Customer Terms and Profitability

L.E.K. Consulting helps clients identify the highest-priority customer segments to target and define value propositions tailored to the needs of those segments while optimizing the economics from both a provider and a customer perspective. Many companies struggle with how to best understand, segment and prioritize customers, leading to a “one size fits all” approach for allocating resources and investment. Relying on rigorous quantitative analysis of sales data, as well as external research, we help organizations inform customer groupings and determine the appropriate segments to pursue with the right value proposition. Our customer targeting capability provides clients with a clear focus on the “best fit” segments where the business can drive revenue and profit growth.

For both new and established businesses, focusing on the right customers can dramatically improve the performance of the business by optimizing sales and marketing investment. For businesses entering new markets, the benefits are obvious: They can target the right customer segments where the business’s value proposition is most effective and where the new business can rapidly drive profitable growth. Established businesses, on the other hand, can use customer targeting to better understand the profitability of different segments in the customer portfolio, find new opportunities to differentiate their proposition, pursue new pockets of growth and decide on the right strategy to serve (or not serve) less profitable segments. Clear customer targeting is particularly important in business-to-business markets, because requirements and value to the business may vary significantly across customers.

Our approach

Reviewing a business’s choices around customer targeting and value proposition is the first key step in L.E.K.’s Commercial Excellence interventions. We help our clients target the right customers with the right value propositions.

	Customer segmentation: Segment customers based on different criteria (demographic, need-based, behavioral or attitudinal), utilizing primary research methods (surveys or interviews) and analytical and statistical tools to manipulate large data sets
	Segment analysis: Analyze the economics of different customer segments to accurately estimate customer cost-to-serve, and  identify levers to improve profitability
	Customer prioritization: Prioritize customer segments for targeting based on their objective attractiveness (size, profitability, growth potential) and a company’s subjective right to win in each segment (e.g., fit of value proposition with customer requirements)
	Strategy development: Review all elements of the customer proposition, including product and service offerings, pricing, and relationship management model, to develop an optimal strategy

Client successes

• A baked goods manufacturer was struggling with profitability, so leadership wanted to identify the cause and bring the company back to a profitable growth stage. L.E.K. conducted a detailed analysis of the client’s profitability by customer and product category and built a robust dashboard to visualize data in real time. This exercise and model helped reveal areas of low profitability and stagnant growth. We closely collaborated with the client’s leadership team and its board to develop a strategic plan for focusing on core customer segments where the organization had demonstrated expertise and could achieve sustainable profitability.