Friday, 10 April 2009

Understanding Your Customers

At a talk I made before Christmas, I had an over-lunch conversation with a company director who revealed that not only had his business just had a record year but that his best customer, who had bought over £300,000 of services would never stop buying as his personal relationship with the key man was so strong; they boozy-lunched together regularly, went to football games, played golf, knew each other's spouses and children - the sorts of things that meant they were friends as well as business acquaintances.

Recently, I happened to bump into the same director and I asked how the business was going. He was pretty down about it. Sales had fallen off a cliff during the first quarter and he had made over 50% of his staff redundant and was now fighting several claims for grievances. When I asked about his top customer, he was even more downcast. Out of the blue, in January, his 'friend' had invited him out for a lunch and given him the bad news. Due to cut backs, the Board had decided that the sorts of services his firm provided were no longer required and that as of immediate effect, no more business would be placed for the forseeable future. Most of the work would be done in-house, as and when required.

The director was absolutely shell-shocked and could not understand how he had been let down by such a great customer and friend. We chatted a while on how this loss had affected his company profoundly before I asked why he thought that his customer would never have stopped buying and he replied simply, 'Because we had a superb relationship, we were doing a great job and I did not think he would let a mate down.'

I did not say it at the time but what my company director friend had done was confuse business logic with human logic. In tough times, numbers do the talking, not people - stark business facts are unavoidable and relationships are only an emotive issue that can get in the way of practical judgement.

No businessman WANTS to look into someone's eye and tell them they are redundant or do they want to tell a friend they can no longer buy from them. But I tell you what, I would rather do the latter with less of a tax on my conscience than the former. In a recession you often have to do both.

It also illustrates the lack of planning and understanding of how a recession can affect your business - this was a case of hubris in the face of stark facts. It was also a case of not understanding the worth or value of what my friend's company was delivering to their customer's business. These are not good business attributes at the best of times but in a recession - it can break a company.

Knowing Your Customer

The story above illustrates many powerful points in business - some of which only really come to light when the markets downturn. While my company director friend had a very strong personal relationship with the main purchasing contact who was very senior, the obvious thought was that his contact was clearly not senior enough. But there was another issue in play - while his customer's business was going well in good market conditions, his contact was effectively running the company. But now the markets had changed and the customer's business had decreased suddenly and fairly dramatically, the contact was no longer calling the shots. He had abdicated that responsibility to his Finance Director (FD), who had run a large knife through the business and cut out all but essential services, staff and suppliers.

My company director friend's company was not on the essential list - it was that simple.

The particular company director in question had not heeded the advice I had given in the talk when we had first met. I had basically said that in a recession, your current customers are the first people you think about - you need to throw a 'Blanket of Value' over them to ensure that you do not lose their custom. There's a lot that can be done but the first thing to do is to truly understand your customers and their business.

When I say know your customer, I mean a complete understanding. It happened that my company director's major customer was a networking supplier whose main customers were telecom companies - in the run up to Christmas many telecom firms had announced severe cutbacks and sure enough this had hit my friend's customer very hard. My company director friend had not looked beyond his order book and relationship to understand how his customer's market could affect his own business. If he had bothered to understand his customer's actual business and who they sold, where and how much, then he would have realised by just reading the business news that the moment the telecom market wobbled, his customer would wobble too. It happened that the biggest telecom wobbler was also my friend's customer's largest customer too - an unhappy coincidence along the chain of events.

An important lesson for my friend is that it is pointless getting super friendly with a single major contact if you ignore the rest of the decision making team. Again, all is fine in the good times, but when the going gets tough, decisions are made in different ways and for different reasons. Having a strong relationship with one person can actually play against you - it could be seen by the cost-cutting team as an unhealthy relationship not based on sound business value and in this case, this was indeed the logic used. Apparently, my compant director friend had suffered because the FD had always questioned the prices at which the particular services were being bought in at - they were clearly not benchmarked against others and he knew there was scope for savings. But my friend's contact, during the good times, effectively had his way. The recession changed that, and the FD immediately applied business logic and stopped the line of supply completely, naming an alternative supplier from a set of three quotes he had received for ad hoc work should they need it.

Company Politics

What clearly had been going on in this case was that the FD had a simmering resentment to his colleague and how he had effectively run purchasing certain services based on human rather than business logic. When recession had struck and the FD stepped up to take over the company reins, he had simply used business logic to kill the suppliers where human logic had been used. In some respects, the FD was also cutting off his nose to spite his face - old suppliers have plenty of experience in the servicing of specific needs, they can also be very flexible if need be. None of that entered the FD's mind - in fact, the FD had played a major political card. The FD had shown his colleague that all along, business logic should prevail and that's how it would be for the future.

