Will Bachman 00:02
Welcome to Unleashed the show that explores how to thrive as an independent professional. Unleashed is produced by Umbrex. And if you visit umbrex.com, and click on the Unleashed tab, you can sign up for a weekly email, get notified of all the most recent episodes, and even get some bonus material. I’m your host Will Bachman and I am here today with Stacy Sifleet, who’s going to talk to me about customer value strategy. Stacey, welcome to the show.
Stacy Sifleet 00:33
Thanks. Well, I’m happy to be here.
Will Bachman 00:35
So Stacey, first off, what do we mean by the term customer value strategy. customer value strategy is a framework for strategically allocating your customer service resources.
Stacy Sifleet 00:50
So it’s kind of a way for you to strategically really define how you’re going to treat customers differently based on the value they bring to your organization.
Will Bachman 01:01
Fantastic. And that’s an intuitive concept, I think, for most of us that if you you know, all of all of our listeners, I’m sure have flown an airplane object into a hotel. And we’re used to a different loyalty levels. That kind of is relatively straightforward as consumers, but it also applies to the b2b realm. And you have an A case example that, I’d love to hear more about that, that you worked with a parts distributor. So Tom, give us that context that describe the situation for us.
Stacy Sifleet 01:34
Yeah, so I worked with a parts distributor, you know, a lot of different customers different sizes of customers. And typically, these businesses, treat all customers very similarly, or maybe just the noisiest customers get the best level of service. So when you think about kind of level of service, and kind of the resources we’re trying to strategically allocate, we’re thinking about, you know, maybe your your sales reps, customer, customer service time, offering payment terms, so different levels of things, you can do free delivery returns. And so historically, this client had just treated all customers the same, they didn’t have a policy for offering different things to different customers. And they actually had one customer, that I don’t have the number off the top of my head, but I believe it made, you know up nearly 50% of their revenue. If this one customer was getting the same level of services, as the customers that were making up no less than 1% of their revenue, they had, you know, 1000s of customers. And so, in this case, we spent a fair amount of time first understanding their customer base and figuring out kind of how can we understand customer value? And how and how can we categorize these customers into different buckets so that we can really develop a strategy and a policy for treating these customers differently. So kind of Initially, the work is understanding the value your your customers bring, and and categorizing that and you can think you know, let’s just do it based on revenue. That’s one way to do it. But it doesn’t tell the whole story. So a lot of the work up front is really understanding how to customers deliver value, and what criteria do we want to use and categorizing our customers into different buckets so we can treat them differently? So that’s kind of the initial piece of the work is really kind of defining groups of customers, and so you can treat them differently. And then secondly, you have to understand what are the services you’re offering? And kind of how are we going to differentiate these services, you know, resources are a constraint, right, we only have so many resources to define. And if we’re going to treat customers differently, some customers are going to get more, and some customers are going to get less. So we worked through really understanding the current services we were offering. But then we also brainstormed, what are other things we can give to our most valuable customers that will give them value, but also kind of create a relationship that will allow us to kind of grow together. So we wanted to make sure that those top tier customers that we identified would get more than they had already. So they were going to get more than the baseline and then the lower value customers were going to get less than they currently received. So we brainstormed and kind of in this case, the current free offerings that everyone got were some of those things I mentioned earlier, free delivery, No Hassle Returns, payment terms offered to them. And then everyone had access to a sales rep. After brainstorming, we kind of came up with new things we could we could offer our most high value customers. One was a full lean process review of kind of how we Work together. So they actually brought me as a consultant into work with their highest value customer, they had a dedicated team to evaluate needs and develop a plan for those customers. annual performance review, no cost emergency pickup. So something previously they had to pay for, if they need an emergency pick up, they could get that training. So kind of and when you think about it as a business for this customer, these were the specific ones. But you can be really creative in different ways that you can add value to those highest, valuable customers. And often, like the whole point of giving these customers more value is to you become a more important supplier or service for that customer. So they, they want you more because most likely your competitor isn’t offering these free extras. So So kind of once we’ve defined, which customers are our highest value, which customers are in the maybe that middle group and which are the lowest, and we’ve defined all of the different free services we could offer, then kind of lay out a structure of you know, our top a level customers are going to get all of these are B level customers or, you know, maybe gonna lose one or two of the three things they previously received. And then our C level customers are going to have to pay more, or if they want to receive certain services, or they’re just not going to be offered. And kind of going back to your airline example, that you mentioned with loyalty, we’ve seen that in in the airline, you know, over the last 510 years previously, everybody could bring on a carry on for free. And now, if you’re buying that lowest lowest ticket fare, you’re going to pay to even bring on a carry on. So this is this is a trend I think we’re seeing in retail, but in the b2b space, there’s a lot of opportunity to help businesses really drive efficiency, and then build more value with those high value customers giving them value and then also capturing it back. And kind of reducing the drain of the lower kind of more painful customers that that don’t add as much profitability to the business.
