StrategyStreet / Diagnose / Segments / Value of Customer Relationship




Part 1: Value of a Customer Relationship

Markets may grow quickly or slowly. At whatever pace the market grows, you will always find yourself spending money to grow or to protect your market share. The worth of each customer relationship limits the amount you can spend on each customer to gain the new customer's sales volume or to protect an existing customer relationship.

How much is a customer worth? Like the answer to so many reasonable questions the answer is it all depends. A customer's worth to you depends on the customer's size for you. A customer's size for you is a combination of two factors: how much the customer buys from all suppliers and what part of those purchases the customer buys from you. These two factors are customer-size and supplier role. The worth of a customer also depends on profits and growth. The greater the profitability and growth of a customer the greater the worth to you. (See Perspective: "Is Bigger Really Better?")

The problem in estimating the worth of a particular new customer is that you do not know what his size will be for you. Nor may you be sure of his growth rate or the profit margin he might offer you. Yet, you must decide whether to seek his business. You solve this problem by using averages for customer segments. You draw these averages from your experience with the customers you have today. You project these averages into the future to estimate the worth of a customer you do not serve today. This section of the diagnosis helps you make those projections.

Size of Customer
Capsule: The first consideration in customer segmentation is the size of customer. Because a customer gets attention from industry competitors according to the customer's size, customers of a similar size receive similar treatment from industry suppliers. They tend to buy in similar ways because of this.

Role in Customer Relationship
Capsule: There usually are several suppliers of similar products in the customer's relationship. Each of these suppliers fills a different role for the customer. Each role receives an allocation of the customer's volume.

Growth and Profitability of Size/Role Segments
Capsule: The price the customer pays largely determines how profitable the customer is. You don't want a fast growing customer unless the customer is profitable. If he is profitable, the faster his growth, the more you like him.

Summary Points

Next: Size of Customer