Selectively Pursuing More of Your Customer’s Business

As suppliers in business markets search for profitable growth, it is natural for them to seek more business with the customers they presently serve. After all, it appears to be conventional wisdom that it is easier and less costly to gain incremental sales from present customers than from new customers. Yet, most suppliers lack sufficient knowledge about customers to devise or implement anything but the most sales-oriented growth strategies and tactics. Simply put, most suppliers plan to sell customers more of what they have been selling them, plus other products thought to have the highest margins based on knowledge of manufacturing cost. As a result, senior managers at many suppliers are finding that although their firms are achieving sales growth as planned, the accompanying growth in profits falls disappointingly below expectations.

To gauge their knowledge of their company’s current customers, managers should ask themselves a few questions: What percentage of each customer’s total purchase requirements is their firm providing; that is, what is the company’s share of each customer’s business? How does that share of each customer’s business vary across product offerings sold and across the different locations each customer has? For each customer, which of the company’s product offerings delivers the greatest value relative to competitors’ offerings and which ones deliver the least? What is the total cost to serve each customer — including the costs of providing supplementary services, programs and systems — and, therefore, what is the true profitability of each customer?1

Many suppliers pursue growth despite lacking accurate answers to these questions. At a leading business network-communications- systems provider, for instance, marketing and sales managers use “share of wallet” (i.e., share of customer business) primarily as a “strategic directive” concerning customer accounts. Drawing from a reserve of well-worn platitudes (e.g., “It costs five times more to find a new customer than to sell more to an existing customer”), management annually admonishes salespeople and key account managers to “sell more to each customer.”2 Other than a crude estimate of sales potential per customer based on number of employees and telephone lines per site, marketing managers have no rigorous metrics of share of customer business with which to set objectives, plan strategy, measure performance or reward account managers for superior results. Salespeople use these crude sales potential estimates largely to prioritize accounts. When they do negotiate annual contracts with key accounts, salespeople attempt to “cross-sell” and “up-sell,” activities they would have undertaken with or without management’s strategic directive. At the end of the year, no one in the firm makes a concerted effort to determine whether salespeople, in fact, did attain a larger share of each customer’s purchase requirement or whether those incremental sales were indeed profitable.3

We contend that without a more fine-grained and disciplined approach, the management platitude of getting a “larger share of wallet” likely will not produce the desired profitable, sustainable growth. Chasing incremental customer business with steeply discounted prices and closing deals through the provision of “free” supplementary services grows customer share but wrecks a supplier’s profits and market strategy. However, progressive suppliers in business markets practice a more nuanced and disciplined approach to answer the question: Which customer-share growth prospects are worth pursuing and which are better left to competitors to fight over?

Over the past three years, we have been conducting management-practice research in the United States and Europe with companies that have superior knowledge of their customers and use it to devise and implement focused, inventive strategies that create profitable growth while increasing the value delivered. (See “About the Research.”) Although these best-practice companies are relatively rare, we found them in a diverse array of markets. In the aggregate, their approaches suggested to us a framework to guide supplier managers in the selective pursuit of a greater share of their customers’ business. That framework is predicated on estimating the current share of each customer’s business, selecting and pursuing appropriate and inventive opportunities to increase that share, and carefully documenting the profitability of the efforts. (See “Framework for Selectively Pursuing a Greater Share of a Customer’s Business.”)

Estimating Share

For any given customer, a supplier’s share of business is its percentage of the customer’s total purchase requirements for all market offerings that the supplier would be able to supply. In short, of the potential business that a supplier and customer could potentially do together, how much are they doing? Knowing this, however, provides no understanding of where the most profitable prospects for growth may be found. To identify those opportunities — which may often come from discovering new ways of doing business — a supplier needs a more fine-gauged understanding of its share of each customer’s business.

Determining its share of a customer’s business for each product category supplied, for example, can provide more insight. Further insight can come from understanding how the supplier’s business is spread across locations. That is, if a customer has 10 plants in its manufacturing network, what percentage of each plant’s purchase requirements does each of the supplier’s offerings account for? This can vary dramatically, from being the single-source supplier in one location to supplying nothing at others. What’s more, the cost to serve a customer and the customer’s own costs also can vary significantly for a fixed amount of business, depending on how that business is spread across locations.

