Key Account Management

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Parag Utekar
Student (MBA), India

Key Account Management

Key accounts of an organization typically require a large, long-term commitment and the involvement of several specialized people due to their buying power and complexity. Delivery systems, terms and conditions involved in the purchase, product applications, and the vendor's products might be changed or developed from scratch for such major accounts. The selling cycle (also: sales cycle) often involves a period of months, or even years, and many expensive sales calls before (hopefully) a contract is signed and revenues are generated. Such effort means a considerable amount of opportunity cost for the vendor in the form of time and attention which can not be not allocated elsewhere.

That's why not every current customer or a potential prospect can be treated as a "Key Account" and the selection of such accounts is a crucial decision for any selling company. Thus having clear account selection criteria is necessary to deploy efficient (key) account management tactics. Depending on the seller's marketing strategy and the competitive situation involved, several factors are relevant in key account selection:
  • SIZE OF THE ACCOUNT: Total order volume.
  • ORDER SIZE: This is probably the most common criterion used by the organizations in judging which customers are categorized as key accounts. In many businesses, large orders are usually less expensive to fulfill than smaller orders due to the economies of scale and the learning-curve effects inherent in many production processes and delivery systems. The extent of vendor sales efforts in these situations requires large orders to amortize the selling expenses and justify the efforts involved. Nonetheless, the order size may not be the only criterion for judging the key account. For example, a high-service, a premium-priced producer, might find buyers that generate the largest orders are often the most price sensitive. The companies might not be willing to pay for the vendor's support offerings because their purchase order makes it easier to establish an in-house service and the support capabilities for the product.
  • PRODUCT MIX: The potential involved in selling across the vendor's product line is often understood to be a key consideration in the key account selection process. It is especially important when the selling company's cost-of-goods-sold is almost equal across its product line. Still, customer price sensitivity varies across some products and not others. This situation especially pertains to many service businesses wherein multiple products share a similar delivery system, but the customers' benefits and price elasticity vary from one service to another. New computer technology created factories that can produce multiple different product designs at the same at lower costs as an equal-size stream of different product designs in the traditional factory geared to unit-cost economies of scale. Thus, in such situations, "system sales" across the vendor's product line can be more profitable than a single large order for any single product.
  • CUSTOMER MAINTENANCE COSTS: Often, it becomes important to project the cumulative cash flow of the relationship history. Account profitability patterns often vary over time and one needs to considers the long term costs and benefits of a large customer. During the development and selling period, the customer's cash flows are often negative, and the demands are typically encouraged by the vendor. When the product gets delivered, and the reorder begins, the cumulative cash flows become positive for the vendor. The expenses required to maintain these orders, "after the sale is over," differ significantly from one account to another, making the customer maintenance cost an important criterion.
Another important issue is that a key account can represent a continuous stream of orders for the supplier. In turn, this stream of orders tends to affect the supplier's business through multiple interrelationships which must be balanced in account-selection decisions: the size of the account; the order size; product mix; the net price and the margins available to the supplier; and the service, support, and other customer-maintenance which tend to affect the cumulative cash flows. In reality, there might be no actual balance of these factors. These large and powerful buyers tend to occupy a strategic position in the marketing plans of the firm and its competitors in the relevant product category. Hence, having a very good Key Account Selection process is crucial.

⇒ Do you have an additional tip or model for managing key accounts?

Sources: Cesdes, F.V. (1989). Managing Major Accounts, Harvard Business School, 9-590-046.

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