SELF TEST #2: Segmenting Customers By Size
What is a customer?
Answer: Any buyer or company purchasing location that has the choice to purchase a product or service from more than one supplier.
Define standardized and centralized approaches to purchasing.
Answer: Standardized is a term denoting a process of selecting a supplier whereby corporate headquarters provides field offices with a definitive list of suppliers from whom the field may choose to purchase. The field office then decides the number of suppliers and the volume to be purchased from each supplier. Centralized is a term denoting a process of selecting a supplier whereby corporate or regional headquarters makes the decision of which supplier or suppliers the field will use for a particular product/service and in what proportions.
Contrast Intermediary and Final customers.
Answer: An Intermediary customer is a customer who purchases the product for re-sale or who plays the major role in recommending the final product purchase. Examples of Intermediary customers would include wholesalers, distributors, retailers and consultants. A Final customer is the buyer who makes the final decision on what product to buy and from which supplier to buy it. Examples of Final customers would be installers and other specialized contractors, consumers, government entities purchasing products for their own use and original equipment manufacturers purchasing a product for inclusion in their own products.
How many size segments would you normally need to cover customer size segmentation in an industry?
Answer: Four, the segments for Very Large, Large, Medium and Small customers.
What percentage of industry sales would you expect Very Large customers to purchase?
What percentage of industry sales would you expect Large customers to purchase?
What percentage of industry sales would you expect Medium customers to purchase?
What percentage of industry sales would you expect Small customers to purchase?
Define a Core, Near-Core and Non-Core customer.
Answer: A Core customer is a customer whose pricing and cost-to-serve requirements will allow the company to earn at least its cost of capital on sales made to the customer through the business cycle. A Near-Core customer is a customer whose pricing and cost-to-serve characteristics enable the company to earn a positive return on net capital employed, but a return below its total cost of capital, on sales made to the customer through the business cycle. A Non-Core customer is a customer whose pricing and cost-to-serve characteristics allow the company to realize a positive cash flow, but a negative return on net capital employed, on the sales made to the customer through the business cycle.
In the absence of actual data for the business, roughly what percentage of customers in the industry would you estimate to be Very Large, Large, Medium and Small
Answer: Very Large 7%, Large 13%, Medium 25%, Small 55%. Note that these are only rough approximations. Markets will vary considerably in these percentages.
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