Making Customer Stratification Work in Equipment Rental

There are several definitions of “stratification,” many of which deal with rock formations. In today’s case, the definition is more on the side of “the dividing of a society into levels based on power or socioeconomic status.” Stratification is also defined as the act of sorting data, people, and objects into distinct groups or layers. It’s a technique used in combination with other data and analysis tools.

You need a method to get through the madness. The goal is increased profitability.

Some of the sources of data are equipment, departments, personnel, and more. 

Customer stratification can help the equipment rental business by measuring:

1. How much business a customer does with you (sales),
2. How profitable they are in gross margins
3. How loyal they are
4. How costly they are to serve (CTS, cost to serve)

Each of these dimensions has a bearing on your sales force’s questions. With the right analysis, they can make decisions about who to spend time with and give services based on their perspective of the relationship with the customer.

The learning objective with customer stratification is how your rental business can improve customer relationships, analyze customer relationships, and improve customer relationships. These items, and even more so today, are very critical as companies struggle to find customers, serve customers properly, and maintain profitability with the customer.

We’re trying to have a value proposition development process and determine what the sales force is going to offer customers in the future. Then, take that knowledge that’s been developed in your research and lay out a strategic plan and put it in motion. 

One of the things customer stratification could bring out is pricing optimization. In other words, what rate do you have to get to make sure this customer is profitable? To do this you need to take an unbiased look at a customer. There is a lot of bias here because it gets into human emotions, feelings, and relationships – all the things that the sales force must handle on a regular basis. But the best way to get an unbiased look is in the data available, such as:

• Sales. How much are you renting to this customer? High volume obviously means an opportunity for margins.
• Gross Margins. High margins = Strong customer
• Customer life or loyalty of the customer to the organization. Number of products they rent and how often. Are these trends going up or down?

Four Main Groups of Customers

Traditional sales management models built around geography or customer type aren’t good enough anymore.

In short, a customer can cost a great deal to serve. This is challenging in equipment rental. Traditional sales management models built around geography or customer type aren’t good enough anymore. Customer stratification can query each customer’s buying power, cost to serve, loyalty, and margins. This sorts your customers into four groups: core, opportunistic, marginal, and service drain.

Core Customers
Definition: If a customer pays high gross margins (rates) and doesn’t cost a great deal to serve, and if a customer is loyal and does a lot of volume, these are your core customers.

You may find that 5 and 20 percent of your customers are core customers and they generally provide between 80 and 90 percent of net margins. This can raise two questions. Why are we bothering anyone else? How could you possibly survive without these core customers?

Opportunistic Customers
Definition: These customers tend to pay well, but they’re not loyal to you, they don’t do much volume, and they’re aware of that.

Since they’re aware of this, they don’t get too demanding on pricing. Often, these are your competitor’s best customers or the core customers of your competitors. They’re people you’d like to establish a relationship with.

Marginal Customers
Definition: Low Profitability. No relationship. High Cost to Serve. And Low Volume.

Service Drain Customers
Definition: Low profitability. Sustained relationship. High Cost to Serve. High volume.

I bet that if you sat down with your customer list and your staff, before even attempting to generate data regarding customer stratification, you would be close to being able to categorize most of your customer base. Customer relationship management (CRM) solutions, such as BiltData.ai, should help cut through the chase.

Other Things to Ponder

In the words of Scott Benfield of Benfield Consulting, customer stratification is “profitability on steroids.”

Getting face time with customers can be challenging. It has been estimated that the average salesperson spends less than 30 percent of their time in person with their accounts and the other 70 percent on administration, traveling, training, quoting, etc. It’s important that your workforce investment pay off. I’m not trying to throw sales personnel under the bus, but some companies need to review what they’re asking them to do with the time available.

Customer stratification identifies those customers who have the most upside sales potential. It empowers your salespeople to make better use of their time. It helps your sales team quickly identify the opportunities that best align with your sales and profit strategy.

The information provided by customer stratification has been proven to move sales productivity up. It’s a long-established business standard that the most direct path to increasing revenues is to discover more opportunities within your existing customer base. It’s been proven to help companies identify latent customer opportunities that await their discovery. It reviews your customer base using a set of objectives and fact-based metrics. The analysis allows you to focus sales efforts on those customers who promise the greatest upside potential.

In fact, equipment rental companies have found that an intentional, targeted sales effort made possible by customer stratification analysis often leads to a significant increase in sales revenues and greatly enhances your understanding of your customers leading to which customers will maximize your value proposition.

Ideally, you look at four key dimensions: Buying Power, Customer Loyalty, Profitability, and Cost to Serve. Rather than focusing on sales force communications, this research focuses on customer relationships and the value customers provide to their suppliers. That value is achieved through increased revenue, decreased expenses, and optimal allocation of assets.

Customer stratification has been proven to drive EBITDA improvement, but it also allows you to more accurately deploy your sales force. Improve negotiations. Get quarterly updates to stay on top of rapidly changing competitive environments – especially in our industry. Better identify new growth opportunities. Optimize your pricing to drive profitability. Drive profitable growth and improved EBITDA without a sizable initial capital investment. Take advantage of best practices, case studies, and personalized training and implementation.

In the words of Scott Benfield of Benfield Consulting, customer stratification is “profitability on steroids.”

Don’t forget an important factor in all this: cost to serve.

Some case studies demonstrate that customer stratification can boost bottom-line profits several points, and that’s because it suggests customer-focused sales strategies that can turn low-margin customers into high-margin core customers. For example, say customers A and B both rent the same product but customer A also rents a complimentary high-profit item, whereas customer B does not.

It’s reasonable to think that marketing the high-profit item to customer B might succeed the customer’s profit profile, and multiplying this kind of individual opportunity dozens of times over would mean that the business is well on its way to boosting bottom-line profits.

The theory of customer stratification focuses on customer relationships. Research suggests that the depth of the relationship is critical to the business’ growth and ultimate survival. Not all customers are the same. Companies must intensify relationships with profitable customers and lessen exposure to unprofitable customers.

Dedicating the company’s sales resources to enhancing relationships with the best customers, the remaining customers in the Marginal and Service Drain categories can be reassigned and managed differently.

Customer stratification can also identify a company’s slower-moving C- and D-ranked inventory items. Companies gain a clearer picture of who is renting those items. Are you stocking these items to support the needs of the best Core customers, or stocking inventory for Service Drain customers who chisel away at price margins, frequently pay late and often return damaged equipment? Rental companies can disinvest in inventory items that don’t serve their profit objectives, freeing up cash to invest in assets that more meaningfully contribute to their success.

Ultimately, customer stratification can increase revenue, boost profits, enhance customer relationships, improve cash flow, and maximize sales force productivity. 

Don’t forget an important factor in all this: CTS.

1. Identify the characteristics of your customers and products
2. Identify the cost drivers within what could be called the Supply Chain processes and functions that impact CTS, like purchasing, storage, transport, customer service, sales as well as overhead.
3. Determine cost allocation rules for each unique customer and product grouping.
4. Conduct a trial data set through the model to test assumptions and results.

This is food for thought and a different approach to knowing your customers and which ones really contribute to your success.