Sales Strategy and Effectiveness
Revenue Retention & Rapid Margin Improvement
In an asset intense industry, volume is one of the key drivers to profitability. Contracting global customer demand is putting sales managers in the spotlight. In turbulent times providing visibility and control is especially important with respect to customer management. In order to succeed, accurate and up-to-date customer insight is required to retain customers, manage economic risk and improve margins.
It is essential to have a customer-centric strategy and to understand the customer needs in order to create customer loyalty.
During an economic recession there has to be even more focus on retaining customers as volumes will decrease and additional customer loss imperatively has to be avoided. Maintaining and potentially expanding market share with a focus on long term profitability is required to emerge as a victor out of the downturn.
StepChange has developed a revenue retention & rapid margin improvement offering. The offering consists of two phases, the first phase focuses on rapid actions to avoid customer loss and close margin leakages. The second phase puts the center of attention on sustainable control to simultaneously start the establishment of needed structures, processes and customer offerings to grow customer loyalty on a longer term scale.
Projects have helped clients (re-)capture 0,5%-1,5% in margins and reduce the risks of bad debt and customer churn.
Customer Segmentation and Service Level Management
The "Achilles Heel" of many companies in the pulp and paper industry is a lack of understanding the true profitability of individual customers and the inability to quickly fine tune the service package paid for by the customer. The key is an understanding of customer segmentation and associated service level management.
Customer segmentation is essentially the identification of subsets of buyers within a market who share similar needs and who demonstrate similar buyer behavior. Once segments have been identified, the seller is able to differentiate his approach and services according to the needs of the customers and to decide how much effort he wants to commit to serve customers.
When you ask sales managers "do you apply customer segmentation?" the natural and typical answer is "yes, of course!". Looking closer it becomes apparent that the segmentation often lacks objective classification criteria. Subsequently, no concrete service differentiation is attached to the segmentation and in many cases the customer differentiation is left to the sales person.
Senior sales people have a good comprehension of which customer deserves and requires which level of service. However, a lack of explicitly defined criteria and services per segment lead to inconsistencies across the whole customer base.
Ultimately, these inconsistencies will result in a number of customers being "over-serviced" with services they do not need, or "under-charged" for services they do not deserve. In both cases money is lost, either for unnecessary services that do not have an impact on top line revenue, or for costly services that are not justified by the profitability of the customer.
Examples for inconsistencies include the availability of small delivery quantities to customers that could use bigger order sizes, or multiple transports a day.
StepChange Consulting supports customers in setting up a solid customer segmentation based on clearly defined segmentation criteria to answer the following key questions:
- "What does the customer value?"
- "What does our company get from each customer today and in the future?"
Based on the customer segments, standard services are defined per segment, i.e. those services that a customer values and deserves based on profitability. Additional services can then be available to each customer segment with an opportunity to single them out and offer them with a service charge.
Product Mix Optimization and Assortment Harmonization (creating a sustainable product basket)
Just as in any other industry, customer demands are increasing, ultimately leading to an ever increasing range of products and services. Absorbing these requirements has significant impact on the supply chain ranging from demand planning, inventory management, raw material requisitioning, production planning and operations. It is essential to avoid falling into the over-servicing trap and suffering from spiraling service costs that typically are not compensated by the customers.
The benefits of a streamlined portfolio are manifold:
- possibility to reduce inventory levels exponentially
- reduced inventory write offs and obsolete stock
- improved lead time and service level of future portfolio
- increased transport utilization
- reduction of supply chain planning complexity
- reduction of order handling and organizational complexity
The core to maintaining a balanced product portfolio is the understanding of product profitability, the quantified cross-selling potential of individual products, and a standard process for periodically consolidating / rationalizing the product & service catalog.