Gaining share estimates.

Most companies begin the process of gathering data to estimate their share of customer’s business by simply having their salespeople ask the customer for this data. Bank of America Corp.’s Global Corporate and Investment Bank (GCIB) group and National Gypsum Co. have used this direct-query approach for almost a decade. And senior managers from both firms report that more than 90% of the time, customers respond promptly with accurate figures.

Other companies supplement sales-force data gathering with market research. Telindus, a leading network integrator for information technology (IT) and telecommunications solutions based in Belgium, is organized around eight competence centers, such as secure enterprise networks, e-business solutions, voice and video solutions, and IT systems management. Telindus account representatives estimate the firm’s share of customers’ business in each of these eight competence centers. Among its top 20 accounts, Telindus’s sales representatives assist clients with the process of allocating their company’s annual IT budget. Thus, these reps clearly understand Telindus’s share by competence center of the top-20 accounts’ IT budgets.

To assess the remainder of its customer base, Telindus relies upon a multiclient study conducted by Computer Profile, a Belgian research company. Through a series of interviews with IT managers at over 600 firms, Computer Profile employees compile estimates of annual IT budgets and identify major new IT projects. Telindus then uses this research data to calculate its share of business with each.

Of course, skeptical managers often ask, “Why should a customer periodically provide such data?” Indeed, some customers may ask what they will get in return for this cooperation, and suppliers should consider what they are prepared to offer customers in return. For example, the Lubrizol Corp., a leading supplier of additives to lubricants and fuels, may provide customers that contribute “share data” with reports on the market size for individual products. Such a report would cost from $40,000 to $50,000 if purchased from an industry association or consulting firm.

To get estimates for customers that are unwilling to provide this type of information, firms turn to indirect methods of estimating share of customer’s business. Bank of America’s GCIB unit, for example, turns to published government and industry data. On the basis of annual reports, 10-K forms and other documents that customers file with the U.S. Securities and Exchange Commission, managers determine the extent of capital acquisitions, business loans and securities trading activities that each account has initiated during the past year. From these estimates, Bank of America managers can readily calculate associated interest payments and bank fees for each account. Dividing the actual amount of business that a customer is doing with the GCIB by the estimate of a customer’s total banking business provides bank managers with a proxy measure of the GCIB’s share of customer’s business.4

Validating share of customers’ business estimates.

Progressive firms find a way to assess the accuracy of their estimates of customers’ share of business. Managers from Lubrizol, for instance, periodically check the accuracy of their data by referring to studies published by the American Petroleum Institute. Honeywell Performance Fibers, formerly AlliedSignal Performance Fibers, draws on multiclient studies conducted by the Fiber Economics Bureau, which routinely compiles fiber-producer data.

Building a customer’s share database.

Best-practice firms build a database for tracking their share of customers’ business and for leveraging the knowledge gained in analyses of the data. Lubrizol has created a customer profile (CP) database system, which is always available on the company’s intranet. Each quarter, sales-people and sales managers review and update information on their global accounts. (Global accounts are defined as a country-customer pairing — for example, ExxonMobil’s business in Argentina.) The CP system tracks finished lubricant, finished fuel and amount of additive, each expressed in metric tons. The sales-people gather and submit the data in gallons, pounds, tons or liters, whichever is easiest for them, and the CP system converts the data into metric tons. The amount of additive consumed by the customer is tracked separately because of the varying “treat rates” — that is, how much needs to be added to achieve performance parameters.

The CP system enables the analysis of changes in the market, such as the impact of new product introductions. Such analyses can provide answers to sales rep and sales manager inquiries — for instance, how much the share of multi-grade oils is growing at the expense of monograde oils in Latin American countries. The CP system also enables regional comparisons among Latin America, Europe and North America.

Technische Unie is an outstanding example of a company that, while minimizing the data-gathering burden on salespeople and customers, rigorously estimates its share of customer’s business, uses independent sources to validate those estimates, and builds an effective customer-share database to leverage the value of the data for itself and its customers alike.

