Wednesday, July 26, 2017

How to find unprofitable customers,...and get rid of them!

In my last blog I explained how SAP Hybris Cloud for Customer provides the right tools to measure customer feedback by means of a satisfaction survey. With the survey we are able to get a better insight in how customers value your organization just by answering a simple question:

"Would you recommend us to your colleagues or friends”

In this blog I will explain how we can use this customer feedback to segment customers and make use of different customer strategies to grow or even divest customers.

A Productive Customer Relation

We would like to measure the value for the customer versus the value of the customer. The value of the customer can be measured in a simple way by getting sales figures like turnover, profitability or gross margin. The value for the customer is in this case expressed as the NPS value.
By combining these two measures we can plot each customer on a chart. Customers that value the organization very high (high Net Promotor Score) and purchase our products frequently are our most treasured customers. We call this the productive customer relation.

The Customer Stratification Model

The foundation for our segmentation model is the Customer Stratification model (Customer Stratification: F. Barry Lawrence, Ph.D. – Pradip Krishnadevarajan - Senthil Gunasekaran).
Lawrence et al. described the segmentation of customers along four dimensions, Sales Volume, Cost to Serve, Gross Margin and Customer Loyalty). In our simplified model we only consider Customer loyalty (NPS score) and Gross Margin so we can assign  customers to one of four quadrants (Core, Opportunistic, Marginal, and Service Drain Customers).

Before we even try to segment customers in SAP Cloud for Customer, let's take a step back to understand how we got to these four quadrants.
When measuring the individual NPS scores we experience that a relatively small group of respondents is either very satisfied or very unsatisfied. The other responses are roughly equally divided and follow a traditional bell curve or normal distribution. This means we can split our customers in half (NPS = 5).

The other "law of nature" is the Pareto law which tells us that roughly 20% of the customers make up 80% of your business. This may vary across different industries and in B2B it is more often 5 to 10 % that contributes to 90 to 95 % of the business. By combining the normal distribution and the Pareto law we have identified the four quadrants.

Customer Segmentation in SAP Hybris Cloud for Customer

Who are those customers that buy your products but do not perceive your organization as very valuable (opportunistic customer). Wouldn't it be great if SAP Cloud for Customer could assist in identifying these customers?

Before we get to that, let's use a simple example. The NPS scores are easy to get as described in the previous blog. Sales figures like turn over or gross margin are generally not available in a CRM system. With relatively little effort you can extract these sales figures from an external (ERP) system and populate a C4C Cloud data source. Just join the standard C4C datasource that contains the NPS values with your cloud datasource. Use this joined data source to build a report that contains the following.

This example has 10 customers (A-J) with each customer showing the NPS value, sales volume and the relative contribution to the total sales. When the sales volume column is sorted from high to low and the percentages are added, you immediately see that 20% of the customers (A and B) contribute 80% of the total sales.

In SAP Cloud for Customer we don't need complex custom key figures with formulas to calculate this. We can simple make use of key figure conditions to make a similar selection. The following picture illustrates this.

Now we have identified all customers and the segment or quadrant they belong to. The last bit we need to do is represent the customers in the specific segment, just like the customer stratification model above. Unfortunately SAP Cloud for Customer is restricted in the chart types that we can use, but a little creativity won't hurt us.

The trick is to use the key figure conditions for creating a report view for each quadrant. The next step is to create a new dashboard in which you use the four report views. When you are done it would look something like this.

In the previous steps I have described how SAP Cloud for Customer provides the tools for measuring customer loyalty (NPS score) and combining this with (external) sales data. This will help you in segmenting your customers along these two dimensions. Now what,  you might think.

Using this customer stratification model should be done with care. Obviously the core customers are to be treasured but your service drain customers seem to be unprofitable and maybe it's time to say goodbye to them or start charging them for services so that at least they become less unprofitable.

It's not a black and white decision

The decision to say goodbye to customers is emotional and not easy. Sometime ago the US telecom provider Sprint fired customers who called the customer support line too often. This may seem harsh certainly from the customer point of view. All in all it's not a black and white decision. Understanding the context can help you determine how and even whether, to fire customers. There's an excellent article about this published in Harvard Business Review that provides more context on how to deal with unprofitable customers.

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