Company politics are normally associated with your current employer but all companies have a political landscape. Knowing your customer well and how all the decision makers, influencers, coaches and ancillary staff play together helps understand how people will react to different conditions - who has pet hates or shows favouritism, who dislikes who and what they might do about it. It means that it is vital to make sure that in the selling process you do not put all your eggs in one basket but make sure there is a strong business relationship with every person involved in making decisions.

Often, if your main contact sits in middle management, it can be hard to go above the person and get to more senior people. This is when your own management becomes important - by arranging a peer-to-peer review of the business relationship periodically, you can ask for higher authorities to be involved to satisfy your own management's needs to have their ego stroked. It's a power thing and it works.

Recording What You Know

Much play is made of CRM systems but the reality is that you need to make sure you capture everything your customer does and says to help build your knowledge base. There are practical reasons for it, of course. It is not enough to be able to retrieve all order, invoice, payment histories but it is also important to have a central repository of all contracts, offers made, phone call conversations, important dates, company organisation charts, personal details - in fact anything.

It's not about being able to out-fox a customer by pulling up an old email and saying 'Ah, but you said on 11 January........', it is about having the ability to draw upon knowledge to help you win more business or keep the customer happy. It also helps augment your personal instincts - you may feel something is an opportunity but the detailed records may tell you the pitfalls or help you realise it.

Most importantly, it helps you to go that extra yard when it is required that may be the difference to keeping or losing a customer. Remember, in my example, my company director's company had supplied services to the customer for some time. In all that time, my friend had only used a CRM package in the last 6 months, beyond that it was tracing email tracks and many of these had been deleted in the interest of saving disk space.

All customer interaction is worth recording and it is worth spending the money to record it. It is also sound business practice and good governance to start when you are small and make it a cornerstone of the business ethic for the future because when you get large, you are going to HAVE to do it.

Good CRM wins more business - that's a fact. In a recession, it can keep you business.

Delivering Value

Perhaps the most fundamental mistake my company director friend made in losing his client is that he confused a strong relationship with delivering value. While he could rightly argue that all his services were well received, delivered well and paid for on time, he had not agreed what the value of the service was to the business generally or to specific areas. Certainly, even if everyone else was aware, the most important person, the FD, was not convinced. In a recession, very often most human logic goes out of the window - what in our eyes is an essential service in finance terms can be a nice-to-have at best and certianly non-essential to the survival of the business.

Every company needs to be absolutely clear what their Value Proposition is not just to new clients but to existing clients. Most companies will rightly believe that they provide valuable products or services to clients and many clients will go along with that in good market conditions. Some clients will drive for savings where they mistake shaving 10% off purchase price as being a saving but if the service then delivers less value then they may well have actually damaged the bottom line.

There is a big difference between value and cost and most purchasers don't get it - you have to make sure that the Value Proposition is sold to the business people as most purchasers buy mainly on price alone. I once did a demonstration on the difference between cost and value - at a company I worked with I showed that a worthless piece of plastic could be worth hundreds of thousands of pounds over a long period. The piece of plastic was the 'Salesperson of the Quarter' award, worth around £30 and for those that won it, they could use it in their CV to justify a better job and more pay, so net themself a great deal of money over time. While the object cost just £30, it's value was far, far greater.

Your products and servives need to address specific needs for customers, and in doing so provide specific and quantifiable value. In a recession, the value needs to be tangible, realisable in short order and be verified by your customer, i.e. not just wishful thinking on your part or based on your own assumptions. You need real data and corroboration from your customers. This Value Proposition needs to be amplified so that all the people involved in decision making clearly understand it and agree with it. Internal promotion of the message is vital and so the messaging has to be precise and easily understood - all your own staff need to be able to expound it flawlessly to be able to communicate the message as well as fundamentally believing in it and delivering on it. It cannot be make believe.

A good example is a service like real time conferencing. People meet all the time and travel costs money. But if you justify savings to the business on travel costs saved you may go up a rat hole because someone may argue that when they travel they can do 2 or 3 meetings at the same time so easily justifying the cost. So my Value Proposition would be to say, with conferencing you can do up to 8 one hour meetings in a different location in a single day, across continents if need be, with multiple people, never leave your desk and still be home to have dinner with your family. The Value Proposition is all about increased productivity and saving time - you can cost an executive's time and ability to be able to address more business issues in shorter time. Let the business put a figure on that rather than you and you will soon see the power of it. An old example was that a drug company could reduce the time to approve packaging of products by a 3 days by using conferencing - not much on a drug that may have taken a few years to develop. But 3 days of sales of a top drug could be worth millions. Ford cited the same on bringing the Mondeo to market as it was designed in several different locations and by using conferencing rather than face to face meetings, they collapsed the design times and got a car to market faster. It also was car of the year and so two or three extra months of sales that they had not catered for meant the car was profitable that much faster.

