Identifying segments of customers with differing needs helps a manufacturer grow revenue and profits with the right customers – and avoid wasting resources with the wrong ones!
A manufacturer of chemicals for the paper industry (Client) was a well-regarded name in the business with a reputation for high quality products and customized solutions. The company had a strong base of technical expertise that was amassed over decades. It enabled them to develop and offer product formulations that suited the exact needs of their customer, thus yielding far superior results than standard off-the-shelf solutions. These formulations were patented, offering protection from competitors. Additionally, a highly competent and technically sound sales team assisted customers in choosing the right product formulation and supported them through the entire purchase and implementation process.
This level of quality, service and customization came at a premium. The price point for the Client’s products was, understandably, higher than that of more basic “commodity” offerings in the market. Also, since orders for their product had to be formulated specifically for each customer, the cycle time from order to delivery was longer.
As Client sought to consolidate its position in the market and drive growth, they faced a challenge. They had on their hands a group of persistently unhappy customers. Their efforts at nurturing those customers and trying to make them happy were not yielding results. Client turned to the LRC as they sought answers to two primary questions:
- Why were those customers unhappy? And
- What could/should they do about it?
What we found
A carefully designed research program included a comprehensive customer survey. Analysis of data from the customer feedback received was telling, leading to a series of insights that would guide actions.
The loyalty profile of Client’s customer base was somewhat skewed toward customer relationships relative to average. (Fig 1) But the management struggled with the 23% that were vulnerable.
Fig 1 – Typical Loyalty Profile vs. Client’s Customer Loyalty Profile
Furthermore, it turned out, that a significant portion of the weaker customers were a bad fit for the Client’s business model (Fig 2). While the Client’s business was designed to deliver premium products and strong technical support, these unhappy customers were looking for short order cycle times and low price. There was a significant disconnect between what Client’s business was designed to provide and what these unhappy customers desired.
Fig 2 – Distinct Needs-Based Segments
It was increasingly evident that two distinct needs-based segments resided within the Client’s customer base. One that was a natural fit for the value proposition the Client’s business was designed to deliver – the “Good Fit Segment,” and another that wanted something the Client could not deliver without making significant changes to its business model – the “Bad Fit Segment.”
Good Fit customers are profitable:
When analyzing the profitability of customers, it was clear that “Good Fit” customers were significantly more profitable than those that were not. (Fig 3)
Fig 3 – Business Model Fit and Profit
Why were the “Bad Fit” customers unprofitable? Many of them demanded that their orders be expedited. This produced additional costs. Others wanted price reductions as they did not value the premium aspect of the product. However, most of the losses resulted from simply spending more time with them – executive time, sales rep time, tech support time, etc. Everyone wanted these customers to be happier. It was that “lots of hugs” strategy that produced almost no additional revenue and huge additional costs. It also took time away from developing customers that were a better fit.
Armed with insights on needs-based segments revealed by research, this LRC Client incorporated these learnings into its strategic plan.
They focused their energies on customers that were a good fit and dialed back efforts to make bad fit customers happy. They shifted away from the “lots of hugs” to a “value based” strategy for these customers. While not ignoring the “Bad Fit” customers, efficient processes were developed to manage them with considerably reduced demands on team members’ time and company resources. Pricing structure and policy for this segment was also revised to reflect real value. This delivered the dual benefit of reduced cost and, ironically, improved margins. Savings realized were applied more effectively to nurture and develop “Good Fit” customers even further.
This smart re-allocation of resources to higher ROI areas resulted in Client strengthening their relationships with both customer segments and consequently, their position in the market.