[Deep Dive] Why Your Account-Based Strategies May Not Be Focused On the Right Customers

 

Source:  Shutterstock

Key Takeaways

• A growing number of companies are adopting account-based programs that treat customers differently based on their perceived value to the company.

• Most companies determine the value of accounts based on current revenue and future growth potential, but most don't track account profitability or use it to judge the value of individual accounts.

• The lack of accurate account profitability information creates a dangerous blind spot. Without it, account-based programs can result in winning more business from unprofitable customers.

The Rise of "Account-Based Everything"

The widespread adoption of account-based marketing is as one of the landmark developments in B2B marketing of the past two decades. The use of ABM has been growing rapidly since it was introduced by ITSMA in 2003. While the early adopters of ABM were primarily large B2B technology and business services firms, it's now used by a wide variety of B2B companies.

About seven years ago, several marketing industry analysts, consultants, and technology vendors began to argue that companies should adopt an account-based approach in other customer-facing business functions, including sales, sales development, and customer success/customer service.

This broader application of account-centered techniques soon came to be called "account-based everything." ABE (or sometimes ABX) is usually defined as "the coordination of personalized marketing, sales development, sales, and customer success efforts to drive engagement with, and conversion of, a targeted set of accounts." (Gartner)

The most rigorous and thorough discussion of this broader use of account-centric strategies and tactics can be found in Account-Based Growth:  Unlocking Sustainable Value Through Extraordinary Customer Focus by Bev Burgess and Tim Shercliff. In this book, the authors provide a detailed explanation of how B2B companies can use account-based strategies and programs to drive profitable revenue growth.

The premise underlying all account-based methodologies is that all customers are not created equal. In most B2B companies, a small percentage of customers account for a disproportionate share of the company's total revenue and profit.

The essence of the strategy described in Account-Based Growth is to identify those "vital few" customers, and then design and implement coordinated marketing, sales, customer success/customer service, and executive engagement programs that are specifically tailored for those high-value customers.

Burgess and Shercliff include an in-depth discussion of how to identify and prioritize high-value customers, how to develop effective account business plans, how to leverage data and technology to gain deep customer insights, and how to bring about the leadership and cultural changes that are necessary to succeed with an account-based growth strategy.

Perhaps most importantly, Burgess and Shercliff emphasize that many companies will need to "radically" reallocate marketing, sales, and customer success resources to effectively support an account-based growth strategy. When you adopt the kind of strategy described in Account-Based Growth, you are essentially placing a large bet on the growth potential of a relatively small group of customers and prospects.

In the balance of this article, I'll adopt the Burgess/Shercliff terminology and use the term "account-based growth strategy" to refer to a go-to-market approach that involves identifying high-value customers and prospects and using coordinated marketing, sales, and customer success/customer service programs to manage relationships with those high-value customers and prospects.

Customer Profitability Is "Missing in Action"

Companies that implement an account-based growth strategy segment their customers into multiple "tiers" based on the perceived importance and value of each customer. Then, they use different marketing, sales, customer success/customer service, and executive engagement techniques for customers in each tier.

In general, companies will invest more time, energy, and financial resources to develop and execute high-touch and highly customized engagement programs for customers in the "top" tier, compared to those in "lower" tiers. This approach means, of course, that company leaders must determine, early in the implementation process, which customers to place in each tier.

As part of the research for Account-Based Growth, Burgess and Shercliff surveyed 65 B2B companies. Ninety-two percent of the survey respondents reported having some kind of "top account" program.

When Burgess and Shercliff asked survey participants what criteria they use to select accounts for their top account program, 87% of the respondents said the future growth potential of the account, and 76% said the current revenue from the account. These were the two most frequently used criteria by a wide margin.

Customer profitability wasn't among the top five selection criteria identified by the survey respondents. In fact, only 45% of the respondents said their company tracks gross profit at the account level, and only 20% reported tracking net profit by account.

This absence of customer profitability information results in an account selection/prioritization process with a major blind spot. As Burgess and Shercliff put it:  "Without this information, decisions about how much to invest in these top accounts and where to allocate resources are being made in the dark."

To make matters worse, many companies that do track some form of profit at the account level still aren't getting an accurate picture of customer profitability.

