RETHINKING KEY ACCOUNT MANAGEMENT

Transcription

1 RETHINKING KEY ACCOUNT MANAGEMENT Identifying key customers in turbulent times By Professor Martin Koschat and Research Fellows Willem Smit and Karsten Jonsen - October 2009 IMD Chemin de Bellerive 23 PO Box 915, CH-1001 Lausanne Switzerland Tel: Fax: info@imd.ch

2 Real friendship is shown in times of trouble; prosperity is full of friends. Euripides Greek Playwright BC This ancient wisdom still holds true in today s marketing world. Attracting and retaining customers in times of growth is much easier and cheaper than it is when business is slow. And, for many companies, the Pareto Principle applies 80% of their sales come from 20% of their customers. So, when the going gets tough, many companies shift most of their marketing efforts to ensuring that their key customers remain loyal. But will today s key customers still be there tomorrow? The importance of identifying key customers that are real friends With more emphasis on Key Account Management (KAM), it is not surprising that the success of these efforts is increasingly scrutinized and critically monitored in terms of its contribution to the company s bottom line. Focusing on key accounts has become more crucial, but it has also turned riskier. If a key customer abandons the relationship, all the money, time and effort invested in the relationship cannot be recovered. These investments are lost when the relationship ceases to exist. Particularly during a crisis, identifying those top customers that are most likely to remain loyal has gotten at least as twice as difficult. First, in turbulent times, the likelihood of losing loyal customers to competitors is greater. And second, KAM budgets are shrinking. Against this backdrop, we would like to rethink KAM and, in particular, the way key customers are prioritized and ranked. Usually the ranking is based on a customer s past performance How much business have we done with them in the past three years? But is looking back the way forward? We argue that observing the sudden changes in today s economy, customers past purchase habits are no longer a sufficient predictor of customer loyalty. In fact, it may be misleading as the sole guideline for allocating future investments to customer relationships. However, finding a good way to rank key customers is easier said than done. IMD - RETHINKING KEY ACCOUNT MANAGEMENT Page 2/6

3 More or fewer key accounts? Trade-offs KAM managers need to make The greater risk surrounding relationship management investments today has a huge impact on KAM decisions, especially when it comes to prioritizing customers. Determining which customers will stay loyal and which ones won t has become increasingly difficult. Table 1 lays out the dilemma marketers and key account managers face when reviewing their customer base and selecting key accounts. When ranking their key customers, managers also set an expectation of each customer s loyalty and positive response to the relationship investments. Yet, nobody can know beforehand how accurate this expectation is going to be. Judgments about customers expected to leave the relationship and switch to other suppliers (column [1]: Key customer is going to leave us ) can turn out to be either correct (they abandon relationship) or incorrect (they stay loyal). By the same token, expectations about customers staying loyal (column [2]: Key customer is going to stay with us ) can either be right or wrong. Thus, in any KAM review, it is essential that the following two judgement errors be minimized. A Type I Prediction Error, or a false negative, is the error of assuming that a customer won t respond to the KAM investments and won t stay loyal, but in reality, she or he is a true friend. The risk here is that this could become a self-fulfilling prophecy. Though the customer had initially intended to remain loyal, she or he may decide to defect anyway because of neglect and reduced customer care from the supplier the result is the loss of a real friend. A Type II Prediction Error, or a false positive, is the error of judging that a customer will stay loyal, when in fact he or she is not loyal. This error ultimately results in wasting valuable KAM money and time on a customer who did not have the initial intention of staying loyal. IMD - RETHINKING KEY ACCOUNT MANAGEMENT Page 3/6

4 To reduce the likelihood of Type I errors and minimize the risk of losing real friends, a company might choose to be less selective and make the list of key accounts longer. But there are trade-offs, since expanding the list automatically fragments the attention per customer and thereby increases the risk of spending time and effort on false friends. And if some of the accounts on the long list leave, this means an increase in the Type II error. For many managers caught in the trade-off, this raises the obvious question: Which is more expensive, a Type I or a Type II error? Yet, there is an escape to this trade-off. Instead of making the list of key accounts shorter or longer, efforts should be spent on making the identification of key account more accurate. How to predict better? IMD - RETHINKING KEY ACCOUNT MANAGEMENT Page 4/6

5 Learning with and from peers: Take the survey We would like to learn more about how companies prioritize their customers when business conditions are turbulent. Please take the survey below and next month we will publish the findings. We will also give advice on alternative methods for ranking key accounts and present research that will help illuminate this important topic. All survey participants will receive a personal with the results so that they can benchmark their company s practices with those of their peers. Martin Koschat is Professor of Marketing at IMD. He teaches on the Building on Talent (BOT), Orchestrating Winning Performance (OWP) and Strategic Marketing in Action programs. He also teaches on IMD s Partnership Programs. IMD - RETHINKING KEY ACCOUNT MANAGEMENT Page 5/6

6 RELATED PROGRAMS BUILDING ON TALENT - Developing the next generation of leaders Program Director Jack Wood - Prepare and position yourself for a higher level of responsibility - Increase your global awareness, business knowledge and capacity to exercise leadership responsibly - Integrate and apply your learning to your company through a real-life project - Get ready for IMD s Executive MBA degree STRATEGIC MARKETING IN ACTION - Winning in tough markets Program Director Kamran Kashani - Boost your strategic thinking about your market and the forces re-shaping it - Gain insights into drivers of customer value, behavior and choice - Formulate a differentiated value proposition for customer-focused strategy and brand platform - Meet the challenge of implementing your strategy, including making a business case and gaining internal support IMD - RETHINKING KEY ACCOUNT MANAGEMENT Page 6/6