The following is from the February 2009 Drilling Down Newsletter. Got a question about Customer Measurement, Management, Valuation, Retention, Loyalty, Defection? Just ask your question. Also, feel free to leave a comment.
Q: Do the principals in the Drilling Down book apply to manufacturing? I was first introduced to Relationship Marketing in an MBA course years ago. I have been looking for an opportunity to test these ideas and now find that chance in this job (I was and still am a foot soldier, but now have more responsibility in these areas).
Manufacturers typically look at the highest revenue-producing customer, then pull out the manufacturing directory and start calling every company in the same business. Not really marketing. Can CRM be used to mine the data we need to be predictive and focused on the value of customers and retention?
A: Sure, same core issues and metrics apply:
1. Retention: Identify best customers, determine order cycles, set up a report that tells you who “should have” ordered but did not based past on past history, either market to them or send this info to sales, depending on the value of the customer.
2. Recapture / Defection: Identify best customers who have stopped purchasing and find out why, take action aligned with the value of the customer. You may not get these customers back, but you will learn critically valuable information that will help you retain customers in the future – is there reason in common why these customers left you? Was there a common Salesperson? A common Product line? A common type of Machine used? A common Material? Take these findings back into Operations and find out if the issue can be corrected.
Sometimes the correction may be needed in Sales or Marketing, e.g. improper machine specs in brochures or overselling of capabilities. Other times, it’s an Operations problem. If the issue cannot be corrected, the question is this: does the company want to expend Marketing or other resources driving this kind of business, if other lines are more profitable and customers of those lines tend to stick with the company for longer periods of time?
In manufacturing, sometimes there can be somewhat of a dispute relative to defining the value of customers, which leads to a faulty definition of “best customers”. As you said, it’s commonly done on sales volume but special promotions and freight deals and so forth can erode margin, and leave some customers who look profitable as not so profitable. So if you are going to base a Marketing program on customer value, you first get with the appropriate folks (Finance, Operations) and come up with a common definition of customer value for the company.
Is sales the best metric? Perhaps, but only if Gross Profit is the same across all lines. Then what of discounts for volume or special deals? What about freight? What about cost of dies / tools for customers who keep ordering new specs instead of repeating the same specs? And so forth, this has to be thought through.
The effort doesn’t have to be complex. You want to end up with a simple spreadsheet formula, the equivalent of “When customer A places an order, 24% of sales is Gross Profit, when customer B places and order, 36% of sales is Gross Profit” and so forth. If you have tons of customers, who might want to run this at the segment level, “If an aircraft manufacturer places an order for a coatings process, 23% of sales is Gross Profit, if a tool company places an order for heavy stamping, 18% of a sale is Gross Profit”. Or segment by SIC codes.
Your finance people may want to use a different performance metric other than Gross Profit, like Contribution to Overhead, Cash Flow, or taking into account depreciation of machines unique to certain customers, or who knows what.
No problem with that. The important thing is to get a formula for the goal that lines up with the way the company is run and the particular business the company is in, and that you understand the implications of this number. Knowing this, you can make the kind of bold Sales, Marketing, or Service decisions that really make a difference to the bottom line. Not just “buying advertising” or “making phone calls”, but Strategic decisions on which customers get what level of service, which business segments to align with and invest more in capabilities for, that kind of thing.
At the same time, don’t get lost in the data / systems work and end up not taking action because you can’t screw down the exact profitability of every customer. Go with a measure of profitability your Finance / Ops folks think is the most consistent and precise measure, which is not necessarily the one that’s the most accurate.
If this value measure starts out with something like just taking discounts and freight into account, then you are much better off than you were, and you can always get better in the future. This is why it’s important to engage other areas in this “value of a customer” discussion, so that everyone is clear and the actions you take line up with the expectations for programs you create.
The Customer Marketing process, whether you call it CRM or Relationship Marketing or Loyalty or whatever, all starts with understanding the value of customer segments or individual customers, before for any kind of Action plan is discussed. This is the step many CRM implementations leave out, and it can be fatal.
Once you understand customer value, all of the decisions regarding the allocation of resources to Sales, Marketing, or Service efforts become much easier to understand, and the value of the different programs and options much easier to evaluate.
And finally, use what you have learned with all this customer analysis to fine-tune your prospecting; rank the SIC code targets by some measure of Profitability or Productivity first and then move down the list. You will be surprised how much the bottom line can improve given a fixed set of resources when you focus on acquiring customers from segments you already know will be the most profitable.
Hope that helps!