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• There is a conflict in the business world between policies of focusing on the product and strategies of focusing on the customer.
• Companies that focus on the product manage the different areas of their organization according to their supply, and they have a “product manager” to design and commercialize it.
• However, a company’s profitability depends on its customers, and especially on the value those customers have for the organization.
• A customer’s potential value is the key to profitability, because it takes the customer’s path and quota into account.
• Knowing the customer in-depth allows us to structure our offer according to different segments and categories, fitting products and services to their needs and optimizing costs to reduce the risk of failure.
The so-called "society of information" has brought with it a new way of facing business. The different communication channels available to strategic decision-makers bring such a large volume of daily information that it’s hard to process all of it optimally. In Spain, 73% of Marketing and Sales directors feel “overwhelmed” by this wave of information. 44% admit that they would have changed certain decisions had they known the information at the right time, because the decisions were based on incorrect assumptions and information. [i].
In this changing global environment, the customer has become one of the main and unknown sources of information for the company. The customer is also the element by which the company fails or succeeds, depending on whether or not they give their loyalty to a rival company in the same sector. Obtaining new customers, retaining existing customers, and above all, guaranteeing their level of satisfaction to encourage them to try new services, are all part of the goals for current companies. Also, there are numerous approaches that advocate, in theory, putting all the focus of business activity on the customer as the base on which to build the entire structure of the organization.
In practice, economic circumstances oblige companies to stick to ruling of the results. Every three months, companies present a balance sheet of their commercial activities to stockholders and members, which will determine aspects such as dividend shares, price fluctuation of stocks on the market, and, consequently, the maintenance or alteration of strategic plans in order to make them fit the market situation and meet previously established goals. Market law has imposed the adoption of short-term strategies designed to disguise numbers as a company goes along, but they have led companies to leave behind a basic element on which they should base their decisions: the client.
There is a common failure in corporate market strategy design: not valuing clients with perfectly quantifiable parameters because they consider this not possible or viable. The result is launching initiatives geared exclusively towards sales.
We have entered a new phase in which the choice between product and client is considered dramatically. The most comfortable trend in the last several years has been opting for the product as the keystone of company strategies. It’s been that way to such an extent, that few companies have gone without the controversial “product manager”, who is responsible for designing and launching new products and services to promote the company’s future growth. The problem is that the product itself has stopped being important; what matters are brands and the perception people have of them. Segmentation and specialization of offers has reduced the number of new products, although their diversification has increased.
Opting for the product is still common in numerous companies, such as financial entities or insurance companies, where departments continue to be divided by services (Life, Home, Multi-risk, Travel…). Few companies have considered the need for a “customer manager” or “segment manager” who assumes the task of approaching the customer and studying them in order to design an appropriate sales strategy that doesn’t depend solely on what service is offered, nor on the promotion through advertising channels.
Focus on the client is a necessity when it comes to profitability. But for this focus to work, it must affect the entire organization. Telecommunications companies are a good example, where one usually finds a sales reorganization based on the size and value of the client. As opposed to other types of companies that organize their structure according to different products, telecommunications companies divide their market into three big areas: Residential, Companies, and “Soho” (“Small Office Home Office”). Establishing this division is an encouraging first step. What is important, in the end, is detecting the best clients, and not the income they bring, but the spending they generate. It is therefore imperative to take the sep from an organization focused on the product to a true “customer centric organization”.
The classic "marketing mix"[ii] (the four "P’s" of all marketing plans) has come up short with the passage of time. The human element must be added to the product, price, promotion and "positioning" factors, and it is represented by the client.
Defending the client as the center of the sales strategy has had much support from a theoretic point of view. In this sense, definition of the “balanced scorecard” concept in 1992 by Robert Kaplan and David Norton gave solid reinforcement to the consumer’s importance in designing a successful strategy. Both men warned [iii] of the importance of adding value by focusing on the client. That is to say, aiming for their satisfaction.
It is necessary to go beyond that: the client must become the element around which all company departments revolve, including such diverse areas as Logistics, Human Resources, Finance, or Technology.
Despite the fact that most companies are aware that this focus on the client is becoming a priority, the majority of large companies are facing tremendous difficulties in making this change. It is understandable that companies that have been focusing on products for years, whose structures are entirely founded on this element, would have difficulties making a change of this scope.
The first step any company should take if they want to reorient their entire strategy from the product towards the client is to assume that each client can be evaluated by their current value, as well as their ability to stay within the company, that is to say, their potential value.
Any large organization is currently capable of measuring their client’s spending. Unfortunately, many do not go beyond that. The use of a product or service, spending frequency, profitability, transactionality, exchangeability, or the client’s socio-demographic profile are some of the new parameters that allow us not only to know what a consumer’s value is, but also their potential evolution over time.
