Customer segments based on customer account profitability

1 Most of the traditional approaches tomarket segmentation are based onnon-economic Customer purpose of this paper is to offersome other approaches based oncustomer account profitability. It shouldbe stressed that these approaches shouldnot be looked upon as alternatives, butasadditionalmarket segmentationtechniques. Furthermore, it should benoted that the two approaches are bothin accordance with the marketingconcept. According to this way ofthinking (market orientation), businesseshave two main goals: (1) to satisfy theneeds of customers by offering productswhich meet their desires, requests anddemands, and (2) to satisfy the businessunit s needs by carrying out exchangesthat result in long-term profitability. ThisINTRODUCTIONT raditionally, the goal of marketsegmentation is to identify productmarkets comprising people, businesses orother organisations with similarcharacteristics and thus similar characteristics are used assegmentation variables for both consumerand business markets.

2 For consumermarkets, the types of segmentation mostoften used are based on variables relatedto geographical, demographic,psychographic and behaviouralcharacteristics. For business markets,additional types of segmentation havebeen introduced, for example, based onindustry sector, buying processcharacteristics (eg formality), structure ofprocurement or buyer 5 Palgrave Macmillan Ltd 1479-1862/06 $ 14,3, 225 237 Journal of Targeting, Measurement and Analysis for Marketing225 Customer segments based oncustomer account profitabilityReceived (in revised form): 14th November, 2005 yvind Helgesenis Associate Professor at the Institute of International Marketing of lesund University College in Norway, where he hasworked since 1993. From 1996 1999 he was seconded to the M re Research Institute, lesund, and the Norwegian Schoolof Economics and Business Administration, Bergen. During that period he was working on his doctorial dissertation, as wellas on other research issues.

3 He has worked for different service sector companies as senior business advisor/director offinance and accounting/managing director. His teaching, working and research interests relate to marketing and managementaccounting (corporate strategy, international marketing, market research, Customer relationship management, etc).AbstractMarket segmentation is traditionally based on non-economic customercharacteristics. Financial approaches can, however, offer additional insight. based oncustomer profitability analyses, this paper offers some financial- based approaches,classified as one-dimensional and two-dimensional or matrix-approaches. By combiningthese financial- based segmentation techniques with traditional methods, a business unitshould have the necessary insight to make decisions in accordance with the marketingconcept. According to this way of thinking (market orientation), businesses have twomain goals: (1) to satisfy customers needs by offering products which meet theirdesires, requests and demands, and (2) to satisfy the business unit s needs by carryingout exchanges that result in long-term profitability.

4 Yvind HelgesenH gskolen i lesund(Aalesund UniversityCollege),Institutt for Internasjonalmarkedsf ring (IIM),6025 lesund,NorwayTel:+4770161218e-mail: Customer profitabilityaccounting is not discussed in depth,and Customer segments based onfinancial characteristics are 41 However, some approaches formarketing segmentation based onfinancial variables have been may be divided into two groups:one-dimensional and two-dimensionalapproaches. This latter category can alsobe called matrix approaches Customer base management can bedefined as the task of analysing thecustomer base in order to identify businessand profit potentials within the customerbase and developing strategies to realisethe identified potentials .42 Traditionaldescriptive statistics (mean values, standarddeviations, etc) and graphicalrepresentations may give fundamentalinsight. Nevertheless, analyses based onordered distributions may give far betterinsight. These approaches may be basedon absolute or relative ,44 Graphical representations maybe combined with economic keymeasures for example, Stobachoffcoefficients.

5 Revenues may be analysedseparately by way of Lorenz curves andGini analyses,customers may be assigned to differentprofitability segments according to somepre-defined rules. Rustet ,47offerone such approach with customersassigned to one of four groups: (1) theplatinum tier includes all the mostprofitable customers; (2) the gold tier differs from the the platinum tier inthat profitability levels are not as high;(3) the iron tier contains essentialcustomers whose profitability is notsubstantial enough for special treatment;and (4) the lead tier consists of theduality with respect to customers andbusinesses also appears in variousdefinitions of marketing, such as thedefinition of the UK Chartered Instituteof Marketing, as given in Jim Blythe s Essentials of Marketing (3rd edition,Prentice Hall, UK): Marketing is themanagement process which identifies,anticipates, and supplies customerrequirements efficiently and profitably .Thus, by combining the two approachesof market segmentation , decision makersmight have the insight necessary forachieving the two main goals of REVIEWD uring the past decade, there has been agrowing interest in market-orientedmanagement 11 Mostattention has been directed at customerprofitability analysis.

