Is Bigger Always Better?

Do the biggest customers always get the best deals?
Not always! Paul Rogers explains how suppliers segment their customers, and why the biggest customers may not always be getting the best deals.

The idea that a buyer may want to be a ‘preferred customer’ for a supplier is a relatively new one.

For decades, Purchasing Managers adopted a tough, adversarial approach to conducting negotiations in order to secure the best outcomes. But at some point in the late ’80s/early ’90s, a different approach began to emerge, perhaps based in part on a growing awareness of key account management strategies being adopted by sales teams.

The rationale is that suppliers have discretion, and could exercise it as they saw fit.

Scale was important to suppliers of course, but there are other dimensions of an account that could affect how a supplier exercised that discretion. ‘Key’ accounts were not just the biggest accounts, but accounts that were strategically significant to the supplier.

For example, if a supplier wanted to recruit a new customer, the value proposition of conquering one from a competitor might be the most attractive option. At the same time, some of the supplier’s existing customers might be costing more to keep their accounts serviced than others. Scale alone is not enough to understand a supplier’s strategies towards their customers; the biggest customers need not always get the best deals!

Supplier preferencing.

Exhibit 1: Supplier Preferencing

Supplier Preferencing was introduced as a concept in 1996 by Paul Steele and Brian Court. It seeks to create a simple framework to assess how a supplier might orientate themselves towards different customers.

There are two dimensions:

1. The relative value of the account
2. The attractiveness of the account

Relative value

Relative value means the value of the account as a percentage of the supplier’s total sales. If the 80/20 rule applies to a supplier’s customer accounts, then most suppliers will have a few large accounts, and a much larger number of lower value accounts. As a rule of thumb, an account value of between 1% and 3% of total sales to mark the division between ‘high’ and ‘low’ value accounts (though this depends in part on the structure of the industry) can be used.

Attractiveness

Attractiveness is a more intangible dimension. The prospect of profitable sales growth would make any account attractive, as would kudos by association. Conversely, an account which is stagnant, low in sales value, and which requires a high level of attention would be considered less attractive.

The Supplier Preferencing model is simple to grasp, but sometimes there is a gap between the perception of how the supplier should treat the customer account, and how they are actually treating it. Here is a simple diagnostic tool to assess how the supplier is actually treating the customer.

Core account.

The supplier is treating the customer as a core account if five or more of the following behaviour’s apply to their management of the account:

1. There is a dedicated key account manager.
2. The supplier participates in joint planning processes with the customer.
3. The supplier owns assets specific to the account.
4. The account is more than 2% of their total sales.
5. The supplier actively seeks longer term commitments.
6. The supplier has aligned some of their business processes with the customer.
7. The supplier uses the account as a reference site.
8. The supplier matches market developments proactively.

Exploitable account.

The supplier is treating the customer as an exploit[able] account if five or more of the following behaviours apply to their management of the account:

1. The account is more than 2% of their total sales.
2. The annual spend with this supplier is increasing faster than any changes in your demand.
3. Performance improvements are negotiable subject to the client offering incentives such as contract extensions.
4. Claims and/or billable activities are greater than similar suppliers.
5. The key account manager is tasked with margin growth or profitability, rather than market share.
6. The supplier tries to build relationships with technical personnel to influence sourcing decisions, or there are other initiatives which have the effect of ‘locking the account in’.
7. The supplier’s annual report talks openly to the need to increase profitability.
8. Meetings with the supplier invariably focus on their costs and the need to ensure their prices are aligned with their changing cost base.

Nuisance account.

The supplier is treating the account as a nuisance account if five or more of the following behaviours apply to their management of the account:

1. The account is < 1% of the supplier’s divisional or company turnover.
2. There is a standard price list and any discounts offered are in line with industry norms.
3. The customer is charged for low value orders, or directed to distributors.
4. The terms and conditions proposed for business are the ‘standard’ terms and are non- negotiable.
5. There is reactive account management, perhaps through a call centre or standard sales team.
6. Attempts to align business processes are met with a lack of enthusiasm and a preference for ‘standard’ service levels.
7. Invitations to bid for additional work are greeted with indifference.
8. There is no enthusiasm to participate in performance improvement programs.

Development account.

The supplier is treating the customer as a development account if five or more of the following behaviours apply to their management of the account:

1. The account is 1% of the supplier’s divisional or company turnover.
2. There is a pattern of proactive communication demonstrating clear interest in building relationships.
3. There is proactive account management, perhaps through a dedicated account manager or sales team.
4. Pilots or trials are conducted on a concessionary basis with some activities undertaken free of charge or at a reduced cost to win more business.
5. While there may be a standard price list, there are discounts available, though these are linked to sales growth.
6. The supplier shows some willingness to negotiate on terms.
7. The supplier is eager to talk in terms of package deals or additional work.
8. There is enthusiasm to participate in ‘proof of concept’ or other collaborative initiatives.

I recognise that some suppliers may display a variety of attributes towards their customers, but the purpose of this tool is to be helpful in trying to map the ‘as is’ and ‘to be’ states in relationship management.

Further exploration of how the customer might change a supplier’s orientation towards them will be undertaken in a future article!