Technische Unie is the Netherlands’ leading distributor of electrical, plumbing and heating products for housing, commercial/ institutional and industrial use. To gain a fine-grained understanding of its share of each customer’s business, two full-time employees conduct field interviews with customers. For each branch of Technische Unie, the interviewers select a random sample of 30 customers, stratified by the number of mechanics that a customer employs — small (fewer than 10 mechanics), medium (between 10 and 50) and large (more than 50). Then they visit these customers to conduct customer reviews and collect data. Each researcher visits one branch every six weeks. Together, they conduct about 500 in-depth interviews per year, each lasting about two hours. About once every two years, Technische Unie calibrates the information from its 35 branches, and this information allows the branches to benchmark one another.

As a result of these dialogues, Technische Unie learns a good deal about its customers. Each customer relates the total amount of material it purchased in each product segment (and within product segment by major product families, such as porcelain and piping) and the number of mechanics it has working in a given area (e.g., electrical, plumbing, heating). This enables calculation of the amount of material used per mechanic during the year. In a related initiative, Technische Unie’s sales representatives interview each customer twice a year to ask about changes in the number of mechanics assigned to each product area. This enables the company to compare sales histories for each account by product category. (Thus, for example, Technische Unie knows that within the plumbing product segment it may be getting its targeted share of the customer’s porcelain business, but not of the piping business.)

In the reviews, each customer also reveals the percentage of material it bought from wholesalers in contrast to what it bought directly from manufacturers. To obtain independent estimates for comparison, Technische Unie gathers data from a regional association of electrical installation firms and similar associations for plumbing and heating. It also has one person check the validity of the data provided by sales reps.

Technische Unie has developed a proprietary laptop program for tracking development, sales by order, margin and share of customer’s business for each customer. The program provides benchmark information by product group for each salesperson, all of whom are free to use it to guide their inquiries with customers about their purchases. To gain the confidence of its sales-people, Technische Unie makes it clear that all such information is to be used only for management discussion and guidance, not to assess individual performance.

Technische Unie’s customers participate in these dialogues because, in part, they see them as a beneficial forum for themselves as well. They use the exchanges, for instance, to request that Technische Unie add specific products to its assortment (the company’s goal is to provide 70% of the market’s requirements) or to discuss adding improvements such as electronic ordering.

Selecting and Pursuing Share

When suppliers know how much of each of their customers’ business they are getting, they can then better understand the array of growth prospects possible with each customer. Further, when suppliers know which offerings customers value most and the cost of providing those offerings, they can accurately target those growth prospects that will be most profitable. At its most basic, the share-growth strategy focuses the supplier’s effort on persuading the customer that purchasing more of selected offerings at selected locations would be advantageous. In addition, progressive suppliers draw on this detailed knowledge of their customers to devise new ways of doing business that add value or reduce cost, which the supplier and customer can equitably share.5

Focused share building.

SEGHERSgroup is a Belgium-based design, engineering, fabrication and maintenance company that serves the petrochemical, power generation and water-treatment industries worldwide. SEGHERS relies on account profitability analysis to guide its efforts in building its share of a customer’s business. The company avoids pursuing business that builds revenue but is only marginally profitable. Instead it seeks to become a focused single-source provider of a customer’s purchase requirements. That is, it attempts to attain 100% of a customer’s business in targeted offering categories while not pursuing others.

For example, one of SEGHERS’s key accounts has recently built a new plant next to an existing one on the same property. While most competitors have pursued service opportunities in the newer plant and have shunned the older one, SEGHERS has done the opposite because the older plant has far greater need for maintenance services. Knowing the older equipment well, SEGHERS has a distinctive capability to profitably maintain it. SEGHERS’s profit analyses have shown that the newer plant’s state-of-the-art equipment requires only low-margin services and, what’s more, there are many competitors capable of maintaining it — competitors who would not refrain from chasing the business with a low-price strategy. Thus, SEGHERS has gained 100% of the business in the older plant, while leaving the relatively unattractive business at the newer plant for competitors to battle over.

