How Can Customer Segmentation Help Your Wholesale Distribution Business?

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We all want to be treated fairly and be sure our customers are treated fairly while maximizing every customer’s contribution to our business.  Many Wholesale Distributors tend to treat all customers the same, not recognizing that some customers are looking for value added services to help them lower their cost of doing business. Some of your customers don’t appreciate, nor do they require these services. This distinction begins to make the case for segmenting your customers.

In the past, one of our customers was very reluctant about charging a 5% restocking fee for returned goods. They eventually rolled out the charge to all but their best customers (who by the way, rarely returned any goods!) and lost no business. This fee is only charged to their “B” and “C” customers and never charged to their “A” customer segment.  This new business process enabled by their Microsoft Dynamics AX  ERP solution allowed them to recover some, if not most of their costs associated with returns.

How should you segment your customers?

To be effective in your segmentation will require some analysis:

  • What products do your customers buy?
  • Which customers buy which products?
  • Why do some customers buy one product over another product?
  • Do you ask your customers about why they buy from you?
  • Do you ask them why they buy the products they are buying?
  • Who pays on time?
  • What would a couple of days improvement to your (DSO) Days Sales Outstanding do to your cash flow?
  • How many times are you out of stock on any given item (and lose a sale!)?

Your ERP solution should be able to provide these metrics.  A solution like Microsoft Dynamics AX  provides built-in Business Intelligence by leveraging Microsoft’s SQL Server Reporting Services.

To get the answers to these questions will require you to analyze the data from your customer's orders. It also may require you to begin a conversation with your customers to find out what they are expecting.  Then you will know who your best customers are and maybe your least profitable customers as well! You may also know which products are fast movers and which ones are not so fast. Who's ordering pallets of goods (to get the better price) and returning most of the order the next month, prior to the invoice being due?

You’ll need to look at the business processes you have in place. How well do they meet your customers’ needs? Which business processes are adding value to your customers or your business? What incentives could you use to help to modify your customer’s behavior?

How do you execute customer segmentation in your business?

  1. Don't do too much!  Decide who will be on the business team to help execute the segmentation process.
  2. Decide how much you’ll spend to execute the new processes, policies or services. Can your existing ERP solution provide you with the tools to efficiently execute these processes? How will you measure progress/success? What will be the implementation timeline? Work on a communication plan, i.e. what will you tell your customers and how will you inform them, your employees, and possibly the outside world? Often times you may not want the customers to know that they are an “A” customer or a “C” customer. You will most likely be more successful in telling them how you are improving your service in general and the benefits of the new service, policy, or practice, but communication will be critical.

Customer Service is often a “cornerstone” upon which the business has been built and every employee takes pride in making certain every customer receives the same service levels and often the same price for products and additional special services.

In order to reduce h owisn costs and keep all customers happy, the Wholesaler needs to begin to segment his customers and better determine service levels for each segment.  This concept can help the Wholesaler reduce costs in areas where he might over-serve one group of customers and under-serve another, thus providing one customer segment with unappreciated services or potentially losing valuable customers in under-serving another group of customers.

By:  Robert Bell, RSM McGladrey  - New York Metro Dynamics AX, GP, SL, CRM Partner

1 thought on “How Can Customer Segmentation Help Your Wholesale Distribution Business?”

  1. Customer segmentation can help you target your marketing to the exact audience based on how they respond to sales. Run specials for different segments of the market and separate your email marketing lists.

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