Keeping Up With Your Customers No Matter How Often They Change
Here is an interesting article from Adrian Slywotzky.
Keeping Up With Your Customers No Matter How Often They Change: The Incredible Power of Knowledge Intensity
By Adrian J. Slywotzky, author of The Upside
Have you ever been blindsided by changes in your customers? Have
you ever felt that half or more of your marketing dollars are wasted?
Were the surprises and the waste really unavoidable?
Perhaps the most insidious strategic risk companies today face is
decimation of the customer base by shifts in behavior, preferences, and
demographics. These shifts may happen gradually or literally overnight.
Either way, they can destroy a business design.
Customers are people—unpredictable, irrational, emotional, curious,
and highly prone to change. Customers can’t keep still. They resegment
themselves from "product buyers" to "value buyers" to "price buyers"
and then back again. Their priorities change from "quality" to "price"
to "solutions" to "style" to "brand." They get richer. They get poorer.
They get excited by and attracted to different styles, different
offerings, different ways to buy.
They get better informed. They get more demanding. They decide to
shop at different places; they start buying shirts through catalogs,
jewelry from a TV network, vacations online. They want bigger cars.
Then smaller. Then really bigger. Then really fuel-efficient. They
pledge allegiance to product brands. Then store brands. Then no brands.
They want carbohydrates, then they don’t. They want big cars; then
small, thrifty ones; then humongous ones—then decide they value
fuel-efficiency and ecological virtue after all.
Every time customer priorities shift, our business design is at
risk. Our value proposition gets a little fuzzier, a little out of
focus. We lose a little business from a few customers; they decide to
peel away once in a while and buy a couple of items from another
supplier. Then we start losing customers altogether. (That’s a little
more worrisome. But at least we’ve still got our old reliables.) Then
we start losing our most profitable customers, the 20% that generate
more than 80% of the income. A trickle of tiny changes turns into a
torrent of departures. And a 1% loss of revenue turns into a 6% loss of
profit.
Customer risk is the most subtle and perhaps the most widespread
strategic risk that any company faces. It’s also the most unnecessary.
How can you take action to prevent customer risk? You can’t force
people to buy from you. As Yogi Berra once said, "If the people don’t
want to come to the ballpark, you can’t stop them."
No, you can’t, but you can reduce the risk of losing customers by
reducing the uncertainty that creates the risk in the first place.
After all, that’s what risk is about—not knowing what’s going to
happen, what your customers are thinking, what they want, what they
will do, what will they respond to. If you could know those things, you
could react appropriately with the kinds of pricing, marketing, and
service offerings that would motivate them to stay.
This is why the first countermeasure for defeating customer risk is
creating and applying continuous proprietary information about your
customers. It’s about answering the question: What do we know about
customers that others don’t? And then using that knowledge to make and
keep profitable customers for life.
The first step is to develop a healthy fear of ignorance, followed
by steps to move your organization from guessing to knowing—shifting
the frontier that separates what you know from what you don’t know, and
thereby reducing the area in which betting (and therefore risk) are
unavoidable. Even a five percent shift in that frontier can translate
into millions of dollars in revenues and profits. Risk, in the end, is
just a very expensive substitute for information.
Companies that have changed from being risk taker to risk shapers
save money and improve their odds of success by creating and then using
information others don’t have to build unbreakable bonds with their
customers.
For an example, consider Coach, the maker of handbags and other
fashion accessories for women. Coach spends over $5 million per year on
marketplace testing of new products. It uses many lenses to read the
market, including more than 60,000 one-on-one customer interviews,
telephone surveys that reach 500 customers at a clip, numerous market
experiments, competitive analyses, prototype studies, and in-store
product tests.
Coach’s customer database has grown to include over 9.7 million
households. CEO Lew Frankfort himself visits Coach stores and
department stores a few times each week, eager to supplement the
bird’s-eye view provided by survey data with ground-level impressions
straight from the mouths of customers.
Coach constantly looks at its customer base from many different
angles, studying metrics such as customer satisfaction, competitive
rating, positive buying intent (cross-checked against actual buying
behavior), new customers, lapsed customers, price response, response to
new varieties of product, and response to variations at the micro-level
(demand for crimson versus vermilion or blue versus aquamarine). The
combination of all these partial views helps Coach construct an
incredibly precise moving picture of the customer.
Based on advance reactions to proposed products, Coach frequently
alters designs, drops products that test poorly, and expands plans for
styles that prove surprisingly appealing. (Recently, a new product
tested wildly popular relative to baseline numbers. Production plans
were doubled.) Frankfort is especially fond of what he calls
quick-and-dirty research—last-minute, small-scale surveys that provide
on-the-spot confirmation of a strategy or highlight the need to make a
change.
The combination of all these windows into customer behavior,
attitudes, and preferences gives Coach an unmatched wealth of
proprietary information about the market—information that helps the
company anticipate and respond to customer shifts before they happen.
Proprietary information is a critical component of customer risk
insurance, but not the whole story. For state-of-the-art players like
Coach, proprietary information is the cornerstone of a system with
several key components. These include:
• Persistently asking the toughest and most probing questions about
customers, their needs and interests, and the ways in which the
company’s business processes can serve those customers better. Always
asking: "What am I afraid to find out today? And how can I find it out?"
• Having models or algorithms that convert the flow of proprietary
information into "ahas!" that the company can act on, especially
pricing systems that align customer preferences and the company’s
economics so as to maximize the flow of value to customers along with
profits to the company.
• Having programs that organize the most important elements in the
customer relationship (such as customized product offerings, reward
programs, and service interventions) so that satisfactory transactions
evolve, little by little, into strong, lasting, low-beta, and highly
profitable relationships.
• A customer-centered culture, inculcated and reinforced through
training and incentives, that gives employees the skills and enthusiasm
they need to keep doing the right things for the customer and the
business.
The ultimate outcome of building a business around proprietary
customer information is the creation of knowledge intensity—a way of
doing business by which the myriad unknowns that characterize every
company have been systematically tracked, quantified, studied,
analyzed, and codified so as to reduce uncertainty, enhance
predictability, and enable managers to make more accurate decisions
than ever before.
How often? All of the time? Nowhere near that often. But increasing
the frequency of right actions from, say, 40% to 50% makes an enormous
difference in the success of any business. Even a one-percent increase
can make a big difference. "Working the numbers" is hard, but those
who’ve done it know it pays off.
Is it genius? Not really. It’s simply about being obsessed with
customers and unrelenting in the quest for information that will help
you know them. Knowledge intensity companies like Coach apply ten to
twenty times as much information as their rivals do. And they are
always looking for more.
As a result, they’ve moved from being passive victims of customer
risk to active risk shapers, reading the changing patterns of customer
choice and making informed decisions about how to respond.
ADRIAN
J. SLYWOTZKY — cited by Industry Week as promising “to be what Peter
Drucker was to much of the 20th century, the management guru against
whom all others are measured”—is a director of Oliver Wyman. He is the
author of the bestselling The Profit Zone (selected by BusinessWeek as
one of the ten best books of 1998), Value Migration, and How to Grow
When Markets Don’t. He has also been published in the Harvard Business
Review and the Wall Street Journal and has been a featured speaker at
the Davos World Economic Forum, the Microsoft CEO Summit, the Forbes
CEO Forum, and the Fortune CEO Conference.