Growing share by strategically building scope of market offerings.

To gain a greater share of targeted customers’ business, a supplier may decide to add expertise or a capability that it knows those particular customers would value. The supplier could then leverage that expertise or capability to provide a better solution for each of those customers — at a lower cost than any of them could replicate by themselves. The supplier may then offer this expertise or capability selectively for a reduced fee in exchange for an incremental share of those customers’ business.

For example, KLM Cargo, a unit of KLM Royal Dutch Airlines, has transformed its strategy from merely providing space on its airplanes to providing end-to-end, supply-management solutions. When viewed simply as a cargo-space provider, KLM Cargo was in danger of being relegated to the low-margin, commodity portion of point-to-point, air cargo transportation, whereas complementary service providers controlled the whole transaction and captured the more profitable portions of it. To reposition itself, KLM’s special cargo (SC) business unit studied the requirements and preferences of selected customers and improvements in value and cost that could be achieved with a reconfigured end-to-end solution. Significantly, the customers that it studied were not the intermediaries, such as freight forwarders and consolidators, to whom it was selling airplane cargo-container space, but the importers and large retailers that initiate the transactions and receive perishable goods. KLM SC learned about problems these customers were experiencing, what percentage of spoilage was typical, and what price premium customers would be willing to pay for fresher products.

Under its Fresh Partners initiatives, KLM SC began to offer dedicated handling service that ensures an unbroken “cool chain” from producer to the point-of-delivery. The company now offers three levels of cool handling service: fresh regular, fresh cool and fresh supercool. With fresh supercool service, KLM SC places the perishables in special temperature-regulated containers at the producer location to guarantee the maintenance of a specific temperature throughout transport — from truck to warehouse, to plane, to warehouse, to truck, to the point-of-delivery.

KLM SC ensures cool transport of orchids, for example, from producer locations in Thailand to the world’s largest flower auction in Aalsmeer, the Netherlands, and then on to the point-of-delivery in other countries. Companies like U.S. Florimex, the largest flower trader in the world, are willing to pay a price premium for KLM’s cool-transport service because their customers are willing to pay more for a fresher product. KLM SC also provides cool transport of salmon that are farm-raised in the fiords of Norway to destinations in Tokyo, Osaka, Sapporo, Hong Kong and Beijing within 48 hours.

Through these Fresh Partners initiatives, KLM SC has become the single-source provider to its import-export customer for orchids, and it has gained as large a share of the salmon producer’s business as its capacity can handle. The former space provider has repositioned itself as a supply management provider of end-to-end solutions, has provided itself with a more profitable service offering and has gained a greater share of selected customers’ business by strategically building the scope of its market.

Growing share by broadening collaborative relationships.

Because it must leverage limited resources, SEGHERSgroup has devised a growth strategy to expand its share of customers’ business by progressively expanding its collaborative relationship with each. This strategy capitalizes on customers’ increasing demands for one-stop shopping of industrial services and a trend toward greater outsourcing of plant maintenance.

SEGHERS’s strategy features a sequence of four business development steps:

First, when pursuing initial business with targeted accounts, the company focuses on providing one special service or activity that it is distinctively capable of providing, such as bolt tensioning, on-site machining, or value repair and overhaul. SEGHERS makes a concerted effort to furnish outstanding service during the initial encounter in order to build customer confidence in its capabilities.

Second, SEGHERS builds on this experience to propose a second level of services that it could profitably provide — ongoing plant maintenance. Again, it is important to note that SEGHERS does not pursue all maintenance business within a plant or refinery, but only those services in which it has distinctive capabilities and would garner significant profits. If a customer insists on a total maintenance solution, SEGHERS selectively partners with another contractor that provides the required complementary services.

Major equipment overhaul is the third step in SEGHERS’s account growth strategy. Senior managers use ongoing maintenance service to gain in-depth knowledge of a customer’s requirements. SEGHERS’s technicians are trained to spot and report any service opportunities. For example, heat exchanger overhaul is a complicated and difficult operation for customers’ maintenance staff to perform, yet it is a rather profitable service for SEGHERS.

