While markups and margins should be included in a distributor pricing strategy, just as important is a distributor’s ability to evaluate wallet share. Within a given account, wallet share is the comparison of known sales to other potential sales opportunities. In order to maximize profitability within a distributor pricing strategy and retain worthwhile relationships, segmenting and analyzing the customer base is key.
Ideal Customer Profiles
There are many factors that influence growth and profitability for a given account. The first step is to establish growth and profitability goals and build clear objectives from them. Understanding the sweet spot, or a combination of factors that, if met, make for an ideal customer profile, is crucial and will make the process of creating and enforcing a pricing strategy much easier. Having a thorough ideal customer profile will allow you to retain loyal customers and also strategize how to approach less ideal customers. Knowing what an ideal customer looks like will allow you to also add more of them to your pipeline.
With a clear understanding of what makes a company a good customer, this can also positively influence sales and marketing efforts making the entire process more efficient.
When evaluating customers to determine how close they match your ideal customer profile, there are several factors that could come into play, depending on the company. All factors can be categorized as either growth factors or profitability factors.
The growth rate is a helpful indicator of how much a given customer’s demand will grow over time. When looking at growth rate, it’s important not to just look at revenue growth but also the number of accounts. While dollars certainly indicate a certain amount of growth, so too does the number of customers contributing to those dollars, especially with a strategy for increasing wallet share within a given account.
Another growth factor to observe is the average spend per account.This number will indicate whether efforts to increase this metric should focus on inside sales, outside sales, marketing or a combination of the three.
In terms of profitability, there are some key metrics to keep an eye on here, as well. Gross profit per order is a much more micro-indicator of how profitable each order from a given customer is. A step up from that is average spend per order. As a distributor, increasing these two values will typically result in more profitability.
Spend Opportunity represents the amount of money a customer could spend with you, regardless of how much they actually do. Spend Opportunities are upsell, cross-sell and other product offerings that a customer is either spending elsewhere or needs to purchase but hasn’t. Along with their purchasing history, there are other, less obvious, factors that contribute to a customer’s spend opportunity. The first is the number of employees. While growth and profitability can indicate certain new opportunities within a given account, the company’s size and ability to handle an increased volume of business can determine whether that new opportunity is actually feasible. Companies with more people typically have more bandwidth to take on new business or an increase in current business.
One segment of customers that often flies under the radar is mid-sized accounts. Because many distributors don’t have the level of analysis needed to properly identify spend opportunity, mid-sized customers often go underserved, creating an opportunity for your company to swoop in and save the day.
Another less obvious factor is the age of the company. Knowing when the company was incorporated can also indicate how sophisticated or efficient their processes are. Some companies hit the ground running with an innovative product but, if their processes aren’t in place to handle the influx, they’ll struggle to fulfill their orders long term. Other companies have experienced some of the growing pains of entering a new space or industry and have worked through the kinks to build processes that make them more efficient.
Another very helpful indicator of whether a company fits your ideal customer profile is where they fit in the customer lifecycle. Also referred to as an RFM (recency – frequency – monetary) analysis, where a customer stands in your customer lifecycle can dictate the appropriate approach which varies greatly for different stages of the life cycle. The goal is to find the acorns that will grow into oak trees and RFM does the analysis to identify which acorns, or customers, have the most potential to blossom.
Determine how recently a customer purchased and how frequently they purchase. At one end of the scale will be one-timers, about 15-25% of the customer base: accounts that made one purchase but never returned for repeat business. This bucket of customers will likely be the most disengaged and least likely to respond to offers or promotions.
On the other end of the spectrum are the roughly 10% of customers who account for between 75-90% of the sales volume. These customers make frequent purchases, sometimes multiple per week, and haven’t gone dormant longer than a few weeks. These customers are the most engaged and most likely to respond to an offer or promotion.
