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.
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.
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!
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:
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 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.
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:
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:
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:
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:
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!