Tag Archives: business process

Customer Loyalty – is there a Right Kind?

Your Customer's Emotional Experience
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We talk a good deal about customer loyalty nowadays, but do we really understand it and know how to gain it?

The “1 to 1” gurus, Peppers & Rogers, define three sorts of Customer Loyalty:

  • Emotional Loyalty – this is about how customers feel about your brand;
  • Behavioural Loyalty – the way customers respond, and whether they actively seek to do business with you;
  • Profitable Loyalty – those customers that help you to make money.

Emotional Loyalty was the first level of understanding of the concept of customer loyalty, with early marketing designed to appeal to the emotions and build a bond with customers in this way. However, it became apparent that while customers might feel emotionally close to your brand, that didn’t necessarily mean they would buy from you, or do so on a regular basis.

This led to the concept of Behavioural Loyalty where marketers sought to find ways of bringing the customer to them to do business, and do so regularly. Of course, in many cases Emotional Loyalty was ignored as the focus was on getting the customer to purchase from you.

More recently, with the advent of tools to analyse customer purchases and overall costs more accurately, companies are discovering that on average only around 20% of customers are profitable for a business, with 60% being around break-even and a further 20% losing the company money, so they then focused on trying to find ways to increase the percentage of profitable customers and either remove the unprofitable ones or make them profitable.

However, isn’t the key really to do the first two well and use this to leverage the third? It really is not about focusing on just one aspect of loyalty, but rather about understanding how all three interact and driving your business accordingly.

On the emotional level, you need to be clear about what your brand stands for and ensure that you deliver what you say you will do – never over-promise and under-deliver as that is the quickest way to kill your brand’s emotional loyalty.

To keep your customers coming back – and we all know that repeat customers are best – your marketing must understand their buying behaviour and ensure that you continue to interact with them to capture the maximum share of their wallets. The Lifetime Value concept is key here.

But, of course, you must ensure you do so profitably – and this is not just about margin, but about the total costs of doing business with each customer. A high margin customer can still result in a loss for you if, for example, they are consistently returning items for credit, needing expensive support resources, paying late, and so on, while a low-margin customer who pays cash and never needs support can be nicely profitable. Be clear about where the costs are for each customer.

A great example of a company that does all three well is Amazon: just look at the brand recognition, the fact that you know they it’s a reliable supplier of books, DVDs, etc., at good prices, with a no-quibble replacement policy, and then see how it constantly offers you new items based on your buying behaviour. Amazon’s systems are not only providing its marketing engine with ongoing offers tailored to your likes, but make purchasing easy, so its internal costs are low as there is minimal need for support.

But, after all, if you really think about it, isn’t this what business is all about anyway: getting customers who feel good about doing business with you as you provide a consistently great customer experience, coming back over and over again to make purchases that are profitable for you?

So, to answer the question as to whether there is a Right Kind of Customer Loyalty, the answer is clearly, “No.” To be successful you need to ensure you are focusing your business on all three – Emotional, Behavioural and Profitable. And, in the famous words of a song first made popular in the mid 60s, “Do What You Do, Do Well.”

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Analyse This!

‘Analysis Paralysis’ is often cited as a reason for businesses failing to achieve their potential – too much time spent analysing an opportunity (or problem) with the result that the window closes and nothing is achieved. In fact, much has been written about this, with Google, alone, returning over half a million pages!

The problem is that many in business – particularly the more entrepreneurially-minded – use this syndrome as an excuse not to analyse anything, relying instead on ‘gut feel’ for all decisions.

However, analysis is a critical part of achieving maximum success in a business and there are many areas where this can be automated to a large extent, too.

One often-overlooked area of a business – because it is nowhere near as glamorous as Sales in many eyes – is Credit Control (also referred to as the Debtors’ or Accounts Receivable Department, depending on where you are in the world). And yet, it’s an area that can have a huge impact on the overall health of a company, and one where analysis should play an important role.

In the years BCC (Before Credit Crunch), of course, many companies effectively outsourced much of the decision-making to Credit Insurers, who would determine appropriate account limits for customers, and would chase up for the longer-overdue debt once it was reported to them. The company was paid out either way – by the customer or the insurer – so was less concerned.

This, of course, has all changed.

Credit Insurers are now a lot more careful with their level of risk and companies are having to re-evaluate their approach: do they accept lower credit limits and a consequent restriction to their business, or do they ‘self insure’ to maximise their opportunities?

By analysing their customers’ payment patterns over time, companies will develop a much better understanding of their customers, being better able to assign appropriate credit limits, while also developing an early-warning system of impending trouble.

