450+ Basis Points from Better Customer Segmentation
epaCUBE Recently Released epaCUBE Segment Optimizer — Users are Already Reporting 450+ Basis Points of Profit Improvement
The number one reason distributors need to tighten up their approach to segmentation is profit. Following a successful beta launch at the end of 2018, we already have epaCUBE clients using epaCUBE Segment Optimizer with epaCUBE Profit Optimizer and reporting a 450 basis point improvement in their profits. That is the kind of profit-building power great customer segmentation can bring to a distributor’s business.
Many distributors are leaving money on the table because they are ignoring segmentation. No matter the size of your company, 450 basis points is a lot of profit that could fund many other initiatives inside your organization. When your segmentation and pricing strategy are aligned, large profit gains are the rule not the exception. One of our users at a recent meeting shared with us that they have captured over a million dollars of new profit in a matter of months working the software and are continuing to see improvements each week.
We have a very simple-to-use answer for your segmentation issues. This month I want to address customer segmentation with you in a three-part blog series addressing:
- What makes customer segmentation so difficult in distribution?
- Why is segmentation in distribution so different than in other industries?
- How does epaCUBE Segment Optimizer turn segmentation into a core strength for distributors?
Difficulties Faced In Customer Segmentation for Distributors
When distributors are earning an additional 450 basis points or more from better segmentation, why aren’t more distributors doing something about their segments?
The main reason is that it is difficult without the right software to analyze and update customer segments. How do you decide what segments are important to your company? How do you decide what behaviors qualify which customers for which segments? Just the thought of categorizing thousands of customers makes most marketing executives heads spin. So you probably set up your customer matrix or customer groups when you installed your ERP system and then never returned to it.
Stale segments negatively affect your profitability. And maybe worse, they negatively affect your customers’ perception of your business through inconsistent and random pricing. So you’re losing profit while you’re irritating your customers. That’s a bad combination.
Even worse, many distributors never set up their segments correctly in the first place. You might find yourself without any segments and no idea how to get started. Don’t feel bad, because you’re not alone. Many distributors never even considered segmentation until other initiatives like a new ERP implementation, a new branch, a new product line, or something else that forced them to start putting customers into groups. Unfortunately, because segmentation is such a difficult topic to analyze and understand, most management teams don’t delve very deep into their customer segments. Instead of analyzing real customer behavior to drive profitability, they take the easy way out. Maybe the lump all of their new customers into a “cash customers,” segment. Then they drop all of the contractors together in another group. If this is the case, there hasn’t been a strategic conversation about what defines a good customer.
Analyzing Customer Segmentation is Difficult
Analyzing segmentation is hard because at the end of the day, segmentation is about what is important to your business. Sometimes that’s a hard conversation to have. That’s why geography and demographics don’t make good segments on their own, because those things don’t drive customer behavior and customer behavior is what drives your success. It doesn’t matter what you do if customers don’t have some behavior with you. You have to sit down with your team and think about the things that add up to success for your business and then craft your segmentation strategy around those things.
Even if you did have the segmentation discussion with your teams and even set up your customer groups and matrices correctly, you can’t stop there. The problem is that customers change their behaviors and new customers enter the system, These changes should be happening on a regular basis because changing customer behavior and new customer additions are what drive successful distribution businesses. It’s also why some of the most successful companies in terms of customer growth have the worst, least profitable customer segments. It is actually possible to grow your way into smaller profits simply because your customers are segmented incorrectly and are receiving the wrong pricing. How do you know when to put a customer into a different segment? That is really important, because your segmentation strategy should determine how that customer is priced, which affects their experience and your profitability.
Distributors Lack the Right Software
Some distributors avoid segmentation because they don’t have the right software available to segment successfully. Let’s not forget that it takes a lot of data to get our segments right, so if we don’t have the right methods of analysis we just push it off for tomorrow. Often distributors don’t even know how to begin attacking and analyzing the problem, let alone solving it. Spreadsheets and BI tools are not enough.Then if you get to the right data and analysis, you’ve got to update all that inside your ERP system constantly to keep your pricing fresh and up to date and profitable. You could drive an entire team of employee nuts just updating your ERP, then turning around making some more changes, then updating your ERP and so on forever and ever.
Pricing Consulting Alone Doesn’t Work
Some distributors think they can get out of the hard work by bringing in consultants. We’ve never seen that work. In fact, we’ve had to do a lot of repair on customer segments for distributors who failed in their work with consultants. You can’t hand over the most important aspects of your customer experience – segmentation and pricing – to someone outside your business. You need to own it yourself. Even if you like the spreadsheets that your consultant provides, it will probably arrive after weeks of time have passed and then you have to digest it into your own systems and culture. By then, your customers have changed again and the work your consultant did is already out of date. But it is usually worse than that because most consultants are making guesses, on your dime, about your profits about customers they’ve never met and they do it too late. Consulting doesn’t work — you have to own the segmentation and pricing process yourself. It is too important to your business, your customer experience and your profits.
Without Good Segmentation, Customers and Reps Mistrust Your Pricing
Perhaps the worst problem you face with bad segments is that your customers and your sales reps stop trusting their pricing. Customers talk to each other and they want to know why do they get a worse price than you offer to a similar business down the road? Unfortunately, the reason is simply that they’re in the wrong customer group and you didn’t know better. So that customer learns that they can go to a different sales rep and get a better price. Now your sales reps are infected with this mistrust of your segmentation and pricing. So the reps start overriding your system pricing and your profitability is totally destroyed because no one is working the right system. Margins and productivity — not to mention morale and customer loyalty — all suffer just because your segments are wrong.
So I hope I’ve convinced you that segmentation is a critical part of your strategy and profit plan. But now what? How does a distributor do segmentation? I’ll be addressing that topic in my second post in this series, “Segmentation in Distribution is Unique.”