The single word that delivers sustainable profitability.

May 15, 2020 | Branding, Marketing, Strategy

The single word that delivers sustainable profitability.

That single word used to be ‘Brand’, but no longer, despite the role of intangibles in the market valuation of an enterprise.

With the tectonic changes in business models over the last 25 years, it seems the focus has moved to ‘Control‘. This change applies even when considering the legacy business models of the last century that are being renovated to meet the demands of this century.

You can tell the value of your brands, and intangibles more generally, if you look at your balance sheet and apply an ‘industry standard’ multiple to net assets. The difference between that number, and the saleable price of the business is the value of your intangibles. If it is a public company, the market value is simply the current stock price, but more complicated if the enterprise is not listed. However, the accountants will tell you there are benchmarks depending on the industry and your position in it. Their valuation will usually be a single figure multiple of the free cash flow, plus the recoverable value of assets.

That calculation simply does not compute with the stratospheric valuations of the successful tech companies around, or the volatility of their stock prices, so something is missing.

A few of the ‘old industry’ businesses with deep branding, also defy that quantitative logic, but not many. P&G’s Tide detergent in the US, Vegemite here in Australia, Coca Cola, and a few others defy, for the moment, the trend to homogeneity.

The common theme amongst those whose valuations defy the accountants calculations, largely the ‘new age’ unicorns, is captured by that single word: Control.

They all have some level of control over the value chain that reaches the end customer.

Remember Netscape? It was the original web browser that delivered smooth browsing to web walkers. It was sensationally successful, paving the way for the web trawling we all now just accept as a normal part of life. Killed off by Microsoft, who at that time had a virtual monopoly over peoples PC’s via MS Office. Microsoft simply bundled Explorer into Office, free, and whammo, Netscape is dead. Microsoft controlled the distribution channel, so was able to squeeze out Netscape.

Domestically, the NSW dairy industry used to be a regulated monopoly, delivering monopoly power to the designated processors via control of the distribution channels, supposedly for social reasons. That monopoly ensured that there was no innovation, and nothing that would disturb the comfortable monopoly was allowed, until economic logic shone through, and deregulation occurred. In a day, deregulation demolished the control the processors had over distribution, and handed it over to those with the control of the channels: supermarket retailers.

That sudden change, for which the processors were largely unprepared despite years of warning, led to the current situation where there are now no domestically controlled dairy processing companies of any real scale.

Spotify, a genuinely innovative platform that has changed, again, the way we obtain our music, relies on Apple for its distribution via the Apple App store. It seems Apple is actively pushing Apple music, so the future of Spotify must be at huge risk, unless they can find a way to gain control of their distribution channel. Apple will squeeze them to death over time, and take not just the subscription revenue from the consumer, but also squeeze down the royalty payments to the music creators at the other end, building monopoly margins.

Nice work if you can get it!

Supermarket retailers around the world have played the same game for ages, nowhere better than Australia, where the two gorillas control somewhere around 70% of FMCG sales to consumers. Proprietary brands have all but disappeared, and most of those that remain have little real value, as the customers have been taught to buy on price by the retailers house brands. This has squeezed proprietary margins by restricting access to the consumers.

Monopolies are great, when you are the monopolist, oligopolies are almost as good, and when you reach unstated arrangements with the other oligopolist, the margins are terrific. Just look at Australia’s banks, who collectively are the most profitable in the world as a % of GDP. Their profits are boosted by the lack of competition, and small regulated number, while their duty of care to customers becomes almost irrelevant, despite their protestations to the contrary. Let’s not talk about Australian petrol retailing, another example of profitable oligopoly control.

Amazon controls a huge chunk of the on line market by direct access to consumers. Third party products sold via Amazon that are successful find themselves faced with Amazon branded competitors very quickly, as Amazon knows more about your financials than you do, and controls the relationship with customers. They will suck out the margins, competitive advantage and shareholder value.

The lesson: build vertical control of your distribution channels into your business model.

