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Extract from “Customer Genius” by Peter Fisk
Doing business on customer’s terms is obvious and essential. Peter Drucker was one of the first to suggest that the sole purpose of a company is to create and retain customers. He reasoned that since the customer alone pays for the product or service, the customer the most important entity within the business. Indeed, in recent years, from the eighties bandwagon of total quality management to the nineties obsession with customer relationship management, organisations have sought to align themselves to customers. However, some argue that a blind obsession with customers has a destructive impact on competitive advantage, the focus on competitors is last as every company seeks to meet the same needs of the same customers. This itself, they argue, leads to falling satisfaction of customers as they are faced with an infinite number of relevant but commoditised products and services. It also misses the stimulus for innovation, for meeting the unarticulated needs of customers, and finding better ways to solve their problems. Companies have succeeded with both strategies – Courtyard by Marriott, for example, was a business traveller hotel concept designed entirely by conjoint analysis-based customer research, focusing on the priority needs of this target audience. Meanwhile companies like Chrysler have succeeded through innovation – their groundbreaking minivan, for example, defining and shaping an entire market despite customer research saying that customers did not want it. The reality is that a successful business does both – these approaches are not in conflict. Having a customer orientation is not about blindly obeying the customer, but about working with them to so that you both understand their needs and ambitions, whether they are articulated or not. Similarly an innovation orientation is not about product obsession, customers are increasingly partners in the innovation process, and all innovations ultimately need customers to embrace them. From Amazon to Zara, P&G to Target, they realise that they need to meet the existing and emerging needs of their customers, but also drive innovation and differentiation. Indeed they realise that a www.thegeniusworks.com © Peter Fisk 2008
customer orientation is not just about bowing to the declared needs of customers, but being selective about which customers to work with, and then collaborating to understand their real issues and aspirations. They also realise that competitive advantage stems from having the better insights, the better customers, and thereby driving better innovation and growth. Perhaps it comes down to words and meanings – early approaches to “customer focus” were largely cultural and superficial, achievable despite being driven by products and internal priorities. Customer focus, customer intimate, or customer driven? These initiatives tended to focus on attitudes and behaviours, and mainly those at the “customer interface” - a term which itself implied that the rest of the business is not connected to customers. They were largely about nice words, soft focus, but when it came to the crunch, it was still business first, customer second - how to gain and grow profits first, satisfy and retain customers second. So what’s different? A “customer business” starts with the customer. It works from the outside in, and then balances this inside out. By starting from the outside in, the business is fundamentally inverted, its priorities are different, and its performance better. No longer can businesses see the best opportunities, engage the best customers, compete most effectively, by standing inside and looking outwards. Products and processes, strategies and systems, rewards and relationships must start and revolve around the customer. Customer-centric is probably the best adjective, if you need one. Customer Value, Business Value Becoming a customer business is not just about passion, it makes commercial sense. Customer businesses deliver more profitable growth, are more sustainable over time, and deliver better returns to shareholders. It can also be a more efficient business, a more flexible organisation, and a more enjoyable place to work. At a strategic level, customers are the scarcest resource of a business. It is easy to secure physical resources from suppliers around the world, except in the case of oil which we all know is running out. It is relatively easy to secure capital, from conventional investors or more recently from private and particularly from ethically-motivated sources. It is not so easy to secure the best talent, as knowledge and ideas become more important. Yet the most difficult to secure, and most valuable resource is the best customers. These are the golden nuggets of today’s business. At a commercial level, customers are the most valuable assets of a business. Consider the market capitalisation of a business – the collective value of all your shares, and reflecting the price somebody might pay to buy your business. This value reflects the future profit potential of your business, and therefore the assets that make up that figure are those that are most important in driving future profits. Today, 86% of the value of publicly quoted businesses is intangible (according to Brand Finance), and the most significant intangible assets are typically brands, relationships and ideas. Two and sometimes all three of these are driven by customers. At an operational level, the best customers cost less and spend more. Research, to be considered in more detail later, describes your best customers as those who are prepared to engage in long-term, profitable relationship. It shows how these best customers will typically stay longer, cost less, buy more, pay more and tell others. Their acquisition costs will be lower, falling to zero as they want to come back of their own accord. Their operational costs will also be low, as they do more themselves. Their perceived value is higher, and therefore they may pay
© Peter Fisk 2008
more or at least seek lesser discounts. A best of all they are great advocates – recommending you to their friends, other people like them – building reputation and attracting others. Every business will quote different figures to demonstrate the importance of customers. The numbers and chosen ratios may differ by type of business and market. However these are some of the most typically quoted statistics, averages and generalisations, but helping to make the business case: • • • • • • • • • • • • • 20% of your customers give you 80% of your revenue 10% of your customers give you 90% of your profit A very satisfied customer will tell 3 other people A dissatisfied customer will tell 12 other people A very dissatisfied customer will tell 20 other people 98% of dissatisfied customers never complain, they just leave 65% of lost customers are due to negative experiences 75% of negative experiences are not related to the product The biggest reason people leave is because they don’t feel appreciated It costs 3 times more to acquire than to retain a customer It costs 12 times more to win back a dissatisfied customer Over 5 years a typical company retains 20% of its customers 5% increase in retention would increase profits by 25 to 55% (Sources: TARP, Bain & Co, ECSW) Most companies are quick to beat their chests about delivering superior value to shareholders, driving profitable growth, reducing risks, improving dividends, and seeing their share prices rise. Of course they can do this in the short term by “slash and burn” approaches to cost reduction and aggressively driven sales. But it won’t last. The only sustainable route to long-term value creation, profitable growth and lucrative dividends, is in creating and delivering superior value to customers. • • Creating superior value for customers – through deeper insights, more relevant propositions, and personal solutions - is the foundation of a successful “customer business”. Creating superior value for shareholders – through sustainable growth, enhanced margins, and reduced risks – is the results of a successful “customer business”.
