Most business leaders want to run an enterprise that is truly “great.” Some are satisfied with running a “good” business, and in many circumstances there is nothing wrong with that.
Over the long haul however, there’s a problem with just being “good.” As the venerable Jim Collins has researched and proven –all businesses over time break one way or the other. Eventually, the few become great –and the rest will ultimately, go away.
Consider the fact that of the largest and most well known businesses in the Fortune 500 in 1955, about 90% don’t even exist anymore. For most executives this is a sobering reality worth consideration and reflection.
“…of the largest and most venerable businesses in the Fortune 500… about 90% don’t even exist anymore…”
Here’s just a few iconic brands that today seem like dinosaurs –or perhaps more appropriately, the fossil records of dinosaurs:
American Motors, Brown Shoe, Studebaker, Collins Radio, Detroit Steel, Zenith Electronics, and National Sugar Refining… all Fortune 500 businesses –the biggest most powerful brands –and none of which exist today. If you said “who?” to some or all of them… then you see the point. They were tantamount to being the Facebook, and the Google’s of their time. While it would be fair to debate the substantial differences and that we’re in different times –the lesson doesn’t change, not a bit.
There are a number of reasons companies become great. They do one thing –very well. They are relentlessly focused on the customer, or as Warren Buffet says, “on delighting the customer.” They face the harshest unvarnished current realities and take action to change it. They have great people who can deliver on a great vision. Many of these points are well developed in Jim Collins’ seminal work Good to Great.
On “delighting customers” there is another perspective as evidence suggest, that is great companies don’t only delight their customers, they also tend to have great customers in their category.
“…great companies don’t only delight their customers, they also tend to have great customers in their category…”
This vein of business and marketing has traditionally been couched as “knowing the customer,” or being driven to “service the customer.” Yet our experience shows there is another crucial dimension –knowing the customer also means knowing who the customer really is and is not.
In our work with many dozens of brands spanning two decades, we’ve consistently found that almost all brands are carried by a surprisingly small number of customers, usually between 10% and 25% that generate the vast majority of revenue and profit —quite literally as high as 75% isn’t uncommon –and sometimes much higher.
“Great Customers” Have Fringe Benefits
So while “great customers,” it seems, carry good companies, great companies have identified a product or service that deeply satisfies, and therefore retains a materially larger proportion of the “great customers”.
That satisfaction can be best measured effectively through simple approaches like Net Promoter Score, where a brand simply asks “how likely are you to recommend us to a friend or colleague?”
Research has illustrated that evangelistic customers are a deep well of profit for a brand, as they attract those like them through referral. Yet many growing brands struggle to acquire customers cost effectively and at scale. Customer value or quality, which we might consider a proxy for a great ‘customer fit’, is second string to gross revenue.
So how can a brand decide to focus on Customer Quality when gross revenue is always the number one requirement?
The answer as it turns out, is fairly simple.
The right customers for any brand are the ones that exhibit the best behaviors, that truly value the brand, connect with its unique value proposition, and spend on it’s products and services most reliably.
These are customers who bring not only the much needed gross revenue, but the profits generally reserved for truly great companies. That affinity is ultimately expressed through trial, repeat purchase, higher order size, and referrals from other customers who are likely to spend similarly.
While it is evident that these behaviors are correlated highly with great products, customer service, pricing and distribution –the unique value proposition is defined in the eye of that customer –which can be objectively defined, targeted, acquired and grown.
None of this however is possible with an customer who simply lacks the potential to ever become a “great customer” –and fundamentally limits the ability of the business to really ever become “great.” –If you think a budget conscious, cost saving customer at Walmart is an exception as Walmart is a rather great business by most measures, consider that a great Walmart customer spends a huge proportion of their discretionary spending at Walmart.
So while a great customer may not be a great customer for you –having the visibility and intelligence on who is or isn’t a high potential customer makes all the difference in the world to how great your business stands to become.
Strategic Implications of Adding Higher Value Customers
The implications of achieving high value customer growth are much more than adding good customers alone. Growing the depth and breadth of high value customers is a requirement in making a company a fundamentally superior business to its competitors and peers.
Consider the following chart where an organization’s “right customer” (aka Most Valuable Buyers) is acquired scientifically, rather than acquiring customers en masse with minimal consideration –or without consideration of the quality of the customer in the first place.
That is to say that the customers an organization is adding are disproportionately more valuable than the ‘average’ customer in their customer base at the start of the period.
In this real-field, proven example, a “Most Valuable Buyer (MVB)”-targeted campaign produced customers with 420%, or 4.2x, the revenue than that of the average buyer in their customer base. While this surely is impressive, there is a strategic implication beyond the high return on high quality customer acquisition.
As the volume of high value customers increases, the percentage of “MVB’s” in the customer base continues to grow. The rate at which their sales and profit volume grows is faster than the rate of customer growth alone.
Amazon Factor: Not Acquiring & Owning Great Customers? Amazon Never Quits
Amazon is of course a factor in a brands decision to focus on and invest in targeting, acquiring and owning the relationship with a customer.
Many executives feel the need to tap into Amazon’s traffic to wholesale their products. What they may not fully appreciate is their product also becomes grist in the most sophisticated retail value extraction machine on the planet today. Amazon is far ahead of all of their retailers in their ability to learn what products to add, and forcing the brands to compete ―sometimes on price― not for customers, and a relationship with them –but for transactions. When Amazon owns the customer and the retailer gets the transaction, brands don’t only get lower margin on the sale, they don’t create a customer relationship –which directly suppresses the brands future profit potential, and substantially dims the prospects for ever acquiring great customers at scale.
This same machine that is Amazon, is built on the premise that any brand can be used to grow the customer relationship with Amazon, and to inform the next category, product, or “look” that Amazon produces under its ever growing portfolio of private label brands. This seismic shift under a business selling on Amazon stands to quietly crushing retail independence, even as the transactions pile up in the short term for the retailer. Is it any wonder most retail brands are beating the “eCommerce first” drum? Yet to few are doing it particularly well, and the siren song of capitulation is “if you can’t beat em, join em.”
The merits of selling on Amazon to have scale are clear and impossible to argue with. The full strategic implications are frequently more opaque to brands and their leadership.
This is why the brands that shine today, are those that command margins not found via wholesale, and have burnished their brand in the eyes of those customers that spend more and spend more often with them.
Biggest Implication: Not Just Profitability, Profit Volume
The key to growth and longevity is developing a competitive advantage that is not easily replicated in the marketplace. The secret is not to cut costs as many companies often do in the short term –rather it is to grow profit volume. In the example above, we can see the dramatic scaling of profits as the percentage of high value customers, or “MVB’s,” increases. As the brand continues to acquire higher value and higher performing customers, the total profit volume grows as well.
How do you grow profit volume? — the formula is simple — find the ‘right customers’ that are high value for your business and continue to get more of them at scale. Those customers will be unique to you and distinct from your competitors. Over time, this formula becomes a sustainable, competitive advantage for your business. At that point, your business moves from an average or “good company” to the profit profile of a “great” company with “great customers”.
Like Jim Collins concluded many years ago, “Those that become great stay, and those who don’t — go away.”
Know intimately who your best customers really are –and who they aren’t ― and focus on “stacking the deck” with your best customer, and your methodically moving towards greatness.
Author: Michael Ferranti