When company leaders adopt an account-based growth strategy, they will be investing substantially more in some customers than others. It's simply not possible to make such investment decisions on a sound basis when they don't have an accurate view of customer profitability. They can easily find themselves in the unenviable position of successfully winning business from customers that aren't profitable.

Why Customer Profitability Matters

If all your customers were equally valuable to your business, there would be no reason to implement an account-based growth strategy, and measuring the profitability of individual customers wouldn't be very important. But the reality is, some customers are far more financially valuable to your business than others. There are three main reasons for this "value disparity."

The Pervasive Pareto Principle

The 80:20 rule (also known as the Pareto Principle) states that 80% of effects come from 20% of causes. One business application of the rule states that, in most companies, 80% of total revenue comes from 20% of the company's customers.

In Account-Based Growth, Burgess and Shercliff argued that the 80:20 rule is nearly ubiquitous, and my experience supports their argument. During my career, I've analyzed sales data from dozens of B2B companies operating in a wide range of industries. In the vast majority of these companies, I found that the largest 20% of customers accounted for about 80% of total company revenue.

The 80:20 rule has important implications because it is fractal, or at least "fractal-like." By this, I mean that the 80:20 distribution pattern repeats itself as the breadth of data analyzed narrows, like a set of Russian Matryoshka nesting dolls.

To illustrate, the rule states that 80% of a company's revenue comes from 20% of the company's customers, but it further states that 64% of total company revenue (80% of the 80%) comes from only 4% of customers (20% of the 20%).

The implications of this aspect of the rule are profound. Suppose that your company has $100 million of annual revenue and 1,000 customers. The 80:20 rule indicates that only 40 of your customers are likely producing about $64 million of your annual revenue.

When it comes to company profitability, the 80:20 rule doesn't go far enough because the distribution of profit is even more skewed than the distribution of revenue. Companies that have an accurate picture of customer profitability frequently find that all of their annual profit comes from a small percentage of their customers. (More about this later.)

The bottom line:  In most companies, a small number of customers have an outsized impact on company financial performance.

Customer Profitability Varies Greatly

The second reason for the value disparity is that customer profitability varies greatly. When company leaders measure customer profitability accurately, they frequently find that their company earns a great deal of profit on its most profitable customers and sustains significant losses on its most unprofitable customers.

The following diagram depicts the kind of customer profitability distribution that exists in many B2B companies. In this diagram, the horizontal axis depicts the percentage of total customers, with customers arranged (left to right) by profitability. The vertical axis represents customer profitability. The horizontal line across the middle of the diagram is the profit breakeven point (in other words, $0 profit). The red curved line in the diagram depicts the typical distribution of individual customer profitability.

What this diagram illustrates is that, in many B2B companies, a relatively small percentage of customers produce attractive profit levels, and a small percentage generate significant losses.

The most sobering point is that customer profitability is not always strongly correlated with customer sales volume. In other words, when company leaders measure customer profitability accurately, they often find that they have large customers at both ends of the profitability spectrum. This explains why basing an account-based growth strategy solely on account revenue is a risky proposition.

Customer Profitability Impacts Company Profitability

The third reason for the value disparity is that customer profitability has a major impact on overall company profitability.

The following diagram illustrates how the dynamics of customer profitability affect overall company profit. Once again, the horizontal axis in the diagram shows the percentage of total customers, and again, customers are arranged (left to right) from the most profitable to the least profitable. The vertical axis depicts the percentage of total company profit. The red horizontal line across the diagram is the actual annual profit earned by the company.

When companies start to measure customer profitability accurately, many find that their most profitable 20% to 40% of customers actually produce between 150% and 300% of total reported company profit. Customers in the middle of the profitability spectrum more or less break even, and the least profitable 20% to 40% of customers actually consume between 50% and 200% of profit, leaving the company with its actual reported profit.

So, all of the profit falling above the red horizontal line in the diagram is unrealized profit - profit the company earned and then gave away. For obvious reasons, this diagram is often called "The Whale Curve of Customer Profitability," and it dramatically illustrates why customer profitability is so critical to your company's financial performance.

