Throughout the summer, I have been working with clients dealing with similar business issues. The similarities reflect the commonalties and constraints many companies face in this very uncertain economy. While every company and industry is unique, these similarities provide useful principles that can be applied in many situations.
The consistent situation is this: an operational leader (typically sales, strategic planning or marketing) has committed to raising additional revenue using current resources and often no incremental budget. In many cases, the budgets have actually declined over the past several years. That leader does not wish to restructure the department or change key players. Executive management has little leeway as well, given the need to provide increasing revenue and profit numbers while facing nominal growth in their core business.
Our leader is in a box, with little way out. Improving efficiencies can generate incremental profit, but often that approach was already used to plug the dike when volume numbers fell short. The operational teams face a key issue workload which is extreme, since many companies have reduced their headcount without reducing tasks. These team members do, in fact, wish to provide strategic insights and to identify new business opportunities but cannot find one free minute in their day to do so. Given the heavy workload and tight time lines, these team members become jaded and disillusioned. Burnout of key people is the source of another discussion in another article but definitely represents a key issue for growing companies.
The key to success when facing such tight constraints is focus. Limited dollars, limited time and limited emotional resources mean that every management decision faces a new screening test not only must the issue have real financial potential by itself, but it will also displace other initiatives that have value in and of themselves. Note that time is even more limited than dollars in such decision making. Priority setting in such an environment is perhaps the most important activity that a leader will do.
In such an environment, leaders need critical customer analysis more than ever and yet are more constrained than ever in their efforts to achieve it. The leaders who are able to overcome the hurdles posed by their environment will lead their teams and organizations in the future.
Why do leaders need critical customer analysis today more than ever? The answer lies in the critical success factor of focus. Simply put, Best Customers are the priority. At the risk of overly simplifying, the top 20 percent of customers who can make up more than 80 percent of total revenue are the critical linchpin in a company’s success and any efforts to support, maintain or grow that segment of the customer base must, by definition, become the highest priority.
Beyond the Platitudes
We have now established that Best Customers must be the highest priority. But just labeling the file folder Best Customers and filling it with projects time lines does not simplify a leader’s task it just creates a convenient bucket in which to hold all the multiple, often-contradictory projects and analysis that come their way over time. It is clear that further refinement is required to meaningfully provide guidance for prioritization and focus.
Three key priorities must structure priorities to link directly to company growth as shown in Figure 1.
The first priority is to hold. No matter what company or industry I encounter, it is very difficult to replace Best Customers. Often 10 or more new customers are required to fill the hole in revenue and profit that comes from losing one Best Customer. In addition, the less tangible benefits of Best Customers referrals, reduced customer service and return requirements will rarely be replaced, ever.
The second priority is to build. To focus on business growth, time is best spent increasing relationships and product penetration among Best Customers. These customers already have a company relationship and are familiar with the products. In addition, they also have some trust level in the company and the products that makes reselling into this segment much easier than new customer sales. This group is also more profitable, since they will tend to have fewer returns or service requests.
The final priority is to grow. Many companies rush to this step without solidifying the current Best Customer base, but eventually, the task will come down to attracting prospects who resemble Best Customers. These customers often have relationships with competitors. Prying them from competition can be more work than finding new customers but should be a major sales force focus, since this group is most likely to grow into Best Customers. The key is to educate the sales force on the difference between the easiest customers to acquire and the best, and structure priorities to reflect those differences.
O.K. The above sounds like logical sense, and this is typically where articles and textbooks end, abandoning leaders to try to intuit their way on what is really the hard question with limited funds and even more limited bandwidth, how do we really analyze the data and create an action plan? I am not talking theory here, but hard-core actions that can make a difference in real time.
The Pedal Hits the Metal
Let’s talk first about exactly what to do, and then we will discuss how to make it happen.
Step 1 Find Best Customers
In order to begin to influence Best Customer behavior, you had better first figure out who they are. Most companies have some knowledge of those customers, but have multiple definitions of what constitutes a Best Customer which leads to confusion and conflicting priorities. At the same time, other companies agonize over customer profitability and never get to an actionable definition. The key is not to get the Best Customer definition completely right, but not to get it wrong. By identifying customer revenue and focusing on a limited group of factors that could shift a customer from profitable to unprofitable, companies can determine the identities of those Best Customers with between an 80-90 percent accuracy level. In customer analysis, the 80/20 rule applies you can get more than 80 percent of the value from 20 percent of the analysis as long as you focus that analysis very carefully and do not waste time focusing on precision levels that will not alter decisions. For example, if your top 500 customers equal 45 percent of total company revenue, it doesn’t matter if you are off by 3-4 percent the answer would still be the same.
Step 2 Determine Business Risk and Opportunity (ROI)
After identifying those customers today, the next step is to review the past one or two years and see which customers are still customers, which are still Best Customers and how they have changed. This analysis will provide a high-level assessment of Best Customer attrition and also provide the first low-hanging fruit targeting former Best Customers with additional products and services to see if you can bring them back to their former status. In addition, qualitative analysis will also identify the reasons why those customers changed behavior, which can permit you to examine current Best Customers and identify their risk of changing behavior. Identifying customers who could change behavior, and the financial impact of such a change, is the first step to developing compelling business risk and ROI analyses. In addition to calculating potential losses, upside potential can also be quantified, providing the fuel to support new priorities for the team and, potentially, for the company.
Step 3 Create Metrics
Once the risk and upside has been quantified, it is critical not to rush directly to priorities and tests. Many companies felt a sense of urgency regarding the potential risks and launched a series of tests without quantifying the base metrics that will determine success. Most teams respond based on their compensation not on metrics. To refocus the team around new priorities becomes a critical component.
Step 4 Prioritize, Test and Refine
The key to prioritizing is to return repeatedly to the metrics that determine success and to make those metrics the cornerstones of the process. In addition, consistent reporting on those metrics ensures that activities that drive the metrics are the ones that the team and all the support organizations prioritize.
After prioritization, the next key is to implement a series of relatively simple programs designed to "move the needle" and change customer behavior. A lot has been written about this subject (including by me), so I will not linger on this topic. The one point I will mention is need to execute a range of simple efforts to change behavior and then quickly evaluate, eliminate poor performers and expand successful efforts. Executional speed will produce sufficient information to support focused fact- based decisions. Focus, after all, is the key objective.
Leaders today often find themselves in a box due to limited financial flexibility and limited bandwidth of their people. Customer analysis is critical to supporting changes in priorities to permit the team that is in place to execute the right work at the right time to have a meaningful impact on the business. By real time in this article, I do not mean instantaneous access to information; rather I refer to the creation of a sense of urgency that will drive your team to focus on meaningful achievements that influence customer behavior.
My next article will focus on how to execute these analyses given limited resources in time and staffing.
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