In many companies today 80 percent of revenue/profits come from only 20 percent of their customers, and other benchmarks show that 50 percent of a company’s revenue comes from 5 percent of its customers. Whichever the measure, it’s clear that a small and disproportionate number of customers are responsible for a large percentage of a company’s revenue. In fact, these strategic accounts (unique customers) are critically important to a company and must be carefully managed as a valued company asset.
Competitive pressure on companies has never been greater. Sluggish economy, globalization, mergers and acquisition, eroding margins, out-sourcing, the technological revolution, shrinking customer bases; these and other developments are creating unprecedented challenges for business executives, especially for those who manage strategic accounts. More than ever, maintaining and building relationships with existing key customers has become essential to sustaining the P&L profile that is needed to survive and grow.
There are two approaches to maintaining a healthy P&L. Cut costs or improve revenue. (Ideally, of course, you do both.) By now the first approach, which dominated the last 10 years, is approaching the stage of limited returns, as organizations realize that there’s only so much ‘excess’ any company can eliminate. As a result the second approach, revenue improvement, is fast becoming a universal imperative. Recognizing that revenue is the lifeblood of their organizations, executives are increasingly following the mantra “back to growth”.
There are two approaches for business intent on growing revenue. Expand into new markets and new customer bases, or optimize the business you have in your existing accounts. These approaches are meant to be complementary, but with global competition severely limiting market expansion, leading firms are focusing on the second option, seeking to develop untapped potential in their existing customer bases.
There are two approaches to improving business with your strategic or large accounts. The old-fashioned methods of try and sell them more and bill them accordingly. Or, a more enlightened method with focus on the development of a long-term, profitable relationship by delivering significant value that improves the customer’s business. In fact the “secret” for business success in the twenty-first century is exactly that; make significant and valued-contributions that ensure the success of your key customers/accounts.
The need for a reliable account management process is more urgent today than it has ever been. If you doubt that, try to find an institutional banker with less than a 30 percent churn rate or a telecom that doesn’t worry about customer retention.
And this brings up a whole new topic: What does it costs to acquire or lose a customer? This is a highly debated subject with answers that vary from; “it depends” to “3 times” to “10 times” to “it doesn’t matter”. Here are a several opinions:
“Calculate the customer life-time value. Calculate the customer asset-replacement cost. Would you be able to replace this account with another of equal value? What is the acquisition cost? Is there 5% or 10% or 20% rule for acquisition: If a customer is worth $10 million annually is the firm willing to invest $500K or $1 Million annually to keep it or to acquire it? What is the return-on-investment (ROI)? Go through a lifetime customer-value exercise. Consider the value you deliver to the account, the replacement cost, and the investment you need to make in the relationship.”
“There is a spurious “fact” that circulates widely alleging that “it costs five times as much to acquire a new customer as it does to retain an existing one,” although sometimes people say it is seven times as much or ten times as much. This fact originated with a Harvard Business Review article a couple of decades ago, which was the result of a general study of retention policies compared to acquisition policies across a range of businesses in different (consumer) categories.”
“The idea that “it costs X times more to acquire a customer than retain one” is an urban myth. First off, acquisition costs vary by industry. The auto industry needs to spend a whole lot more to acquire a customer than, say, ING Direct who can jack up their interest rates on CDs and acquire a lot of new customers. Second, costs to both acquire and retain customers ebb and flow with economic cycles. In good times, acquisition costs decline. Third — and most importantly — retention costs are INCALCULABLE. A firm has to first determine what it includes and excludes in the definition of retention costs.
Do you include all the costs associated with providing customer service to customers in your retention calculations? After all, if you don’t service them, you will have less chance of retaining them. Do you allocate all IT application maintenance and enhancements to your retention calculations? If you don’t continually improve your transaction and interaction service capabilities, your ability to retain customers diminishes. The reality is that no one has the slightest clue what it costs to retain a customer, because no one has defined a standard for what costs to include and which ones to exclude.”
And, the debate continues.
Clearly, maintaining what market analyst Frederick Reichheld calls the “The Loyalty Effect” has become a make-or-break proposition for business today. Whatever their size and whatever their markets, companies everywhere need to protect their key strategic customers as important business “assets”. They need to deliver real customer value or risk being “re-positioned” as a commodity supplier. They need to invest appropriately in the strategic relationship and safeguard against account erosion.