Your Value Proposition needs to deliver something similar - something of real value to companies that can be measured easily and flow to the bottom line, and in times of recession, fast. In recession, buying criteria change quickly and old logic can go by the wayside. Make sure your Value Proposition is up to date, addresses the the issues posed by the recession and delivers real, measurable value to your customers - and make sure they agree with you.

The Blanket of Value

Having your Value Proposition agreed is one major step. Now you have to remember that for many small firms a single big customer loss can mean the difference between profit and loss overall. In my example it was far bigger. Also, a rule of thumb says it costs roughly 5 times more to find and onboard a new customer than it does to retain an existing one, so losing a customer is a double whammy to profits.

It is easy to get complacent about value and service and make assumptions in good times, but recessions have a habit of posing hard questions. So my strong advice is to engage with your customers early - and I mean talk to them. Go ask them what it is that they value about your service but more importantly what MORE can you be doing. Don't just cut price, offer more value by asking what would make life easier. Ask them about their priorities, if there are any steps you can take away from them that will help reduce their cost because you can do it cheaper. If they are making redundancies, try to look at what tasks may fall down a chasm and that you can pick up for them. Try not charge extra but get agreement on the longevity of your contract as a negotiating point.

Make sure you meet more regularly - put peer-to-peer teams together to actively look for efficiencies in areas like order processing, shipments, logistics, support, invoicing - whatever. By putting teams together it is amazing what can be achieved. Document every new process and the saving that is produced, publicise it, make sure decision makers know and then look for more. It's not just about making courtesy calls this is about proactive teams solving business issues. The more issues you solve with real, tangible outcomes that either decrease costs or increase productivity, the more value you are providing, augmenting your Value Proposition. And of course, what is successful in one customer can be cloned in others.

In a recession, throw a blanket of value over your customers - try not just to be a supplier but a partner in their times of trouble.

Sharing The Pain

Everyone hates seeing business drop or prices go down and so why would you actively go out and try to achieve that same objective? It seems like business suicide.

It can be, but it can also be a powerful weapon in the long term. Imagine one of your suppliers coming to you and saying that they realise that your business is under pressure and there is a need for costs to be cut. Imagine if they said that they would accept a lower price or free shipping for 6 months in return for an extension of the contract for a year or more? Firstly, it may actually acheive what your finance people have just asked of you which is to cut costs, secondly it is one less problem to think about and thirdly, extending the contract costs nothing right now. Further, by accepting lower prices and bargaining for something in retrun, why not ask to pitch for other parts of their custom under the same principle?

Sharing the pain as a supplier is not as daft as it looks. It gets you closer to the client, you become a proactive adviser and trusted member of the team rather than just a supplier and again your value to the organisation rises. Most other suppliers will only decrease costs when asked and then they will try the negotiating tactics but the customer will be making all the running and so the reductions will come on their terms only.

One way to share the pain if you provide services is to defer the profit and base it on results. This is becoming vogue in some sectors like legal services or telephony savings like revenue assurance but you might want to take a part of your fees upfront then defer the rest to be earned quarterly over a period like a year against achieving certain goals which could be performance related like cost savings or increased productivity. If you are confident in your services then there is no fear and it also makes sure that both parties have 'skin in the game' and give you a revenue and profit profile to look forward to that you can take to the bank if required to get some short term borrowing against it.

The bold supplier that is proactive will take the customer by pleasant suprise and, long term, it will bring more profit.

Be Innovative

By knowing your cusromers's business and their pressure points, in times of recession, by being proactive you can also see different opportunities. For instance, if you are proactive in one area, you get exposed to new issues. By innovatively working your products and services you may be able to come up with a solution and create a new business opportunity. Once you are part of the 'trusted team', customers will be more open to tell you what the issues are and maybe even help you design a new service to address it - so confident they are that you are acting in their best interests.

Some banks are doing this now, even when they are largely vilified. NatWest are mobilising their salesforce to get out and meet individuals and talk about how they can help reshape their finances for the future. It's a clever way to win back hearts and minds but it aslo a long term profit winner if they can sell more insurance, savings options, loans and pension plans - it also augments the brand of the bank which has lost so much value via its parent, RBS. Innovation in a recession sows the seeds for the future and often the best new products, services and companies emerge from the worst of times.

Don't underestimate the fact that companies are looking for solutions to problems still - it isn't always about cost savings. Now is the time be creative.

