May 6, 2021 | Customers, Marketing
LCM: Lifetime Customer Margin.
There is lots of talk, mostly hype, about Lifetime Customer Value. When you look closely, it almost always means lifetime customer revenue.
Revenue is of little commercial value in the absence of margin, so the discussion is somewhat misleading.
Understanding the margin generated by customer segments, or in some cases, individual customers, is an immensely valuable metric. It enables you to focus activities where there is the most benefit to the enterprise. You can make both strategic and tactical decisions with a great level of confidence based on the margin delivered.
Customer margin is also an enormously useful metric elsewhere.
Salespeople are often rewarded on revenue, which can be gamed. Margin over time is much harder to game, and a far better measure of the effectiveness of a salesperson in delivering value to the enterprise. In any comprehensive key account management process, margin is one of the best measures of the impact of sales and marketing investments made.
Similarly, calculating the cost of acquisition of a customer gains traction when measured against margin rather than revenue.
One of my clients’ businesses relies on referrals as a major source of sales. Increasingly they are moving towards margin on converted referrals as the single metric that best measures the impact of their efforts.
It is proving to be a rewarding strategy.
Header credit: Dilbert and his mate Scott Adams.
Apr 30, 2021 | Customers, Small business
Cost plus pricing has always been the worst pricing strategy to employ, although the most common. It is because it is superficially easy, understandable, and requires little thought.
In my experience, the use of a cost-plus pricing model is an indication of a lazy, or uninformed and poorly advised management.
The chances are they have no idea of what the real costs are.
Such a pricing model indicates that there has been no effort to isolate the cost drivers and determine a strategy that reflects their competitive and economic context.
All that has been considered are internal factors that the customer has no interest in at all.
It is also often an indicator that the costing system is driven by accountants, who manage by variances from some mythical standard that rarely reflects the reality of a production process, but over which they can absorb overheads.
Rubbish system, and here’s why:
- Standard costs. Most operations have a standard COGS system in place that is revised up or down against a schedule, often annually. In the meantime, variances are theoretically tracked and explained, but they tend to get lost in the chaos of day-to-day operations, and a budgeted gross margin.
- Costs included in a standard system are wrong the day after they are put into the ERP system. It may be a year before they are updated, and even then, remain inaccurate.
- Cost variability. Real costs will go up and down, often daily, and even hourly, depending on a range of factors, Factory throughput, supplier price changes, overtime, WIP losses and a host of other factors all impact actual cost. At the very least, you need to know if you are winning or losing at Gross Margin because of these changes.
- Sales management is compromised in the absence of robust gross margin analysis. Depending on the degree of autonomy the sales force has, they can be ‘generous’ to customers for a range of excuses, normally associated with sales budgets expressed in volumes, rather than gross margin dollars and percentages. This enables all sorts of ‘gaming’ of sales to exist.
- Increasingly in a commoditised market, value is delivered by intangibles rather than the physical product. It is geometrically harder to put a price on this value to a customer, so the potential for sub-optimal pricing is magnified by poor product costing.
- Customers do not care about your costs at all. Not a whit!. What they care about is the value delivered to them. Price for that value, just make sure you can make a sustainable profit on the way through.
At the very least the P&L should be broken up into cost of goods sold, further broken into customer and product categories, trading variable costs, and fixed costs. At least then you have the chance of identifying where the cash is leaking out, as it is leaking.
When you need some outside expertise to maximise your profitability, call me.
Apr 26, 2021 | Customers, Sales
Our sales efforts are often focussed on what we perceive to be customer pain points. Solve a problem for them, remove the pain, and you have a sale. So, the logic goes, and as far as it goes, it is pretty good.
However, an analytical look at the pain points of customers rather than just making broad assumptions can pay dividends. Such an analysis is a part of every useful key account planning session I have ever constructed.
As with most examinations, a frame of reference adds to the value of the discussion. It usually evolves that pain falls into a few categories.
Financial pain points. The most obvious and common. You can save them money, either by offering cheaper alternatives, or by increasing the productivity of the option they are already using. The latter strategy is always better, as ‘cheaper’ can quickly become a slippery slope. I would never use the term ‘cheaper’, always ‘better value’
Process pain points. You can help them build their productivity by helping optimise their processes, to get more out of the same investment, Always a welcome outcome.
Sales pain points. When you can assist a customer of yours to increase their sales, they will be forever grateful, and reward you with their ongoing business.
