Base KPI’s on behaviour, not outcomes, for best results

Base KPI’s on behaviour, not outcomes, for best results

It is budget season, so amongst the detritus of everyday management, we have to make time for creating the budgets for the next 12 months, in Australia usually starting July 1. Hopefully, budget preparation is a normal part of the management ‘flow’ of your enterprise, where it follows naturally after a regular strategic review and preparation of operational plans. The budgets then become a financial expression of the operating plans, but sadly, it is most often not the case.

Irrespective of the procedures that dictate preparation, part of the budget process is the setting, or in most cases, the resetting of Key Performance Indicators, KPI’s.

In almost every case I see, KPI’s are all about outcomes, achievements that more often than not are recorded in the financial reports, which are an alarmingly one dimensional reflection of performance in today’s world.

Would  it not be better to set KPI’s based on the behaviours we want, which are after all the underpinning of outcomes. It is unlikely the outcomes will be favourable unless the behaviours that occur are constructive.

There are many challenges in  setting KPI’s  in this way:

It is hard to do, therefore we take the easier route

To be effective, behaviours, and specifically the behaviours we want, need to be made sustainable, part of the everyday routines,  not something that happens when the boss is watching.

Behaviors are a product of  the environment in which we exist, so the task of management is not just to mold behaviors, but too mold the context in which you want them to evolve. Commonly this gets called alignment, but almost always it implies financial alignment, rather than the broader definition that includes revenue generation activities, operations, process optimisation, and capability development I think appropriate

Behaviours are integrated into the processes of any enterprise, together they make up what is commonly called ‘Culture’. Again, these do not evolve without senior management taking control, and being seen to do so, thus enabling the processes to evolve in a direction consistent with the objectives of the enterprise.

Are the behaviours in your enterprise all contributing to the objectives, or are they disconnected, the KPI’s just a set of optimistic benchmarks dreamed up in the boardroom designed more to intimidate than motivate?

 

 

How to build a super effective customer ‘Persona’

How to build a super effective customer ‘Persona’

 

Who is your ideal customer, the one who will not haggle the price, who loves the product you sell, and proselytises for you? Knowing that person in great detail would be marketing and commercial gold.

Like all gold, it is hard to find, subject to all sorts of distractions and false starts, but immensely valuable when discovered, and discovery is usually incremental, rather than a ‘eureka’ moment. This means it is also a demanding challenge.

What is often also forgotten in the effort to define that ideal customer, is that every customer also has an ideal supplier, one who meets all their needs, delivering value in excess of the cost to them. It is a two way street, and a relationship only prospers where there is value being delivered to both parties.

It is always worth remembering that customers will buy when they are ready to buy, and that is not necessarily when you are ready to sell.  The name of the game is to be around when they are ready, with the credibility and value proposition that is compelling to them, which means that the better you understand them, the more effective your revenue generation efforts will be.

How do you define your ideal customers?

I have used the ‘Who, What, Where, When, Why & How’ model extensively to define the ideal customer with my clients. It is an iterative process, deceptively demanding, as it requires decisions about who is not an ideal customer, and therefore excluded from primary consideration. Choices like this are challenging, but necessary, particularly for small and medium businesses which do not have the luxury of a big pot of marketing money, you have to get it right or waste limited resources.

Following is a quick explanation that will enable you to at least start the process

Who: Is the demographics they may exhibit. Where they live, age, sex, education, job,  and all the other quantitative characteristics that are available. These parameters are pretty much all that  was easily available in any detail until digital tools came along.

What: are their behaviours. Do they go to the opera or rock concerts, perhaps both, do  they travel overseas for holidays, what sort of causes, if any, do they support, are they likely to demonstrate their beliefs publicly, or are they just internal. All the sorts of things that offer a picture of how they think, feel, and behave in all sorts of situations.

Where: will you find them digitally, as well as in the analogue (perhaps real) world, and what means can you use to make a connection. Are they likely to be avid users of Facebook, Linkedin or other social platforms, are they comfortable buying on line, do they ‘showroom’ digitally then visit the physical retailer, do they get their news from Facebook and Reddit, or more focused news sites, or even, surprise, surprise, newspapers and magazines.

