Enhancing Financial Stability by Creating a Balanced Customer Portfolio

Published with permission from Bart Schwartz, Swartz Consulting

About five years ago a new industrial manufacturing client of mine was proudly showing me its newly constructed segmentation model. It primarily sold into six different industries, but automotive accounted for roughly 40% of its revenue. When I asked what the company liked so much about selling into automotive, the answer I received was “Nothing”. In fact it had the worst price realization and consumed the most resources per revenue dollar of any industry served. But when I asked what the company was doing to de- emphasize its focus on automotive, I received blank stares. They had never considered the idea of shaping who their customers were. When the economy eventually slowed in ‘08/’09, company revenues dropped by 45% year over year. Had its exposure to automotive been less significant, the drop would have been less severe. The bottom line is that it isn’t enough to simply understand the segmentation of your customer base, you have to actively manage and shape your customer base in a way that mitigates your risk and fosters financial stability.

Creating a balanced customer portfolio requires a company address three critical questions:

1. What do we know about each segment’s prospects?Assessing a segment’s prospects requires both a macro and a micro-economic perspective. From a macro perspective it is important to understand what the major opportunities and risks are for the segment as a whole. For example, the birth of on-line shopping created an increased need for transportation and shipping services. These industries grew significantly in those years and many companies that served them benefited. Another example is the alternative energy industry which is highly dependent upon legislation for tax credits that affect its spending. A quick change in legislation can change fortunes quickly. From a micro-economic perspective the company must understand how well-positioned it is to serve the segment profitably in the future relative to the competition.
2. What does our ideal segment allocation look like? Once the company understands each segment’s prospects, it should determine the targeted amount of business it wants from each segment. Designing a customer portfolio is not all that different from designing a financial portfolio. No one knows what the future holds, but experience has shown that investors that strike the right balance of exposure to different instruments (e.g., stocks versus bonds), geographies (e.g., Europe versus Asia) and industries (e.g., energy versus transportation) tend to achieve better returns. The same holds true for a customer portfolio. The company should consider its goals and tolerance for risk in setting its desired segment mix.
3. How should we guide our investments to achieve the ideal allocation? Achieving the desired mix is typically a function of how the company uses its resources. If the company would like to increase the portion of its business coming from a particular segment it should direct activities like product development, marketing and sales targeted towards that segment. Segments that are less in-focus should receive relatively less investment.

Like any strategic objective, managing a balanced customer portfolio requires discipline and focus. Increasing emphasis on one segment often means not committing resources to a potentially promising opportunity in another segment that is targeted to be de-emphasized. The portfolio needs to managed and adjusted constantly, but the long-term benefits of stability and risk mitigation are well worth the effort.

Bart Schwartz, Managing Principal, Schwartz Consulting, Inc.

Schwartz Consulting is a boutique consultancy that focuses on strategy, marketing, sales and service for manufacturers and distributors.

For more information, visit www.schwartzconsult.com

Can Big Be Beautiful?

When it comes to delivering a truly differentiated customer experience, small companies have a distinct edge. In a small business environment where a handful of employees personally serve every customer, know every product or service, and have the authority and responsibility to do the right thing, delivering a unique and personalized customer experience comes naturally.

As companies get larger, however, they often lose that personalized touch. Being big does not preclude the creation of great experiences; it only means that they just have to work a little harder to achieve and maintain it.

Smaller companies have a distinct advantage when it comes to customer experience management. Their very survival depends on managing each and every customer relationship; therefore a customer-centric mindset comes naturally. They are not unencumbered by politics or corporate policies that can get in the way of delivering great customer service. In addition, a handful of employees know every customer and every aspect of the business, which makes them nearly omnipotent when it comes to serving customers. Clearly, sometimes small is truly beautiful when it comes to delivering a great customer experience.

Does that mean that larger companies have no chance of cashing in on customer experience management? Not necessarily; big businesses can overcome many of the barriers that are presented by size and scale. In fact, some large companies have relied on a customer experience differentiation to rise to the very top of their industry.