A Final Word

As I noted earlier, companies that are using (or plan to use) an account-based growth strategy segment their customers into multiple tiers based on each customer's perceived value. Then they develop and use more high-touch and highly customized engagement programs for customers in higher tiers compared to those in lower tiers. One fairly typical approach is to use three tiers, with Tier 1 customers being those with the highest perceived value.

One primary goal of measuring the profitability of individual customers is to provide business leaders with information that will help them make better decisions about where to place each customer in the value hierarchy.

In Account-Based Growth, Burgess and Shercliff recommended that companies prioritize their accounts based on two factors:

1. The "attractiveness" of each account; and
2. The competitive strength of their company in/with each account.

The research by Burgess and Shercliff clearly showed that an overwhelming majority of companies use current revenue and growth potential to determine the attractiveness of each of their accounts.

This article demonstrates that business leaders should also consider customer profitability when evaluating account attractiveness.

[Book Review] An Insightful (and Timely) Guide To Marketing Metrics

Source:  Kogan Page

Most marketers will readily acknowledge that effectively using metrics, analytics, and data has become critically important to successful marketing. Companies can now access a huge amount of data regarding the behaviors of customers and prospects, and, therefore, "data-driven marketing" has become a guiding mantra for marketers.

Many marketers are now using metrics, analytics, and data to track the performance of some marketing activities, but relatively few companies are systematically using metrics, analytics, and data to make strategic marketing decisions. As a result, many companies are missing the opportunity to improve future marketing performance.

That's one of the main themes of Christina Inge's new book, Marketing Metrics:  Leverage Analytics and Data to Optimize Marketing Strategies (Kogan Page, 2022). Ms. Inge is the founder and CEO of Thoughtlight, a technology consulting firm and marketing agency that specializes in digital marketing and analytics strategies.

Ms. Inge clearly states her objective for the book when she writes:

"This book shows you how to apply the latest analytics to all aspects of marketing management . . . [I]t provides step-by-step instructions on how to create a data-driven marketing strategy . . . They [marketing metrics] are not just about understanding what happened in the past, but also about using that information to shape what will happen in the future."

What's In the Book

Marketing Metrics is a holistic, thorough, and non-technical guide to the use of metrics, analytics, and data in marketing. In Chapter 1, Christina Inge introduces her topic and lays the foundation for the content in the remainder of the book.

The discussion of specific metrics is found in Chapters 2-10. Ms. Inge describes and explains how to use a wide range of metrics including:

• Customer, channel, and branding metrics (Chapters 2-5)
• Content metrics (Chapters 6-7)
• Product, pricing, and "place" metrics (Chapters 8-9)
• Testing methods and the use of metrics in agile marketing (Chapter 10)

Marketing Metrics then addresses two issues relating to marketing management. In Chapter 11, Ms. Inge reviews the major laws and regulations pertaining to data privacy, and she describes several frameworks relating to data governance and the ethical use of data. In Chapter 12, she discusses the importance of "data evangelism," and she explains how to design effective marketing dashboards.

Chapter 13 of the book describes the skills that marketers need to be "metrics-driven," and Chapter 14 contains an extensive list of publications and other resources relating to marketing metrics and analytics.

My Take

Marketing Metrics will be a valuable resource for any marketer who doesn't have extensive experience using metrics and analytics to track current marketing performance and support strategic marketing decisions.

Christina Inge does an excellent job of making a complex topic both interesting and accessible to marketers. Her writing is clear, and she manages to thoroughly explain the metrics she discusses, while almost entirely avoiding the use of mathematical formulas.

Ms. Inge also provides numerous examples throughout the book to illustrate how marketers can use metrics to make better decisions and improve marketing performance.

One of the most important insights in Marketing Metrics is found in the opening chapter. Ms. Inge contends that companies must develop a "metrics-driven culture" in order to use data effectively, and she further argues that the creation of a metrics-driven culture requires marketers to be comfortable with ambiguity and uncertainty. She writes:

"Interpreting data depends on context, which by its very nature contains a whole lot of ambiguity . . . So, although numbers can give us answers, they also raise a lot of questions, and those answers they provide are not always clear or easy ones. This means that smart metrics-driven marketers learn to navigate uncertainty using data as a compass, not always as a map, let alone turn-by-turn directions."