When: will they be ready to buy? In some markets this is not a big issue, but in many, it is a huge one. For example, if you want to sell to government, the best time to be on the doorstep with an offer is towards the end of the financial year when departments have unspent money left in their budgets. Normally there is a Strong ‘use it or lose it’ mindset in government departments, and they are loathe to lose it, as that will reduce their bargaining power at the next budget round. In private enterprise, the two items that require watching are the budget cycles, getting a major purchase into the budget is often a part of the game, and being aware of changes in the customer and markets that often acts as a catalyst is the second. Takeovers, personnel movements, large contracts being let, are all situations where change is occurring, and the enterprise is normally more receptive to new ideas, and new suppliers.

Why: should they respond to your entreaties, to do whatever it is you are asking of them. What is your value proposition to them? What promise of a new and better tomorrow can you deliver? What can you deliver that is different and more valuable to them than any alternative? If you cannot answer these questions, it will come down to price, and winning a price war is a great way to go broke.

How: will you service the transaction, and the subsequent relationship that may emerge. This is usually down to questions about your business model and the ‘fit’ that has with the customer.

An essential adjunct to the creation of a persona is to create a customer journey map. This is the process that your ideal customer will go through from the initial itch, to awareness, consideration, preference, then to the transaction. This will enable you to use the persona to inject yourself into the decision making and buying process a customer is going through to optimise your chances of success.

I would be delighted to assist you to work through the process, it will deliver significant rewards when done well and implemented effectively.

‘Organic’ investment should be the saviour of (some) retail.

‘Organic’ investment should be the saviour of (some) retail.

I went into a retail store last week with a problem, not really expecting to find anyone or anything that remotely met the immediate need I faced.

My web search had revealed many solutions, none of which gave me much confidence for one reason or another, but it had sparked a few ideas.

Lo and behold, the store I went to, (after a bit of web research) an independent store that clearly understood the niche it was servicing, had made a significant ‘organic’ investment.

They had several people who understood my problem, and were able to offer several sensible alternative solutions, one of which was perfect.

When faced with the same or similar challenge again, guess where I am going!

It may not be for a while, but inevitably it will happen again. Meanwhile, guess which store I am touting to my friends and colleagues.

Ironically, it seems that the most successful retailer on the planet, when measured by the standard retail sales/sq foot, and margin/square foot metric is one of the tech disrupters: Apple. They have redefined bricks and mortar retail by adding ‘organic’ sales staff to the best long term branding job ever seen, except perhaps for a couple of the major religions. At the end of 2017. Apple had 499 stores worldwide, and not content to leave well enough alone, are continuously investing and experimenting with formats, layout, branding, and the important ‘organic’ part of this hugely successful bricks and mortar puzzle.

On Wednesday (Feb 14, how appropriate) the Myer CEO was dumped by the board for failing to turn the ship around. The last time I was in a Myer store, admittedly some time ago, as I have no wish to repeat the experience,  there was no staff anywhere to be seen. My intention had been to buy a suit that had been advertised as part of a sale. Good price, good brand, I was in the store to buy, but no sale for Myer, although I did buy a similar suit elsewhere. Firing the CEO will have little impact on my future purchase intentions, without the long term investment in one of the the foundations of successful retail, good people at the customer coal-face, and a management culture that recognises and nurtures those people.

Digital is great, the convenience, price, and range are seductive, but there is no substitute for a person who has deep domain knowledge, has seen the problem before, and who is happy to help, and clearly gets a kick out of doing so. After all that, price does not matter so much, it just needs to be in the ball-park.

Just ask Apple.

Photo credit: Harry Pappas via Flikr

The downside of FMCG retail scale.

The downside of FMCG retail scale.

Woolies and Coles have around 75% of FMCG sales in this country, depending on whose numbers you believe, and which categories are included.

They have huge scale, from the farm gate through the supply chain to the consumers wallets. As a result, their cost of capital is low, as lenders, both cash and equity see the risks as being low. When you add in their ‘trading terms’ as a component of  their cost of capital, as it should be, the numbers would look even better. Pay your suppliers in 90 days, having used your scale to reduce the price to subsistence levels or lower, minus  the deductions for whatever you can dream up, during which time,  the stock has turned over several times.

Bargain!

By contrast, the small suppliers, those few that are left,  are seen as poor risks, which in fact they are being an endangered species. Their costs of capital are high, as are their operating and working capital costs, which leaves little to nothing to be invested in the future of their businesses.

That is why they have mostly disappeared. Their management has been unable to balance the competing demands of low price and increasing operating costs, such that even large seemingly successful businesses became smaller unsuccessful ones to be sold off to whoever had the cash. Consider Goodman Fielder, SPC, Dairy Farmers, National  Foods, CSR, …… need I go on?

