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Account Segmentation and Maintenance: Why it is Necessary and How to Do It 1990 FUTRENDS Group Report, Tool #11 Account Segmentation The '90s will be the decade of segmentation on the marketing side of the business. This move toward segmentation will carry over to customer service operations as well. Unprofitable accounts will be de-marketed and downgraded to lesser levels of service and in some cases dropped altogether. It's not easy to face, but some customers cost more to service than they will ever return in revenues. The cost and time required to service them are the expense of your profitable accounts who may view your distracted level of service to them as a negative and in turn drop you as a supplier. Getting ride of unprofitable customers is an issue that few managers, especially sales managers, want to recognize and deal with. Yet companies that don't deal with this issue stand a good chance of losing key accounts, company profitability, or both. Figure 1 Source: Customer Service Institute, 1010 Wayne Avenue, Silver Spring, MD 20910. Once a company has studied the profitability levels of its accounts and assigned costs associated with a "hassle factor," it should prove enlightening to group the accounts similar to the ratings shown in the circle in Figure 1. Do one based on volume, in other words, group the accounts that are your "A" accounts, the 20% that give you 80% of your volume, next "B," which represents the 20% of the remaining 80% of the revenue, and so on through to the "E" level account. If you have rated the profitability of your accounts, you can segment these and compare the list. It would not be unusual to find that some high dollar volume accounts are not contributing their fair share to your bottom line and may even be having an overall negative effect. Very large accounts may bargain hard for special pricing, as well as special services, so they should be carefully analyzed for profitability. The next step before considering which customers get what level of service is to examine each of the accounts and determine if they deserve special attention and movement to a higher care level for a legitimate business reason. Some of these reasons can include: Growth Potential - while the account may be small now, your research indicates that you should take a chance on its growth. Be careful your salesforce does not overestimate the growth potential of marginal accounts. TLC - some companies receive a higher level of care based on market or legislative conditions, such as the health care or the government markets. Decide whether servicing the account(s) is worth the loss of potential profit that could be expected from an expenditure of your time and efforts elsewhere. Intangible ROI - some accounts may contribute indirectly to your company's growth and profitability. Perhaps on of your accounts is always arriving at your door with a new design idea. They might not have all worked out, but the few times that they have has resulted in sales growth for your firm. These design, product, or service idea people may rate big in the hassle department and fall short of order volume, but you consider it a worth-while R & D expense. Fortune 500 - it sometimes pays for a distributorship to have a "name" account or two on its client list for promotional reasons. You may not get much business from them, but if they aren't hurting your profitability you may want to continue servicing the account at the level they demand. You may want to de-service or discontinue business with an account for reasons other than revenue and profitability. Some of these reasons can include: The mix of the products sold to this customer does not complement your business and your business would run more smoothly if you did not have to buy or produce these products for a specific customer. The hassle factor mentioned earlier is a very real consideration. Hassles cost your company in service time and may cost you dearly in low morale and turnover. An account that makes excessive demands for attention that are not justified by its volume or business or employs people with whom your employees have to deal who are perpetually difficult and disagreeable may be a real drain on your company. The location of the account may make it undesirable to service and may prevent you from implementing programs and efficiencies in your company. Maintenance The traditional strategy of hustling new accounts has declined in appeal for several reasons. In the slow growth, no growth, consolidating industry, the entrenched competition doesn't give up business easily and usually gets a last look to counter any new competitive proposals. According to Bruce Merrifield, of Merrifield Consulting Group, Inc., a prospecting firm must invest extra marketing dollars to build a case, and if it succeeds and lands the account, the margin dollars captured may be less than the cost of servicing the account. Under these conditions, formal account maintenance and retention programs are a must. Your sales function needs to be measured on account retention as well as new accounts. One way to measure customer retention is to establish a sales mechanism that allows you to track monthly gross margin dollars for each account. Once you have this capability, take the most recent three months of gross margin dollars for each account. Once you have this capability, take the most recent three months of gross margin dollar for each account and divide by the previous three months (*months 4 to 6). This simple analysis will allow you to evaluate the status of each account to see whether it is growing, flat, or in decline. Account trends also need to be examined across account levels. For example, is