Patterns: The Profitability Effect
of customer behavior is the greatest strategic risk facing businesses
today. Every day they vote with their time, with their word of mouth,
with their money and with their allegiance, for the business designs
that best serve their evolving priorities. The results of their
shifting decisions are value creation and value destruction. Customers
many markets, not all customers are profitable. An examination of
true pricing and the true costs of serving customers may reveal
that a company is actually losing money on many customer accounts.
The shift from "all customers are profitable" to "many
are not" has been triggered by declining gross margins and
increasing variability in the cost to serve customers. Suppliers
will be rewarded for being much more rigorous in:
current and potential profit customer by customer
the promising customers, and
how much to invest in those customers.
profitability is a relative concept. When a firm's capacity utilization
is low, even a "bad" customer is valued because the incremental
volume helps to cover fixed costs in the short term. For
the long term, however, the fundamental issue remains: either replace
the "bad" customers with good ones, or reduce capacity,
or do both. The key to reversing this downward spiral into unprofitability
is the ability to continuously resegment the customer base. A customer
profitability system can reverse the process and enable a company
to exploit profit shifts to its advantage. By developing an accurate
and dynamic model of how profitability varies at the individual
customer level, a company can select and develop strategic customers
who yield the greatest long-term value.
do you do when you're in a Profit Shift pattern?
the time and effort to build a customer profitability system
and update it regularly.
Change pricing, service levels and investment levels accordingly.
an industry matures, growing customer heterogeneity and increasing
customer sophistication change the fundamental nature of the market.
Early in an industry's evolution, most customers are well served
by a standard product. As these customers become more familiar with
the product and apply it to different needs, their requirements
begin to move in many different directions. Suppliers may then begin
to modify the product to better serve different customer groups.
outcome of good segmentation is a larger market. Customers will
pay more for a product or service that is well suited to their needs.
In this new environment, the company that segments best and delivers
a message that best addresses customers' needs, wins. Three market
conditions must exist before the microsegmentation pattern can succeed.
must be an increase in customer heterogeneity.
sophistication must escalate. As customers' expectations for greater
functionality or personalization of a product or service increase,
they will demand more offerings and more choices.
both of the conditions above are present, a third market condition
technological change through systems infrastructure
will allow a company to service multiple segments efficiently.
The Internet and advanced database technology, particularly with
the targeting capabilities of intelligent agents, represent tremendous
potential for this effect.
do you do when you're in a Microsegmentation pattern?
the deck finer and finer. Identify the most profitable slivers
and offer them perfectly tailor-made options.
Then build a fence around them so that your competitors find
them prohibitively expensive to acquire.
distribution of power between sellers and buyers influences every
negotiation or transaction and profoundly influences the allocation
of profits and value. Significant power imbalances can translate
quickly along the value chain. Several factors can trigger the power
formation of professional purchasing groups that bring tremendous
expertise to the purchasing process
overabundance of information on suppliers' costs and performance
lack of differentiation in either the products offered or the
business models used to serve customers.
a company's customers have gained the upper hand, there are a few
the customers. If key customers are more consolidated than you,
then consolidate back, merging to ensure that customers can't
do without your portfolio.
the offer, change the customer.
the customer. Companies can vault past their customers via a strong
end-user brand, direct channel initiatives and innovative strategies
to minimize their current customers' response.
the customer. The most radical move of all is to buy your largest
customer. To generate value, make this move just before power
starts shifting to customers, not after it has progressed. Purchasing
of a distribution channel lets you join rather than fight the
rise in customer power.
do you do when you're in a Power Shift pattern?
the power equation. If that move is impossible, redefine the
the only avenue is to create a fundamental redefinition of the customer.
This is true when your company is faced with an irreversible power
shift to your buyers, when it has reached a plateau in profit grown,
or when your industry has run into a saturation problem in its customer
base. Some market options include:
segments Look at your current customer base and rethink
value chain participants Your traditional customer may
not be the most important customer in the system. Then alter your
marketing and branding strategy to appeal to the new market.
The most important customers are often not actually involved
in the economic value chain of a product. Instead they are advisers
who are key to success. Reviewers are frequently gatekeepers.
decision makers Within a targeted customer set, redefining
the decision makers can be the key to unlocking new profit.
entrants Sometimes the redefinition opportunity derives
from the arrival of a new customer group. These groups emerge
for many reasons; deregulation, dramatic changes in costs and
prices, technological innovation, or a violent twist in the evolution
of customer priorities. The new groups often have needs and priorities
that are wholly different from those of your traditional customers.
shift from old customers to new is an opportunity that should be
searched for regularly, across every strategic situation.
do you do when you're in a Redefinition pattern?
beyond your current customer set.
Search the broader system for the most important and the most
Build your business design around them.
is based upon Profit Patterns, written by Slywotzky, Morrison, Moser, Mundt
and Quella, published by Times Business, Random House, copyright © 1999 Mercer
Management Consulting, Inc.