A Foolproof Guide to Customer Stratification

Distributors have a finite amount of time and talent to spend building their business. Efforts to win and retain customers are costly and resource intensive. While a focus on the right customers will help you grow your business and improve margins, a focus on the wrong customers can drain your resources, standing in the way of growth and profits.

Today, more than ever before, it’s vital for distributors to be able to identify their most valuable customers and work to best serve their interests to secure their loyalty for the long term. It involves analyzing and grouping existing customers based on various factors to guide engagement. The end goal is to maximize sales and marketing efforts and pricing to achieve retention and profitability.

• Indiscriminate discounting by sales reps.
• An inability to cross-sell/ up-sell due to lack of customer-specific offerings and/or recommendations.
• An inability to allocate time and resources optimally due to lack of customer insight on value.

This is why customer stratification is so important. Customer stratification is the process of analyzing customer data and behavior to identify high-value customers, such that organizations can apply resources accordingly. Distributors use this understanding of customer value to provide a glide path for the organization to cater to those customers that provide the best “investments” in exchange for their time and effort.

Most distributors know their products and their competition; but when it comes to knowing their customers, there’s a lot they don’t know. Information about customers is mostly relationship-oriented, based on sales person tribal knowledge or gut-feel.

Assessing customer value via this relationship-oriented approach is akin to looking at only the tip of the iceberg, where the more granular data-driven details of the customer value of that relationship exist well below the line of sight.

Perhaps you have two customers that each buy $100,000 worth of goods from your company.

Which is the more valuable customer?

Customer A makes 10 purchases per year of $10,000 worth of goods.

Customer B makes 100 purchases per year of $1,000 worth of goods.

While Customer B buys commodity items, Customer A is buying products that are more specialized, which warrant a higher margin. Customer B also returns 10 percent of what they purchase.

In this scenario, it’s quite easy to spot the customer that delivers the greatest value to the organization, but it gets immensely more complicated when dealing with thousands of customers and multiple variables that must be factored into this equation.

This is why technology for customer stratification is imperative; it does the work of taking thousands of pages of reporting and applies the right factor ranking and weighting to help distributors make sense of their customer data. A weeks’ long process can be completed in mere minutes; making quick work of all this data can give distributors the power and flexibility to run through more “What if” scenarios.

• Buying Power: This is defined as a combination of data points ranging from sales revenue to unique orders and items. Customers with high buying power are good customers, but also have the ability to demand tighter margins based on their influence and flex. This is a critical consideration in customer segmentation strategy.
• Profitability: This is an obvious behavior, but understanding why and how a customer becomes profitable is an important insight to fold into segmentation.
• Cost to Serve: Weigh this factor against buying power and profitability to get an honest evaluation of how good a customer is for your business. If they place big profitable orders, but don’t pay their invoices and burn through your resources and daylight regularly, they are probably eating into profits in other ways.

By analyzing customer data and behaviors, organizations can stratify or group customers. These categories might include: Core, Opportunistic, Marginal, and Service Drain.

• Core Customers – profitable customers that transact in high-volume on a regular basis.
• Opportunistic Customers – profitable customers who buy infrequently when their regular supplier stocks out.
• Marginal Customers – customers that buy infrequently in low sales volumes and require either low prices or high service levels.
• Service Drain Customers – high-volume customers that require higher levels of service while demanding low prices.

Customer stratification allows organizations to make different pricing choices for each group to ensure each customer is priced right, according to their characteristics. This is really about understanding the key value propositions that characterize your relationship with that customer — What’s important to them, and what’s important to your business?

One of the best things about customer stratification is it’s easily within reach of just about any distributor. The biggest success factor is the organization’s willingness to adapt.

Many distributors have misgivings about the resources needed to execute a customer stratification and pricing optimization program. The reality is that you don’t need to have a big pricing team; the resources you already have in place will suffice. Getting up and running with your program will require a few weeks’ commitment, but after this, the time commitment is approximately one hour per week.

With the right technology in place, you have insight to ensure optimal pricing is in place for every customer. Many distributors worry that this technology will supersede human sellers. This is not the case. Customer stratification and price optimization can still leave room for human negotiations. However, it can give distributors a huge advantage – allowing them to be more optimistic by finding windows of opportunity that may be fleeting.

Customer stratification is really about understanding what are the key value propositions that characterize your relationship with that customer — What’s important to them, and what’s important to your business?

When your customer stratification and pricing is based on real data, you can be assured your organization is focused on dealmaking that drives optimal profitability.

Ready to get in the data-driven driver’s seat? White Cup’s Revenue Intelligence platform enables distributors to make sense of their data and make business decisions that improve revenue performance. We can help you connect the dots of your data across critical business systems, revealing key insights via analysis, and provide the tools you need to take action for revenue improvement.

White Cup makes it easier for businesses to use their data to make better decisions toward profitable growth. Our Revenue Intelligence platform with CRM, BI and pricing tools give customers easy access to intelligent information that drives revenue growth, increases profitability, differentiates their business, and engages their employees. Over 1,000 customers trust White Cup across the distribution and office technology industries with decades of industry expertise. To learn more, visit whitecupsolutions.com.