Founded in 1974, GfK Custom Research Incorporated (CRI) is a market research firm with offices in Minneapolis, San Francisco, and New York. CRI has 140+ employees, and in 1998 generated $30+ million annually with a highly focused "core" partner management program. The firm's total client base in 1998 consisted of 80 customers, 36 of which CRI considered core partners—CRI's elite customer status. CRI had nine account managers and nine account teams, each of which managed 1 to 5 major customers and whose charge is to help the business grow at these assigned—and very carefully screened—customers.
How CRI screened those customers in 1987 is an excellent example of a firm conducting a portfolio analysis to determine customer value. Wanting to grow from its $10+ million in revenue, CRI took a serious look at its 157 customers to decide where its true financial opportunities lay. CRI classified its customers' value into four "quadrants," which CRI co-owner and partner, Jeff Pope, describes:
Figure 4-3: Customer Value Clarifications
High Volume & Low Margin. About half of these customers were new ones that CRI figured would become more profitable. The other half were on the verge of the high-volume, high-profit quadrant.
High Volume & High Margin. These customers had a supplier reduction program and valued an ongoing relationship with CRI. There were only 10 of these customers, but they accounted for roughly 30 percent of sales.
Low Volume & Low Margin. CRI once believed it could make many of these customers more loyal, but time revealed that this group wanted to work with numerous research firms.
Low Volume & High Margin. These were small customers who were very profitable, but the key issue for assigned account managers was whether there was more potential for sales.
In 1988, after using activities-based costing and internal meetings to classify its customers on these quadrants, CRI realized that only 10 clients fell into the most desirable quadrant (High/High). The firm also discovered that 100+ customers provided very little, if anything, to CRI's top or bottom line. When CRI factored in selling and administrative costs, such as ongoing proposal writing, many of these customers were value "bleeders." CRI owners and partners realized that they had been paying so much attention to its top 30 customers—by revenue—that they had never really prioritized their total customer base, some of whom were Fortune 1000 firms, albeit unprofitable.
We often ask executives if their firm would benefit from removing 5 percent of its lowest-performing customer relationships. They usually reply that there would be large benefits: allocating sales resources to higher-value customers, getting rid of a customer group that tends to have too many service requests relative to their generated revenue, and potentially getting rid of several support people who spend most of their time with these smaller customers. Many firms suspect or know that they are serving unprofitable customers, but very few analyze their customers on a case-by-case basis, looking at the each customer's revenue, direct costs, selling costs, and true profit. And of those firms that have conducted that sort of portfolio analysis, even fewer have done what CRI then did—during the next few years they let the marginal customers go so they could concentrate on the "core" partners. In other words, they began to manage their customers as a portfolio of relationship assets.
This was not a simple or easy process—removing customers is as counterintuitive a move as a sales-based firm can make. But CRI let those clients go (most by not responding to RFPs) and concentrated on its high-value account relationships. By 1992, the results were already evident: CRI's sales had grown to $16 million—a 45 percent leap over 1987's numbers.
To continue the positive growth, CRI systematized the quadrants' lessons by setting up account-selection criteria or gates through which a prospective customer must pass before it is accepted as a strategic account. The selection process, initiated in 1988, has been substantially refined. It begins when a prospective client or customer calls in with a potential job. The company routes that prospect to CRI professionals, some of whom have 20 years of experience. In the course of the conversation, these professionals ask a series of questions to determine if the job and the customer are true opportunities. While Beth Rounds, senior VP at CRI, emphasized that this screening is not an interrogation, she said CRI does ask these six questions:
How did you hear about us? The best answer here is that the caller received a referral from a firm that CRI had helped (90 percent of CRI's business is from referrals). If someone is calling in simply because they saw the firm's name somewhere (an Internet or industry directory, for example), the call may be purely transactional, which other questions will reveal.
What kind of work is it (in terms of industry or scope)? The answer here allows CRI gatekeepers to identify whether the caller's request is outside CRI's expertise, in which case CRI recommends indirect competitors. This question also allows the gatekeepers to tell whether the caller is simply price shopping.
What's your budget? This may seem to justify a "none-of-your-business" response, but the gatekeepers have the experience to make a ballpark estimate based on the answer to question #2. They can then see if there are major gaps between the job and the budget, in which case the job is turned down.
What are your decision criteria? CRI turns thumbs down on any blind bidding or decision-by-committee situations. They know that bidding wars and long, drawn-out committee decisions can dramatically erode margins.
Who are we competing against for your business? Given the type of job, CRI knows who their true value-based competitors are. When gatekeepers hear those names, they know the caller has done some research to find the best. If the caller names three price-based competitors, CRI knows it would be better off handing the business to those competitors.
What's the reason behind your call? If the prospective client has a legitimate need for a new supplier (if a past supplier has stopped providing value, for example), CRI will look at it closely. But if CRI senses the caller is doing some end-of-the-year price shopping, the potential job can die here.
Rounds estimates that fewer than 10 percent of the approximately 25 incoming calls per month make it through these questions. Rounds, however, has several cautions for firms wanting to copy CRI's screening questions. First, the questions are not foolproof. It is still possible to get "a great interviewee," someone who says all the right things but can't do what he says. He may, for example, lack the budget or the power. The second caution is that there are times when an answer that normally would be considered "wrong" is overlooked if there is a strategic reason for doing so—if, for example, the job represents a major inroad into a particularly desirable client. But the questions allow CRI to be selective about whom they want as customers.
CRI can quantify virtually all the benefits of its approach. In 1988, CRI had 157 customers and $10+ million in revenues. By 1998, it had cut its customer base to 80 (some of which were Fortune 100 firms). Its revenues had tripled to $30 million, and its margins had doubled. In 1996, CRI also won the Malcolm Baldrige National Quality Award, at that time the smallest service firm ever to do so. There are serious opportunities for bottom-line improvement by serving the right strategic accounts.