When the customer becomes fully confident in SEGHERS’s capabilities, SEGHERS’s sales managers pursued the fourth level of desired business — total shutdown service, including planned and emergency shutdown. Total shutdown service is the most elaborate service SEGHERS offers, including piping repair and replacement, valve and pump overhaul, vessel overhaul and replacement, and control system maintenance. The work is expensive and may require an entire refinery to be shut down for a week or more. For SEGHERS, this turns out to be demanding, yet much more profitable work.

Profitable growth through multiple single sourcing.

Suppliers and customers can each gain significantly from the greater consistency, continuity and lower transaction costs of single-source arrangements. Still, a customer may be understandably reluctant to give 100% of its business to a single supplier. Continuity of supply, the ability to obtain competitive prices, and access to new technology are all legitimate customer concerns.

Multiple single sourcing is a concept that enables customers and suppliers to reap the benefits of single-source arrangements while minimizing the potential drawbacks. Under a multiple single-sourcing arrangement, each plant in a customer’s manufacturing network is single-sourced, yet the customer maintains at least two suppliers across the network. For example, a customer with 10 manufacturing plants would have one single-source supplier at six of its plants and another single-source supplier at the other four plants, with each supplier serving as the backup to the other. As part of the arrangement, the customer might require each supplier to share process or product improvements with the other. The customer could then keep track of the improvements each supplier contributed and use that as a criterion for awarding future business.

Progressive suppliers often follow a two-step process for multiple single sourcing: First they work with customers to persuade them of the value of being single-sourced at each location, regardless of which supplier is chosen. Then they persuade those customers that added value will be delivered by selecting them as the single source. Honeywell Performance Fibers’ experience supplying carpet mills provides an instructive case study.

Tremendous customer consolidation in Honeywell Performance Fibers’ industry caused the company to focus its efforts on the carpet mills that it believed had the best chances of prospering. The largest carpet manufacturer in the world today is Shaw Industries Inc., whose sales have grown from $250 million to $4 billion in the last 15 years. Shaw has about 100 manufacturing locations, of which 10 to 15 are yarn plants. Initially, Honeywell was supplying very little to Shaw. To become a strategic supplier, it developed an innovative product specifically designed to meet Shaw’s demanding yarn and carpet manufacturing requirements.

Honeywell Performance Fibers and Shaw jointly created six-sigma teams to tackle some of Shaw’s key challenges, such as achieving greater operating efficiencies, product aesthetics and dye-ability. These joint studies revealed that using a single-source supplier for each Shaw plant would improve performance and lower costs. At each location, Shaw would be able to reduce the time it held inventory from one to two weeks to three days. It could also limit the spinning-equipment line changeovers (by using a single fiber type as the source material for a variety of yarns of different construction), improve yield and consolidate invoicing.

In the implementation, Shaw first made Honeywell the single-source supplier for one line at one plant, which represented about 25% of the plant’s business. After demonstrating the viability of this move and the cost savings associated with it, Honeywell was made the single source on two lines at that plant, then eventually the single source for lines at other plants. Finally, Honeywell became the single source at one plant.

Now, Honeywell Performance Fibers is the single source at several yarn plants, and Shaw is one of its largest customers. Growth in their business together has been limited by mutual strategic considerations of how much business each wants a single supplier or customer to represent. Thus, Honeywell’s strategy has been to shift its product mix to a more profitable one for both Shaw and itself, supplying fiber for the middle to upper end of Shaw’s carpet offerings. Interestingly, because of this focused share targeting, Honeywell no longer supplies the plant where it initially had demonstrated the viability of the multiple single-sourcing concept.

