THE CUSTOMER REALLY DOES RULE
By Dave Carey, Managing Partner
Among the business lessons and rules learned over the years is that the customer really does rule. This was learned in the context of understanding that there are a finite number of sources of actual, hard cash for a business. Among the alternatives are:
Borrowing it (in the form of debt or equity or venture capital)
Selling assets (if you have them to sell) or
Getting it in the form of revenue from customers
Among the three, it makes sense that if one could choose, they would choose revenue from customers. Debt, equity, and venture capital, in the beginning start up phases, are fine. Unfortunately each has continuing costs associated with it. Continued borrowing over time can become onerous and eventually lead to a company's demise. Selling assets is fine until the assets run out. But over time, revenue is the sustainable source of cash that is the reward that the customer bestows upon a company for its excellence and the value of its offerings. There is nothing onerous in reasonably “growing the top line” on a continuing basis.
Now customers have numerous choices as to where they send their money and who they reward, i.e. they have alternative choices called “the competition”. A competitor, by definition, is “the customer's alternative choice”. There are direct competitors (those that are very much alike in appearance), indirect competitors (those that do not look alike but serve the same customer need), DIY (do it yourself) alternatives and in some instances, doing nothing is an alternative choice for the customer.
So how does a business capture the customer reward?
Since the goal is to have the customer send you the money, and lots of it, the first step in maximizing cash from revenue is to find a group of customers that can be served in a meaningful and sustainable, economic fashion. This is called “target market selection”. One of the first major strategic decisions that any company makes is deciding what market it will serve. Since it can't be all things to all people, it must be something meaningful to some group. In nature there is a saying “no species can live everywhere, but each species must live somewhere”. Translated into the business world, this means find a specific, relevant target market that is compatible to your business strengths. Focus on that market. Don't spend a lot of time considering irrelevant markets; a waste of resources.
Once that target market has been selected, the second major strategic decision that a company must make is deciding what will be its basis for a sustainable competitive advantage. There will usually be alternative choices for the customer' money in the target market; called competition. And in order to maximize the revenue stream from the customer, one must have a unique and distinctive advantage over those alternative choices. Lower cost, unique features, superb service, distinctive positioning, are a few of the alternatives for establishing a competitive advantage. Whatever one selects, be sure it is sustainable and affordable.
Well, having selected a target market and established a basis for competitive advantage, the next step is to set revenue goals and operational tracking measures that will be the predictors and evidence of the wisdom of the strategic decisions. Another lesson or rule is that one should always be number one in market share within the relevant target market, or at least a close number two. The customer's response in revenue terms is what drives market position. The more they like and value what you are doing, the more revenue they will send you. Market leadership reflects the relevance of the market selected the strength of the offer's unique and distinctive advantage and the value seen by the customer. Conversely a weak market position indicates the weakness of the strategic decisions and, of course, less revenue.
As noted above, operationally, the relative value of the offer as seen by the customer, in comparison to their alternative choices, is an accurate leading indicator of what their actual in market performance will be. Value can be determined by:
Ranking and valuing the offer's features in terms of their importance
Rating one competitor Vs another on the features, and
Rating each competitor Vs the other in terms of its perceived value (CVA score)
All these measures aid in predicting what the customer will do. Since customers usually behave in relationship to the value they perceive, the highest value score for a competitor will lead to the highest revenue stream to that competitor.
There is another aspect to being the market leader and that is the competitor with the highest market share (by virtue of selling the most volume) is usually the low cost producer within the selected market segment; or they should be. Through scale and experience effects, market leaders should have the lowest costs. Combined with the greatest revenue, this makes the market leader the competitor with the highest margins and returns, i.e. the financial leader. Not a bad combination.
In the long run, some companies seem to continually outperform the others in terms of market position, margins, returns, and creating shareholder value. Others do not, lagging behind in market share and financial performance. Since the marketplace is neutral to everyone, why do some companies do better than others? Winning companies have a winning strategy as it relates to target market selection, unique and distinctive offers, cost control and investing scarce cash resources. Winning companies become number one with their customers in their respective markets. And they understand the value of being the low cost producer. But most importantly, they recognize the value of the customer who is the final arbiter of their success. WHAT'S IN YOUR WALLET?
Eminent Logic specializes in working with companies in helping them attain their market and financial goals. CVA (understanding the customer and their values), EVA (optimizing margin, return and cash flow) and PVA (maximizing the productivity of employees) are the three tenets of the Eminent Logic Business model for creating shareholder value.
Go to http://www.eminentlogic.com/ebi_sub.asp to subscribe for free to Eminent Quarterly and receive a copy of our new articles.
Eminent Business Institute Team
“Enjoy the value it brings it you”
©Copyright Eminent Logic 2010 - 2011