The long term problem that this trend delivers is that innovation, the creation of new value for customers, and the lifeblood of retailers comes from the edges, from outside the  status quo. It is usually those smaller, entrepreneurial businesses that get in there and have a go, take a risk, and survive on their vision, wits and determination, that deliver the category makers.

Pity they are almost all gone, and what we have left is a number of ‘traditional’ retailers seeking to optimise their existing operations, while having nothing to fight the well-funded disruptors coming to eat their lunch.

Woolworths emasculating and closing Thomas Dux is the classic case of corporate strategic blindness. Now they have backtracked with the very well thought out new Marrickville Metro store, which is not Woolworths, but the ghost of Thomas Dux back to haunt them. Meanwhile, Amazon is really innovating, taking their pilot Amazon Go store public a couple of weeks ago, in a move that goes well towards defining the store of the future.

The downside of scale is the conservatism and lack of real innovative and strategic vision that comes with a business intent on optimising the current model. If that worked, Olivetti would  still be a significant player in the document creation business, Kodak would still be creating memories,  and Microsoft would still be a near monopoly.

Header credit: apologies to Monty

A marketers explanation of Net Present Value (NPV)

A marketers explanation of Net Present Value (NPV)

What the Hell is NPV?‘ the marketer cried

Accountants seem to love to baffle with jargon, but that is not, usually, what they set out to do.

Rather , they use terms as a shorthand to describe what to them makes absolute sense, but to the rest of us, mere marketing mortals, seems like gobbledygook.

One of the ones that commonly causes headaches is ‘Net Present Value’  or NPV.

Guaranteed to put most marketers to sleep.

However, you should not sleep, way better to understand the idea in simple  terms so you have an understanding of the conversation, and can contribute in a meaningful way.

NPV  is simply one of the common methods of calculating the relative value of a number of investment choices. It recognises that money you have today is worth more than money you may have tomorrow because it can be invested,   used now, while the ‘future money’ is subject to inflation and risk.

Often the term ‘time value of money’ will be used.

It is one of a suite of calculations that can be used when sorting out which projects to pursue from a range of possibilities. It provides an objective measure that enables you to make better choices, that management challenge in a world of subjectivity, conjecture and bullshit.

Marketers should understand the principal, if not necessarily the formula, which is readily available in just about every spreadsheet application since  Visicalc. Remember that? I do, it became a marketers best friend, years before excel emerged.

The formula is relatively simple, it just looks a bit complex.

The discount rate is the rate of inflation used, plus the amount you choose to add to allow for risk.

Most businesses use a consistent discount rate that reflects their return on investment hurdle rates. For example, if the current inflation rate is 1%, and the business requires an 8% ROI, the discount rate will be 9%

The great benefit of NPV to marketers is that it uses the cash flows derived from a proposal to sort out the priority, not just the quantum of the initial investment, so  it reflects the forecast cash success over time.

For example, you want to invest $3 million in gear to launch a new product, that is forecast to deliver a net profit of $1.3 million/year for 3 years, with a discount rate of 9%.

There are a number of sequential steps to take.

  • Calculate the present value of each years net profit by dividing the net profit by (1+discount rate). In year 1, that is 1,300,000/(1+.09) or 1,192,661. The ‘1’ in the formula being the current inflation rate
  • Repeat the exercise for each subsequent year, in year 2, it would be 1,192661/(1+.09) or 1,094,184.
  • In year 3 1094,184/(1+.09) 1,033,838
  • Add the present values calculated, 1,192,661 + 1,094,184 + 1,003,838 = 3,290,683 to give you the total forecast present value of your money in three years, then subtract the initial investment to give you the net present value of the investment.  $3290683 – 3,000,000 = $290,683.

The larger the positive number the better, a negative number would indicate that the project will drain cash from the business, a positive one adding cash.

To make the choice between investment options, repeat the exercise for  each, and pick the one with the highest positive value.

Clearly, the calculation is based on a series of assumptions and forecasts, so there is a lot of room for error, but when used in a consistent manner it is a good tool to assist making difficult choices, and offers the flexibility to do some informed scenario and ‘what if’ planning.

 

 

 

 

The easy way of course is just to go to excel, and look for NPV in the formulas tab, which will give you the numbers, but not the understanding of what they mean.

Photo Credit: Bentley Smith via Flikr