Unfortunately, many marketers have a tendency to expect metrics and analytics to provide clear-cut answers, and these unrealistic expectations can lead marketers to ignore the results produced by their metrics and analytics efforts or simply avoid using metrics and analytics when making decisions.

In a 2020 survey of marketing leaders and analytics practitioners by Gartner, respondents said that analytics influenced only 54% of their marketing decisions. When asked why analytics wasn't used to support more decisions, one of the top reasons cited by respondents was analysis does not present a clear recommendation.

Lastly, Marketing Metrics is a timely book. With uncertainty about future economic conditions likely to persist for at least the rest of 2023, it will be more important than ever for marketers to maximize the results produced by their marketing programs. Marketing Metrics can help marketers achieve this vital goal.

[Research Round-Up] Two Surveys Explore the State of ABM

 (This month's Research Round-Up features two recent studies that examine the state of account-based marketing. One is the 2022 ABM Benchmark Survey by Momentum ITSMA and the ABM Leadership Alliance, and the second is the ABM Census 2022 survey by B2B Marketing. Both studies provide valuable insights regarding the attitudes and practices of ABM marketers, and the findings point to the ongoing growth and development of account-based marketing.)

Elevating ABM:  Building Blocks for Long-Term Growth (2022 ABM Benchmark Study) by Momentum ITSMA and the ABM Leadership Alliance

Source:  Momentum ITSMA/ABM Leadership Alliance

• A web-based survey of Momentum ITSMA member companies and ABM Leadership Alliance contacts
• 279 respondents - marketers at B2B technology and business services companies
• 61% of the respondents were from North America/Caribbean; 31% were from Europe
• Survey conducted in August 2022

This is the 6th annual ABM benchmark survey conducted by Momentum ITSMA and the ABM Leadership Alliance. As with earlier editions of the research, the 2022 study provides a window into the current state of ABM investments, strategies, and tactics, and reveals what companies with high-performing ABM programs do differently from others.

Here are some of the major findings from the 2022 study regarding the current state of ABM:

• Survey respondents said they are devoting (on average) 28% of their total marketing budget to ABM.
• 71% of the respondents said they will increase ABM spending in fiscal year 2023.
• Nearly half of the respondents (47%) said they are using at least two types of ABM.
• When it comes to the objectives of their ABM programs, these survey respondents place equivalent importance on winning new accounts and growing business with existing accounts.
• Over half of these survey respondents (56%) said their ABM programs are in the early stages of development - either "exploring" or "experimenting."

The 2022 study also provides important insights regarding the practices of high-performing ABM programs. The survey found that "ABM Leaders" (defined on page 25 of the survey report) are significantly more likely than "All Others" to:

• Position ABM as a company-wide growth initiative (page 27)
• Practice "one-to-one ABM" (page 29)
• Invest in technologies to enable deeper market and account insights and to optimize performance (page 36)
• Tailor customer value propositions and content for individual accounts (page 38)

ABM Census 2022 by B2B Marketing (sponsored by 6sense)

Source:  B2B Marketing

This study was based on a survey of "over 100 client-side marketers across all industries." The report does not include a demographic profile of the survey respondents or indicate when the survey was conducted.

This survey covered some of the same issues that were addressed in the ITSMA research described above. Some of the findings of the two studies are quite similar, and some are notably different.

ABM Objectives - In the ITSMA study, survey respondents placed near-equal importance on winning new accounts (47%) and growing business with existing accounts (44%). The findings of the Census survey were almost identical. Forty-seven percent of the respondents said their primary ABM objective is winning new accounts, and 43% said growth in existing accounts.

ABM Spending - Respondents to the ITSMA survey said they are spending (on average) 28% of their total marketing budget on ABM. In the Census survey, 76% of the respondents said they are spending 10%-30% of their marketing budget on ABM activities.

Increase in ABM Spending - In the ITSMA survey, 71% of the respondents said they expect to increase spending on ABM in fiscal year 2023. The findings of the Census survey on this issue are interesting. Eighty-four percent of the respondents said they expect to increase their ABM activities moderately or significantly in the next 12 months. But, only 41% said they expect to increase their ABM spending over the next 12 months. It's difficult to see how both of these expectations can be achieved.