In years to come, there will be no alternative.

It will be expensive, and risky, and certainly different to the model those of us over 40 grew up with, but that is the new world of vertical competition we now live in.

Does your packaging tell a story?

May 12, 2020 | Branding, Marketing

You can have the best product in the world, but if the packaging is inconsistent, out of place, bland, and does not accurately describe the product, or what a consumer might be expecting, it will not get bought.

Jeans and T-shirt will normally not get you entry to a black tie event!.

As I wander around supermarkets, I regularly see packaging that has been designed to appeal to the designer, or perhaps the product manager, rather than telling a story about the product to the consumer, the one being assailed by messages inside and outside the store.

The design may be artful, it might meet the regulatory standards, and it almost certainly has a logo prominent somewhere. However, does it stand out on shelf, does it deliver a message to a busy and stressed buyer who does not really care about your artful design, but just wants to get what she (and it is still almost always a she) needs, so she can get on with it, and get out of the store as quickly as possible.

A really good test is to put a package in front of people who do not read English, and have a translator ask them to describe the product, and what benefit it delivers. Fail that test, and back to the drawing board you go.

Pack design is a part of a process, the make or break part when it comes to consumer trial. Developing and launching a product, even a line extension is a significant investment, don’t you think it should be given the best chance possible to succeed, to be selected off the shelf, and to deliver a return?

Next time do not do the pack design at the end of the development process, do it at the beginning. Sending it out to a ‘designer’ at the end of the development process, looking for a quick turnaround and cheap price, could end up being the most expensive piece of design you ever did. Failure to grab attention, and encourage customer trial will make that cheap, quick, but artful pack design, a really dumb idea.

When you need help thinking this all through, call me.

PS. Bet nobody nicks my grandaughters lunch again!!

directors; do you understand your rights and obligations?

May 8, 2020 | Governance, Management

directors; do you understand your rights and obligations?

There are a lot of SME’s around that are now in unexpected and unplanned financial trouble. For some it will be terminal with a potentially huge impact on personal assets, as well as those of the businesses they run.

Many owners of SME’s do not fully understand their rights and obligations, often despite having an accountant that does their compliance and advises on financial structuring.

In particular, many owners of SME’s do not understand the obligations they have under the Corporations Act as directors of their company.

This was brought home to me in a conversation yesterday with a casual acquaintance who I thought would be pretty well informed.

Following is a simple checklist, if in any doubt, ask your accountant the question. now is not the time to be dodging asking those questions because of the cost.

Insolvent trading.

It is illegal to trade while insolvent, and doing so risks personal and criminal liability. It is a black and white test: ‘Are you able to pay debts as and when they become due’? For manufacturing businesses the answer is often tangled up in the valuation of inventory, and the state of your debtors ledger and revenue forecasts.

Can you collect what is owed to you, what can you reasonablly expect to sell, and how much cash do you have on hand.

Solvency is based on the expected cash flow, the result of these calculations. If you are not solvent, you are, by definition insolvent.

Directors duties.

As a director, which most will be, there are duties imposed by the Corporations act, and ignorance is not a defence.

You are required to act in good faith, with due diligence, and not improperly use information gained as a result of your privileged position. When solvency is in question, you are further required to look after the best interests of creditors.

In order to carry out these duties, you need to be fully aware if the financial position of the business, and have a management plan that addresses the problems. If in any doubt at all, ensure your accountant is completely informed and able to offer their expert advice.

What to do?

If your conclusion is that you are, or may be insolvent, a voluntary administrator can be appointed. The effect of this is to voluntarily relinquish control of the financial management of the business to an outsider, whose responsibility is to ensure creditors, in a defined order are paid. It does however, limit the liability of the director after the day of the appointment. This option leaves you with more options than a wind up order instigated by a creditor, or group of creditors.

