As a CEO, your job is to devise a strategy for performance improvement. Insight into your customers' preferences and behaviours, and how these might change over time, is essential. Take full advantage of your competitive position - and gain the most from your "pools" of profit.
There are a number of valuable analytical tools that will help you turn up data and insights into all the sources of profit pools.
Changes in customer preferences and behaviour
An important source of profit pools, is everyday changes in the preferences and behaviours of customers. Most of the tools we will discuss here are designed to help you anticipate and respond to such changes.
Customer segmentation is an indispensable tool for performance improvement, because it answers fundamental questions any company must face. Customer segmentation ensures you know:
- You are selling to the right customers
- Which segments should be the primary target of your product-development efforts, and of your sales and marketing activities
- Which regions and countries you should be competing in
- In which markets you can create differential value
- How you should differentially allocate your sales and marketing resources to various segments
A management team must understand which customer segments are most attractive in terms of size, profitability, and growth. They must also make an honest assessment of their company's capabilities to meet each segment's needs relative to the competition.
Some segments "fit" a company better than others - that is, the company has greater ability to serve these segments in a way that is differentiated from competitors. Some segments are more profitable, either because they generate higher revenues, because they can be served at lower cost, or both. And some segments are growing faster.
Segments with high growth, high profitability, and sufficiently large revenue potential are a company's natural focus. But the company may also be able to adjust its value proposition to serve high-growth customers that are not currently very profitable.
Effective segmentation can also reveal underexploited opportunities within your customer base. By "de-averaging" your customers and prospects, you can often find hidden pools of profit that could be more fully exploited.
A great starting point for this sort of analysis is to identify segments that are willing to choose your product over others, or that are willing to pay more for the bundle of needs and wants that your product represents. Have you fully penetrated all the customers in the market who have similar characteristics? Among those you have penetrated, have you earned and captured 100 percent of their purchases?
Divide your customers into three camps:
- Those who buy primarily on price
- Those who are looking for some combination of quality and service
- Those who are looking for some form of prestige through buying a particular brand
Segment needs and performance (SNAP) charts
Different customer segments will have different wants and needs. If you compare your offerings for particular segments with those of your competitors and substitute products as they are viewed by these customers, you are likely to glimpse what will happen to your profit pools and relative market shares down the road.
How to assess the needs of different segments over time:
One simple tool - called a "SNAP chart" - can often get you 80 per cent of the answers:
- Define the specific attributes of the products or services you offer that might be important to the customer segments you want to target
- Conduct research aimed at determining how important each of these actually are to these customers
- Assess your performance on each attribute as viewed by the customers and where each of your competitors performs on these dimensions
The results show how you measure up to the competition in the eyes of your key customer segments. You can use it to identify which gaps are most important to close (if you're behind) or widen (if you're ahead). You can also see where you might be over-shooting the mark.
For example, if the company exceeds customers' requirements on innovation and assortment, two attributes that rank four and six respectively in importance to the customer, the company is incurring costs that may not earn a return in the marketplace. However, if it is slightly underperforming, compared to competitors, on quality, which is number one in importance, and significantly underperforming on customer service, which is number three, the company probably needs to take action to close those gaps.
SNAP charts, incidentally, underscore the importance of an effective segmentation strategy. To oversimplify only a little: if you have only one undifferentiated offering, you are unlikely to meet the needs of your customers as well as competitors that have offerings tailored to each significant segment. You will also probably incur unnecessary costs in over-serving needs that are not highly valued by some customers.
Customer ethnographic research
Traditional quantitative and qualitative research techniques can help identify and size customer segments and characterise their needs. But in fast-changing markets, or in situations where innovation is required, customers often have trouble articulating or even recognising their own needs.
Consumer-products and technology companies have pioneered the use of a tool known as "customer ethnographic research" to address this kind of situation. It's a way of identifying un-met needs that customers might not be wholly aware of.
Researchers spend time with customers in their businesses, homes, backyards, cars - wherever their product is used. They watch what customers do - the frustrations they encounter, the jury-rigged devices they come up with to solve their problems. This helps the company develop products that customers wouldn't necessarily have been able to describe.
