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 percent that generate more than 80 percent of the income. A trickle of tiny changes turns into a torrent of departures. And a 1 percent loss of revenue turns into a 6 percent 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 percent to 50 percent 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.