PoS Aug 2013 | The Myth of the Strategic Customer

Hello,

Most B2B firms give too much importance to business from large companies. They chase big firms often at high cost in the belief they will yield substantial revenues if pursued doggedly. They assume marquee customers – they call them strategic customers – give others confidence to do business with the firm. More often than not there is nothing strategic about these customers.

Large firms use their buyer power to demand lower prices or higher levels of service. As a rule suppliers make less money from selling to large firms than they do to others. Marquee customers can sometimes instil confidence in others but business buyers are smarter. They assess suppliers for the value they can deliver.

New customers do not flock to the doors of suppliers merely because a few large companies buy from them. But these realities are often disregarded and the so-called strategic customers are pursued in spite of the high cost of serving them.

Revenues or margins?

A large and moderately successful company once told me their best customers were Fortune 500 firms. I asked them what they meant by best: large revenues or attractive margins? A quick analysis revealed these customers were neither a source of large revenues nor profits.

Only six out of top 26 customers were Fortune 500 firms. They accounted for 34% of the company’s sales and operating margin. The balance top 20 accounted for 42% of revenue and about the same in operating margin. Average revenue and operating margin for each Fortune 500 account were 39% lower than the average for the top 20 customers that were not Fortune 500. In short, the Company’s strategic customers were neither big nor very profitable.

Qualifying the strategic customer

So, is there something called a strategic customer? There is indeed but it has nothing to do with how large the customer’s business is. The idea of the strategic customer is consistent with strategy: how the firm competes effectively. A good strategy rests on the ability to create and deliver superior customer value. A strategic account should, therefore, be one to whom the firm does or can deliver greater value than competitors do.

Read ‘Don’t Lose Money With Customers’ from HBS Working Knowledge.

Delivery of superior value results from the match between the firm’s capabilities, how they conduct activities in their value chain, and customer’s needs. This match creates competitive advantage because customers prefer to do business with the firm. They either pay more for services, or it costs less to do business with the customer. Strategic accounts are where the firm enjoys competitive advantage. This is why strategic customers are more profitable, as they should be.

Identifying the strategic customer
The search for strategic customers should begin within. Identifying them is not enough. One should uncover why they are the most profitable accounts. What is it we do for them that they love? How do we do business with them? Why do they find it attractive? What capabilities do we bring to bear?

Answers to these questions tell us why they are strategic customers and how to find more like them.

The numbers show…

The company in the quoted example, a client of mine, took the lesson to heart.

Fortune 500 ceased to be a customer qualifying criterion. They defined parameters that would help them identify prospects who would perceive superior value from the services of the Company. They recast their value chain to become more appealing to target customers.

The results have been remarkable. In the last three years they have outstripped their industry peers in growth and profitability, quarter on quarter on quarter.

You too can, with a little soul-searching and number crunching.

V.N. Bhattacharya
Business Strategy Consultant

Read How to Identify the Best Customers for Your Business from MIT Sloan Management Review.