The ABM Census 2022 study also addresses several other topics. For example, the report discusses the types of ABM that are being used, the challenges marketers face in implementing account-based marketing, and the state of ABM maturity.

***

Both of these studies are worthwhile, but it's important to note that neither claims that it uses a representative sample of B2B marketers. I keep hoping that one day someone will conduct an ABM survey that is based on a representative sample of B2B companies. That would enable us to gain a much clearer understanding of the current state of account-based marketing.

What Is the 95:5 Rule? Does It Apply To Your Company?

In 2021, The B2B Institute, a think tank supported by LinkedIn, published a report featuring several papers authored by researchers with the Ehrenberg-Bass Institute for Marketing Science.

One of the papers was written by Professor John Dawes, the Associate Director (Operations) at Ehrenberg-Bass. The main topic of Professor Dawes' paper was how advertising works, but he began by describing what he called the 95:5 rule. He wrote:

"It might surprise you to learn that up to 95% of business clients are not in the market for many goods and services at any one time. This is a deceptively simple fact, but it has a profound implication for advertising. It means that advertising mostly hits B2B buyers who aren't going to buy any time soon."

The 95:5 rule is based on business buying patterns. Professor Dawes gave this illustration of the rule:  "Corporations change service providers such as their principal bank or law firm around once every five years on average. That means only 20% of business buyers are 'in the market' over the course of an entire year; something like 5% in a quarter - or put another way, 95% aren't in the market [in any given quarter]."

Professor Dawes argued that advertising "works" because it builds and refreshes memory links to a brand in buyers' minds. These memory links will be activated when buyers do come into the market. Therefore, he writes:

"To grow a brand, you need to advertise to people who aren't in the market now, so that when they do enter the market your brand is one they are familiar with. And, that they mentally associate your brand with the need or buying situation that brought them into the market. That way, you increase buyers' purchase propensity. And if you do that across enough buyers, your market share will grow."

Professor Dawes' paper should trigger two questions in the mind of a B2B marketer.

1. Does the 95:5 rule apply to my company/in my market?
2. Should I follow Professor Dawes' advice and market to buyers who aren't "in the market?"

In this article, I'll discuss some of the major nuances of the 95:5 rule. I'll address the second question in a future article.

Is the 95:5 Rule Valid and How Does It Actually Work?

The 95:5 rule makes sense on an intuitive level. If, for example, your company has just purchased and installed a new HVAC system for its manufacturing plant, it probably won't need to replace that system for several years. So, it won't be in the market for HVAC equipment for quite some time.

The rule is also supported by other research. For example, recent research by NetLine Corporation (the operator of a content syndication platform) found that 30.8% of the B2B professionals who access content via the NetLine platform expect to make a purchase within 12 months, 15.2% expect to buy within six months, and 7.6% expect to make a buying decision within three months.

It's important to recognize that the percentage values in the 95:5 rule were never intended to be interpreted literally or viewed as universal. In his paper, Professor Dawes wrote, "The 95% figure is not meant to be a precise rule. We're using it as a heuristic to get the idea across that the vast majority of businesses, for a large proportion of products, are not in the market in particular time periods."

In fact, the 95:5 rule can't be universal or precise for several reasons. Here are three of the more important reasons:

Category Differences - The percentages of buyers who are in or out of the market during a given period are based on how frequently they purchase a particular product or service, and purchase frequency can vary significantly across product or service categories. For example, the percentages will be quite different for a company selling industrial machinery that customers purchase about every ten years than for a company selling personal computers that customers replace every four or five years.

Averages Aren't Always Accurate - The percentages produced by using the rule are product/service category averages, and they may not accurately reflect the purchasing patterns of your company's customer base.

Unexpected Events - The rule doesn't account for unexpected events that may disrupt normal customer buying patterns. For example, the appearance of a major new technology may cause customers to replace their manufacturing equipment more quickly than usual.

Even with these caveats, the 95:5 rule describes a valid and useful principle. It can, for example, enable marketing and sales leaders to estimate when particular customers or prospects may be ready to initiate a buying process.

***

As I noted earlier, Professor Dawes argued in his paper that companies should advertise to potential buyers who aren't currently in the market. I'll discuss this issue in a future article.

Illustration courtesy of Colin Kinner via Flickr (CC).