A way to Classify Customers to Clarify Marketing Strategy


TO CLARIFY YOUR MARKETING STRATEGY, START CLASSIFYING YOUR CUSTOMERS

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.


Comments

Post a Comment

Popular posts from this blog

NEW PRODUCT DEVELOPMENT PROCESS

Image
NEW PRODUCT DEVELOPMENT PROCESS As markets and customer preferences change companies adapt to insure success. Adaptations usually are made to capitalize on markets and expertise a firm has developed over its life . Some adaptations are limited to updating packaging or marketing approaches or finding new uses for established products. There are occasions where new products are needed in order to meet new customer needs or address a disruptive market innovation. When addressing changing market needs and market disruptions it is necessary to find good ideas and then have a process to evaluate and narrow the field to the ideas most likely to succeed. Generating new product ideas The first step in generating good ideas that will further develop the markets and expertise that defines the firm is to clearly articulate the job customers are hiring the firm to perform. Here it is important not to be too restrictive in the focus of the definition. It is probab...
Read more

10 Considerations for Pricing a Product or Service

When introducing a new product or service to the market a key, and often critical, consideration is the price for this offering. I have seen folks simply take the cost of production and use a percent mark up as a pricing model. This is the simplest model and it provides a good example for the need to consider other pricing model options. Here are 10 things to consider before setting a price for your product or service: ·       Mark up Based on Cost Vs Retail . In the opening paragraph I gave the example of a model being used that marked up a product by a percent over the cost. The cost used here is generally direct cost or labor and materials. If someone wants a 30% of the asking price to be the mark up, then using 30% of cost won’t provide the desired outcome. Simply put, it is the wrong math. If something costs $1 to make and it is marked up by 30% for a selling price of $1.30 then the profit of based on the asking price...
Read more

Grow Your Business Through Community Involvement and Leadership

Business is built on relationships that start with individuals and grow to include groups and institutions. Community involvement is an excellent means of creating opportunities to meet individuals and develop meaningful relationships. Whether you are a large company or a small, family-run operation relationships built through community involvement pays big dividends.   For companies considering how to get involved in the community, here are some pointers for choosing the best activities for your company. 1) Don’t choose too many activities. Stay within the bounds of your financial and human resources. The goal here is to have a successful business that grows and participates in the community. 2) Choose activities that help employees grow in the community and develop new networks. Most Chambers of Commerce have Leadership programs for developing community leaders. These programs are excellent and bring long-term benefits for the organization and the employee...
Read more