SELF TEST #5: Serving Customer Segments on the Size/Role Matrix

Test #1:

Why do we care about the volume available from the average customer in each Size/Role segment?

Answer: This analysis allows us to compare our performance versus the average competitor in the marketplace. It also helps us calculate the expected profitability of a customer we do not serve today, providing we know which size segment the customer occupies and which Supplier Role in the customer relationship we seek.

Test #2:

How do we compare our company versus competition using the Size/Role matrix?

Answer: Once we have calculated the average volume by segment or position on the Size/Role matrix, we know the average performance of other competitors in the marketplace. We can, then, array our sales volume on the same matrix to compare our performance to that of the average competitor. We are particularly interested in the strategic positions of the Heart of the Market, the Primary and Secondary roles with Very Large and Large customers.

Test #3:

What is the potential problem in calculating growth rates by Size/Role segment?

Answer: The potential problem is that some customers may change their size segment over time. To solve this problem, calculate growth rates based on the segments as they existed three to five years ago.

Test #4:

Can I calculate the profitability of an unknown customer in a size/role segment using average pricing for the segment?

Answer: Yes, but this is not without risks. Prices vary a great deal within a customer size segment in tough marketplaces. As a result, when you use an average price to calculate the profitability of a Size/Role segment, you should also calculate the lower limit on pricing you would accept in order to serve a customer in that segment.

Test #5:

In a Hostile market, when does a customer become unattractive?

Answer: In hostility, a customer becomes unattractive when he no longer generates cash for us after all the cash costs of serving that customer. Profitability is not critical, cash generation is. If we have the excess capacity to serve the customer, we would serve him as long as we generate cash in the relationship.

Test #6:

What components of the Customer Buying Hierarchy drive the most sales volume movement in Hostile marketplaces?

Answer: In a hostile marketplace, Reliability and Convenience, and especially Reliability, drive the greatest amount of sales volume movement. Function and Price tend to be less important since the other competitors in the marketplace turn those into commodities.

Test #7:

Are there Size/Role segments that some suppliers can not serve?

Answer: Yes. In many markets, the Size/Role segments of the Very Large Primary and Secondary Role segments and the Large Primary segments can be served only by the larger competitors in the marketplace. These competitors have the volume capability and support structure to serve these largest customers in all of their locations, with all of their product needs.

Test #8:

What is a Core customer?

Answer: A Core customer is a customer who allows us, through the business cycle, to earn our cost of capital. He pays prices through the cycle high enough to enable us to cover our cost to serve him and also generate a profit sufficient to give us return equal to, or in excess of, our cost of capital.

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