Customer Profitability Analysis Using BCG

matrix for Derricks Ice-Cream Co.

Derricks Ice-Cream Company is located in modern premises and
manufactures and distributes 30 different ice-cream product lines from
its suburban base in the UK. The products are distributed by Derricks
own fleet of refrigerated trucks to six major wholesale distributors.
Annual sales are currently around the 10m level, distributed among
the wholesalers as indicated in Table 1. Derricks control about 35% of
its metropolitan market, but this shrinks to less than 10% in outlying
areas where there are many small competitors.

Market shares for six customers

Customer
Ardrons Wafers
Butler Ices
Cahills Cones
Donleavy Ices
England Wedges
Frankston Chocs
Others
Total

% Sales
19
12
25
09
14
20
01
100

The company usually hold up to four weeks of stock in their central

cold stores to meet the distribution requirements of their six major
customers. The cold stores cost is approximately 500000 p.a. to run,
but excess capacity can be hired out to other non-competing firms.
The requirement of meeting the sometimes uniquely specific
requirements of customers has been causing Derricks management
some serious headaches recently. They recognize the importance of a
client-focused approach to marketing and distribution, but are
beginning to feel that they are being exploited by some customers who
are never satisfied with the level of service provided, however
extensive it may be and this is costing them a lot of money.

So, to analyze the current situation we will form a BCG matrix and
recommend decision on its results.
BCG matrix will help us to examine distributors in he companys
portfolio on the basis of their related market share and industry growth
rates.
In other words, it is a comparative analysis of business potential and
the evaluation of environment.
According to this matrix, business could be classified as high or low
according to their industry growth rate and relative market share.
Relative Market Share = SBU Sales this year / leading competitors
sales this year.
Market Growth Rate = Industry sales this year - Industry Sales last
year.
The dimension of business strength, relative market share, will
measure comparative advantage indicated by market dominance. The
key theory underlying this is existence of an experience curve and that
market share is achieved due to overall cost leadership.
BCG matrix has four cells, with the horizontal axis representing relative
market share and the vertical axis denoting market growth rate. The
mid-point of relative market share is set at 1.0. if all the SBUs are in
same industry, the average growth rate of the industry is used. While,
if all the SBUs are located in different industries, then the mid-point is
set at the growth rate for the economy.
Resources are allocated to the business units according to their
situation on the grid. The four cells of this matrix have been called as
stars, cash cows, question marks and dogs. Each of these cells
represents a particular type of business.
Here, the relative market share can be calculate from the data given
above. But the market growth rate which is used as a proxy to the cash
out flows has not been given so we will analyse our customers that is
the six major distributors on the basis of the information given and
from the information give we deduce the following parameters to see
how productive these customers are. The parameters are as follow:

Discount Required
Delivery Distance
Unique Packaging
Urgent order frequency
Payment handling
Volume of Sales

Order frequency

Now, we rate all the six customers on an 11 point scale i.e. from -5 to 5
and evaluate their performance, where we do not have any information
we give a zero that is we have a neutral position towards it.
Parameters
Customers
Ardro Butle Canhi Donleav Englan Franksto
n
r
ll
y
d
n
Discount
4
-3
5
-5
4
0
Required
Delivery Distance
0
-5
0
0
0
5
Unique Packaging
5
-5
5
0
0
0
Urgent Order
5
-3
4
-4
5
-3
Frequency
Payment
0
0
5
-5
5
-5
Handling
Volume of Sales
4
2
5
1
3
4
Order Frequency
5
3
3
-5
5
-3
Total
23
-11
27
-18
22
4
For Example: For Ardron Wafers from the information given we have
that it requires low discounts for the volume and it maintains large
inventory and thus have highly predictable delivery requests and
holding requirements. Thus, on the scale we give it a 4 for asking low
discounts and 5 for order frequency as its delivery request are highly
predictable. Also as it employ standard packaging thus it has no unique
packaging and thus we give it a 5 on that parameter.
The same is done for all the six customers (dealers) and thus it
substitutes the market growth parameter on our BCG Matrix.
Now, we calculate the relative market share from the data given
above:
Relative Market Share = SBU Sales this year / leading competitors
sales this year.
Customer

Market Share

ln(RMS)

19
12
25
09
14

Relative Market
Share (RMS)
0.76
0.48
1.25
0.36
0.56

Ardrons Wafers
Butler Ices
Cahills Cones
Donleavy Ices
England
Wedges
Frankston Chocs

20

0.80

-0.22

-0.27
-0.73
0.22
-1.02
-0.58

Now for our BCG we have ln(RMS) on the x-axis and the total figure of
the customer assessment on the y-axis.
Customer
Ardrons Wafers
Butler Ices
Cahills Cones
Donleavy Ices
England Wedges
Frankston Chocs

ln(RMS)
-0.27
-0.73
0.22
-1.02
-0.58
-0.22

Total Customer
Evaluation Score
23
-11
27
-18
22
4

Strategies for different customers:

Ardons Wafers: They have very few demands and are also a
regular and reliable customer and comes under the ? category
and thus should be promoted so as to make it a star one day.

Butlers Ices: For butler we can restrict free deliveries as they

are located quite far away from our central base. We should also
charge a premium amount for the customized packaging and
should help them in improving their inventory system so as to
reduce the crisis deliveries.

Calhills Cones: It is our star performer and also has no unique

demands of any sorts. They have a reputation for paying on time
and also have a great inventory management system. We have
a good relationship with them and should continue to strength it.

Donleavys Ices: It is not a great customer perhaps the worst

of all, it commands a low market share and also have score in
evaluation and thus it falls under Dogs category. It has also
threatened the company of taking its business away. We should
not give it unjust discounts and also ask it to update its
inventory system as daily free delivery is an expensive option.
Seeing its low performance and the threat of not cooperating our
company can let go of this customer if it doesnt complies to our
conditions.

England Wedges: It is a good customer as it doesnt have any

unique demands of its own and it is also ready collate sales
credits and make monthly claims and as it orders in bulk the
delivery cost is also low for it. Thus, we should promote it and
help it in any way possible as it can be our future star.

Frankston Chocs: It is on the margin of ? category and the

Dog category. It is a big customer as it accounts for 20% of the
sales i.e. 2 million, so we have to make special provisions for it.
It should be helped in becoming independent in their
merchandising procedures and we should also give assistance
for inventory control and for the ordering segment.