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.
© 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:
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.
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.
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.
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.
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
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