Being big isn’t always easy. As companies grow, they add channels, markets, products, employees, and thousands of other touch points. They may also add new layers of hierarchy in an attempt to manage new offerings. Each addition can contribute to the exponential growth in the overall complexity of the customer experience. As a result, large corporations can begin to lose touch with their customer’s needs and expectations.

However, being big doesn’t preclude companies from being a leader in customer satisfaction.

Consider the most recent results of the American Customer Satisfaction Index (ACSI) for the Internet Retail industry. The overall king of customer satisfaction in this group is none other that the largest company in the sector - Amazon.com:

Internet Retail
American Customer Satisfaction Index - 2008
Scaled of 1-100, 100 being the best

ACSI Score by Company (Scale=1-100)

• 88 Amazon.com, Inc.
• 87 Newegg Inc.
• 84 Netflix, Inc.
• 83 Internet Retail Average
• 81 eBay Inc.
• 80 Overstock.com, Inc.

Source: American Customer Satisfaction Index. Retrieved from www.theacsi.org on February 12, 2009.

Indeed, big can be beautiful as demonstrated by Amazon.com. Amazon is the oft-mentioned benchmark for customer personalization. Their focus on customer experience has been well documented and discussed. They have utilized technology to provide personalization on a broad scale to provide each and every customer with a sense of familiarity and insight. By leading in customer satisfaction, they are on track to exceed $19B in Net Sales for 2008 according to available 2008 quarterly earnings reports.

Amazon has avoided many complexities that plague other large businesses. They predominantly operate within the on-line channel, which reduces the number of physical locations or markets that they must coordinate. As a fairly young company, they have yet to experience the bureaucracy and paralyzing politics that can build up over decades of growth. And the company still embodies the spirit and vision of its founder, Jeff Bezos, who still runs the company.

Companies like Amazon are proof that large businesses in any industry can indeed compete with a differentiated customer experience. If businesses can overcome the complexities that are presented by size and scale, they can excel at customer satisfaction. By doing so, big can indeed be beautiful.

Can A Strong Brand Beat a Recession?

Despite dismal economic and business conditions, two companies with strong brands seem to be oblivious to the chaos that surrounds them. In an environment that seems to have no silver lining, Colgate Palmolive and Apple Computer have posted results recently that would make any business envious. How did they do it? Good management and a strong brand appear to be the magical combination to beat even the worst of recessionary conditions.

The current economic environment over the past 12 months has been anything but encouraging. The Dow Jones Industrial Average (DJIA) and NASDAQ Indices are down over 35% since this time last year. The U.S. unemployment rate has risen by 2.3 percentage points - to 7.2 percent - since the start of the recession in December 2007, according to the Bureau of Labor Statistics. The Consumer Sentiment Index reached a 28-year low in 2008, according to the University of Michigan.

Needless to say, the past 12 months have not been conducive to profitable business growth. Yet two companies with strong brands have managed to weather the storm quite well. The strength of their brands has instilled deep customer loyalty that appears to be unbreakable, even when consumer spending is under tremendous pressure.

As economic prognosticators continue to predict doom and gloom, consumers appear willing to spend their hard-earned and well-guarded cash on the brands that they love and trust the most. Consider the recent earnings reports from two brands that lead their respective product categories: Colgate Palmolive and Apple.

Colgate’s (CL) 2008 fourth quarter earnings jumped 11%. Their net income rose to $401.2 million, or 73 cents a share, from $361.2 million, or 65 cents a share, a year earlier. The company, whose brands include Colgate toothpaste, Irish Spring soap and Ajax cleaner, said sales rose to $3.21 billion from $2.9 billion a year earlier. Colgate achieved this stellar performance despite the reduction of worldwide advertising costs by 140 basis points.

Apple (AAPL) recently reported the best quarterly revenue and earnings in the company’s prestigious history. The company posted record revenue of $10.17 billion and record net quarterly profit of $1.61 billion. All of Apple’s key brands showed strong growth: Apple Macintosh® sales grew 9%, iPod sales grew 3%, and iPhones sales grew 88% over the year-ago quarter.

These companies were able to achieve outstanding results in a recessionary environment by establishing and managing a strong brand. That is good news for businesses and economists that are seeking a path to success through the fog of recession.