What’s more, utilising this information in cash-flow forecasts will provide a far more accurate picture of expected income for a given period than the ‘rule of thumb’ that so many companies seem to still use. And, of course, this should feed through to enable companies to give accurate information to their creditors as to payments due, and take maximum advantage of any early-settlement discounts that may be available.

It all comes down to understanding your business more thoroughly. If nothing else, the economic conditions of the past couple of years should encourage businesses to pay a lot more attention to the fundamentals, and that will be good for everyone going forward.

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Cash Flow or Bust!

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The recent furore over large companies asking to reschedule debt repayments has once again highlighted the issue of cash flow, and how important it is to even the largest businesses.

The companies are not really bankrupt – in one recent example, a company with debts of an estimated $60 Billion has these amply covered by an asset portfolio which, even in these depressed times, is reckoned to be worth around $100 Billion. Why, then, is it trying to put back the payment of some $3.5 Billion due this month?

The simple answer is that it doesn’t have the free cash available… Business plans were built on an expectation of a certain level of trading – primarily in property sales – which simply dried up with the global economic crisis. Without the sales, the company quickly found itself running short of cash and so unable to service upcoming debt repayments. Unlike governments around the world, of course, a company can’t simply print more money to get it out of a hole (an unwise move for governments that seldom seems to stop them, though!). In the absence of being able to improve its sales to generate cash, it must either borrow more money to repay old debts, or delay the repayment of those debts. And this is what the company in question is now trying to do.

The fact is that many more businesses fail through cash flow problems than for all other reasons combined – an estimated 80% of failures, in fact!

So how do companies get out of looming cash-flow crises?

The answers, of course, vary enormously with the type of business, but a few general items cover the vast majority of situations:

  • Boost sales – this is the most common response, and can be helpful. However one needs to ensure that it is not a case of delaying the inevitable: that sales are not done at such low [special] margins that the business cannot cover even basic costs. Reducing profitability for a short period to get extra sales can help cash flow, but reducing it to a point of significant loss is potential suicide.
  • Manage Inventory– this is a more complicated area and one not fully appreciated by many businesses. One needs to not only reduce inventories to a level appropriate to the business and lead times, but also to manage the ordering process to stop islands of excess building up (look at weekly sales, instead of monthly, and you’d be surprised how the picture can change, for example).  Reducing inventory by 3-4 days is like putting an extra 1% on the bottom line, and lower stock means lower payments which helps your cash flow, so systems should be in place to ensure stock doesn’t age, and that ordering is appropriate to the business run rate.
  • Reduce Receivables – another potentially complex area that is often neglected in the interests of “keeping customers happy.” If you are known as a soft touch, then your customers will stretch your payment terms to pay those that are more demanding (or financially beneficial). Instead of sending a month-end statement and hoping the money will roll in, send it at the beginning of the month and have credit controllers call your customers before mid-month (when they’re quiet anyway) to ask about any possible queries on the statement. Simply removing these queries proactively will reduce your DSO noticeably in most cases. Of course, there are many other techniques, too.
  • Reassign Assets – although this might not help a short-term cash flow issue, managing your assets properly can help prevent cash flow problems. Do you really need to own your Head Office, or is it an ego thing? Do your vehicles, or IT systems, need to be owned or can you lease them? In many cases you’ll find that the benefits of leasing or renting are significant in terms of cash flow and they have tax benefits, too.

All of these issues can play a significant role in helping you manage cash flow better, and there are more, besides, depending on the nature of your business.

The real point, though, is to run your business in such a way as to avoid getting into this sort of trouble in the first place – cash flow problems can literally put even the most profitable company out of business.

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Keep it Simple, Stupid

What is it about the human race that while we all apparently prefer ‘a simple life’ we delight in adding layers of complexity to everything?

Much to nobody’s surprise, I imagine, a recent McKinsey article, “Consumer Electronics Gets Back to Basics” showed that something like 2/3rds of consumers valued simplicity and price over a more comprehensive set of features. And yet, product after product is designed to have more features than its predecessor – generally at an incrementally higher price or, at best, the same price.

Just look at today’s ‘bloatware’ as an example. Remember the days when Bill Gates declared that “640KB ought to be enough for anybody” referring to the, then, new PC’s maximum memory capacity? Nowadays, you’re lucky to get away with less than three thousand times that much (2GB)! And yet, how many of us use more than 10% of the features available in today’s ‘productivity suites?’ I don’t, and many consider me a ‘power user.’