In between the two extremes are customers that could benefit from some educational programs aimed at getting them to purchase a higher volume, other complementary products or the same products more frequently. These customers have somewhat recent purchases but haven’t returned for a month or two. They are at risk of defecting to a competitor but have also shown the willingness to purchase from you, at some level. There will also be some accounts that have grown dormant over several months and the best way to categorize the approach to these customers is reacquisition. Consider them lost accounts that must be re-engaged and re-educated on your catalog to encourage a repeat purchase and hopefully some frequency thereafter.
Given how many factors go into effective pricing and identifying upsell or cross-sell opportunities, it’s hard for a sales executive to measure, much less ensure, consistency across the whole team. It’s also difficult to onboard new sales reps and get them up to par without first overwhelming them.
Being able to identify inconsistent or declining purchasing patterns by customers in order to find new sales opportunities is the goal of sales executives at distributors everywhere. While that may seem straightforward and obvious, often times the processes aren’t in place to do so. Especially if manually driven, it can take months to notice certain trends that, if recognized sooner, could have been acted upon and potentially reversed.
Our studies show that 68% of a sales reps time is spent doing research and, even then, 89% of sales reps miss sales opportunities because of information overload. So while having a cognitive-based sales strategy may work for the top performers who likely already have some familiarity in the space, it’s actually counterproductive for the rest of the team because they lose so much time researching and still aren’t able to leverage that new knowledge into the business.
The Opportunity Detection tool from PROS does a lot of this work you, already. Using 30 years of machine learning and sales deal analysis, Opportunity Detection can optimize distributor pricing and, combined with the right internal processes, ensure that your company remains at the forefront of distributor pricing strategies. Opportunity Detection scans all customer and purchasing data in order to identify similarities. From there, it identifies inconsistencies, churn, and gaps in buying behavior and flags them so that a sales rep or manager can then strategize how to gain more consistency, minimize churn and fill said gaps.
Churn Algorithm If a customer buys less and less each purchase, eventually they won’t be a customer anymore. The PROS Opportunity Detection churn algorithm is designed to identify declining purchase behavior allowing sales reps to recognize this downward trend immediately and take action to reverse it.
When customers are inconsistent with the quantity and frequency of their purchases, it makes it harder for distributors to price appropriately and also forecast profits going forward. Opportunity Detection has an outlier algorithm that identifies large variations in the timing and quantity of purchases, providing an opportunity, again, for a sales rep to strengthen the relationship and aim for more consistent orders.
Let’s say one of your more experienced sales reps often recommends a particular product to a certain type of company while a younger, less experienced sales rep hasn’t yet developed the radar to make recommendations yet. The consistency algorithm within Opportunity Detection scans all similar accounts and recommends products that are common amongst then, therefore bridging the knowledge gap between veterans and newcomers and bringing the whole salesforce one step closer to global consistency.
The Opportunity Detection tool makes it easier for salespeople to identify where a stronger or more personalized strategy may be necessary. That’s step one. The next step is to provide these accounts with a winning price.
Three common causes of weak pricing are insufficient monitoring, lack of knowing how to price effectively and having poor strategies. These are often caused by inefficient or ineffective sales and pricing processes. Because of these inefficiencies, a lot of the burden then falls back on the sales rep. But combining a well-developed process along with a powerful tool like PROS Opportunity Detection will often drive previously undiscovered incremental revenue.
One of our case studies highlights an example of the union between helpful technology and human oversight in the sales space. The learning curve for this company had become so consuming that account analysis wasn’t even happening and sales opportunities were being missed. Sales reps were overwhelmed by the catalog of products and had little insight into the ideal customer profile, making it hard for them to prioritize prospects and customers. So they implemented the PROS Opportunity Detection tool and combined it with a manual approval process so that the system made recommendations and the sales reps could review and either accept, reject or postpone them. The results in the first six months were that 60% of recommendations were accepted and the company saw $6M in annualized revenue gains.
If you fear that your sales organization may be missing out on deals as a result of a wide array of knowledge amongst your sales team, consider implementing Opportunity Detection from PROS and coupling it with some changes in your own processes to ensure that the most critical knowledge for your team is available, understood and equally influential across the board.
About the AuthorMore Content by Richard Blatcher