Will Bachman 07:10
So there’s a lot to explore, and what you just said. Let’s start with the first step that you’re taking of defining groups of customers by profitability. You can’t just rely just on the revenue because you also have to look at the cost to serve those customers. How did you go about it in the case of the auto parts company of actually figuring out not just the customer revenue, but the customer level profitability? certain certain types of services, it might be tough to allocate? Because it’s something of a fixed cost. So how did you do that customer profitability analysis.
Stacy Sifleet 07:54
So I like to do this with a cross functional team, I feel like that’s the most successful way to do this. If you have, if you just do this with a sales team, you’re going to get a very different answer than if you do it with the operations team. So getting kind of people across the board, you know, you want to include finance, operations, sales, and we brainstorm a long list of metrics. And some of the metrics we looked at were, you know, revenues, important unit sales, important revenue per order, gross profit, which is tricky, because sometimes you don’t have all those things allocated. For this business, one of the things that was really important was pay on time payments, you know, I’ve kind of how frequently they were on time versus kind of having to go after them looking at profit growth or revenue growth, because they were really trying to grow. They also had number of delivery destinations in the initial list. And so I have done this exercise in the past where there’s a whole profitability study done beforehand. In this case, we didn’t we didn’t do that we use the profitability from their, their earpiece system. So it might not have gotten down to kind of exact, including cost to serve. But sometimes, you know, there is some of that work. But in this case, we did this really broad brainstorm with a cross functional team. And then kind of going around the room and and I guess, kind of voting kind of getting a consensus of where you know, the top three to five criteria were. And in this case, the top criteria was gross margin, days to pay, year over year growth, gross margin growth. So we had gross margin of two different views and then returns so returns they wanted customers that had lower returns because the returns really dragged their profitability down. So we ended up with four different criteria and gathered the data. And then we had a multi criteria model that basically based on the weight of each criteria, so we also, after selecting the criteria could weight them differently. So gross margin, I think we waited 50%. And the other three kind of had slightly lower weightings to get up to 100. And ultimately, we calculate a what, what I call a customer performance value. So you end up with a number you take. You take all those criteria, and you convert them to a factor. So they’re all on a scale of one to 1000. And then you can come up with a customer performance values, you can really rank the customers based on that one number. And then you spread them out across, across the buckets have we had a, b and c customer rankings. So we would end up having a policy basically treated the customers in three different ways depending on where they fell.
Will Bachman 10:45
Now let’s let’s talk about informing the customers of this, it’s probably not the most pleasant conversation, to go to a customer and say, You’ve we’ve been giving you these freebies, free on turns, No Hassle Returns, all these other nice things. And now you have to pay for those because you’re not a very profitable customer. So tell us, how did you work with that parts supplier? To manage that process of communicating it to the client to the customers? One question I have is, do you tell the customers “Hey, if you want to be in Tier B, or our gold level of service, you would need to be spending more money with us? Or you need to pay us faster?” Or do you tell people what they need to do to qualify for the next level? Yeah, to communicate that whole thing?
