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Rule No 5 All customers / suppliers have a different value to you

There are, of course, many ways by which sellers can categorise or segment their customers. By far the most common is size or revenue, but this is 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 nor 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 the revenue. Just look at Courtaulds which makes branded and private label clothing for the retail sector, and which has just gone into administration losing hundreds of jobs. The main reason for the demise of Courtaulds is the impact the collapse of department store chain BHS, their major customer, has had on the business. Therefore, having a ‘default setting’ for dealing with all customers is not the right answer.

So, how do we assess the value and desirability that customers bring. The answer is information and analysis; sounds boring but information is power. Now I am acutely aware that we are all members of a wider market fraternity. Therefore, the well-recognised suite of tools for analysing the market are vital. Whether this be an analysis of the vast array of available financial and strategic information on the internet, or measures like SWOT, PEST(LE) and Porters 5 Forces to determine the position of a customer or supplier in the market are invaluable. However, in this article, I am focusing on the balance of power between two negotiating parties and will concentrate on two under-used tools.

Customer Positioning Matrix.

The first, and a highly effective tool for assessing the relative value and importance of customers, is called the ‘Customer Positioning Matrix’ or sometimes ‘Portfolio Analysis’ or the ‘Supplier Preferencing Grid’. Sales Managers and Directors take note, because this tool will influence way more than just negotiations, and will give you a level of clarity about your customer portfolio that you did not previously have.

The grid itself is a standard 4 box matrix:

  • The horizontal axis measures the % of Sales Revenue using Pareto’s principles for the centre line. Thus, it is perfectly normal for 20% of customers to deliver 80% of the total revenues.
  • The vertical axis measures Customer Attractiveness or Desirability.
  • The grid or 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:
  • It helps in the allocation of resources to specific customers, and whether the right resources are being allocated to the right customers.
  • It can determine the style of relationship that is appropriate to have with this client – and whether the real relationship truly reflects this.
  • It can influence the amount of time spent with these clients. 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)!
  • It should significantly influence the price and profitability targets for specific customers.
  • And, last but by no means least, it should determine our negotiation style for different customers.

What is perhaps most interesting is that the Chartered Institute of Procurement and Supply (CIPS) take this model very seriously. It is taught on their programmes and 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 this, it raises serious concerns around Supply Chain Risk. Curiously, they have often a better understanding of this balance than the seller has!

Category Market Positioning Matrix

Of course, the corollary is true too. Sellers need to understand how valuable their products and services are in the Buyer’s eyes. Buyers use the ‘Category Market Positioning’ or ‘Supply Positioning’ Matrix to determine the relative importance of their categories of spend. Understanding this model is a game-changer for Sellers. In many ways, this model epitomises the conflicting strategies of professional buyers and sellers; sellers emphasising their value and differentiation to enhance their negotiating power whilst buyers counter this approach by focusing on price and alternatives in the market. Many professional buyers are the masters of playing down the value of their supplies and suppliers – even to the extent of trying to commoditise them. Unwary sellers fall into this trap whilst those who have done the analysis properly and understand their true value can counter this approach easily. Similarly, unscrupulous sellers will try to beef up their differentiators when talking to unwary buyers. Perhaps most soberingly, the fact is that the buying fraternity seem in general terms to have a deeper and broader understanding of these issues than sellers. And ‘information is power’.

Bring Customer Positioning and Category Market Positioning together and you can build a really good assessment of the real balance of power and relative value between the customer and the supplier and who really controls ‘the fear of loss’.

So what?

What are the lessons to be learned here? There are three:

  • The first is that ‘information is power’. But, remember this too; power is of no value unless you take advantage of it. (Power is not bad – the abuse of it is bad.)
  • Second, all customers and suppliers have a different value to each other – understand this and you can control ‘the fear of loss’ which will help you achieve your objectives in any given negotiation.
  • Third, put yourself into the other party’s shoes and envisage life from their perspective. You will often learn something more about yourself in so doing.

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