4 Tips for Improving Customer Profitability

Despite increased focus on customer centricity and putting customers at the core of the business, many organizations do not have an accurate understanding of which customers are profitable and which are unprofitable. With markets increasingly becoming competitive and consumer behaviours constantly shifting, investing in customer relationships is the key to long term sustained profitability.

Gone are the days of unrelenting customer loyalty. Today’s consumers are actively pursuing brands and providers who deeply understand their struggles for progress, why they make the choices they make and then create the right solutions and related set of experiences to ensure they solve their Jobs to Be Done. In other words, customers are looking for companies that are able to deliver unrivalled experience. Failure by the company to meet these expectations means the customer will simply choose to spend their money elsewhere.

Companies that are able to deliver this first class customer experience are better placed to acquire and retain more profitable customers, and increase the profitability of customers that are low or loss-making. Thus, as more companies increasingly focus on customer centricity, customer profitability analysis (CPA) should become a top priority for all businesses. CPA helps you identify which customers are profitable and which are unprofitable. Not only does CPA tell you the profitability status of each customer, done properly, it also helps you develop an understanding of why certain customers are more or less profitable than others.

Develop a Deeper Understanding of Your Customers

In the past accessing customer data was a big challenge. However, in today’s technologically driven and networked economy, detailed customer profiling is now possible. Thanks to advanced analytics, huge data sets can now easily be collected, stored and analysed to reveal strategic insights, and to a large degree, predict future customer behaviour. All this is achieved in real time.

Having a broader understanding of your customers empowers you to start offering products and services that communicate directly to various customer groups and deliver your brand promise. It also enables you to focus on one-to-one or personalized customer marketing as opposed to adopting a one-size-fits-all approach. Take time to understand what is it that your customers value about their relationship with your business and what are the experiences they are seeking in order to make progress.

So often businesses ignore the social, emotional and functional attributes of their product or service offerings and spend significant time on generics, resulting in frustrated customers and lost revenues. Customers are now hyper connected. Social media platforms are continuing to gain prominence as communication channels for customers to discuss brands, ask questions or raise issues and complaints. Millions of these voices should not be ignored at any one time as doing so leads to higher churn rates. Every social conversation is a real-time reflection of your brand promise and potential.

When companies engage and respond to customer service requests over social media, those customers end up spending more with the company and are also most likely to recommend the brand to colleagues. Do you know what customers are saying about your products and services and how to change the conversation if you need to?

Developing a deeper understanding of your customers means moving beyond the basics of income, age, gender, race or geographical location. Take a comprehensive and holistic view of your customers. Fusing different data sources, structured and structured will help you unlock key customer insights and differentiate your company from competition. Today, we have more data about customers, that is growing increasingly complex and dynamic. Gathering data is not the main problem. The real challenge is transforming information into insights that we can leverage to provide customers with a superior experience.

Know The Costs-to-Serve Component of Your Business

The core idea behind customer profitability analysis is that companies can improve their profitability and reduce their operating costs by being more customer focused. Emphasis should not be on acquiring a large number of customers, rather, on acquiring high-value, long-term customer relationships. Quality versus Quantity. Not all customers are profitable. On the face of it, they might all look profitable but when we dig deeper to assess their worth, you will be surprised to find out that a handful of them are margin leakers.

Knowing which customers are costing your business more to serve in comparison to the revenues they generate helps you channel focus and resources on this group in order to try and convert them into profitable buyers. When it comes to measuring customer profitability levels, using aggregate measures of profitability, such as gross margin, is misleading. These measures ignore the nuances of serving particular customers, segments or other populations of interest. One other common practice which is also misleading involves applying a flat cost-to-serve percentage to each transaction’s gross margin in order to calculate the transaction’s profitability.

Companies should analyse the profitability on a transaction-by-transaction basis and examining each transaction’s profitability based on its pocket margin – the actual profit earned after deducting all the costs related to a transaction. It is no secret that the majority of customers are after a superior product or service at the lowest price possible. Although at times it is possible to grant them concessions, long-term this is not sustainable.