Strategic pain points. The most severe pain is often not self-inflicted, it comes from outside, from things that cannot be controlled. The best that can be done is to anticipate and plan your response. Assisting a customer to survive and prosper by helping them identify and consider their response to emerging pain points, always works well as a sales strategy.
The key is to put yourself in a position so that you can identify their pain points. This can take a considerable amount of research into the company, and their competitive and strategic domain. By this means you can add value to their efforts by application of the solution to the problems that emerge. This applies equally to existing customers, as well as key potential new customers, although emphasis on ensuring existing customers remain in the tent is almost always more productive..
In my experience, this customer research pays great dividends, tactically and strategically.
Feb 1, 2021 | Customers, Marketing
I regularly see and hear people suggest that ‘thinking from first principles’ is a great thing, a foundation of success. Often when these people are flogging a product or service of some sort, their offering somehow becomes a function of a first principle.
‘This marketing automation stack is built from first principles‘ is a claim made by a vendor to an acquaintance who runs a modest but long-lived SME. The business is constrained by IT limitations of various types. A combination of lack of cash, underdeveloped understanding of the tools available and how they work both individually and together, and general wariness about florid claims about the returns that will arrive, magically, on installation,
What should we mean by ‘first principles’?
Aristotle defined it as ‘The first basis from which a thing is known’. Philosophers since have added their own wrinkles, but it comes down to the few single facts that provide the foundation of whatever idea you are considering. When you break a problem down to this level, it enables you to, sometimes, reassemble from a different set of possibilities, ideas from different fields, and end up with something new.
Thinking from first principles is challenging.
Our brains have evolved to reduce the cognitive load as a survival mechanism. Fight or flight must kick in quickly, automatically, just in case the rustle in the weeds is a sabre-toothed tiger. We therefore have mental models, or patterns we use unconsciously to classify things we see and set out to think about. Even when we set about thinking carefully, we are still subject to the mental models we have built up, the analogies and experiences we have that enable us to respond with the minimum of cognitive energy.
John Boyd used the evolution of the snowmobile as a demonstration of ‘First principles’. A snowmobile combines the body of a boat, the tracks of a tank, motor and controls of a motor bike, and skis, to deliver a machine that gives mobility on the snow. Similarly, Elon Musk used first principles to build his own rockets for SpaceX. He broke up a rocket into its component parts, then built his own rockets with parts sourced independently. Musk’s whole business empire is based on reimagining something and rebuilding from first principles. Arthur Conan Doyle via his character Sherlock Holmes, advocated the same approach. ‘When you have eliminated the impossible, whatever remains, however improbable, must be the truth‘. William of Ockham in the 14th century wrote similar words that have been passed down as the wisdom of Occam’s razor.
When you apply this thinking to marketing, and consideration of what it is that makes a successful business, you come down to one simple first principal.
Happy customers, who willingly and spontaneously refer you to others.
When you have happy customers, little else matters beyond a competitive capability to supply the product or service at a competitive price that returns an industry average gross margin.
What are the first principles of your business model?
.
Jan 29, 2021 | Change, Customers
Technology is not disruptive: it is customers that are doing the disruption, technology is just the tool.
Just like matches disrupted the flint and steel manufacturing industry, Josiah Wedgewood disrupted the pottery industry, and the motor car disrupted the horse transport industry. These three, and many others you can think of, were driven by customers preferring the new offering, as it better met their needs. It is customers who are driving the disruption of shopping, communicating, travelling, and all the rest.
Once you accept technology is just the tool, you can start thinking about customers.
The best place to start is with the customer journey.
What are your customers trying to achieve when they buy a product? Do they want a drill bit, or do they want a hole? Do they want a luxury central city hotel, or do they want somewhere comfortable to sleep with a café nearby for their breakfast?
Understand the customer journey, what it is they are looking for, and the means by which they currently get there is key.
Once you have that figured out, you might be able to see places where the current value chain that serves customers can be re-engineered.
Technology is one way, but there are others.
A business I worked for years ago replaced a network of distributors with direct salespeople backed up by a very friendly telephone process. This was pre internet, so no tech beyond the phone and a hand recorded version of a CRM on customer cards was used. The results were spectacular.
