Introduction

Juragan Material is an online marketplace for construction materials in Indonesia, enabling users to browse and purchase construction materials with either cash or a term payment option. The company provides a wide range of products, including building materials, tools, and hardware.

The Problem

Juragan Material offers customers the flexibility to pay their purchases through term payments. However, determining the ideal credit limit for each customer is a challenge due to the difference of customer habits in purchase and payment.

It's become a problem because if Juragan Material gives large credit limit to a customer who is unable to repay it, they could lose money. On the other hand, if they give small credit limit to a customer who is able to repay it, they could miss out on sales opportunities.

The Approach

Understanding The Challenges

Juragan Material should assign a generous credit limit to customers with larger transaction values and a more modest credit limit to those with smaller transaction values. However, manually setting credit limits for each customer can be time-consuming. Offering the same credit limit to all customers can be unfair and inaccurate. These two approaches are not suitable because each customer has different credit needs and financial capabilities.

Recognizing these challenges, Juragan Material needs an efficient approach for categorizing customers into different segments based on their transaction history and payment habits. This approach will help Juragan Material to assign different credit limits for each segment, align with their credit needs and financial capabilities.

Collect and Analyze

Our business team recently conducted a customer survey to gather insights from 50 customers. From the survey results, we divided customers into small, medium, and large businesses based on total employee, company age, and total vendor. This initial analysis identified company size as a key factor influencing credit needs and financial capabilities.

To gain deeper insights, we also analyzed their past transactions over the last 8 months. Focusing on variables like credit payment terms, purchase amount, and total project handled. We then established thresholds for each variable to assign their size. This approach helped us to determine final size (small, medium, large) to each customer, providing a clearer picture of their credit needs and financial capabilities.

Define Customer Segments

Once we have the final size, we compared it with the type of materials each customer has purchased to categorize them into different segments. This categorization helps us understand which customers consider Juragan Material as their primary supplier. Those who purchase essential materials are more likely to choose Juragan Material as their first option, while those who only buy inessential materials may have chosen Juragan Material as a last-minute option for urgent needs.

The Result

Our analysis has identified 5 distinct segments based on credit payment terms, purchase amount, total projects handled, and type of materials. We have given each segment an animal nickname to reflect its characteristics:

1. Elephant: Represents customers with long payment terms, high purchase amount, high number of project handled, and purchase essential materials.

2. Baby Elephant: Represents customers with moderate payment terms, high purchase amount, low number of project handled, and purchase essential materials.

3. Bull: Represents customers with moderate payment terms, low purchase amount, high number of project handled, and purchase essential materials.

4. Cow: Represents customers with moderate payment terms, low purchase amount, high number of project handled, and purchase inessential materials.

5. Deer: Represents customers with short payment terms, low purchase amount, low number of project handled, and purchase essential materials.

We have established and assigned distinct credit limits for each segment, ensuring efficient allocation. The Elephant and Baby Elephant segments, characterized by their high purchase amounts, are granted higher credit limits. The Bull and Cow segments, involved in numerous projects, are assigned moderate credit limits. Meanwhile, the Deer segment receives lower credit limits suited to their lower purchase amounts and number of projects they handle.

The Impact

After assigning appropriate credit limits to each segment, Juragan Material achieve several positive outcomes:

1. Reduce the risk of financial loss: By assigning lower credit limits to segments with a higher risk of late payment, Juragan Material can minimize potential financial losses from bad debt.

2. Increase sales opportunities: For segments with reliable payments and high purchase volumes, assigning higher credit limits encourage larger transactions and increase sales.

3. Maintain a healthier cash flow: Efficient allocation of credit limits across segments ensures that available budget is utilized effectively, which results in a more stable and predictable cash flow.