Stacy Sifleet 11:39
No. And I mean, I think this is a really important piece of this, because often, you know, a sales rep is gonna go out and talk to a customer, and they’re just gonna want to talk about, Oh, these are new products we want you to potentially buy. But having this really clear understanding of how your customer ranks, can arm your sales team to have really much more successful and beneficial conversations. And, you know, they’re there, every customer from this can have a performance improvement plan. And I don’t think we didn’t, we didn’t recommend going out to the customer and say, here’s your improvement plan. But we we did arm the sales reps with know, this customer is ranking really high on their returns, the returns to sales ratio is just it’s off. So figure out what’s going on. And it gives the sales rep really a conversation to have and allows the customer when we did communicate, you know, if you want to get to this level, where you get your free shipping again, or your access to the emergency pick up for free, you know, these are your targets, you need to get your gross margin growth rate up here. You need to reduce your returns to sale ratio, you know, and whatever it is, but every single customer is going to have some opportunity to improve and, and so it’s helpful in kind of giving the sales rep something to talk about other than, you know, you want to buy some more.
Will Bachman 12:59
So, in what was that initial communication to the customers? Was it the salespeople that did it? What material Did you give them? Did they say essentially, we’ve done a reevaluation, you know, you’re, you’re a crummy customer, because you only buy a little bit you complain all the time, you don’t you pay us late and you return half the stuff we send you. And so now you’re gonna have to start paying for, you know, you’re gonna have to start paying for returns a restocking fee. And we’re gonna start charging you, you know, 2% whenever you’re late. I mean, how did you how did you have that conversation was just an email from the CEO, was it the salesperson? Did you have a PowerPoint document to walk them through it? Like, what was the whole? Yeah, communicate?
Stacy Sifleet 13:45
Yeah, so we we had some, we put together some kind of more formal documentation. So there was kind of a clear communication going out. Unless it was a really small customer, it was a conversation with a sales reps for the lowest. So the C customers, and the C customer cutoff was pretty low, because there was a lot of hesitancy by the the client to you know, cut off services for for a large portion of their clients, their customers. And so when we when you see kind of the initial rollout of this the break on a the chain, so that a customers were getting more, so those conversations were really easy to have, the B customers were getting cut back a little bit. So they were gonna they were they were not going to have direct access to a sales rep, they were going to be directed more to the inside sales and a sales rep would come potentially if they got up to this higher level. And the see the lowest customers really, I mean, maybe not all negative profitability, but very low profitability. It was kind of the long tail of customers, which a lot of businesses are kind of used to but those would get an email and they’d be able to call and talk to somebody from inside sales if you know if they wanted more information. And sent that email was not as great because they were losing some some more value significant value, but they were really small customers. And so the B group that was losing some service, but were still important customers to business, they got, you know, personal phone call discussion with their sales rep, you know, off sometimes if the sales rep was was close enough, they would get that conversation in person. But that was combined with, you know, clearly documented so that the communication was really consistent across all customers.
Will Bachman 15:30
Now, one question that some business owners might be concerned about, or some executives, if we’re recommending this approach, I can imagine this pushback, which is, my Platinum customers started out as small customers. And I don’t know which of those sea level customers eventually might become a customer. And my intuition is that they start, they try us out a little bit. And over time, they grow and grow and grow. But if I, you know, have crummy service at the beginning, or this very limited restricted service, then I may, you know, save money now, which is fantastic. But I might not be cultivating the next generation of Platinum level clients. So how do you address that concern that you’re going to limit that funnel? for the future? Yeah, you look at the potential growth of customers, as well as what they’re currently doing with you.
Stacy Sifleet 16:34
So, I mean, I’ve heard that I think, I work with a lot of, you know, family owned businesses, entrepreneurs that have kind of kind of built up, and I kind of consistently hear, you know, we kind of give everybody, we don’t know who’s gonna be the next big customer. So we want to get you know exactly what you’re saying here. And I think, you know, we want to make it clear, the lowest, the lower value, customers aren’t going to be getting bad service, they’re just not going to be getting premium service. And I mean, there’s always, you know, business owner can always, you know, say, I’m going to override, and I want to give this customer you know, better service. But I think, get back to, you know, when these conversations come up, I get back to, you know, resources are a constraint, you cannot give everybody the top level service, or else that top level service will just go down, because there’s not enough resources to give it to everyone. So, when you think about 8020, you really want to focus your efforts on kind of what’s most valuable. And if you try to spread it across all of your customers, it’s just going to get diluted, and nobody’s going to get really great service. So we really want to focus on kind of growing the profitability, growing those customers that are great, giving good service to everyone, but better service to those more profitable customers. And, you know, there’s always the opportunity, if there really is high potential, and it’s a small customer, you can always override them and give them better service. But the more you do that, the more you’re diluting that premium service, because you just can’t, you can’t you can’t have more resources than you have. There’s a limit.