Considering any sort of reengineering of the existing value chain means that there will be an element of risk, However, the risk can these days be mitigated by using the Lean Startup methodology, simply, placing a version of the chain in front of customers and seeing if, and how they use it. If the product is entirely new, it is not much use asking them, as they have little frame of reference. Henry Fords dictum of the faster horse still holds true, but seeing how customers use a new product in its minimum viable form is the best way to gather insight. We used to call it test marketing, so this idea is not really new, but the technology that enables it more easily than ever before is.
Alongside technology enabling customers to make different choices, there comes the second baseball bat to the head of incumbents: the business model.
Again, business models are simply the manner in which you deliver value to your customers. The manner in which this value delivery happens can change, enabled by technology, which changes the business model.
They go hand in hand.
Let’s take retail. I was in a large format general retail store a few weeks ago, and there were customers all over the place playing with their phones. Some were just amusing themselves, but many were price checking, seeking product specifications, availability, and looking at product comparison websites. I am sure some bought products, but equally sure that many walked out, either delaying the purchase or making it elsewhere.
Opportunity lost.
The huge untapped competitive advantage bricks and mortar retailers have, is that they have the potential for human interaction. We are a social species, so seek to commune with others. Yet, this retail store, typically, had cut down on staff on the floor, saving costs presumably in the face of online competition. A few added sales staff who were product experts, there not to sell product but to assist potential customers make the right choice, even if that choice was not available immediately, would have made a huge difference,
Back to the customer journey.
In the old days, customers travelled almost the whole journey in the one place, a retail store. Once they determined they needed a product, they went to a store they trusted, and were given information by the salespeople, made a choice and paid, had it delivered. All in the one place.
That has changed,
Now the power of the retailer that came from controlling the information has been lost, the information is available everywhere, so the customer can make their choices while nowhere near a retail outlet. However, often they will go and have a look at the physical product, in a store, just to make sure, or just to get a better sense of the physicality of the product. They then can check price and availability and make a decision on the supplier. Showrooming is the term often used, and it is a powerful new force, underutilised by retailers. The customer journey doesn’t finish with the product delivery. Now there are tech tools that will follow up, ensure service is delivered, ask for referrals and ratings, all designed to offer information to the next customer who may be showrooming.
Technology is the enabler of changed customer behaviour, not the driver. The driver is customers looking for increased value by seeking and accepting the removal of commercial friction.
Header cartoon courtesy of Hugh McLeod at gapingvoid.com
Dec 8, 2020 | Customers, Innovation
Everyone wants ‘innovation’.
Fair enough, unless we innovate, we stand still, and get killed in the rush.
However, in my experience, it is not the number or quality of ideas that is the limiting factor, it is the execution of those ideas that limits us.
We do not need more ideas, we need more of them to see the light of day. Even if they fail, you will learn, and hopefully do better next time.
It is also necessary to define what you mean by ‘innovation’.
To some, an innovation is a change of pack design, to others, it means the development of an entirely new application of some basic science. Most fall somewhere in the middle.
To my mind, anything that results in new value being created can be classed as an innovation.
Then you get those who refer to innovators as disrupters, further clouding the landscape.
For example, Uber is often cited as a disrupter, a source of disruptive innovation. Do they create new value? Yes, a bit, but there have been taxis around since the Romans were building on the seven hills, so that is not new. What is new is the app that puts the ordering, payment and progress of the Uber to your pick up point in one place. The disruptive element is that the previous cosy registration systems of most cities and their taxi services have been thrown away, so what has been disrupted is something that added no value. The exception to this is the London Black taxi service, where ‘The knowledge’ is a huge barrier to entry, while delivering sustained certainty of high quality service.
I also do not like the ‘fail fast fail often’ crowd, as that becomes an excuse for a lack of due diligence.
What I do like is a stream of disciplined experiments, aimed at testing the veracity of a hypothesis, which becomes a platform for improvement.
In some markets this experimentation is easy, in others, it is extremely hard.
Similarly, in some contexts it is easy, and in others very hard.
For example, the successful tech companies are running A/B experiments all the time on their websites, making evolutionary changes to their algorithms constantly.
By contrast, if you want to test market a new consumer retail FMCG product aimed at mass distribution, you have a real problem. The choice is South Australia, or Western Australia, which some might say are not representative anyway. Testing your product in farmers markets, food service, or your wife’s friends remains an option, but rarely a good model for supermarket distribution.
Red herrings abound!
Do not let them distract you from the hard work of creating new value for customers.