Oh, and don’t believe that the complexity is simply as a result of more capacity – people have been calling for simpler PCs for decades. In a Newsweek interview back in 1995, Oracle Chairman Larry Ellison said that the PC was too complicated and difficult to use then, predicting the PC would soon be replaced by simpler desktop devices – the ‘network computer,’ a no-frills computer/terminal that performs basic chores easily and simply and sells for less than $500. Perhaps Oracle’s recent purchase of Sun Microsystems will enable him to move us all in that direction some 15 years later: Sun already sells this type of device – they call it a Sun Ray.

The big surprise for many vendors last year was the Netbook. Initiated by Asus, this basic notebook PC really set the proverbial cat among the pigeons. The form factor was first tried in the mid 90s with a notable lack of success (it was called the sub-notebook in those days), so there was a healthy dose of scepticism when it was announced last year. Acer, as the first major multinational vendor to see the opportunity, quickly produced its own line of netbooks and gained enormous market-share as a result: seeing a significant increase in unit sales last year, just as the downturn was biting most companies. Here was a classic case of people wanting simplicity – what a pity, then, that the software was not also available in ‘Lite’ versions, meaning that many early adopters of netbooks ended up returning to the larger, more powerful machines that could handle the software workload.

But it’s not just in PCs that simplicity is the watchword. A couple of years ago a start-up company, Pure Digital Technologies, introduced a simple, one-button solid state video camera that runs on a couple of AA batteries. This device, the Flip, quickly grabbed 14% of the US video camera market surpassing all but the long-time market leader in sales. It’s a wonderful little camera and perfect for recording those ‘moments’ of life – I know, I got one soon after launch and swear by it. Interesting, then, that Cisco acquired the company a few months ago – is simplicity to be Cisco’s driver now?

This desire for simplicity is evident in many other areas of life, too – look at how people are embracing simpler airline and hotel offerings: companies offering easy-to-use services that do what’s needed at a reasonable price. The same goes for other products, like the success of Tide Basic laundry detergent.
And here’s the key – to succeed, products and services must be well-made, practical, offer the set of basic features that people need (read: market research is critical) and be seen as offering great value. Properly done, this can be achieved at increased margins to the over-featured products we’ve become used to, so increasing shareholder satisfaction along with customer satisfaction.

As the saying goes, “Keep it Simple, Stupid.”

Isn’t this what we all want?

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Is there value in a Repeat Customer?

Why is it that although every marketing book / article I’ve ever read tells me with authority that it costs 5 (or more!) times as much to get a new customer as to sell to an existing one, so few companies understand this?

Do their executives and marketing people not read?

I know you’ll have many examples of such wasted opportunity, and I’d love to hear those that stand out in your mind, so to get the ball rolling, let me give you a couple of – to me – amazing ones…

Newsweek is top of mind at the moment as I have just received my annual renewal notice. This ongoing piece of optimism on their part really baffles me as the renewal fee is almost exactly TWICE what I would pay to take out a new gift subscription, and that excludes the (admittedly dubious) value of the little extras they send with gift subscriptions.

When I queried this with the “Customer Service” people at Newsweek a couple of years ago, all I got was a rather terse note saying that the renewal price is the best available offer for my country. This in spite of me providing them URLs to prove otherwise in my original query… So, each year for the past several years I’ve allowed a subscription to lapse and taken out a new gift one, saving myself a tidy sum in the process.

This is, of course, a lot more expensive for Newsweek: apart from the trinkets, they always allow a lapsing subscription to run on for a few issues while they send out several reminder letters.

Why not just give subscribers the same deal (without the trinkets) and save on the letters, too?

Another great example is that of Consumer Electronics stores – full disclosure: I love gadgets and electronics stores. The opportunities they miss to get steady repeat business are legion! Let’s face it: they have my information as I invariably pay by credit card and they could easily ask me to sign up for a “loyalty card” or just permission marketing.

But they don’t.

Each time I visit, I’m treated as a brand new customer (not a great experience in most cases to be honest). They miss opportunities to sell me upgrades or add-ons for products I’ve previously purchased (unless that’s the purpose of my visit). They don’t keep records of what sort of things attract me so I can be carefully guided by the marketing people to buy more. In fact, they have no idea who I am at all – and yet the company executives that I’ve come to know from some of these stores are searching for extra sales, especially in these tough economic times…

When are companies going to wake up to the real, lifetime value of their customers?

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Putting a Spring into Business Models

Are we thinking wrongly about business models and, for that matter, about the models that apply to many other activities, too?

While most of us think in linear terms, we respond to stimuli in a very non-linear way and this is why our models fail us.

A good example is that of traffic – the way it bunches up and stretches out as drivers slow and speed up, with each reacting to the vehicle in front – it’s much more like a spring or elastic band being stretched and let go, than linear.