Documenting the Profitability of Greater Share

Gaining a greater share of a customer’s business does a supplier very little good when that incremental business comes at the cost of reduced profitability. Shrewd customers can take advantage of a supplier’s lack of understanding of the true costs of serving them. Assessing profitability solely from knowledge of their manufacturing costs, supplier managers and salespeople give price concessions for greater volume and, to close deals, throw in additional “free” supplementary services, programs and systems that customers want. If the supplier does not understand the costs of providing these services, profitability may suffer.6

Best-practice suppliers have the discipline to accurately assess their total cost to serve each customer, including the costs of providing supplementary services, programs and systems. For example, Technische Unie’s disciplined accumulation and leveraging of knowledge about its customers enables it to identify its best prospects for profitable growth, but because there are 4,500 electrical installation firms in its market and nearly 10,000 firms in total, Technische Unie must be selective in its targeting. To guide these decisions, the company performs a customer-contribution analysis including acquisition costs per product group, the cost of sales calls on the customer, the logistics cost, the handling cost, the credit cost and the year-end bonus paid to the customer. Thus, the net result and true profit margin for each customer are known.

Progressive suppliers formally document how a greater share of a customer’s business has translated into greater profits. Profitability may come from lowered costs, a higher price paid by the customer or a more profitable mix of business with the customer. Bank of America provides an illustrative example.

In early 2001, incoming CEO Kenneth D. Lewis dramatically shifted the Bank of America overall strategy from rapid growth through aggressive bank acquisition to delivering superior shareholder value through enhanced operating profits. In line with the new strategy, managers of the Global Corporate and Investment Bank unit launched share-building initiatives, targeting 375 strategic clients to which it believed it could profitably deliver superior value. GCIB was seeking to become the lead bank for as many of these clients as possible, striving to become the focused, single-source provider in selected offerings, while declining to pursue business that it could potentially provide in other offerings. GCIB teams were striving to grow the profitable and highly stable, fee-based global treasury and cash management business, which includes funds collection and concentration, disbursements, investments, information reporting and forecasting services. These teams also pursued a greater share of each client’s highly profitable investment-banking business, including equities, mergers and acquisitions, and risk management services. At the same time, the GCIB teams did not pursue and, in fact, attempted to reduce or exit the high-risk and low-profit loan business.

Within two years, GCIB’s new approach had begun to produce results. Although its 2002 revenues declined by 4%, operating profits increased by 12%, and the shareholder value added nearly doubled. Low-profit loan balances dropped from a peak of $99 billion in August 2000 to $67 billion in 2001 and are heading toward $50 billion. In the process, GCIB has stepped away from many low-margin, primarily loan-based relationships with major corporations, including Wal-Mart and IBM. In 2001, GCIB gained lead-bank status at 34% of its targeted strategic clients, up from 12% in 1999. More importantly, revenue per strategic client jumped 54% from 1999 levels.

DeSter ACS, a subsidiary of Swedish paper-products company Duni Travel, has also been disciplined about assessing and pursuing profitable share of customer’s business. DeSter manufactures and markets over 10,000 paper, plastic, stainless steel and glassware food-service products and amenity kits to the airline industry worldwide, as well as providing design work and inventory management systems. The company’s sales managers (as its salespeople are called) are evaluated, in part, on the growth in DeSter’s share of its customers’ business. Each sales manager targets items that DeSter does not presently supply but could profitably supply. For each product type, DeSter senior management has specified a target contribution margin. DeSter will walk away from items that the customer demands at too low a price. In addition, the sales managers themselves have a contribution margin target for each of their customer accounts.

Profiting From Finer-Grained Knowledge of Customers

Beneath the veneer of the often-heard rhetoric about being “market-oriented” and “customer-focused,” most companies in business markets still have difficulty being anything more than sales-oriented. Yet, simply supplying more of the same offerings in the same way to customers overlooks more profitable ways of growing business with them. Building the scope of the market offering, broadening collaboration and multiple single sourcing each represents a way to grow share of business selectively with a customer and, at the same time, improve the profitability of doing business together for both the supplier and customer. However, to be able to focus their limited resources on the best prospects for attaining profitable growth, suppliers must invest not just in CRM systems, but in gathering data and generating knowledge about their customers’ purchase requirements, the value of the offerings that they deliver, and the total cost incurred to serve each customer.7 While gaining this detailed knowledge is not easy to do, in an increasingly difficult world of strong competitors and demanding customers, it is becoming essential.