Customer Segmentation

In order to pull away from the pack of commodity chemical providers, a chemical manufacturer decided to become the specialty product provider to the paper products industry. While competitors chose to differentiate on the basis of price or logistics, this manufacturer chose instead to target a specialized user niche desiring customized solutions. Despite the fact that specialized chemical products perform better for their applications than commodity versions, not every customer wanted or valued the customized solution and was therefore not willing to pay for it.

Industrial Goods & Services 1The challenge for this manufacturer was to identify– among current customers– those who valued the better performing chemical as well as the additional services provided by the customized solutions approach: a more knowledgeable sales team to design a solution and explain the benefits, plus a team of technical people to work closely with the customer to train on and illustrate the full benefits of the solution. Given the higher cost structure required to provide customized solutions, it was not an option to simply absorb costs. The expectation was for customers to pay a premium price for a product that could earn greater profits for the manufacturer.

Additionally, past customer surveys revealed just ‘average’ scores when it came to overall perceptions of the company. Management felt they could do better than average and would have to if they expected to successfully market their chemical alternative. They turned to the Loyalty Research Center (LRC) to help improve customer performance perceptions and find the ‘right’ customers for customized solutions products.

LRC knew that in order to identify the customized solution segment and gain a better understanding of what it would take to improve performance perceptions, additional information would have to be gathered from customers. Questions were added to the customer survey to get at user needs and value definitions and identify more specific and action oriented performance measures.

LRC segmented the customer base by product need and found two segments of current customers: one that fit this manufacturer’s new business model for a Customized Product and the other fitting into competitors’ Commodity Product offerings.
The manufacturer was now faced with the dilemma as to whether they would have the courage to focus on the one customer segment, to the exclusion of the other, and risk losing customers.

The Commodity Product segment represented 40% of current customers but only 20% of revenues and even less of this manufacturer’s profits. Additionally, these customers used multiple suppliers, were less loyal, with many classified as ‘vulnerable’ and ready to take their business elsewhere. Armed with the financials and the loyalty scores, the decision was not hard to make – these were not desirable customers for this manufacturer.

As for the Customized Product segment, they not only represented more of the current business volume and profits, they included customers who were significantly more likely to give high value and quality ratings and classified most often as loyal to this manufacturer. These were the ‘Keepers’ and Management was pleased to find that no performance issues existed within this desired segment.

Customized Product Commodity Product
Overall Value 76% 21%
Overall Quality 87% 32%

The information clearly set the path for implementation of the manufacturer’s new business model. The Customized Product segment already produced more sales and profits and had a higher rate of loyalty. By shifting more attention away from the Commodity Product segment, the manufacturer was also able to differentiate better and build a stronger customer base.

Posted in Case Studies, Industrial Goods and Services, Insights.