Making segmentation a business reality for chemical companies

02 September 2011 16:53  [Source: ICB]

Profitability of chemical companies may be largely dependent on how they manage the upstream dynamics of feedstock markets, but the chemical industry is learning how to improve margins through better customer segmentation in the downstream market too.

But, research and experience show that these efforts do not go far enough, and they may be leading some companies to spend more than they should on serving customers.

Last year, Accenture and the American Chemistry Council undertook research with chemical suppliers and buyers that revealed the imprecise nature of segmentation efforts.

Feeling the squeeze, Rex Features
 © Rex Features

Indeed, many segmentation initiatives are likely to be providing only a false sense of security in terms of their ability to truly discover what customers want.

Only 26% of chemical industry buyers said they were highly satisfied with their suppliers' overall performance and 31% said chemical suppliers failed to differentiate themselves. This figure rose to 55% in North America.

The solution lies in better segmentation. But what does that mean?

SEGMENTATION THAT'S RIGHT

In essence, it boils down to two things. First, companies need to take a more sophisticated approach to defining segments.

Second, they need to take concrete steps to develop differentiated approaches to target each segment, but, in a way that is good for both the customer and the company.

Well-intentioned segmentation efforts can fall short; first and foremost because chemical firms tend to use traditional and simple segmentation methods that place customers into A, B or C categories. This would be based on limited attractiveness-related factors, such as the volume of business done with the customer or the margins on products they have bought.

This method provides an incomplete understanding of what customers downstream want and are willing to pay for.

As a result, chemical firms often end up over-delivering and over-spending by providing high levels of service to all customers.

Or they emphasize factors such as increased technical service, knowledgeable salespeople and collaboration, which some customers do value but other don't.

This means that companies are spending money on offerings that really do not matter to customers; they are increasing their own costs with little or nothing to show for it.

A more sophisticated approach bases ­segmentation on the dimensions of customer needs, customer behavior and customer ­attractiveness (see box). With these three perspectives, companies can determine how to best serve various customer segments and, at the same time, maximize their own profits. ­Experience bears this out. Some chemical companies that have improved identification of the most attractive customers have reduced campaign costs by up to 35%.

Others that have developed a clear understanding of customer needs have increased customer acquisition rates up to 400%.

Finally, some companies have found that the effective clustering of customers into strategic segments has helped reduce customer churn by up to 15% and extend customer lifetime by up to 25%.

SEGMENTATION THAT WORKS

Once multidimensional, insightful segment definitions are in place, companies need to translate those segments into action. That is where many stumble.

Salespeople and service representatives may not understand how to use the segments or, under the real-world pressure of trying to sell products.

They may go beyond the defined segment policies to keep customers happy. Too often, the policies derived from segmentation efforts are essentially "left on the shelf."

Here, chemical companies need to translate segmentation policies into business rules such as minimum order quantities, packaging and technical service levels that can guide employees as they work with customers.

Adding this type of discipline to the process pays off, but why?

When a global manufacturer of specialty chemicals recently established clear segmentation business rules governing all its customer-facing activities, it achieved sustainable margin improvements of 40-150 basis points.

There are several significant practices that can help ensure that segmentation is put to work in the organization:

  • Make the segmentation strategy clear and actionable: the terminology used in segmentation should be descriptive and easy-to-understand. For example, customers might be put into categories such as price buyer, quality buyer or reputation and trust buyer.

In place of long lists of complex business rules, companies should provide employees with short, simple "recipes" that explain the kinds of actions that should be taken with each type of customer.

It's important that segment terminology be agreed by the various customer-facing groups involved, and that it is clearly communicated to sales, marketing and service employees.

  • Build segmentation into the organization: business rules governing customer interactions should be hard wired into the systems.

Systems can give salespeople and customer representatives concise guidance about how to serve customers, based on segmentation ­policies, as they work with customers in real time or plan customer visits. This helps ensure consistent, appropriate treatment of customers and compliance with policies.

  • Sharpen the focus on costs: to a great extent, the profitability of a customer will be determined by the costs of such things as rush ­orders or below minimum-order quantities.

Thus, to assess attractiveness, companies need to have a detailed view of what it costs to serve each customer. They need to invest in the capabilities to go beyond an aggregated view and allocate such costs to specific customers.

  • Plan for sustainable results: segment definitions should be reviewed and updated on a regular basis at a minimum, once a year.

Customers downstream may become more or less valuable, offerings may evolve, business strategies may change and segments need to be kept up-to-date to reflect those shifting business realities.

Otherwise, market segments and business rules are likely to become obsolete and impractical, and largely ignored by salespeople who are trying to meet customer needs.

Improving segmentation will require change, but it will also create real opportunity. By rethinking their approach, chemical companies can strengthen their ability to give customers what they truly want and are willing to pay for.

They can make segmentation work, day-in and day-out, and use it to increase revenue and profitability and also to reduce cost-to-serve.

  • Goetz Erhardt is a senior director in Accenture's management consulting organization, serving chemical and industrial markets. He specializes in marketing and sales strategy.

KNOW YOUR BUYER

A better approach for chemical companies to maximize profits would be to base market segmentation on the three dimensions customer needs, customer behavior and customer attractiveness

  • Customer needs: companies need to carefully research what buying factors customers consider important and uncover those that they value more than price; that is, the "extra" services, customizations, quality levels, delivery schedules and so forth that they are willing to pay more for. Beyond marketing or sales teams using their experience with customers, suppliers could offer interactive tools that allow customers to input individual preferences, deal breakers and other data; or even configure product offerings to suit them. This can give suppliers real-time information at a low cost.
  • Customer behavior: chemical companies are often surprised when they scrutinize actual customer behavior. An analysis of "exception handling" at various companies found exceptions such as rush orders can account for about 60% of orders. Data systems can be used to flag sudden changes in behavior that allow suppliers to intervene early. Where exceptions cannot be avoided, pricing can be modified to compensate or to alter customer behavior.
  • Customer attractiveness: customers do not all cost the same to serve, and they do not all make the same contribution to a supplier's profitability. Companies should carefully assess each customer's value to the company, looking at ­factors such as profitability and volume of business done with the company. It is ­important to look not only at current attractiveness, but also future attractiveness in terms of potential growth and innovation.

Author: Goetz Erhardt



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