Key accounts - Big... Beautiful? (Ed)

Jo my German friend wrote a post yesterday about "Key account management" here, it discussed how your big customers (in terms of sales volume) may not necessarily be worth the effort, money and time spent that must be spent to keep them happy
I had a few thoughts on this myself:

Degree of customer independence
I suppose one thing that needs to be taken into account when talking about these “Big customers” is whether they hold any weight in the decisions made by other parties in the marketplace.

Suppose that “Compu Co.” sells a type of computer to retail shops all around the country, their biggest customer accounting for more than 20% of their sales is PC World. Although this relationship takes a disproportionate amount of time, money and effort PC World are judged as the industry leaders by the competition and all the smaller players purchase according to the trends set by the industry leader. In this case it may be worth the money and effort expended on keeping this “key account” going strong, as a consequence they receive stronger sales from the other 80% of customers who judge their product to be superior to the competition – “it must be, PC World just bought 10,000 of them!”

However if the “Key account” company does not have such sway over the other operators in the marketplace and is completely independent, as I would assume is the case in the majority of b2b relationships then the importance and priority attributed to keeping the big guys happy needs to be re-examined.

The influence of a customer down through the supply chain.
Some industries may be structured so that one set of large customers have a hugely disproportionate say in what gets sold at a later stage in the market. From my own experience the example of pharmaceuticals manufacturers and hospitals comes to mind.

In Ireland the network of Irish hospitals are considered a “Key account” not primarily because of the quantity sold in the actual hospital, but because the decisions made in the hospital have wide reaching effects into the market as a whole.

Hospital pharmacies are able to purchase pharmaceutical products at a heavily discounted rate in comparison to their private sector counterparts, with the manufacturers employing the logic that whatever drug they get prescribed in the hospital, will continue to be received by the patient outside the hospital. So by selling the hospital cholesterol lowering drugs at bargain basement prices, the company have now ensured that 54 year old Johnny will be paying for these on the outside world till death do them part.
As much hastle as it is to maintain these hospital relationships – its is most certainly worth it.

Eggs and Baskets.
To keep it short: nothing is certain, especially in this economic climate. If your key account worth 30% of your sales were to... go out of business... where would that leave you. Expect the unexpected.

They are just my observations on the situation, and in summary I think Jo is correct, the fact is that many companies seem incapable of distinguishing a difference between a customer that provides Sales volume and one that provides superior profitability. Exceptions certainly exist however, and I suppose the lesson to take away from this is that analysis of WHY your supposed "key accounts" are important should be thorough and ongoing.
for example below... big... NOT beautiful

Aer Lingus: Death by rejection?

Well 2008 is almost behind us and the Aer Lingus/Ryanair saga continues with no sign of an agreement in the near future. In my opinion the continued blanket refusal by Aer Lingus to consider a takeover by Ryanair is completely unfounded and ridiculous.
Firstly it is clear that sentimentality and politics are getting involved in the situation, where clearly this should not be the case. The “state run company” attitude is still following Aer Lingus around like an unprofitable shadow and is clearly getting in the way of important commercial decisions, like say... dropping an unprofitable route:

“Also at the hearing, Aer Lingus has been told that unless it re-instates a Shannon to Heathrow service, there would be considerable support among TDs for the Ryanair takeover bid. A number of TDs from the Shannon region said there was still a lot of anger there, about the pull-out”

The fact is that Aer Lingus is not a charity, it does not OWE any airport in Ireland anything, the airline should be able to make commercial decisions without having TDs from the Shannon area interfering and I have a feeling that a management headed up by Michael O’Leary wouldn’t stand for this constant interference from these irrelevant parties.

My second point of contention with the anti-Ryanair takeover crowd is their insistence that the takeover bid “significantly undervalues Aer lingus”:

Ryanair says the proposal represents a premium of about 28% over the average closing price (€1.09) of an Aer Lingus share for the 30 days to November 28. It also represents an premium of about 25% over the closing price of €1.12 of an Aer Lingus share on Friday.

Given that Ryanair offered 25% over what the market values Aer Lingus at, I find it bizarre and absurd that someone would argue the bid “undervalued” the company, again this act of denial of financial reality is another example of the complete ignorance of the Aer Lingus board as to the state of their company.

Some interesting facts from Finfacts.ie:

Since 2006, when Aer Lingus rejected Ryanair’s €2.80 offer, they have:

• Spent over €24 million on its defence of Ryanair’s 2006 €2.80 offer


• Allowed its director’s basic annual fee to almost treble from €17,500 to €45,000


• Allowed its non-executive Chairman’s basic annual fee to increase fivefold from €35,000 to €175,000


• Increased short haul fares by 7% to €94Increased fuel surcharges 5 times to a current average of €75 per sector


• Aer Lingus’ forecast operating losses for 2008 and again in 2009
  

In summary I suppose I would like to tell the Aer Lingus board to get real, a Ryanair takeover is the best option for the continued existence of the company. Its time for Aer Lingus to get the sentimentality of “the good old times”, and the politics out of its decision making, its also time to have a management that is not afraid to make tough decisions, and its time for Aer Lingus to get a strategic plan that will ensure the companys long term survival.