Who is Driving Your Profits?

Volume 6 Letter 5

A chemical division of DuPont had a problem on its hands. The customer base was growing but sales were flat and profit margins were being squeezed. After much frustration DuPont decided to look at their market differently and developed the following chart. Since DuPont sold the same chemicals at various price levels depending on the volume of the purchase, timing of the purchase, delivery terms etc. they put the profit margin percentage on the X axis. For the Y (or vertical axis) they labeled total volume of chemicals purchased (whether the chemicals were purchased from DuPont or another supplier). Next, using a bar chart, they listed each customer’s total purchases in blue and the percent of those total purchases from DuPont in Red. The bar chart looked something like the graph below:
Dupont Profit Margin Chart
In DuPont’s case the actual chart had many more customers plotted. Here’s how DuPont used the map. Customer number 1 for example was actually a lump sum of many smaller customers all paying low margins (in the 4% range) and all purchasing the bulk of their chemicals from other suppliers. When the cost to service these accounts was factored in many of these accounts were actually money losers. The strategy here was to drop many of these accounts.

Company numbers two and three were also interesting examples of bad customers. Even though DuPont sold them a significant amount of chemicals DuPont was not their number one supplier. DuPont was being used to keep the customer’s main supplier’s price in line. The strategy here was to offer these companies the chance to increase their percentage of business or they would no longer supply these accounts.

At the opposite end of the scale customer 10 not only paid a significant premium but also used DuPont as their preferred supplier. The question was “why”? To which no one could initially answer. The strategy with this customer was to find out why they appreciated DuPont so much and could the answer to that question be used to leverage business in other segments.

In the end DuPont increased their volume of chemicals sold, increased the profit margins the chemicals were sold at and reduced their customer base by a significant percentage.

To be meaningful any market segmentation must find patterns in one’s customers’ purchase behaviors whether that is in Chemicals, Pharmaceuticals or Resource Exploration etc. Ultimately these patterns tell a story – (as they did to DuPont). Which customers are willing to pay a premium, which features or benefits are most appreciated by your customers? Such information will allow one to segment the market and focus resources (time, money and people) in areas where superior profits, volume or both may lie.

Effective market segmentation focuses on a few selective issues. It must be redone when those issues have lost their relevance. What are your significant issues and how can you better segment your market?1 Who’s driving your profits?

Further reading

1. Rediscovering Market Segmentation, Daniel Yankelovich and David Meer, HBR Feb 2006 PP122 – 131

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