6 Research has beenvery limited, however, and furtherprinted publications have 15 Although there is nodisagreement with respect to theimportance of this problem area, thestandard textbooks of managementaccounting either do not considercustomer-relatedfinancial topics or onlytouch on 18 Very few papers dealing withcustomer profitability analyses havediscussed Customer segments based onfinancialfigures. Some articles havefocused on problems that have had tobe solved in order to establish reliablecustomer 22 Othershave been more preoccupied withtheoretical 26 Some researchershave focused on contexts and empiricalresults that is, case 31 Andstill others have been preoccupied withstudying relationships between customerprofitability and various antecedents ofcustomer 37 One of theconsequences is that even in special 226 Journal of Targeting, Measurement and Analysis for MarketingVol. 14,3, 225 237 Palgrave Macmillan Ltd 1479-1862/06 $ profitability on the vertical axis,low to high.

7 The customers are assignedto one of the following segments : (1) top performers (upper right), highloyalty and high profitability; (2) underachievers (lower right), highloyalty and low profitability; (3) non-profits (lower left), low loyalty andlow profitability; and (4) high potentials (upper left), low loyalty and highprofitability. When matching customercharacteristics with respect to attitudes,behaviour andfinancial information atthe individual Customer level, however,confidentiality issues and codes ofmarketing should be 61 Inaddition, such matching activities may beagainst the law or require a licence fromthe ACCOUNTSIn order to producefigures, tables, keymeasures, etc of Customer segments basedonfinancial variables, one needscustomer accounts. Thus, there is a needfor empirical data. In this study, theNorwegianfishing industry is chosen as acontext, specifically four Norwegianexporting companies of klipfish andfrozenfish. This industry is characterisedby almost worldwide export activitiesoriented towards various product markets(geographical areas).

8 Each product markethas many participants, both on the buyerside and the seller side. The productsoffered may be perceived as , the importing companies buyproducts from several exporters, oftenlocated in different countries. Two of thecompanies export klipfish and the othertwo frozenfish/fillets. The sample,consisting of 564 orders related to 176customer and 36 geographical markets,represents about 4 per cent of the totalNorwegian exports of products fromthese lines of business. This industry issuitable as a context, as discussed who are costing the businessmoney. Other approaches also ,49 Two-dimensional or matrix approachesShapiroet that it may beuseful to think of customers in twodimensions: net price realised and cost toserve. They introduce a matrix with costto serve on the horizontal axis and netprice on the vertical axis. based on theaverages of the aggregated values of theperiod under consideration, thecustomers are assigned to one of fourgroups: (1) carriage trade (upper right)costs a great deal to serve, but thecustomers are willing to pay; (2) aggressive customers (lower right)demand the highest product quality, thebest service and the lowest prices; (3) bargain basement (lower left) arecustomers that are sensitive to price andrelatively insensitive to service andquality; and (4) passive customers (upper left) can be served cheaply andare willing to accept higher a techniquecalled the decision grid analysis.

9 Thehorizontal axis measures contribution as apercentage of sales, low to high, and thevertical axis measures volume, low tohigh. The customers are assigned to oneof the following segments : (1) winners (upper right), high contribution and highvolume; (2) problems (lower right), lowcontribution and high volume; (3) losers (lower left), low contribution and lowvolume; and (4) potentials (upper left),high contribution and low approaches have been offered 54 Other market segmentation procedureshave been introduced, such asproduct- Customer matrices55orclassifications of customers based onloyalty and ,57 Here, Customer loyalty is measured on thehorizontal axis, low to high, and Palgrave Macmillan Ltd 1479-1862/06 $ 14,3, 225 237 Journal of Targeting, Measurement and Analysis for Marketing227 Customer segments based on Customer account profitabilitycosts of the exporting companies wereeasily found from the invoices receivedfrom the producers, while the other costsof the exporters all represent differentsorts of marketing costs.

10 Of course, allthe accounts and all the vouchers stillhad to be thoroughly revised. In thisway, about per cent of the totalcosts were traced and assigned directly tothe cost objects of the various levels ofthe market hierarchy. Thus, only percent of the costs (indirect costs) had tobe accumulated into cost pools andallocated to the various cost objectsaccording to the ABC 1 shows the layout of thecustomer account report that is themain items (cost groups), as well as theaverages of the Customer accounts of thesample (n 176), and Table 2 showsdescriptive statistics for important itemsof the Customer accounts. Items resultingin reductions in the sales revenues(quantity discounts, bonuses, etc) arevery moderate in this industry. Directproduct costs are more significant, onaverage representing about per centof Customer revenues. These costs consistof purchasing and packaging costs,inward freights and brokers marketing costs related to ordersand customers represent about percent of Customer revenues.