A way to Classify Customers to Clarify Marketing Strategy


From Texas CEO Magazine, December 2012
By Gary Randazzo

Every business, at some point, will review its marketing strategy. The cause for a strategy review can come from a difficult business environment, a windfall in profits, a change in technology or a change in customer preferences. When a marketing strategy review is in order it can be challenging to decide where to start.  

Classifying Customers

Classifying customers, based on the amount of their spending, can be a good place to begin. Spending used as a metric can help the analyst understand which customers provide the biggest impact: 

1)      Key customers representing the largest percentage of sales and profit

2)      Customers with the potential to provide greater sales (under-potential)

3)      Customers that do little or no business with the organization but use products similar to those offered by the organization (nonusers)

This simple classification may reveal some important information. For example, a company may find the key customers located in a specific geography, be of a certain size, have a particular business orientation or other characteristics that may be useful in developing marketing programs to attract new customers. This analysis may also reveal characteristics that define nonusers of the company’s products. Understanding the size of the nonuser and under-potential markets and their characteristics may also prove useful in market growth strategies.

The classification of customers may be enough to launch an ad campaign or promotional efforts but may not be enough to justify new product introductions or significant changes in marketing strategies

Price Versus Cost to Change

After customers have been classified, look at various products and services and analyze them on the price vs. cost to change relationship between the business and the customer. This approach measures the cost of the product offered versus the cost to the customer to abandon its current product and adopt an alternative.

According to this type of analysis, when the cost to the customer to change is equal to the price charged, there is equilibrium. Equilibrium assumes the customer would have to pay the same price to make a change and assumes all other factors are equal. The assumption also is that price is the critical factor in causing a customer to change. If customer service, guarantees, and maintenance are other important non-price issues, then this group of customers could be at risk.

When the cost to the customer to change is greater than the price charged, there is a positive equilibrium relationship. This may provide the ability to increase the volume or increase the price of the product and increase profitability, without jeopardizing the relationship with the customer. Again this assumes that price is the critical factor. If other factors are important and the ability to deliver those factors to the customer difficult, then increasing the price to the customer could cause the customer to consider other vendors.

When the cost to the customer to change is less than the price charged, then there is a negative equilibrium relationship which may provide the customer a reason to find a substitute product or service. This scenario may be an indication that the business has some special strength – not price related. A close study of this group might be useful in setting strategies for the first two groups.

The smaller groups that emerge will help analysts determine if an action taken to affect one category of customer will have a negative impact on another customer group. Thus, if a strategy change is employed to attract more sales from under-potential customers who have a positive equilibrium status this could result in a negative impact to key customers in the equilibrium or negative equilibrium categories.

As an example, a company with a client who is classified as under-potential with positive equilibrium might be a client that has a low unit cost but still spends most of their dollars with a competing vendor. A strategy to offer this client a lower price for increases in spending might be considered. The downside might be key clients in the negative equilibrium or equilibrium categories would now face, at a higher cost, competition from the newly attracted under-potential advertiser. This situation might result in key customers diverting dollars to other vendors or require a price (and profit) reduction for key customers.

The customer categories can be combined with the equilibrium categories so there are now three equilibrium categories for each of the customer classifications.

Customers in negative equilibrium may not be concerned with price as much as they are concerned with intangibles such as customer service or long-term supplier relationships. Key customers in this category are likely to be very profitable and can be subject to special attention by competitors.

Nonusers in negative equilibrium may be those customers belonging to the competition who purchased when their regular supplier was unable to provide product. This group could be worthy of further study and could be an opportunity to win market share from the competition.

From a company point of view, the area of greatest concern would seem to be those products with a negative equilibrium relationship. Negative equilibrium means these customers could change products and save money, thus they are vulnerable to aggressive attack by competitors. Since this group is paying more for the product or service than they would from another source, it is very important to understand where they are placing the value of the business relationship.

It would also appear those customers with a positive equilibrium relationship would be satisfied with the relationship, because changing to another vendor would be more expensive than continuing the current business relationship. There may be an opportunity to increase pricing with this group but it is necessary to understand where the customer is placing the value of the relationship.

Those customers in equilibrium may be worthy of in-depth analysis to determine which factors could cause them to change suppliers, since price is not an issue.

While this analysis uses price versus cost of change as a decision point, it is not a pricing analysis. It does help identify actions that are price related and will affect profit and further stresses options available that may be used in lieu of price related actions. The process instills a disciplined approach of addressing strategic marketing issues and helps improve an organization’s chance of choosing the optimal marketing decision.

Gary Randazzo is founder of Houston-based GWR Research, a media marketing and management-consulting firm. Mr. Randazzo served as Senior VP at the Houston Chronicle and EVP and General Manager of the San Francisco Chronicle. He can be reached at gary@gwrresearch.com.

Posted on 08 December 2012

Pat Niekamp, Publisher

December 2012

Copyright © Texas CEO Magazine.


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