellent time for people to share the customers' particular challenges or what they see as the accounts' opportunities. Field service people, for example, may know of a customer challenge, but if they are not aware of their firm's total competencies, they may not see that challenge as an opportunity. But if they share what they saw or heard, someone else at the meeting may see it for the opportunity it is. This sort of cross-functional pollenization can also reinforce firm alignment and team building, and can bring revenue generation and profitability top of mind for everyone. Answering this question can also be the first step in developing or refining an account planning process—because in many cases the answers can point out a glaring gap in the supplier's account intelligence.
Where are these accounts on the transactional-to-strategic buyer continuum?
Using 1 as a purely transactional customer and 3 as an account that is looking for a strategic partnership, what numbers would you assign to each of the customers you are currently thinking about serving strategically? Before the cross-functional meeting, ask the attendees to classify the targeted customers' buying orientation. While there may be some differences in customer divisions, we've always been surprised at the level of agreement about which accounts are transaction- and cost-focused and which think in terms of strategic relationships. If you assign many 2s, make a second pass at each customer/division and try to force a choice. Answering these questions can really help determine which customers are worth serving strategically.
There is a tremendous first-mover advantage to determining which customers are truly profitable and which are not.
Several years ago, a manufacturing executive gave a presentation at a small marketing gathering. He said that his firm's goal was to help his competitors go out of business, and to that end his firm was conducting very sophisticated loyalty and profitability analyses on its customer base. He and his firm wanted to determine where true value really lay and, just as important, where it didn't. Once his firm determined which customers were bleeding value, he said those customers were, one way or another, going to be migrated to the competition. He believed those accounts "were customers the competition really deserved." Within 18 months, the program bore fruit: a major competitor that had absorbed many of the manufacturer's cast-off customers had dropped out of the market. There is a tremendous first-mover advantage to determining which customers are truly profitable and which are not.
Is there anything else we haven't asked you about these customers that you think we should know?
This is a catch-all question, but in a number of cases it will bring up something that has not been discussed or an opportunity that you didn't see before. We recommend using it at the end of the meeting when everything is still fresh in the attendees' minds.
We have kept this discussion at a fairly high level. We now have an example of a firm that, using an approach similar to the one we just presented, analyzed its customer portfolio, actually dropped more than 100 customers (from a total of 157) over time, and in the process doubled revenues and tripled margins.