Perceived Value Creates Profit: A B2B Customer Retention Case Study

John Smibert

ProfitCreation

Business to business relationships are complex. Their success and longevity are sensitive to many influences.

This short article explores the returns that one organisation has achieved from their investment in managing the customer's perception of value.

Case Study:

Three years ago a services company undertook a study of their ten largest customer relationships.

These top ten revenue based customers represented 35% of their  profit. Their most profitable customer provided over 50% of the top 10 profit.  Their top 4 customers drove 100% of the profit from the top 10 (or 75% of the company's total profit).

This means that the next six customer relationships were net break even   accounts. In fact three of the top 10 revenue customers were significant loss accounts.

Another statistic was that three of the top four relationships were over 7 years old.  Four of the remaining 6 relationships were younger than three years.

Observations:

  1. The older the relationship the more profitable it is likely to be. It's difficult to make a profit from newly acquired relationships in a competitive market. What's more the cost to acquire a new account is seven times the cost of retaining an old one. It is therefore vital that everything possible is done to retain relationships. Perhaps some of the investment made in capturing new business should be transferred to customer retention and growth activities.
  2. A small number of large customer relationships typically drive most of the profit. These accounts represent most of the shareholder value.  If two or three were lost the share price would suffer.
  3. A large percentage of customers were loss accounts. Analysis and strategy change is required to convert these accounts to profitable relationships. This generally takes investment in satisfaction management, innovation, business alignment and partnering programs.

Strategic  Response:

This Company decided that they needed to increase their investment in customer retention programs. In the first instance they implemented a program to formally work with each key customer to benchmark perceived relationship value.

During this consultative process they obtained recommendations from each customer to drive an improvement over the value benchmark.  They developed an action plan based on the customer recommendations, then implemented them and repeated the process every six months.

Perception Gap

Through this process they found out that some of their key customers felt that the supplier had become complacent and lacked innovation. They needed a supplier that would align with them to drive change and create more value.

The supplier has since implemented 'partnering' and 'innovation' programmes with some of these customers to drive improved value from the relationships.

Outcome:

Results were significant.

The supplier has retained all ten of their top customer relationships and nine of the ten are now profitable.

They have driven a significant increase in revenue from these relationships.

They have also acquired some valuable new accounts as a direct result of d their demonstrable commitment to delivering value to their customers.

They estimate that their share value has risen by over 10% per annum as a direct result of their customer retention and growth programs.

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