Illustrating progress or value is a key example of how to be creative. Don't just send reports to people on how the business is being serviced, make them available online, offer a customer portal for accessing key indicator information, reports, account statements, shipment tracking, tracking of savings, make contact information available and, above all, make promotions and offers clearly and readily visible. Think about a way that the information can be prominent but not intrusive - ask what platforms your customer use or dashboards and then work out how you can provide relevant information to it as a feed.

Now is the time to think of automating services like ordering. The internet is so powerful to help and adding ecommerce services can be easier than you think. Adding catalogues and stock availability may be harder but many systems now support this. Make sure you take this opportunity to leverage the web in your favour, as well as the customer's.

The procative supplier always delivers more value.

Don't Hide Bad News

It is easy to think and, possibly sensible, that if you are struggling financially then you should keep that fact away from your customers. However, they are not stupid and will soon either see it via the service received, read it in the press or get it from the competition. In fact, should they not receive the news from yourselves but from elsewhere, it will only lessen their opinion of your company. Bad news is a fact of life - so deal with it. I am not a fan of Alistair Campbell-style spin or flannel - facts are the key.

The important thing is to have thought the whole thing through, what the issues may be, how that has affected your company, what have you done to remedy it and what that means to the customer, short and long term. There is no point in lying so if a person has been made redundant who deals in some way with the customer, make sure you have a clear plan as to who will pick up their reponsibilities and what the customer may have to do to help - like educating or similar. The key is to have thought it through and work out how to genuinely minimise the impact on the customer's perceived value while acknowledging there has to be some.

It pays to be proactive, honest and open with customers - they know the market situation and it can be 'There by the grace of God' that they are not having to do the same or, indeed, they are.

Segment Customers

You are clearly going to have big customers, worth more to you than others. In a recession, think in terms of profit and cash and don't get blinded by mere revenue. What may be a major account by revenue may not be in terms of profit or they may be a bad payer and an increasing credit risk.

Make the more profitable customers the target of your increased value activities while actively decrease services to the big but draining customers. Target to get more business from the more profitable ones and don't get too concerned if less profitbale ones go. 'Revenue is vanity and profit is sanity' they say and they are right, particularly now. Everyone is obsessed with growth - it's a consequence of the stock market. Right now the key is to survive and if that means standing still or going backwards in terms f revenue - do so, so long as the rate of decline in profit is not the same. By managing your customers by profitability, you will protect the best ones first and margins will actually improve as a result. This becomes a handy platform on which to build for the future.

I don't like losing any customers but some drain resources for little profit. Don't be afraid of losing that kind of customer - while it may hurt in the short term and even damage egos, you have to realise what is best for the business. It is business logic over human logic.

Review Your Prices and Charges

In the process of segmenting customers it is important to review charges across customers. Like most businesses you will find mistakes and anomalies. Question them, correct them and address them. If a customer has been charged too little, then work out if it is approriate to charge for the missing revenue while correcting the price. If you don't, tell them you have waived it but use it in negotiation and your value statements.

You will generally find that many customers are getting better prices than they should and some worse. You may not want to do anything about it but when looked from the customer segmentation data viewpoint, you may find that less profitable customers are getting the best prices and this can speed up the process of prioritising services and resources to the best customers. The important thing to be is aware of who is getting what and why. You never know, it could mean releasing vitally needed profit and cash in the business.

Profit and Cash

The two major issues faced by firms in a recession are the lack of profit and decrease in cashflow - this has the knock on effects on costs and borrowing. In being innovative with customers the one thing that would be most beneficial is to sell more things and get the cash in quicker.

So there is a challenge to design some services or products which address immediate and important needs but design them with a big incentive for cash payments. Obvious things would be to make more products available online with credit card payment facilities - this can easier than you think. If you have excess or slightly older stock in hand then you may want to turn to brokers and eBay to try and get a quick turn over even if you have to take a loss.

Target your customers who have the best facilities in terms of cash position to make the best offers - make the offers compelling and providing instant results in terms of bottom line impact. It's hard to design something that is applicable to all businesses but think what you have got in your armoury that can be used and be creative and aggressive.

Your Current Customers Are Your Lifeblood

Finding new business is a tough game and even harder in a recession. Money is tight and the world is competitive. The most important thing in tough times is to hang on to what you have with dear life. Protect your customers and make sure they know how much they mean to you and, more importantly, you mean to them. A recession brings into sharp focus whether products and services are delivering real, tangible value to businesses in the short term and so make sure you tailor your offerings to do just that and corroborate it with your customers.

Think creatively - don't stand still or get complacent. This recession is one of the worst experienced by most people and the speed at which it strikes is brutal. Make sure you throw your 'Blanket of Value' over your customers now - preserve and protect them, nurture them and keep them on your side. The relationship will only get stronger as the markets recover.

They will surely help you survive and thrive.

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