An Industrial Distributor uncovers hidden growth & profit potential in its customer base using
Background & Challenge:
One of the largest industrial distributors in North America (“Client”) provides a broad range of products and value-add services to approximately 500,000 customers in the infrastructure and construction sectors. Customers are serviced through branch locations across the region. Held by a private equity firm, Client was challenged to achieve specific organic growth goals over a ten-year holding period. Turning to the Loyalty Research Center (“LRC”) for help, they sought insights into their customer relationships that would enable them to achieve their goals.
After understanding the exact nature of Client’s challenge, a research program was designed to capture detailed customer feedback. More specifically, it would provide insights on:
- Strength of customer relationships and how they were dispersed across strong; (Loyal), moderate (Neutral) and weak (Vulnerable) segments;
- The financial outcomes of current relationships (industry spend, wallet share, and margin);
- Near-term opportunities to increase wallet share and spend with Client by Loyal customers;
- Mitigating risks among Vulnerable customers;
Long-term investment opportunities for migrating weaker to stronger relationships over time.
Customizing a Loyalty Metric:
The ability of the LRC’s Loyalty Metric to explain behaviors sets it apart from all other relationship measures. Linkage to customer behaviors and ultimately, financials, makes it a powerful tool to guide actions and effect change for success. By customizing a Loyalty Metric for Client’s situation, we illustrated strong discrimination in the financial outcomes for customers across the Loyalty segments: Loyal customers generated significantly more revenue and profit, both of which eroded considerably as the customer relationship weakened. Assessing each of the three relationship segments would enable client to 1) Identify “low hanging fruit” for business growth and 2) Determine opportunities to make investments to improve relationships. This case study focuses primarily on the former, near-term opportunity.
What we did:
A telephone survey was designed in collaboration with the Client to get the desired customer insights. One-third of Client’s customer base was randomly selected to ensure that branch representation in the sample was in the same proportion as in the customer population. Interviews were conducted with a mix of commercial, residential, and industrial contractors.
What we found:
The analysis revealed relatively strong overall customer relationships for Client. As illustrated in Figure 1, compared to the typical Loyalty Profile we find in healthy B2B organizations, Client’s customer base consisted of a significantly higher percentage of Loyal customers.
Figure 1: Comparing Client Loyalty to LRC Benchmark
In terms of the financial implications, the results were dramatic. Figure 2 shows that
- Client stood to nearly double its wallet share if it could migrate a customer from the Vulnerable to the Loyal segment.
- This would translate to an average of $155,000 in additional revenue per customer.
Figure 2: Financial Outcomes by Loyalty
In Figure 3 below we see that when extrapolated to the entire customer base, the total revenue opportunity per segment was sizeable.
Figure 3: Overall Business Implications
With an estimated total annual spend across its customer base at $1.3 billion, a significant revenue opportunity of over $600 million was uncovered. Using incisive learnings on the financial implications of its customer relationships, Client was able to chart a precise path to successful growth of revenue and profits. That path included strategies and actions involving modest investments with short term impact as well as those with long term impact and bigger resource commitment. Some of the opportunities that that emerged were:
- Increasing the wallet share in the Loyal segment:
These customers give on average 68% of their spend to Client. Not all of the Loyal customers gave the Client 68% of their total spend. How can Client leverage its strong relationships to get a bigger share? Identify those customer accounts with a strong relationship who are giving Client below 68% share. Why is the percentage lower for these customers and what can be done to increase it? This is low hanging fruit.
- Mitigating the risk of vulnerability:
Some customers in this segment give more than 50% of their wallet share to Client. This relatively high share (despite a weak relationship) demands intervention to improve the relationship and prevent defection.
- Individual account reports:
Account reports produced from the survey data provide insights with both short term and long term implications.
- Identify which Loyal customers give more than 70% of their wallet share to Client and which Vulnerable customers give more than 50% of their wallet share to Client. What is different about these customer accounts and/or their experience with Client? What can be done to replicate these most positive experiences and reduce the probability of a negative experience?
- Explore the competitive environment in which these customers are doing business:
- From which other providers are they purchasing products?
- What is their loyalty to those providers?
- What are Client’s competitive advantages that can be leveraged (particularly with customers who view Client at parity or a disadvantage compared to the competition)?
- What are competitors’ disadvantages that can be exploited (especially among customers which are vulnerable with the competition)?
- In instances where wallet share is relatively low for the respective segment, determine if it is due to a lack of awareness of Client’s product and service portfolio.
- Is it more of a marketing and communication challenge rather than a product design, performance and execution challenge?
- Does this imply a need for more consultation on the part of inside and outside sales teams?
Partnering with the LRC to develop a relationship measure and its potential to assess financial implications of customer relationships, Client was able to harness its power and realize its goal of business growth!