Weighing up customers

RULE NUMBER 5 All customers and suppliers have a different value to you There are, of course, many ways in which sellers can categorise or segment their customers. By far the most common considerations are their size and revenue contribution, but these measures alone are simply not adequate if you want to determine how to manage a relationship or how to negotiate with a customer. Put simply, big is not necessarily beautiful, and small is not necessarily unattractive. As has often been quoted, size is not everything...

The fact is that not all customers are equally important or attractive, nor do they always hold the balance of power in a relationship. Suppliers can afford to lose some of their customers and may well be better off for doing so. Furthermore, some customers represent a huge risk, especially when they account for a sizeable percentage of revenue. Just look at the unfortunate case of Courtaulds, a long-established maker of branded and private-label clothing for the retail sector, which recently went into administration, losing hundreds of jobs. The main reason for the demise of the company was the “The fact is that not all customers are equally impact on it of the high-profile important or attractive, nor collapse of department store do they always hold the chain BHS, which was its major balance of power in a customer. So, having a “default setting” for dealing with all relationship” customers is not the right answer.

How then do we assess the value and desirability that customers bring? The answer is information and analysis. It sounds something of a dull cliché, but the old adage that “information is power” holds true. Now, I am acutely aware that we are all members of a wider market community. Therefore, the well-recognised suite of tools for analysing the market is vital. Analysis of the vast array of available financial and strategic information on the Internet, and measures like SWOT, PEST(LE) and Porter’s Five Forces to determine the position of a customer or supplier in the market, are all invaluable. In this article, however, I am focusing on the balance of power between two negotiating parties and will concentrate on two under-used analytical tools: “customer positioning” and “category market positioning”.

These two tools are explained in more detail in the boxes on the following two pages. Together, they offer a really good assessment of the balance of power and relative value of the customer and supplier, and who really controls “the fear of loss” in the relationship.

KEY TAKEAWAYS There are three vital lessons to be learned here: l First, information is power. But, remember this too: power is of no value unless you take advantage of it. (Power, in itself, is not bad – only the abuse of it is bad) l Second, customers and suppliers are all different, and have a very different value from each other. Understand this and you can control “the fear of loss”, and this will help you achieve your objectives in any given negotiation l Third, put yourself into the other party’s shoes and envisage life from their perspective. You will learn a lot about them, and often a good deal more about yourself too, by doing so.

HIGH

DESIRABILITY OF ACCOUNT (Hygiene factors and motivators)

DEVELOP (and nourish) or RETAIN (and sustain)

LOW

% OF SALES REVENUE HIGH

The Customer Positioning Matrix (sometimes also referred to as the Portfolio Analysis or the Supplier Preferencing Grid) is a highly effective tool for assessing the relative value and importance of customers. Sales leaders take note, because this tool will influence far more than just negotiations, and will give you a level of clarity about your customer portfolio that you did not previously have.

The matrix itself, pictured above, is a standard four-box grid: l The horizontal axis measures the percentage of sales revenue, using Pareto’s principle for the centre line, whereby It is normal for 20% of customers to deliver 80% of the total revenues l The vertical axis measures customer attractiveness or desirability.

The matrix is, in itself, a valuable snapshot of the portfolio of customers. However, it is what we do with this information that governs how effective the tool is. It can be used in many ways: l It helps in the allocation of resources to specific customers, and in deciding if the right resources are being allocated to the right customers l It can determine the style of relationship that it is appropriate to have with a particular client – and whether the existing relationship truly reflects this l It can influence the amount of time spent with the client. Interestingly, we often find that a disproportionate amount of management time is spent on “nuisance customers” (at the expense of spending more time with key strategic accounts) l It should significantly influence the price and profitability targets for specific customers l Last but not least, it should determine our negotiation style for different customers.

