B2B marketers i.e. marketers serving in industrial markets supplying products and services to organizational buyers need to adopt key account management strategy. What is key account? How to identify them? How to design an organization to manage this strategy? What systems and processes to follow?
It is a known fact that 80:20 rule applies to every business i.e. 20% of customers contribute to 80% of company’s business(revenue/volume terms). Thus identifying such customers and treating them separately and building long term relationships would be a key to success. Thus key account management is defines as [i] KAM is considered as a management approach adopted by selling company. It builds portfolio of loyal key accounts and they are offered on a continuous basis added value to standard product &/or service package . Appropriate technical, social and process links get established once this concept is accepted to be practiced by both; a buyer and a seller. The focus is on building relations rather than on transactions. Rather than looking at current volume of business for identifying key accounts, marketer needs to apply multiple criteria e.g. current volume/value, future volume/value, cost to serve and thereby profitability of each account, reference/prestige value of such account, possibility of strategic alliance/networking opportunity to develop future innovative products/solutions for such accounts etc.
Over time, the key relationship gets converted from basic to integrated KAM as shown in Figure-1 below.
Fig. 1 Hierarchy of Relationships
Hierarchy of relationships
• Basic– At the time of new customer acquisition, operational relationship gets developed wherein transactions are handled efficiently.
• Co-operation– Over time with repeat orders, cooperation is sought by both the parties for reduction of risk and enhancing ability to forecast, reduction in ordering costs, inventory carrying cost by JIT(Just in time delivery).
• Interdependence: During this stage, trust & recognition of mutual dependency is developed. High collaboration and interdependence gets developed over time. Once confidence is established in the relationship, it culminates into stable & valuable relationship.
• Integrated-In this phase, both the parties realise fullest potential. The seller develops and builds long term relationships with each of their customer accounts. The characteristics[[ii]] of integrated key account management are; i) buying and selling processes/systems and strategies are integrated by both the key account buyer and seller, ii) there exists complementary and mutually dependent relationship between buyer and seller, iii) dedicated cross boundary, functional/project team is setup on both sides which are socially bonded. iv)There are high exit barriers for both the parties. v) Even if there is an exit by either party , the exit is traumatic, as substantial time, energy and resources are invested by both the parties. For a buyer, in order to change a supplier several types of costs are involved such as psychological, physical, and economic costs which may act as a barrier for switching.
In order to determine the profitability of each customer, more & more companies are adopting activity based costing approach. It is an approach which first identifies activities needed to serve the customer, and how these activities are linked to revenues and consumption of resources. [iii] In determining profitability, marketer needs to identify presale costs, production costs, delivery costs and post-sale service costs of each customer and identify those which are low cost to serve and also contribute significantly to current volume/value sales or have potential to do so in future.
The benefits which emanate from such relationships are many. For a marketer, customer loyalty & advocacy which can be leveraged to get new customers, lower cost to serve with the accrued learnings to serve key accounts, possibility of extracting more value, transparancy and flow of information sharing etc. To key accounts the benefits may range from financial benefits such as loyalty discounts, stable prices, structural benefits such as systems & processes streamlined to serve in real time at both ends and relational benefits such as invitation to cultural events, membership to clubs etc.
In order to pursue strategic Key Account Management, the organization needs to adopt systematic approach to excel. It should define strategy for key accounts which will be driven by current corporate strategy. Then it should install cross functional teams with multi disciplinary approach to create appropriate organization, get the support and involvement from senior management, and from time to time measure the success of the KAM program. KAM team need to develop financial insight to measure true profitability of key accounts and their sensitivity as advocated by MCE[[iv]]. For KAM team, key performance measures should be determined and communicated and the organization should strive for full costing measurement to determine success and value of such program. For KAM team , it should recruit appropriate people with high motivation and define their roles and responsibilities to align with the existing organization. It should create a higher level position for a manager handling KAM, and install regular performance reporting system. Appropriate processes and tools would enable successful implementation of such program in the organization.
[i] Malcolm Macdonald;Beth Rogers; Diana Woodburn, (2000)” Key Customers: How to manage them profitably” ButterWorth Heinemann , 300p.
[ii] Vyas Preeta H,(2012), ,”Key Account Management” IIMA Working Paper W.P. No. 2012-06-08, June,17p.
iii Kaplan & Narayanan,” Measuring and managing customer profitability,” Journal of Cost Management,15(September/October 2001): P.5
[iv] MCE(Management Centre Europe),(2013),” How economic and technical changes have made key account management a strategic imperative” from www.mce-ama.com, accessed on 20th December 2013.
By
Dr. Preeta H. Vyas, Associate Professor,
Adani Institute of Infrastructure Management