Part 1: Value of a 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 a specific allocation of the customer’s volume.
The average supplier in a market would be delighted if each of his customers bought everything the customer needed from him. Unfortunately, customers do not usually see it that way. They may buy their requirements from more than one supplier in the market. (See Symptom: “New entrants are penetrating the distribution channels of the industry’s leading competitors.”) When customers do this, they expect each of the suppliers to fill a distinct role in their relationship. This role is another important driver of the worth a customer has for you because it changes the size of the customer. Most customers allocate specific portions of their total product purchases to each role in their relationships.
In order to understand the customer’s true size for a supplier, you must determine the average volume the customer purchases in each role. Each role brings a specific volume of purchases in the customer relationship. (See Perspective: “The Big Slice of the Pie.”)
The Primary Supplier role belongs to the supplier with the largest share of the customer’s purchased volume. The supplier with the next largest amount of the customer’s purchases fills the Secondary Supplier role. If there are one or more other suppliers, they fill the Tertiary Supplier role, and so forth. (See Symptom: “Customers are consolidating their purchases.”) The average customer spreads his purchases among each of these roles in a consistent fashion for several years. As a result, you may use averages for the percentages of volume purchased in each role to project the volume you might gain in a new customer relationship.
Role in Customer Relationship Questions
The combination of the customer sizes along with the roles that the average customer of each size offers suppliers creates the customer size and role matrix. When you view the matrix for the entire industry, each position on the matrix becomes a size segment. The Size/Role matrix may show the percentage dispersal of the total market’s sales volume into segments composed of a combination of customer size along with supplier role. A variant on this Size/Role matrix could show the average percentage of the relationship’s volume that customers of each size allocate to suppliers in each role.
As a result of these analyses, the Company may find that customers who tend to buy from only one supplier may be larger customers in the industry than are customers who purchase more volume in total but do so from more suppliers. The Large customers with multiple suppliers, by spreading out their large volume, effectively reduce their size and relative attractiveness to the Company.
- On average, how many suppliers will customers in each size segment use? (Analysis 10)
- What is the expected volume for each position on the market’s Size/Role matrix? This volume may be stated as a percentage of total purchases the average customer makes or as a specific unit volume. (Analysis 14 and Analysis 15)