It is particularly interesting to note that the Chartered Institute of Procurement and Supply (CIPS) takes this model very seriously. It is taught on its programmes because professional buyers want to know how valuable they are as customers to their suppliers. Once they know this, they can improve the perception of their relative importance in order to strengthen their own position. Even more significantly, they analyse what proportion of their supplier’s revenue they account for – and if they account for more than 15% of it, this raises serious concerns around supply chain risk. Curiously, buyers often have a better understanding of this crucial balance than sellers.

Market complexity

HIGH

Time/cost to switch resources

Business impact if there is a problem

LOW

% OF SPEND HIGH negotiator has in the eyes of the other party. The other party will measure this by trustworthiness, authority, reputation and expertise l Pathos – empathy and emotional appeal – is the emotional appeal of your argument (verbal and non-verbal). This can be either positive (warm, emotive) or negative (coercive). Rich analogies, storytelling and humour are powerful emotional themes that have a profound effect on the other party’s perceptions l Logos – logic or factual information – is synonymous with logical argument. This can involve the use of facts, statistics and evidence. There is often no shortage of this to support both sides of the argument (witness the recent EU referendum). The key is to make it understandable, logical and real.

Buyers use the Category Market Positioning Matrix (also known as the KEY TAKEAWAYS

Supply Positioning Matrix) to determine the relative importance of their This all holds as true today as it did 2,300 years categories of spend. But understanding this model is a game-changer ago. There are two key lessons to draw: for sellers too, because they need to understand how valuable their First, the most powerful and persuasive products and services are in the eyes of buyers. In many ways, this arguments contain elements of all three types of model epitomises the conflicting strategies of proof. Ethics provides the professional buyers and sellers, with sellers “Sellers need to understand how credible foundation upon emphasising their value and differentiation to enhance their negotiating power, while buyers counter this approach by focusing on price valuable their products and services are in the buyer’s eyes” which your case will be built. For example, the use of reference material, and alternatives in the market. awards and third party Many professional buyers are masters of playing down the value endorsements all build credibility. Emotions are of their supplies and suppliers – even to the extent of trying to the primary reason for making a decision and commoditise them. Unwary sellers tend to fall into this trap, while those hence are extremely powerful. Emotional who have done the analysis properly and understand their true value decisions are made in the unconscious mind, can counter this approach easily. Similarly, ruthless sellers will try to which controls 99.9% of our activity. Witness beef up their differentiators when talking to unwary buyers. somebody falling in love, or buying a new car or Perhaps most sobering is the fact that, again, the buying community house – the primary driver is an emotional seems to have a deeper and broader understanding of these issues than connection. So, the use of positive and negative sellers. As always, information is power. emotion should be a cornerstone of our negotiating and persuasion strategy. Logic is used to validate an emotional decision. Logical RULE NUMBER 6 decisions are made in the conscious mind. They People buy from people – so, understand are rarely irrefutable and can be confusing. So, the three types of proof used by know your facts and keep it simple. If you watch persuasive speakers Dragons’ Den you know that once the dragons see Absolutely fundamental to negotiation is our that the entrepreneurs don’t have their facts ability to persuade others to accept our view. In straight, they’re out. 350BC, Aristotle identified that persuasion was Second, our negotiating, selling and buying “the art of getting people to do something they propositions, websites, marketing and proposals would not ordinarily do if you did not ask”. It is should all reflect elements of these three types of a shifting of attitude, of getting the other party proof. Take a hard look at your sales and to move their position closer towards yours. As SIMON BUZZA is a founding marketing outputs to see if they really do contain such, it has a profound effect on negotiation and conditioning. He identified three types of proof partner of the NewDawn Partnership, an advisory service that focuses on delivering elements of all three. If not, you are unlikely to compete effectively at the negotiating table. used by highly persuasive speakers: operational improvements to (For more on ethos, logos and pathos, see Sarah l Ethos – honesty, sincerity and ethics – is a the buyer and seller interfaces of a business. Visit: Hinchliffe’s features in this and previous editions of measure of the credibility or respect that the www.newdawnpartners.com Winning Edge.)