“Customer value” is therefore the starting point - not the financial value of the customer to us, but the value we create for them, which is obviously a perception that differs by customer, rather than an absolute value. But it is the notional value, the philosophy, and approach that matter. Building a customer-centric business Defining a “customer business” can sound simple and obvious. It sounds like the right thing to do. And this is perhaps why so many organisations, and particularly their leaders, have failed to appreciate the more fundamental differences involved. They have applied the philosophy, but not the disciplines that move from a product to customer obsession, and to turn passion into profit We understand now that it is about creating value for customers first, and business second. We are ready to embrace pull rather than push approaches to our markets, and to adopt this more holistically in our “outside in” approach to business. We can also make a strong business case for it, based on the significant impacts on profitability and value creation.
© Peter Fisk 2008
Customer centricity: Turning the business on its side But what are the more practical differences? How does it affect the business strategy, the performance metrics, and our decision-making criteria? What does it mean for the way we recruit and manage people, for our key operational processes and systems, and for organisation structure? To be absolutely clear, what does it mean we must stop doing, and what must start doing?
Customer centricity: a fundamentally different approach Moving from a product-centric to customer-centric business is a like flipping the organisation on its side. It is about aligning the organisation to the customer experience, rather than product management. It is about managing your customer portfolio rather than your product portfolio. It is about solutions rather than products, and relationships rather than transactions. It is about measuring www.thegeniusworks.com © Peter Fisk 2008
profitability – with profit and loss reports, the budget allocations, the performance rewards – by customers and segments rather than by products and business units. The specific differences between a product-centric to a customer-centric business are shown below. Some of them are obvious, whilst others require more explanation which will follow later. Some of them challenge ingrained principles or philosophies of business – such as moving from a large catalogue of products, to a capability to bring together the right solutions, or the replacement of % market share with % share of best customers. How do you make this happen? What matters most? And where should you start? Of course every business is different, and every business will already have embraced some aspects of customer-centricity. Fundamental will be the strategic direction, targeting the right performance metrics, and giving people the tools to act differently. However it is the business that combines these many different factors that will be able to realise the real commercial benefits.
© Peter Fisk 2008. Extract from “Customer Genius” by Peter Fisk, published by Wiley Capstone.
Peter Fisk is an inspirational author and speaker, consultant and entrepreneur. His best-selling book Marketing Genius has been translated into 28 languages, and he was recently described by Business Strategy Review as “one of the best new business thinkers”. Business Genius was published in 2008 and describes the challenge of sustaining business growth through turbulent times. He has worked internationally with market leaders including British Airways and Coca Cola, Marks & Spencer and Microsoft, Virgin and Vodafone, O2 and Orange. He was the transforming CEO of the Chartered Institute of Marketing, led the global strategic marketing consulting team of PA Consulting Group, managing director of Brand Finance, and partner of strategic innovators The Foundation. He now leads The Genius Works, helping business leaders to see things differently – to develop and implement more inspired strategies for customers, innovation and marketing. The Genius Lab is an accelerated innovation process, Zoom Ventures is an incubator bringing together business investors and social entrepreneurs, whilst The Fast Track offers executive development and global retreats. For more information visit www.thegeniusworks.com or email firstname.lastname@example.org
© Peter Fisk 2008
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