The Customer Benefits Budget: Engineering Customer Relationships
Tuesday, January 30, 2018—A great new way to look at the dynamics of pricing and margins, service levels, and cost-to-serve could open the door to great customer relationships and permanent profit success.
While I was writing for some up-coming videos, I realized that each customer relationship has its own inherent operating-cash budget, and that budget is consumed by some combination of logistical costs, service level, and pricing level.
Customers should get to decide how they divide up that budget. Some will need high costs in logistics (say, many small orders to many locations), so will not have as much to dedicate to aggressive pricing and special services. Others will choose to operate on reduced logistics and forego special services in order to get the lowest-possible price. Tailoring the combination, trading one category for another makes you truly customer-centric, while protecting the financial value of the relationship.
Obviously, if we provide certain customers with high-cost logistics AND low price, it blows the budget and we lose money on the relationship. This is already what's happening in many accounts, and is the source of so-called "margin challenges." The customer is driving high operating costs, but not generating sufficient operating cash to cover them. In other words, their price is too low.
A company with their sales team fluent in this dynamic has considerably more profitable growth, and much more productive customer relationships. It's also an open door for the sales team to offer aggressive prices to key accounts, without hurting company financial performance.
Your company could develop four named service models:
• price priority – aggressive price, low transaction count, standard service
• logistics priority – unlimited transactions, higher price, standard service
• service priority – average transaction count, higher price, special services and benefits
• balanced – mid-range margin, average transaction size, standard service
This would formalize four basic models, and customers could be assigned. Those that oversee the deliverables would know the service levels each customer qualifies for, and could do the initial assignments.
Another, less structured approach would be more in price negotiation. The customer would be aware that higher logistics costs are connected to higher pricing, with sales and operations collaborating to assess the balance best suited to the account, and they could do the initial assignments.
Why does this Matter? Because recognition of the interactions of the three elements, and rationalizing their levels in each account can eliminate the individual customer losses that are blocking the aggressive pricing you need to capture potentially-profitable high-efficiency accounts.
So how do you get started?
First, develop your own named service models, and build flexible processes and systems to track and deliver the right service model to each account.
Then, assign an appropriate model to each of your significant customers. Educate and train on this principle, so the customer-facing reps know exactly how to present and negotiate the balance between the three elements. Begin to rationalize your customer base along these lines, moving to shift the balance of benefits, starting within each of your high-volume accounts.
Next, begin the process of balancing the mix of money-making and money-losing accounts. As the losses from the worst accounts are diminished, you can use lower prices as bait for new high-volume accounts, keeping the three elements in balance, of course.
What's the takeaway? Price, service levels and logistics are interrelated – more of one will always mean less of another. Everyone needs to know this, especially executives, sales reps and customers. With this simple principle, every customer can be valuable and profitable, customers can choose the element that's most important to them, and so each relationship can be tailored for win-win.
This produces a highly-productive, high-efficiency customer mix, and industry-leading profits and growth.
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