The Changing Face of Customer
The greatest source of value for companies is a set of intangibles that doesn't get reflected in the financial statements - Customers. Developed, well nurtured and ongoing relationships help in producing sustainable returns to share holders. This raises many questions. How does one manage customers and return on customers? Companies are managed as a portfolio of products / services when the value creating entity is customer. Resources gets optimized across products and not customers why? Product lifecycle management takes care of the products life, why isn't there a similar system to manage customers.
Virtually everyone agrees that a company's most important asset is the value of its customers, yet this is one of the most ignored by most managers due to their focus on day by day, quarter by quarter operations.
Customers are currently managed on three planes - short term, intermediate term and the long term. But normally sales people are interested in getting immediate results and the current share of wallet rather than the share of mind or any other long term metric. The negative effects of such moves become more pronounced in cases where there is no other differential between the competitive products and promotes commoditization.
Most industries sell their products / services not to a single buyer but an assortment of buyers. It is rare that the buyer group that any organization faces is homogenous in nature. We sell to a variety of customers who put our product to a variety of uses. Our customers can differ in terms of the volume of purchase, importance of our product as a raw material to their produce / portfolio, in income patterns, education and a host of other parameters. Customers therefore just don't differ from a structural standpoint but from an economic and cultural standpoint too. Customers differ also in terms of the most important parameter viz their growth potential. One has to take into consideration the cost of servicing the customers although certain fixed costs and processing costs tend to remain the same, certain variable costs can sky-rocket.
Hence, how a company manages its customers and the return on customers is going to play a pivotal role in the profitability of the company as such which in turn will help in making reproducible and sustainable returns for share holders. Managing return on customer becomes strategically important. Selection of the right strategy with due considerations to the structural framework of the customers becomes a prerequisite especially in mature industries wherein otherwise it will be hard to sustain.
The Structural Framework of Customers
Porter's Theory suggests a four part model consisting of
a) Purchasing needs vs. company capabilities
The purchasing needs can be used strategically if a firm is placed comfortably compared to its competition in serving a particular need and thereby gain a competitive advantage. The significance of growth potential is self evident, higher the growth higher the demand for the firms products. The structural position is divided into two for strategic reasons as unexercised power to bargain is always a threat. Cost of servicing is one last criteria but crucial.
The changing face of customer loyalty:
The next analysis on customers would be in terms of loyalty. Often used but mostly not clearly defined, determined or measured. This another changing area receives less scrutiny. We often research and identify the change drivers but don't appreciate the magnitude and the possible results. There are three distinctive and broad based models of customer loyalty.
Monogamy - Loyalty as primarily an attitude that leads to a relationship with a brand.
We still see our grandma use a particular brand of soap / cosmetic due to the repeated usage, the positive brand experience that she has undergone, and the positive reinforcements of that particular brand - the same has become a part of her. They are less susceptible to negative promotion and their buying patterns can be analyzed and reached easily. They practice monogamy if one may say.
Polygamy - Loyalty is there but with a logic / pattern co-promoting polygamy.
The customer buys a particular brand due to various reasons like satisfaction, non indulgence, price, promotion, etc... Here loyalty is there for a certain time period until the next brand enters his mind frame. Loyalty is divided for a few brands.
Promiscuity - Impulsive buying behavior.
This behavior is also exhibited by customer groups, where they shop different brands with no apparent reason other than trying out a new brand just to break that monotony or due to impulsive buying behavior exhibited at point of sale in response to certain stimulus like in shop promotion / display / facings etc...
When trying to decipher the nuances of customer loyalty one should also carry out the analysis as to why a particular / group of customers are behaving in a fashion that seems loyal. Research has proved that there also exists such a state where customer's inspite of having unsatisfactory service will still stay with a particular firm. Hence, this situation warrants a closer analysis.
Customers can be categorized for this analysis based on their loyalty status and the level of satisfaction.
These forms the customer group that although being satisfied do shop around for better offers and products.
The terrorists are currently highly dissatisfied set of customers who spread their dissatisfaction bad mouthing the firm to everyone they meet and the firm can treat them as lost customers.
Highly satisfied customers who do the word of mouth campaign for the firm. This group is highly critical to any firm and value should be provided and extracted from this group for long term sustenance.
Dissatisfied customers who are unable to move out to a new choice due to some exit constraints.
The above analysis will help the firm form their strategies in a better way.
A New Paradigm for Customer Interaction:
In today's competitive market one can't achieve competitive advantage by having an e-biz site, by providing good service, by having a call center for customers to interact or by implementing a state of the art CRM suite leave alone a product with some unique selling proposition.
Sustainable business models are those that nurture a trait of encouraging and empowering their customers to interact, co-create and make their own choices. Having a CRM in place isn't going to be a panacea to this issue of understanding customer and his behavior as customers are the sole determining factors that will make an interaction a success or failure. Only basic relation with the customer counts and only those who are able to nurture this relation and leverage it will be able to sustain in the long run.
This change in terms of the interaction with the customer is now forcing marketers to rethink their strategy towards customers. Earlier the marketer used to define the value proposition and deliver. Care was taken to ensure that the gap between the value proposed and the value delivered was little or non existent. Early in my childhood , whenever I needed a toy , my dad never used to buy me one, he would get me a some plaster of paris and let me make the toy of my choice and the pleasure and excitement that I derived out of this exercise was no way comparable to having a readymade toy. What my dad did to me that day is what we are doing to our customers today.
We enlist our customers in the process of co-creating value if I may borrow that term from Prof. C.K.Prahalad. This fact of co-creating value is evolving and is gaining popularity day by day and a lot of corporates have started building their future strategies around the concept of co-creation.