Look at how consumers react to shortages of items. It really is much the same – an impending shortage leads to people purchasing a little more to tide them over, while a stock-out position either leads to brand switching or to buying extra once the item is back in stock, so the consumer doesn’t run out again. This, of course, means demand that follow a wave pattern, rather than a straight line.

However, every inventory-ordering system I’ve seen works in a linear fashion, leading to inevitable periods of over-stock after a shortage and accelerated stock-out if an impending shortage is discerned.

Doesn’t this equally apply to investors? Think about how the stock market reacts to news – it almost always over-reacts, whether positively or negatively, and then settles down. Again, although, we expect a “rational” (read: linear) response and our models are built in this way, the actual pattern of prices is anything but linear.

I have little doubt that it is this that leads to huge market “melt-downs” as automatic sales are triggered in response to the over-reaction to an event which leads to more automatic sales, and so on. Look at global stock markets early this year – do we honestly believe that the total value of companies was half (or less) what it had been six or seven months earlier? There’s no question they were worth less as earnings were impaired, but were they really worth so much less? The answer might be found in the big increase in share prices from March – perhaps it wasn’t a bull market as some were calling, but simply a correction to the over-reaction during the last half of last year, and things seem now to have stabilised. At least until the next piece of news…

The answer, it seems to me, is to rework our models to allow for human response to situations: the inevitable over-reaction and consequent wave patterns in demand, share prices, traffic and just about everything else. By allowing for this sort of response and predicting the effects, we can dampen them in the same way that a car’s shock absorbers dampen the effect of a bump on the suspension/springs.

Bad Processes Kill Business

While I argued last week that oversight of business is necessary to move us to a longer-term approach to growth, too much oversight is even worse for a business.

I’ve come across countless examples in my own, IT, industry where companies seem to try very hard to prevent sales, rather than make them – all as a result of too much oversight. Let me illustrate this with an excellent example.

The company in question, let’s call it ABSC (A Big Software Company) is a very significant multinational software vendor, with offerings targeted at a range of companies, from the very largest down to a mid-size level – and it is this mid-size level where the powers-that-be are expecting significant growth. The only problem is that their processes and procedures effectively kill sales in this market and make them extremely difficult in their traditional high-end one, too.

Let’s assume that an end-user, we’ll call it Widgets Inc., wants to purchase a 100-user system from this company after being sold on the concept by a Reseller of ABSC – in line with ABSC’s policies that all SMB sales go through the channel. The outline of the process is as follows:

  • Reseller calls ABSC and requests a quote (they cannot yet provide a quote to Widgets Inc. as there are no official price lists).
  • The Account Manager for Reseller at ABSC in turn requests a quote from ABSC EMEA HQ as even he has no pricelists. The turnaround time for this quote is typically 2-5 working days (not helped by different working days in different countries).
  • The Account Manager receives the quote from ABSC’s EMEA HQ and emails it to Reseller who can then provide an official quote to Widgets Inc.
  • Widgets Inc., accepts the quote and asks to place the order. Because Widgets Inc., is a new customer (as are most SMBs!), Reseller has to supply Account Manager with extremely comprehensive information on Widgets Inc., in order that this can be properly recorded on the ABSC systems for, amongst other things, credit purposes (even though ABSC is not providing Widgets Inc., with credit as that is up to the Reseller).
  • Account Manager enters all the data and applies for the software licenses. This approval process generally takes some 10 working days to go through the various internal levels in EMEA HQ (although 4-6 weeks is not unusual). Eventually, approval for the sale is granted and Reseller can download the software licenses. Total turnaround time from when the customer firsts wants to buy until delivery is some 4 weeks on average, and up to 2 months if there are any problems.

Apparently, the rate of lost/cancelled sales as a result of this tedious process is very high – customers simply go with their #2 option for the solution, where that solution can be provided more quickly.

Of course, what should happen is that Widgets Inc. expresses interest, Reseller gives immediate quote from its own pricelist, Widgets Inc. agrees and places order on Reseller who places this on Account Manager at ABSC and is then given the licenses within a day (after checks are made that Widgets Inc. is not prohibited by US Law from accessing the software).

Unfortunately, though, this streamlined approach to business is the exception rather than the rule in our industry. ABSC is, admittedly, an extreme example (although absolutely factual), but most IT vendors have degrees of this sort of inefficiency built-in. We might sell software and/or hardware to make [other] companies more efficient, but our own processes leave a great deal to be desired instead of showing the way.

Isn’t it time the customers started expecting the vendors to practice what they preach? It would not only allow them to get what they want, when they actually want it, but should reduce prices, too, as the sort of process described above is extremely expensive in terms of manpower and, therefore, cost.