You’re funding the activities that support your biggest customers. But do you have a plan that allocates those funds based on other metrics besides just sales volume to determine budgets? Do you have a process other than your instincts or past budgets?
In other words, are you underfunding accounts that – with resources – might be able to grow and contribute to your sales and profitability?
Here’s a customer ranking tool that will provide you with facts to make tough calls and hard choices around who to fund for growth – and who it’s time to cut back with.
Using a 9 Box Approach for Evaluating Customers
What’s necessary is a tool that puts all of your customers on a level playing field. To do that, we modified the 9 box grid approach commonly used in strategic planning.
The 9 box approach usually speaks in terms of invest, selectively invest and divest. These aren’t business units being evaluated, they’re customers. Every customer is important and needs to feel special. What we want to do is evaluate our investment in that customer – especially where it comes to driving profitability.
To avoid internal misunderstandings, you may find it useful to rename the customer groups as Tier I, Tier II and Tier III. It defuses the sales team’s concerns around they accounts.
The downside to this approach is that customers are always ranked against each other, so there will always be a top, middle and bottom tier.
Building the Customer Ranking Tool
To effectively place each customer in the appropriate 9 box grid, we needed to find a way to factually plot the performance of each customer. The best way to do that we felt was to use concrete financial measures over a multi-year period.
First, take a 4 year snapshot of each customer’s:
- Average Net Rev
- Average Gross Margin Revenue
- Average Gross Margin %
- % of Net Sales based on your current full year forecast
Now rank each customer by each separate measure. These ranking are going to be added together in different ways to build the tool.
On the LEFT axis we evaluated:
Ranking of Average Net Revenue
+ Ranking of Average GM$
+ Ranking of Average GM%
= Sum of rankings
On the BOTTOM axis we evaluated:
Ranking of CAGR
+ Ranking of % of Net Revenue
= Sum of rankings
Each customer was ranked highest to lowest. Meaning your top customer has the largest rank. Said another way, if you rank 20 customers against a measure, your best customer is a 20 and your worst performing customer is assigned a 1.
Now calculate and plot where each customer lands on the grid. Each axis is ranked low to high.
What Does This Customer Ranking System Mean?
Some customers will get more investment and resources than they have historically. Others will not.
There will ALWAYS be customers in the TOP, MIDDLE and BOTTOM 1/3 (because they are ranked against each other). Never forget this critical fact.
This will provide you with a tracking tool to use for customer movement over time. For example, after your annual planning and budgeting process is complete, you can evaluate the plan and budgets to show customer movement.
What Does This Customer Ranking Tool NOT Mean?
That you are going to walk away from lower tier customers or that that you are not going to support your customers because they are in a lower tier.
It’s also important to look at different channels or segments by customer and not simply your largest customers overall.
This tool is to help you discover insights about your customer base that sheer revenue can’t. It will ultimately lead to better budgeting decisions that will build your sales and profitability.