Whether a CEO, CFO, COO or are responsible for running a division or branch, it is critical you run a financial segmentation on your customers at least quarterly. Not all customers are created equal. Never have been, never will be. To get the most out of this article, it is important to download the pictures or view in your web browser to understand the financial segmentation matrix.
The graphic above represents a customer financial segmentation matrix or Segmentation IQ™. We start by understanding the number of customers in each segment and the value each segment brings to the company in terms of revenue and contribution margin.
We have segmented and color coded the three revenue and three contribution margin segments as follows:
Revenue from left to right:<$200K, >$200K, >$750K
Contribution Margin from bottom to top:<14% CM, >14% CM, >22% CM
The upper right segment (1-1) is high revenue, high margin. The lower left segment (3-3) is low revenue, low margin.
The objective is to determine resource allocation based on financial segmentation and the capability to move these accounts “up and over” to the right. With Butler Street’s proprietary Segmentation IQ™, we have the capability to run “what if?” scenarios to determine the best course of action. Example:
What if we raise prices 10% in Segment 3- 3 and 40% of the customers accept the increase?
What will that do to company revenue and EBITDA?
What if we stop servicing 20% of the customers in Segment 3- 3?
Once customers are segmented, we look to five key strategies to profitable growth:
Review: these are low revenue, low margin accounts. We need to determine if these clients are strategic to a particular market and if not, we need to raise prices/rates or move to a lower cost channel (telesales, Internet).
Efficient: these are higher to high revenue clients with low margin. We need to determine if we can raise prices/rates and if not, find a way to reduce the cost to service these clients.
Develop: these are clients with revenue from low to high with margins that are accretive to the overall company/division margin. We need to find a way to gain a bigger share of wallet in these clients through “deep and wide” penetration.
Grow: these are clients with low revenue and high margin. We must understand our penetration rates and make every effort to advance the relationship by selling more products and services to these clients.
Protect: these are higher to high revenue and high margin clients and must be protected at all costs. We need to start by completing Quarterly Business Reviews to educate these clients on the value we bring and look to further expand and secure our relationship.
Understanding the profit contribution by customer, by segment can provide actionable insights for companies. It’s the starting point for making better decisions and developing long-term strategies for success. If you don’t know which customers and which products/service lines are providing contribution margin, you’re not maximizing profitability. Underperforming segments represent opportunities for improvement. High-performing segments provide opportunities for expansion. The resources and efforts should be shifted to segments and customers with greater potential for positively impacting the bottom line.
At Butler Street, we have developed tools like Segmentation IQ™ to ensure our clients are making the right decisions as it relates to client and talent development. It is the first step to client development—perfected. Once financial segmentation is completed, actionable insights are developed to ensure we are advancing the relationship through Key Account Management and cross-selling additional products and services. Want to learn more? Click on CONTACT and let’s talk.