It is a proven fact that most businesses make the majority of their income from a small proportion of their customers. Often the make up of a firm’s income stream replicates the Pareto principle: That 80% of the results of an activity come from 20% of the resources applied to that activity.
What this has resulted in is that the 20% of customers that provide a business with the 80% of its income are treated differently to ‘mass’ customers. Firms attempt to develop closer relationships with the top 20%; they define them as key accounts.
Key accounts are not necessarily a firms most profitable accounts and they may not be the biggest accounts in terms of scale. Key accounts are those which best fit with a businesses strategy and the achievement of its long-term goals. These are the accounts which the most secured sustainable benefits.
Key account management is the process of allocating and organising resources to achieve the optimal business within a balanced portfolio of clients and which allows a company to meet its corporate objectives both at present and in the future.
A key account manager is the person with overall responsibility for such commercial relationships with one or more organisations.
Unfortunately, all too often, the development of key account managers within a business is dealt with by promoting salesmen: often beyond the level of their competence. A fine case of the Parkinson Principle.
Someone who is highly skilled in attracting new customers may not have the skills needed to develop deeper relationships with clients.
Another issue is where there is a disparity between how customers and clients view the relationship. For example, a small food producer may see its relationship with a major supermarket as a crucial key account but the management of the supermarket chain may categorise the small food producer as a minor transactional relationship.
Many small businesses get into serious trouble when they are over-reliant on one large contract. If that contract is withdrawn, they cease to be viable.
Key account management has benefits in terms of both risk and cost reduction.
Risks are reduced because:
- Firms and their key customers can share assets which can lower breakeven costs
- Information can be shared both formally and informally
- Key accounts allow for increased flexibility and vertical integration
- Key accounts allow for volume commitments and joint planning.
Costs can be reduced through:
- Reduced production costs
- Reduced transaction costs through better information and less uncertainty. Transactions can become a matter of routine (but beware they don’t become a matter of assumption.)
There is however a limit to the cost savings of key accounts. They can take up significant resources to develop and maintain. Key accounts are not cheap and you may incur significant costs servicing them.
There are significant benefits for buyers through the development of a key account relationship. Buyers benefit by:
- reduction in costs by reducing task repetition;
- better management of supply chains;
- tighter quality control at reduced cost
- collaborative product development reducing research and development costs.
For suppliers in a key account relationship, there are dangers. There may be issues of control and dependency. Profit margins may be eroded.
It is therefore crucially important that there is a strategic rationale for entering a key account relationship.
It is also important to develop a range of key accounts meeting different organisational needs and goals.
Professor Malcolm Macdonald of Cranfield University defines four types of key account:
- Strategic – this is where there is a strong relationship between the supplier and the buyer and high attractiveness for the key account relationship. Strategic KAM customers are Very Important Customers. They align closely with your organisations aims and goals. They are organisations ripe for developing partnerships which are mutually beneficial. These customers tend not to buy on price but on derived relationship benefits. Usually, there are a wide range of contacts between Strategic KAM organisations; from the shop floor to the boardroom. This leads to joint planning and joint product development. This leads to interdependent and integrated KAM relationships.
- Status – These are Very Valuable Customers. This is a relationship which is less attractive that a strategic relationship but which where there is still a strong relationship between the buyer and seller. The focus in such relationships should be one of vigilance and motivation. Often these relationships will require tailoring of products to meet the buyer’s requirements therefore ensuring security of supply. Often in these relationships price is less important than the choice of supplier. Often there are some common goals between the two KAM partners. Often these relationships are defined by long-term contractual obligations. You do not want to over invest in these relationships as it can improperly reduce margins.
- Star – these are KAM relationships which are highly attractive but which are less important than strategic KAM relationships. Often these relationships are defined by price and the security of supply to customers. Star Key accounts also place importance on service levels. These relationships often require the development of tailored offers. The aim with star key accounts should be investment to deepen relationships and to improve joint processes. These are relationships you look to develop into future strategic key accounts.
- Streamline – These are less attractive key accounts with less a less important relationship than other forms of KAM. Often these accounts rely almost entirely on a transactional basis. Streamline KAM customers often only want standard products and price is key. You do not want to over invest your time and resources on these accounts. Investment on these accounts should focus on maintaining a consistent relationship pattern and careful selection of these customers for deeper relationships.
Remember that these four categories of customer probably account for the top 15% of your customer base. You cannot rely on a single category. Instead you should develop a combination of the four types of KAM relationship which best aligns with your organisational goals, objectives and mission.