Premature appointment of a voluntary administrator is sometimes a temptation, so there has been recent changes to the Corporations act to allow a ‘Safe harbour’ which offers directors protection against personal liability of an insolvent trading claim. There are conditions attached to such protection:

Tax records are up to date.
All employee entitlements are up to date.
There is a concrete, stress tested plan to trade out of the difficulties, that does not include optimistic forecasts and hopes that ‘something’ will turn up.

From March 25th as part of the governments response to the Corona induced problems, the ‘Safe harbour’ provision have been extended. You are now allowed to incur debts in the course of ordinary trading for the next 6 months, and the thresholds for issuing statutory demands have been increased. This is not a ‘get out of gaol’ card, simply a recognition of the reality of the current situation, and other director duties are not impacted. For details talk to your accountant.

The plan.

As noted, hope and rosy projections do not constitute a plan. There has to be specific actions taken to stabilise the financial situation, that will necessitate some challenging decisions about asset disposal, restructuring of operations and perhaps personnel, and managing the manner in which further costs are incurred. Together these should offer a concrete pathway to rebuilding the financial capacity of the business to trade its way out of insolvency.

The obvious elements of the plan will be:

Assessment and reordering of the cost base. Removing, reducing and deferring as much cost as possible, both fixed costs like rent, and discretionary costs like planned capital investments, and revenue generation activities that do not have a short term payoff.
Ensuring you have accessed government and provider assistance
Communication with all stakeholders. Employees, funders, suppliers, regulators, landlords and key customers.
Aggressively managing your cash conversion time by extending by agreement, payment terms to creditors and chasing debtors, early, politely, and often. This is just managing your working capital. The cash flow forecast is the essential tool for doing this. every change you make should be reflected in the cash flow forecasts.

The key ‘takeaway’ is to manage your cash.

The huge benefit of the giant Corona jolt

May 4, 2020 | Change, Leadership, Lean

The huge benefit of the giant Corona jolt

For years I have been a proponent of what is loosely described as ‘Lean thinking’.

In effect it is a continuous process of removing waste by a combination of critical thinking and continuous improvement.

The biggest impediment to a lean process is always the mind set of those who need to change in order to reap the benefits. Change is really hard, especially when the existing state is comfortable. It usually takes a jolt of some sort to gain any sort of traction. There have been times when I have applied that jolt myself, as a means to remove complacency.

However, we are currently in the middle of a giant jolt delivered by the bug, which should have created the greatest potential for lean traction I have seen in many years.

A lean process will progressively remove any activity that does not add value to the end customer, and seek to compress the time it takes to deliver that value.

In other words, if it is essential it stays, non essential, it is on the list to be dumped.

Suddenly we are all looking at the services we saw as part of life and re-evaluating them with the question: ‘Is that essential, how does it add value?’

We are involuntarily applying a critical eye to everything we do, seeking to identify and line up for removal, anything that is not essential, that is just consuming time and resources for little or no value.

To use lean parlance, the ‘Current state’ as it was pre Corona is recognised as no longer an option, and we are by necessity experimenting with the elements we need to survive commercially. In that process, will seek to understand how the ‘Future state’ might look. In every case, you can make some assumptions, and apply them as guiding principles to the things you are considering.

For example, will it be part of the ‘future state’ for office workers to commute, often multiple hours a day, to sit in expensive offices in a CBD to do their work? For the last 20 years, despite the amazing communication tools suddenly available, it has been for most. The dominating management culture, mostly the child of old white guys like me, who substituted a bum in a seat for useful outcomes, said it was so.

This current experiment with remote working has demonstrated the nonsense of this formerly dominating view. We do need however, to substitute the humanity of the casual conversation and social networks built from personal contact.

We can save ourselves a lot of time and money by working from home, partly from home, or perhaps decentralised mini-offices. Reducing commuting time is like reducing machine changeover time: it releases capacity otherwise being wasted. For no cost beyond a change of mindset and perhaps a few modest enabling tools, we can free up huge amounts of potentially productive time.