These streamlining initiatives tend to be infrequent and all too often, they simply stall. The main reason is the complexity of the task with thousands of SKUs and a conflicting tendency to introduce new products. The resulting resistance to reassess the product basket on an ongoing basis also contributes to the phenomenon of increasing portfolio complexity. The key is to build a continuous product assessment process into daily operations comparable to processes common in the customer retail business where all shelf products are continuously monitored for their profitability and discarded or changed if not delivering a sufficient margin.
We believe that a solid understanding of product profitability is key to preventing the future product range from getting unnecessarily complex. High margin products need to be identified, taking total cost and Activity Based Costing into account. Non- or low-profit products need to be extracted and assessed for cross-selling dependencies or future potential or reassessment of the cost to serve.
Typically low volume products cause over-proportionally high efforts, e.g. set-up time of machinery or administration of supplier base. The cost to produce such a material might also top the costs to buy it.
Once the current product range has been streamlined, a product lifecycle management process needs to be established to ensure the strategic fit of products into the current and future portfolio.
StepChange has supported companies in the paper value chain to reassess and stream line their portfolios with the result of increased service levels, improved margins and reduced supply chain complexity.
Paper & Packaging companies struggle to capture value through situational pricing. Typically prices are determined according to "the market". Sales forces are sometimes hesitant to apply informed differentiated pricing to different customers. Upon closer review, there is often little analytical information available about the cost drivers of each client. This lack of quantitative transparency is a disadvantage in the negotiation process as it limits the range of supportive arguments and thus drives down confidence of salesmen to defend their arguments in a price negotiation.
The result is often an unstructured and inconsistent pricing approach that shows little differentiation among customers and results in a loss of margin and poses a significant threat potential especially during a downturn in the economy. Pricing information is increasingly transparent, and an unjustifiably low price for one customer can have a knock on effect with other customers. Consistency is key to mitigating pricing threats.
Often customers are over-serviced, either by providing standard service levels in excess of requirements, or providing additional services which are not paid for. Both scenarios result in margin loss, sometimes to the extent of loss making. The main cause for this is the lack of integration of supply chain information, transparency of transactional costs, customer strategy and personal incentives for the sales force.
Management of prices & margins based on holistic supply chain information is the key to improved value generation. Knowing the cost drivers on a transactional basis will allow for improved, fact-based decision making and will support solid customer negotiations.
The StepChange team is experienced in identifying the key value levers that influence pricing leakages quickly and decide on the best approach to capture this untapped value.
Sales Channel Optimization
Selling profitably through the right channel is a challenge in a commodity industry. In parts of the industry volumes going through merchant channels have been declining leading to a concentration of the merchants. In other parts of the industry the key to success is the supply chain integration and closer link of the partners in the supply chain. Overall, as in any other industry, the availability of information and an ever increasing transparency in the value chain leads to a requirement for redefinition of the sales channel approach to increase or keep profitability. Furthermore, there is a tendency to push service requirements backwards in the supply chain. What used to be the role of a merchant has now become part of the service catalogue of the mills. At the same time end-customers have pushed down some of their process requirements to their suppliers.
Redefining the role of each player in the value chain requires thorough analysis and scenario modeling to prepare for and anticipate future developments to define a differentiating competitive strategy.
The output of this analysis is an assessment of the sales channel effectiveness. Truly effective channels serve targeted customer segments, maximize sales and minimize cost, while providing the appropriate service level.
The channel selection generally depends on an assessment of customers' needs, and the proprietary costs and benefits whilst taking strategic intentions into account.
"Are we effectively and efficiently serving our customer base?" Answering this question becomes much easier if a customer segmentation based on profitability and customer requirements exists.
Based on the needs for each customer segment, a certain set of value propositions can be selected that match the customer requirements, yet also comply with profitability constraints.
The definition of the channel needs to consider the specific process requirements of each customer segment.
The StepChange Consulting team can support you in assessing the effectiveness and profitability of your current sales channels. We help our customers to design an appropriate mix of channels that successfully serve the target customers. In order to meet the challenges of tomorrow and to support strategic decision making, we develop scenarios with our customers that explore the development of business environments to select the fitting sales channels.