Bankinter has been able to implement this concept with notable success in Spain. This entity, the first multi-channel bank in the country, applies more than 1,000 specific variables to their clients that allow it, thanks to experience and the information it gathers and processes, to know not only what their clients are like, but something more: which ones are the best and what a good client’s profile is like. If it’s possible to know a client’s value according to their habits, tastes, social and geographic position, or quality of life, then it is also possible to find out which ones are more valuable and which are less, and to design different, marketing, sales, and assistance policies for each profile.
When contemplating the situation from this perspective, in order to increase sales and generate more income, it is not necessary to obtain more clients at any price. In any case, it is necessary to attract those with a higher value and, better still, it is necessary to retain those we already have. According to internal estimations, the churn rate fluctuates between 10 and 15% [iv]. That means that in a little over 6 years, a company ends up producing a renovation equivalent to an entire client base.
A company cannot allow itself to lose its most profitable clients and chalk it up to a natural result of churn rates. This absurd idea is part of the logic of the majority of companies, who consider it normal that their control and management departments have detailed financial scoring cards, but do not consider the need to acquire similar instruments for clients, with the goal of knowing their portfolio’s true value. This allows them to perform selective obtainment tasks, optimizing their account values and generating greater value for the organization.
To stop this threat of client loss and try to control the information that they generate, many companies have trusted their strategies to tools such as CRM (Customer Relationship Management).
It’s fine for a company to equip itself with technology that optimizes their management processes, as long as it doesn’t think that technology alone will be able to make the big organizational turn towards the client that we talked about earlier.
This explains the high number of failures associated to CRM implementations – the rate is close to 70% in Spanish companies, according to internal estimations[v]- and the relative success in the implementation of ERP solutions (Enterprise Resource Planning).
What’s the difference between one tool and another? Many companies already know it: while ERP providers have limited themselves to selling technology to improve management processes, CRM providers have united this concept with the promise of reorganizing company’s results accounts. Today, the majority of companies are aware that the change from structures focused on the product to structures focused on the client does not lie only in software, as useful and advanced as that might be. The only way to make this “big jump” is gearing the entire company towards only goal capable of truly assuring success and profitability: knowing the client.
In the last several decades, large corporations have undertaken a desperate race of mergers and acquisitions. Sectors such as banking, insurance, telecommunications, the pharmaceutical industry, or the automotive industry have been the main players in this race for cost cutting, resource optimization, the search for new and prosperous markets, and economic growth.
However, the value generated rarely makes the transaction profitable. Approximately 50% of mergers and acquisitions of the last 30 years have not produced added value.
The problem arises when a non-existent value is given to the intangible part of the acquired company. When Terra paid 1.25 billion dollars to acquire Lycos, it became one of the main Internet companies in the world, with more than 40 million consumers. Afterwards, they agreed that, in a sector where the clients barely generate direct income, it was too ambitious to value them so highly.
When a merger or acquisition is undertaken, the calculation of the value of intangibles is left to the bank. The area of goodwill is where aspects like knowledge, employees or brand are scored, but it is usually done without logical criteria, leaving the clients behind.
There are known formulas to encourage client spending, such as ARPU (Average Revenue per User) or MOU (Minutes of Usage), but they only focus on one aspect of total value -spending-, which should be broadened with much more complete measurements (profitability, acquisition cost, value as client, frequency, recurrence...), in order to reflect the true value of the client and their future potential.
Business logic has given way to a series of beliefs that, seen from the policy of focusing on the client, are somewhat less than half-truths. One of them is the idea that the company with the most clients is the market leader. When those clients generate little value in comparison with what the company spends on them, they become a dead weight that can lead a company to bankruptcy.
Neither are the most solvent clients the ones that are best for companies. In the case of credit entities and banks, it seems clear that the best clients are those who can liquidate their debt in the least amount of time possible, because that allows the organization to recover the money it loaned in a short time. However, in the long run this idea is incorrect, since the longer a consumer takes to repay a loan, the more interest they must pay and, most likely, the more services they will pay for with the entity in question.
On the other hand, social position does not always determine what population is ideal for a company. A recent study from the consulting firm Forrester Research has revealed that the adoption of consumer technology in the United States is not always linked to income levels, but rather, it also varies according to the ethnic minority one belongs to. In this sense, 15 % of the African-American population says they’re ready to buy a computer this year, as compared with 7% of the white population. Also, Hispanics have the greatest interest in entertainment equipment, such as digital music equipment or video game consoles, despite the fact that their purchasing power is $16,000 less per year.
[i] Daemon Quest, "Study on information use by Spanish directors”, internal report, December 2003.
[ii] Borden, Neil H., "The Concept of the Marketing Mix", 1965.
[iii] Kaplan, Robert and Norton, David, "The Balanced Scorecard", Harvard Business School Press, 1996.
[iv] Daemon Quest, "Companies aimed toward the final client lose between 10 and 15% of their clients", internal report, July 2003.
[v] Daemon Quest, "CRM fails in 70% of Spanish companies", internal report, June 2002
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