Ask yourself the Question; ‘how much time per person can we save by the removal of the necessity to commute’? When you have answered it, ask if there was a better way, for the people concerned, and the stakeholders in your business, to have spent that time.

Header photo courtesy Dominic Freeman

9 simple but vital customer metrics

May 1, 2020 | Uncategorized

9 simple but vital customer metrics

Understanding the dynamics of customer behaviour in your market is the core of making informed decisions. It is easy to become tangled up in all sorts of metrics, but simple is usually the best. Simple to calculate, simple to understand, and simple to track and report.

These 9 are commonly used simple metrics, pick the couple most relevant to your business, and make sure the measures do not become KPI’s, invoking Goodhardts law.

Customer retention: the rate at which you keep customers after acquisition.

You need to determine the time period, which is logically linked to the time it takes to acquire a customer, the number of customers at the beginning and end of the period.

Formula: End customers – added customers /start customers.

Customer churn: the rate at which you lose customers. It is the opposite of the retention calculation.

Formula: Start customers – end customers/start customers.

Lifetime customer value: the revenue, or if you prefer, gross margin a customer delivers over the average lifetime of the relationship. Averages as we know can be misleading, so when there is significant variation between classes of customers, or customers of a particular line of products, calculate them separately. This enables focussing of your marketing effort where it will deliver the optimum return.

Formula: Average order value X average repeat purchase X average lifetime.

Cost of customer acquisition. Obviously it is useful to understand the cost of acquiring a new customer, particularly when it is compared to the lifetime value. The time period over which the calculation is made needs to be agreed.

Formula: Number of new customers / the amount spent on revenue generation activities.

Average order size. Simple calculation again, and a very useful one, to be calculated over a set period. The standard nomenclature in FMCG for this calculation, which is a core metric of retail performance, is ‘Basket size’. In FMCG this is often further broken into differing demographics, time of day, and the variety in the basket, which delivers necessary information for pro active category management. It is often useful to also do the calculation by delivered margin, which is the margin delivered at the checkout, plus margin delivered for shelf space and paid promotional activity.

Formula: the number of orders /total revenue from those orders.

Share of Wallet. This is probably my personal favourite, particularly in B2B situations. It almost always creates a vigorous discussion about the extent of the ‘wallet’, which is an extremely valuable strategic conversation to have. When the relationship is strong, having this conversation with the customer concerned can give you valuable information, they will tell you what you have to do to get more business, or indeed, retain what you currently may have.

Formula: Total sales from a customer/total expenditure made on products you could supply.

Order frequency. Depending on the product category, order frequency is often useful, particularly comparatively and as a trend.

Formula: time between orders.

Net promoter score. NPS has become very popular as a single measure, and is now often used as an objective, but as we know, once a measure becomes an objective, it ceases to be a good measure. (Goodhardts law) Nevertheless, all you need, usually via an after sales survey that asks us to rate the business 1-10, on the simple question ‘would you recommend this product/service to a friend or colleague? . (which is why we get so many requests to fill in a survey every time we ask a question)

Formula: Percent of promoters – percent detractors.

A score of 9 & 10 are seen as promoters, 0 – 6 detractors, and 7, and 8 as neutral and not counted.

Strategically important customers. These customers are not always the biggest, or most profitable customers, but for one reason or another, they are the most important to your future. Perhaps they are currently small customers showing strong growth, are aligned closely to your strategic objectives, or vital to the smooth operation of your supply chain. In some cases they may not even be current customers, they may be a potential customer who offers access to an adjacent market to which you aspire, or someone who is developing technology that will enhance or disrupt your current market. There is no formula for this class of customer, just a recognition that they are key in some way to delivering strategically, and in tough times, they are the ones on which you focus limited resources.

It is easy to become overwhelmed by measures, which diminishes their value. Pick the few that are the key leading indicators in your business, and track them and most importantly, track the drivers of the measures in your business that deliver them.

When you need an experienced set of eyes, give me a call.