Apparently, a strong brand can beat a recession. Establishing a strong brand just may be the most critical strategy for any company looking to weather the current – or future – economic storms.

Establishing a strong brand, however, does not happen overnight. A brand is not simply a logo, a tag line, nor a snappy ad campaign. The brand, in fact, is not even defined by the company – but rather the perception that is created in the minds of the consumer. Establishing such a strong and differentiated brand perception takes time and an outstanding customer experience.

As a sign of hope in tough times, companies that have successfully built a strong brand have shown that they can indeed beat the recession.

Find Your Torch Points

Without a doubt, Customer Relationship Management – or CRM – has become a mainstay in current day business vernacular. Business professionals now talk effortlessly about touch points, customer experience, customer segmentation, and cross-channel integration. CRM has come a long way since its early days, but there’s still a lot of room for improvement.

Despite the maturing of this once nascent business capability, companies continue to struggle to consistently deliver seamless, effective, and meaningful customer interactions. It’s no wonder that customer satisfaction can be elusive for so many companies.

Although most companies will proudly tout their CRM capabilities, the true measure of success is customer satisfaction. The stakes are indeed high; in a competitive market, the ability to build and nurture customer satisfaction can make the difference between success and failure.

Too often, however, even the best of CRM intentions can miss the mark; promotions can miss the mark, cross-channel experiences can be inconsistent, and call center navigation can be inconvenient. When issues arise, they create a torch point; a defect in the CRM process that can leave the customer wanting or frustrated. The severity of each torch point can diminish customer satisfaction or lead to outright defection.

Finding the torch points in your business requires an unrelenting focus on quality, a heavy dose of process discipline, and an industrial strength measurement capability.

Consider the automotive industry; manufacturers were taught a costly lesson that defects and lower quality led to rapid erosion of customer satisfaction, brand perception, revenues, and profits. Automotive manufacturers responded by developing an unrelenting focus on quality; they managed process quality, measured every minute detail, and developed robust product testing capabilities.

In our automobile example, defects are easy to spot; when the car won’t start, the transmission fails, or the air conditioning goes out – it’s pretty obvious that there is a problem. In the CRM world, however, the torch points aren’t so readily evident. Businesses have to look closer to see where their customer relationship capabilities might be breaking down.

CRM torch points can occur in a variety of situations or interactions. Here are just a few examples that seem to occur too often in today’s business environment:

1. Account number fumble: When a customer contacts a call center they are asked to enter their multi-digit account number. Yet when they get transferred to a live customer service agent, they are asked for this information again.
2. Promotion defect: A consumer products manufacturer or retailer runs a promotion on Father’s Day weekend for 20% off a particular item. Some customers snap up the deal but forget to bring their coupon or specific promotion code. If and when the customer returns with the coupon to collect the 20% discount, the store won’t honor it since it is now past the promotion period, even if the customer has the receipt to prove the date of purchase.
3. Sorry, wrong channel: A customer visits a web site only to find that they can’t find the product they were looking for unless they visit the store. Conversely, they visit the retail store only to find out that they are out of stock and are directed to the web site to see if it’s available online.
4. No card, no benefit: Many businesses utilize the ever-popular loyalty card to dispense rewards or discounts. An extremely loyal customer drops into their preferred store without their loyalty card. Despite being an extremely loyal customer, the store refuses to dispense any rewards or discounts without the physical loyalty card.
5. Feel the pressure: Cross-selling and up-selling can be lucrative for many businesses, but applying pressure sales to get customers to buy more can often have a negative impact on the customer experience. A customer that is ready to complete their shopping experience is confronted with a pressure sales environment trying to get them to ‘buy more.’

These are just a few simple examples of torch points that can occur anywhere in the customer experience lifecycle. Even the best of CRM intentions can sometimes miss the mark; promotion policies can create buyer’s remorse, cross-channel experiences can be inconsistent, and call center navigation can be inconvenient. When CRM torch points arise they can leave the customer wanting, frustrated, and unsatisfied.

If your business smells CRM smoke, it might be time to put out the torch point fires.

Do you know where your CRM torch points might be?

Inside Jobs, June 23, 2008