Will Bachman 18:08
Let’s talk about something you mentioned earlier, which is this annual review, annual performance review. Yeah. Talk to me about what that would look like. Imagine that the pages that are in front of us walk us through the pages of that the agenda for that discussion, how does that create value for a client to or or customer to be providing that annual review?
Stacy Sifleet 18:38
So when you think about, you know, so and it’s going to vary business to business, so I think kind of a quarterly business review you might have with a customer might be annual if they’re a smaller customer. And so you’re going to be the sales rep would be would have kind of standard material, kind of Oh, no. Yeah, that’s okay. We can edit that part out. So okay, can you are you still on? Are you on speakerphone? Are you on your phone? No, I’m on I’m not on speakerphone. At least I don’t think I am. No, I’m not that I volume definitely doesn’t feel like the same way it was. Let me hang up again and try calling you again. Okay, it’s not a good connection.
Is that better?
Will Bachman 20:13
Let’s try it here. Just tell me again what you had for lunch.
Stacy Sifleet 20:20
Will Bachman 20:22
leftover. Something is not great with I don’t know if it’s my phone show. No. Just just, I’m sorry. Tell me.
Stacy Sifleet 20:34
Just, this is my dog sitting here. He’s pretty cute.
Will Bachman 20:42
Okay, why don’t we proceed? And you’re talking right into the handset? Yeah. Yeah, I am. Okay. I don’t know what’s going on. But Alright. So let me just ask that question again. Okay, so be a little bit more natural. So we’ll go ahead and restart here. Let’s put the time down. 21. Okay. Stacy, you mentioned earlier the annual performance review, as a concept. Talk to me about that meeting, what’s the agenda? What did the pages look like? How does an annual performance review add value to a client?
Stacy Sifleet 21:29
Yes, I don’t think it necessarily needs to be an annual performance review, it could be quarterly depending on the cadence that the sales rep typically meets with the customer. And so this wouldn’t be a meeting where it’s just Oh, you’re not performing well on these areas, and we want you to be a better customer. But this would be kind of an added agenda item to their kind of typical sales meetings that they’re scheduling with, with the customers. And so they might be looking at kind of overall account performance, making sure that the customer is receiving what they need on a timely basis, there’s no issues. So kind of checking with a customer and managing that relationship. And then that added agenda item could be looking at maybe a metric where the customer is underperforming. And it’s going to depend on the business depends on what metrics are really important to that business for the case, we’ve been discussing. The metrics, again, we’re reducing days to pay, you know, gross margin gross margin year over year, so depending on the customer, and you know, we probably pick maybe just one or two, if there’s, you know, two metrics where they’re underperforming and say, you know, we saw what we saw over the last year, your gross revenue, the numbers of orders, in dollars, you purchase kind of went down 2% from last year, what’s going on, is there anything, you know, we can do to grow that, you know, and so it would be kind of more of like a discussion, that way to really understand what’s going on with the customer, and, you know, figuring out how to fix it. So your returns have been really high, you know, have you been having some issues with ordering or what’s happening. So digging into that, and looking for opportunities to grow, and fix some of those, those or improve some of those metrics, and, you know, including that, that discussion, if they’re really close to the edge of, of moving up to the next, you know, customer group, so if they’re on the B group, but really on the cusp of being a, we can kind of develop, you know, a plan, you know, if you can get your gross margin, your your gross revenues up, or payments up, you know, 5%, year over year, next year, then we can get you into this group. And these are all the things that we can provide, if you get there.
Will Bachman 23:43
It’s one thing to make some decisions and say, ABC, here’s the different services we’re going to offer charge for but operation and we’ve talked about communicating that change to the customers. But operationally, what did you do to actually drive compliance and implement it so that the people, the sales people, the customer service, people know, this is a B customer or a C customer so that if a C customer calls or traditional sales rep, and starts trying to chat with them, they know Oh, that’s a C customer, I have to just tell them to, you know, go talk to inside sales now. So, or if they try to return something like tagging them in the system, so that we know that okay, you can’t do that anymore. How did you what was what did it take to implement the change operationally?