there a trend developing where sales are becoming flat in your B-level accounts (your better, but not your best accounts)? This measurement also allows you to monitor the progress of account segmentation strategies. For instance, if you have selected certain accounts to de-service (provide a lower level of service), this measurement allows you to track whether the strategy has resulted in a loss of business. Your strategy may very well have been to lose the business, and this allows you to track your success. It could also show you that the de-servicing wasn't enough to make a difference to some of those accounts. However, if your trend lines show that you are losing an account or accounts, the FUTRENDS Group and Bruce Merrifield offer the following ideas for account retention: Formalize your quality program and train your employees to aim for zero error rates, on time, every time delivery, and excellence of customer communications. When you experience a service or quality miss, pull out all the stops to immediately correct the problem, exceeding the customer's expectations whenever possible. Identify your most profitable "A" class accounts and develop a plan to provide them VIP services and attention. Train employees to understand your account segmentation strategy and be well versed in who the key accounts are and what services they are to be provided. Be proactive in account retention. Don't wait to lose an account to respond to a customer's needs. Included in this tool kit are measurement surveys that will provide you all the information you need to establish service levels that match the profitability contributions and needs of your customer base. The costs of conducting these surveys are minimal for the information they provide. Research has shown that a business's most active accounts will take the surveys seriously and will provide quality input. Advertise your company's eagerness to hear about service and quality complaints. Prepare staff not to be defensive when complaints are received. The proper handling of complaints is one of the many topics that are addressed in 36 WAYS TO IMPROVE CUSTOMER RELATIONS, which is included in this kit. Merrifield recommends the offer of an unconditional service guarantee on measurable elements of your customer service strategy, such as $X off every order on which promised delivery has not been met. Merrifield contends that employees are motivated by such guarantees because they demonstrate the importance company management places in the commitments that have been made. Retain your service-motivated employees. Many businesses have found that paying higher wages is a lot less expensive than financing the costs of turnover. Merrifield recommends paying 120% of the going market rate to attract and retain the excellent employee. Identifying Your Services Once you have analyzed your accounts and segmented them according to their level of volume, profitability, and hassle index. The number of account levels you have is some what dependent on the variety of services you offer, but you do not want to have so many that the program becomes unwieldy. Every company should be able to list basic levels of service that may include an 800 number, 72-hour turnaround of credit approval, special promotion notification, copy of a company informational brochure, and perhaps a telemarketing sales call once a quarter. Then you build up from the basic service level, analyzing all the services you currently perform — even if they may be for only a customer or two. Next determine from customer surveys and other marketing intelligence what services you should be offering that you currently are not, as well as those special services your idea people have contributed as being potential for including for special accounts. Assign these services to each of the account levels that you feel warrant such treatment. Keep in mind the cost of these services versus the profitability of the accounts assigned to the level being considered. Service costs can be developed by working with your people to establish average times spent to provide a service. For example, have your customer service people track how long it takes to handle an order that has an error in the specifications. That average time multiplied by the cost center rated for that department (total of all wages and benefits for that department divided by the total number of available man hours, i.e., number of people times 40 hours times 52 weeks, less factor for vacations and absences) will give you the cost of that service for consideration. The same need exists for establishing costs for special "800" numbers, assigned account coordinators, floor space in your warehouse, special labeling, etc. The objective is to develop a list of costs per occurrence or per some time measurement that can be used to relate back to the profitability of an account that benefits from such services. Figure 2 And finally, of critical importance, is the need to take the guess work out of handling accounts under this new system. One of the easiest ways is with a customer service procedures manual that details how exceptions like errors, late deliveries, special promotions, and quality problems, are to be handled for each account level. Figure 2 shows one approach to making such a procedures listing. The way in which the procedures are established and then implemented and supported will be the basis for the success of any account segmentation program. The procedures must emphasize the corporate thinking as it relates to account profitability and segmentation to ensure that customer service personnel understand how the use of resources is to be allocated and why the allocation of these resources is so necessary. Back to Customer Segmentation