Research on Strategies to Use When You Can’t Afford an Overhaul

I. Aligning Incentives in Supply Chains

  • i. Supply chains are expected to work efficiently without interference, as if guided by Smith’s invisible hand. But our research over the last ten years shows that executives have assumed too much. We found, in more than 50 supply chains we studied, that companies often didn’t act in ways that maximized the network’s profits; consequently, the supply chains performed poorly.
  • ii. Incentive schemes are often badly designed. Our favorite example of this problem is a Canadian bread manufacturer that felt it needed to increase its stocks in stores. The manufacturer allotted deliverymen a certain amount of its shelf space in stores and offered them commissions based on sales off those shelves. The deliverymen gladly kept the store shelves filled—even on days when rival bread makers were offering consumers deep discounts on their products. The Canadian baker had to throw away heaps of stale loaves, and its costs soared as a result. The deliverymen earned handsome commissions, but the company’s profits fell because of an ill-conceived incentive scheme.
  • iii. Executives must get to the root of incentive problems, so they can choose the best approach to bring incentives back into line. In our consulting work with companies, we often use role play for this purpose. We ask senior managers to identify decisions that would have been made differently if they or their suppliers had focused on the supply chain’s interests instead of their own interests. We then ask why decision makers acted as they did. In some cases, the answers suggest improper training or inadequate decision-support tools for managers; most of the time, however, they point to mismatched goals.
II. Which customers are most profitable?

  • i. By segmenting customers based on their value to you over time, you can increase the value you deliver to them in return and thus obtain their increased loyalty by providing customized products and services in a highly predictable fashion.
III. How to Identify the Most Profitable Targets
i. Here’s our Top 10 list of criteria we’ve found to be most useful in identifying financially-optimal targets:

  • Decision-Making Power
    The more responsibility the target has for making a buying decision, the more valuable the target.
  • Sales Potential
    The more a target buys or uses from the product category, the more valuable the target.
  • Growth Potential
    The more a target group is growing, the more valuable the target group.
  • Lifetime Value
    The more product a target is expected to buy over its lifetime, the more valuable the target.
  • Retention Potential
    The more likely it is that a target can be economically sustained and, therefore, retained over time, the more valuable the target.
  • Common Motivations
    The more homogeneous and preemptible a target’s needs are, the more valuable the target.
  • Problem Potential
    The bigger the problem the target has that the marketer can solve, the more valuable the target.
  • Responsiveness
    The more a target responds to a company’s marketing efforts, the more valuable the target.
  • Media Exposure Patterns And Media Costs
    The easier and less expensive it is to reach a target in media, the more valuable the target.
  • Findability
    The more easily a target can be identified in databases, the more valuable the target.
IV. Finding Your Best Customer: A Guide to Best Current B2B Customer Segmentation

  • As with most business initiatives, the goals and outputs of customer segmentation research will likely depend on your company’s stage, market conditions, and myriad other variables. However, there are some relatively standard schemes that coincide — or at the very least overlap — with most needs-based or value-based segmentation initiatives.

For example, here are six standard segmentation schemes that could be applied to your customer segmentation research:

  • Segmentation by geographic base / reach
  • Segmentation by industry / sub-industry / industry served / customer served
  • Segmentation by product class / product usage
  • Segmentation by organization size (measured by revenue, number of employees, etc.)
  • Segmentation by product delivery model / product format / packaging format / special technology /process methodology
  • Segmentation by special use / needs