Stacy Sifleet 24:37
Yeah, I mean, that’s a great question. And it’s really tricky, because it’s changing a lot of behaviors that people have been doing, you know, for a long time really kind of a, you know, especially like customer service, they’re really focused on getting what the customer needs. And so changing that behavior is is challenging and how we did it is, well, first, we made really clear, we made a really clear policy, so You know, we developed, you know, a matrix that showed, you know, these are all the services we offer across the top, these are the customer groupings, and it’s an X or it’s blank. And if it’s, there’s an X, it’s something we offer, if not, it’s not available to that customer. So first step, make sure the policy is really clear, it’s really well communicated, and the team is trained. And then, you know, when the sales rep get those calls, from the C customers, it’s, you know, it’s maybe not taking the call, it’s taking the call and kind of directing them inside sales, but it’s, it’s an ongoing effort, because initially, the sales reps continued to take those calls, and they would tell the customer, you need to call inside sales, but, you know, their routine would have them continue to solve their problems. And so over, you know, a few months, it was kind of an iterative process of continuing to remind people and, and, and, you know, continuing, you know, we had scripts in languages that we provided to the customer service and sales reps to help them manage those discussions, because, you know, they’re harder discussions to have. And so that’s, that’s kind of how we went through it. And we were able to, within the GRP system actually create a field, so we could, you know, when the customer service pulled them up, they were able to see kind of which ranking that customer was to, to help help that because you can have a list printed out of all the customers, but if it’s not easily found, when they’re, you know, acting, it’s harder. So. So that’s kind of how we implemented it. But it did take it was an iterative process, because it didn’t happen overnight.
Will Bachman 26:31
And what is the impact of delivering this? Can you share a bit about what happened to the results in terms of customer feedback in terms of customer profitability growth?
Stacy Sifleet 26:46
Yeah. So I think, surprisingly, the C group of customers, there was very little noise, because they were, they were not customers that were super, you know, they, you know, this, this, my client was not really a super important supplier for them. And that’s why they kind of fell so low. So it wasn’t that much noise there. And so that actually went really well, relatively well, kind of considering what what the team was expecting. I think the huge benefit was on that the a customer grouping, because there was just a much bigger engagement with those customers, I was really small group, I think it was, you know, three or four, it’s very small group of customers that got that extra level of service. But but the sales there kind of grown it also, one of the reasons that drove this product with this particular client is they were seeing a lot more competition. And they were, they were actually really scared, they were going to lose some of their, you know, most important customers. And so this added level of service really kind of solidified the relationship in it, it made it much harder for their customers to leave. And so it gave them a much more sense of security with those really important customers that were driving so much value to the organization. So it kind of solidified that relationship, and helps them maintain and grow that business. With the B customers. There was a little bit more pain, but I think there was an understanding and it also helped improve, I think the communication back and forth, because there was more understanding of the customers performance and, and kind of how that customer could grow into the higher level. So the B customer group was the hardest. We didn’t, we saw profitability increase. We saw that growth at the top and then we really didn’t kind of suffer too much pain with the lowest group that really lost the most services.
Will Bachman 28:45
Well, that’s good news. Stacy, if listeners want to follow up with you and find out more about your firm or connect with you or ask you a question, Where would you point them?
Stacy Sifleet 28:59
You can email me at Stacey at pricing velocity.com. Great, we will t AC y at pricing velocity.com.
Will Bachman 29:09
And we will include that email address in the show notes. Stacy, thank you so much for joining today. It was great hearing about customer value strategy, your approach to that and interesting case study. And listeners if you are so inclined to give this show a five star review on iTunes. It helps people discover the show makes me feel great. And I would deeply appreciate it. So any questions you have for me that you’d like me to discuss in a future episode, email me at firstname.lastname@example.org. Thanks for listening. And Stacey, thank you so much for joining today.
Stacy Sifleet 29:47
Thanks so much.