Part 1: Value of a Customer Relationship

• Video #66: Overview of Segments Part 1: How to Look

• Video #67: Overview of Segments Part 2: What to Expect

The attraction of the customer relationship depends on its levels of profitability and growth as well as on its size. A profitable customer who is growing fast is more attractive than is the same size customer who grows more slowly. On the other hand, a large customer relationship that has low profitability becomes even less attractive with high growth.

You use your company’s experience with current customers in each segment to project the profitability and growth of new customer relationships.You may focus on relatively simple measures. These measures use segment averages drawn from your experience to estimate the likely growth rate and profitability you would experience if you were to establish a relationship with a customer in the segment.

The growth rates among segments may vary. These differing growth rates change the relative attractiveness of the various customer size segments. The company’s expectations for demand and sales growth may vary by customer size as well as by role. The company might project one growth rate for the total market and separate growth rates for its component segments on the size/role matrix. Each customer size segment may have an expected growth rate above or below that of the total market.

For example, the larger customers in the market might receive far more favorable prices from the industry’s suppliers than do smaller customers. These lower prices might enable larger customers to grow faster by allowing them to offer their own customers a better value. Or, the medium-sized customers may be growing faster as they offer their customers services not generally offered in the market as a whole. (See Symptom: “Some Companies Have Begun to Replace Their Direct Sales Forces with Independent Distributors (or vice versa).”)

Growth may vary across roles as well. In some industries, customers are consolidating their purchases. That is, they are moving more of the volume into the Primary Supplier and, perhaps, Secondary Supplier roles and away from Tertiary Supplier and lower roles. In other industries, customers are fragmenting their purchases. They are adding suppliers or giving more of their total purchase volume to secondary and below roles than they had in the past.

• Video #61: The Heart of the Market

Segment Growth Questions

	Analysis 7: Industry Growth by Customer Size
	Analysis 17: Share Shift Across the Customer Size and Role Segmentation Matrix

• What are the expected growth rates of each customer size segment? (Analysis 7)

• Why do growth rates vary from one customer size segment to another?

• Is the industry’s volume allocation by size and role changing? If it is changing, what are the causes driving the change? (Analysis 17)

The Company’s assessment of the potential profitability of a prospective customer relationship on the size/role segment matrix is the result of its calculation of the average price the segment pays the supplier (See Perspectives: “Is Your Industry Ripe for Hostility?” “Who Has Pricing Power?” and “The New Pricing Structure“) and of the average cost per unit of sale the Company would incur to serve the segment. As with segment growth estimates, the projections of average prices and costs originate in the Company’s own experience in the market.

The average price paid per unit of sale will certainly vary by segment. (See Symptoms: “Fast growing competitors focus on the industry’s large customers.”) The industry’s low pricing for a customer segment may reduce the profitability of that segment. Larger customers tend to pay lower prices than do smaller customers. Larger customers buy in greater quantity and thus qualify for higher quantity discounts from suppliers. Further, competition for these large customer relationships is more often intense than is competition for smaller customer relationships. The greater intensity of competition for the larger customers causes competitors for those relationships to offer ower prices as incentives. These lower prices may easily spread to other similarly sized customers, resulting in much lower average prices for a larger customer segment than for smaller segments.

Segment Profitability Questions

	Analysis 8: Average Price Paid by Size of Customer
	Analysis 30: Returns by Position

 

The Company uses an average price paid by a customer segment in order to estimate what the price might be on a new customer relationship in the segment. The Company may wish to be more precise in its estimation of likely customer pricing by breaking the size segments into sub-segments if prices by customer size vary a great deal even within a size/role segment. The Company would still make this estimate based on the prices it receives in its current customer relationships.

• What is the average price paid by members of each market segment? (Analysis 8)

• What is the Company’s best guess for the price it would realize in each size/role segment?

To round out the profitability analysis of each position on the size/role segment matrix, the company estimates the cost-to-serve the average customer in each segment. It then combines the expected prices, the costs-to-serve and the average growth rates for each segment to estimate the net present value of a new customer relationship in the size/role segment.

Cost to Serve Examples »

• What is the Company’s best guess for the cost-to-serve a customer in each size/role matrix segment?

• What is the expected net present value of a new customer relationship in each size/role segment? (Analysis 30)

You use the same size/role segment matrix to analyze market volatility and find future opportunities for market share growth.

Basic Strategy Guide Users Go To: Step 5