Segmentation has traditionally grouped customers by industry, product, or trade channel and then taken a one-size fits-all approach to serving them, averaging costs and profitability within and across segments. The typical result, as one manager admits: “We don’t fully understand the relative value customers place on our service offerings.” But segmenting customers by their particular needs equips a company to develop a portfolio of services tailored to various segments. Surveys, interviews, and industry research have been the traditional tools for defining key segmentation criteria. Viewed from the classic perspective, this needs-based segmentation may produce some odd couples. For the manufacturer, “innovators” include an industrial distributor (Grainger), a do-it-yourself retailer (Home Depot) and a mass merchant (Wal-Mart).Research also can establish the services valued by all customers versus those valued only by certain segments.
Then the company should apply a disciplined, cross-functional process to develop a menu of supply chain programs and create segment-specific service packages that combine basic services for everyone with the services from the menu that will have the greatest appeal to particular segments. This does not mean tailoring for the sake of tailoring. The goal is to find the degree of segmentation and variation needed to maximize profitability.
But those in the lower left quadrant have little interest in the advanced supply chain management programs, such as customized packaging and advance shipment notification, that appeal greatly to those in the upper right quadrant. Of course, customer needs and preferences do not tell the whole story. The service packages must turn a profit, and many companies lack adequate financial understanding of their customers’ and their own costs to gauge likely profitability. “We don’t know which customers are most profitable to serve, which will generate the highest long-term profitability, or which we are most likely to retain,” confessed a leading industrial manufacturer. This knowledge is essential to correctly matching accounts with service packages – which translates into revenues enhanced through some combination of increases in volume and/or price.
Companies profitably deliver value to customers. One “successful” food manufacturer aggressively marketed vendor managed inventory to all customer segments and boosted sales. But subsequent activity-based cost analysis found that one segment actually lost nine cents a case on an operating margin basis. Most companies have a significant untapped opportunity to better align their investment in a particular customer Relationship with the return that customer generates. To do so, companies must analyse the profitability of segments, plus the costs and benefits of alternate service packages, to ensure a reasonable return on their investment and the most profitable allocation of resources. To strike and sustain the appropriate balance between service and profitability, most companies will need to set priorities—sequencing the roll-out of tailored programs to capitalise on existing capabilities and maximize customer impact.

Aval Sethi