The revenue sieve
Once you know more about your customers, you need to figure out the appropriate actions. One tool that can help you capture more value from your segmentation is known as the "revenue sieve".
The revenue sieve starts by asking the question: "Which customers represent 100 percent of the market we could serve, and why do we not have all of it?". This technique breaks down the difference between the fully addressable market and a company's current sales to determine exactly what are the factors leading to "leaks" in the company's revenues.
To apply the revenue sieve, you need to take a fresh and detailed look at the addressable market. Starting with the total market, identify the points of leakage between that and your current sales.
Though your various customer segments might have different needs, look for commonalities. You can then re-focus your offering and re-structure the salesforce, applying best practices for each type of customer.
The result will be a rekindling of growth. By understanding the leakage between full potential and current sales, your company can take concrete actions to grow.
Loyalty and retention
Customer retention and loyalty can be enormous boons to growth and profitability. Think about how rapidly your company grew last year. How much of the growth came from new customers, and how much did you lose from customers who left you for a competitor? Most companies' revenues are like a leaky bucket. As you add revenue in the top, you lose it out the bottom.
This happens for a variety of reasons. Some of your customers have bad experiences and move to someone else. Some enter a new phase in their life cycle and now find your offerings less attractive than those of a competitor. Others experiment with the innovations offered by competitors. In many industries, increasing customer retention can be the biggest single driver of profitability.
An obvious starting point, of course, is to measure accurately how well you retain your customers and what share of their purchases you have earned. Understanding customer retention in each segment of customers, and mapping the differences in retention rates among customers acquired through different channels, on different products, pricing or service plans, and with different customer experiences can help locate "hot spots" for focus.
But while this is an important technique for figuring out what has happened in the past, managers have long struggled to find a way to anticipate future issues.
Traditional measures of customer satisfaction have failed to gain the trust of management teams for a variety of reasons. The measures often rely on complicated, hard-to-understand indices. They are often based on small samples of customers, and they may become available only after a long time-lag because they require months of data collection and analysis. The measures may also fail to explain and predict variations in customer behaviour and profitability.
In recent years a metric and approach has been developed, known as Net Promoter® Score (NPS), which measures loyalty and can help predict customer retention and share of wallet. NPS is derived from asking your customers just one question: how likely they would be (on a zero-to-ten scale) to recommend your company, product, or service to a friend or colleague?
Typically, companies using the NPS approach follow up with only one to five additional questions. That keeps the survey short and respectful of a customer's time. Speeding up the feedback enables the metric to become an embedded operational process, rather than remaining an isolated piece of research.
Looking at your results over time is the best way to assess and predict customer loyalty, and greater loyalty is the best way of plugging the leaky bucket. You can calculate your results by customer segment, and you can compare your scores with those of your competitors simply by surveying customers of all the relevant companies.
If you find that your results are declining over time, additional research into your customers' experience may reveal the reasons and may help show how to improve things. In businesses with many customer touch points this can be challenging, but the reward is worth it.
The key to success is identifying the factors that are most important to the customer. Analysing why customers defect can be an effective way to learn exactly what is most important. Customer satisfaction is usually a combination of many complex factors that are difficult for a customer to articulate and prioritise - but when customers decide to leave you, they can usually tell you exactly why. So focusing on identifying and eliminating the root causes of defection is a powerful tool.
You can supplement your analysis with a host of diagnostic tools related to loyalty: share-of-wallet analysis, analysis of the lifetime value of a customer, customer migration analysis, and so on. Depending on your situation, you will want to use a variety of tools to understand your customers in depth. It's a key to both diagnosing your current performance and evaluating opportunities for the future.
Segmentation and retention efforts are at the ends of a six-link chain of activity that enables a company to earn more profits per customer than its competitors, and then to out invest the competitors to generate greater growth, as below:
- Identify the most attractive target segments
- Design the best value propositions to meet their needs
- Acquire more of the target segment
- Deliver a superior customer experience
This will result in:
- Growing your share of the wallet, and
- Drive loyalty and retention, with more promoters and fewer detractors