The traditional concept of market was built around the firm and the customers were just a group that the company sells to and hence all theories and concepts evolved around this concept. The market did the process of value exchange and value extraction and the process of value creation had little or no place in the marketers map. Companies have concentrated on the relationship with their customers and not on the evolving changes in the market place, which has led to commoditization. Customers now armed with better knowledge, options and much aware of their negotiating clout have started to understand that they can also extract value from the old point of exchange - the market.
Customers of eBay or bazee.com paying differently during different seasons and reasons speak volumes about this. With this managers have to learn that the prices are no more fixed on the basis of the cost of production but also based on the perceived utility of the product to the customer. They are no more the price makers but are price takers too.
One can cite a lot of examples for firms following the co-creation concept such as e E-bay or Dell Computers which believe in their customers co-creating the value. Coming to Indian examples two companies which strike my mind are ITC and Asian Paints. Both have made major strides in terms of laying the infrastructure and to a certain extent achieving by involving customers to co-create the value they need. ITC's e-chaupal is known to everyone as a tool that not only helps ITC in getting to know its customers requirements but also in making the portal a knowledge pool that could be harnessed for future needs. It brings together many customers of ITC and its non - customers who become glued to the portal and ITC after realizing the great potential of getting to learn more in their required area of agriculture and management through the portal.
Asian Paints would be another example of a typical brick and mortar firm which normally sells to the wholesalers and retailers who form their normal business channel, starting up an initiative Customer First. This initiative has a lot of other sub initiatives and support structure which will eventually lead the company in the forefront as far as innovating an environment for the customer to co-create. This initiative puts the customer in the locus and everything else is centered around the customer. The sub initiatives like the CSI / Customer servicing initiative ensures that the basic hygiene factors are met as far as customer satisfaction is concerned. Its support structure like the project sales and home solutions ensure that the customers are able to get the right kind of support to co-create their perceived value.
With all these, what becomes obvious is the fact that the value that a customer pays will be decided by the kind of co-creation experience the customer undergoes. The value will henceforth be a factor of the interaction between the firm and the customer and not the product or its features. The value will tend to rise as the co-creation experience of the customer is improved and vice-versa. The point of interaction are many in today's scenario and all of them need to be fine tuned to give the customer the same kind of experience and the right kind of experience.
The traditional concept has focused on the process of value extraction as the focus of management. Now that is challenged and the process of value creation and the interaction and the experience has become the focus of management.
Change in how the firm looks at a customer:
In response to the above mentioned changes in the structure of the customer and the method of interaction, companies need to realign themselves. The foremost responsibility of the CEO would have to include "to preserve and increase the value of the enterprise "and the value of the enterprise would be the difference between the return on customers and the infrastructure cost.
The process of valuation of a customer has progressed for a qualitative standpoint of yesteryears to a quantitative state today. One has to agree to the fact that this process is full of nuances and there is no said correct procedure to be adopted one may opt from the basic to the sophisticated techniques available. This would provide one with a quantitative ground to analyze customers.
Return on customer = NPV (lifetime value of current and potential customers).
The strategy should be to categorize customers based on value and implement specific strategies to address that segment. It has been found that general mass marketing campaigns get a response rate of 1% and that the non respondents tend to become 0.5% less likely to respond to a repeat solicitation which means that with a campaign that doesn't meet the needs specific to a customer, the chances are good that we might lose that customer in the long run if we continue with non specific campaigns.
Categorizing customers by value:
Most Valuable customers form the bread and butter of any firm and this group is to be taken care of very well. The strategy that is to be deployed given the above consideration would be to retain and manage this group efficiently.
Most Growable customer forms the group whose current actual value may be low but have huge growth opportunities and hence the strategy should be to invest resources to maximize growth. Secondly this group will form a heterogeneous one hence managing different customers differently will help in optimization of resources and extracting better value from them.
Super Growth customers form a group whose current value and potential value are huge. Hence the strategy should be to invest and retain at the same time. This group may also manifest some kind of heterogeneous behavior, which may warrant the strategy of managing different customers differently.
Low Maintenance customers forms a group whose current value and potential value is less - which implies irrespective of the retention and other growth strategies this group will behave in the same fashion - less value hence the strategy retain them without any allocation of resources.
Below Zero customers form a category where the value extracted by the company is below zero which might be due to two factors viz they provide no value to any other competing firm / category / product or the value proposition is to be revisited. In most cases the latter is found to be faulty requiring a change in the value proposed.
Migrators are the last category of customers. This particular category is seemingly increasing due to unknown reasons currently. The phenomenon may be obvious or not so obvious depending on the product offered by the firm. This may also be due to the polygamous behavior discussed earlier in this article. Reasons whatever they may be this group needs to be analyzed further, tested out and then probable segments could evolve out whose unmet needs trigger such a behavior which can be addressed.
Companies also need to change the way they looked at how customers looked at their proposition. Certain features / attributes have today become hygiene factors which no longer tend to increase customer satisfaction or loyalty but have become generic to products. Hence the companies will have to look for the real motivators which trigger behavior that will favor the firm. There also exists in the market certain practice that has been there for long and has no impact on loyalty or satisfaction. Companies fall into the trap of classifying them as hygiene but they may not be necessarily hygiene. They may turn out to be potential areas which will reduce their overheads/ cost structure. As markets evolve and customers and companies get more and more information about each other and the evolving market what also comes up alongside are potential opportunities which can become future motivators. Firms also need to concentrate on this to take care of their long term sustenance.
a) Competitive Advantage by Prof. Michael .E. Porter
Subramanian Ramachandran is a Post Graduate in Management(MBA) preparing for his Doctorate. He has experience in business - in general management, operations and systems and his key interest area is change management. Contact Subramanian by e-mail: email@example.com .
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