Customer & Product Segmentation

Situation

• Global $2 billion plastics and packaging manufacturer
• Decentralized management structure with high levels of local autonomy and limited standardization
• Growth in local markets was based on strong customer-service culture, leading to product proliferation and lack of profitability
• Increasing challenge from niche players offering limited product ranges at low prices

Actions Taken

• Customers were segmented based on volume and strategic importance
• Products were segmented based on volume and growth potential
• Analysis confirmed that more than 80% of margins came from less than 15% of product line
• Minimum target margins were set by product and customer segment combinations and used to drive pricing decisions

Results

• Bottom 5% of customer were removed, or had their prices raised within 3 months
• Bottom 10% of products were removed or had their prices raised within 3 months
• Average margin increased from 19% to 24% in the first year
• Inventory was reduced by 50% as a result of aggressive product line pruning
• Minimum margin thresholds are used to prevent unwanted products and customers from sneaking back in