When making pricing decisions, it is important to consider all of the things you are giving away that add value to the customer, and don’t forget they shrink your pocket margin and take money from your pocket. There is always that group of customers that is difficult to serve, constantly nagging you and making unreasonable requests. Because the majority of businesses are only interested in boosting top-line revenues and want to preserve the relationship, they are repeatedly giving in to these unreasonable demands.

We have to try by all means not to set a precedence for our customers and make them believe that they can get away with anything. There are times when concessions make sense, and other times a very bad decision.

By clarifying the impact of customer requests on individual cost-to-serve elements, a customer profitability analysis can help your company avoid leaking pocket margins through such slip-ups. At the same time, it gives you an opportunity to educate and empower your employees to negotiate more profitable prices and terms of service. ABC data can be used to calculate the overall profitability of serving a customer with a product.

A detailed breakdown of costs-to-serve can help you identify opportunities to improve profits by altering buying behaviour in ways that are relatively unimportant to the customer, but drive large cost-to-serve savings for you. By examining customers’ historical transaction details, a company can determine which products are likely to drive profitable add-on-sales. Up-selling and cross-selling opportunities are far more likely when the customers are happy.

Evolve Existing Customer Relationship Management (CRM) Systems

Digital transformation is a journey that’s well underway for many companies, and the connected customer is at the heart of it. It is no longer a case of whether a company should embrace digital, but rather, how soon. IoT and Industry 4.0 technologies are reshaping business models for the better, enabling companies across all industries to boost business performance and consistently deliver unique shopping experiences across multiple channels.

As companies adopt these new technologies, it is critical to drive data integration across the business and ensure that existing systems are capable of communicating flawlessly with other software. This will further enhance your abilities to collect and analyse data, and gain strategic customer insights at a very detailed level.

It is also important to acknowledge that the ultimate goal of CPA may not, in some circumstances, mean selling a product or service at a higher price, but providing a pleasant customer experience. Greater customer service also has a commercial value, even if it doesn’t deliver an immediate commercial benefit. Thanks to new technologies, companies are now able to discover new insights from previously unimaginable sources. Notable examples are speech and facial recognition applications. Through these applications, companies are now able get a better view of their customers, identify irritated or unhappy customers and stem some troubling trends way before they become uncontainable.

No doubt advances in computing power are presenting new strategic performance improvement opportunities for the business. However, care must be taken that the company does not end up investing in unnecessary systems. It is easier for the company to jump on the investment band wagon without first clearly answering why. Successfully and consistently identifying what information is the most relevant and generates the most value is key to selecting the right tool. Technology is an enabler of higher performance.

Transforming Customer Profitability is an Evolving Journey

For the business to obtain the greatest commercial benefit from CPA, there is need to transform not only the company’s management systems, but also the company’s attitude towards its customers. Customer experience is significantly differentiating leaders from laggards. How you engage with customers before, during, and after a sale will dictate future success. Additionally, CPA must be aligned and implemented together with the strategy of the business. If there is a divide between CPA’s stated goals within the business and the way this is actually delivered to the customer, the whole process will succumb to its knees.

Also important to note is that customer profitability analysis is an organization-wide exercise, and not an isolated exercise embraced by one department or segment only as this will not deliver the required levels of cost reduction and profit increases. However, due to resource constraints, you can start small, focusing first on a portion of revenues or a single product line, business unit or geography, and then expand the effort as resources allow. In the long run, these pilot projects can act as proof of concept and also generate profit increases that can be used to fund further improvements. It is better to start small than do nothing at all.

Customer profitability analysis gives a company a clear view of how much revenue each customer generates (what they buy and how they buy), how much it costs the company to generate that revenue, and, most importantly, when and why these costs are incurred. This information is then used to guide efforts to transform the company’s less profitable relationships into improved profitable buyers. Firing customers should be your last resort after you have exhausted all reasonable efforts.

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Leading in Uncertain Times

One of the biggest challenges facing business leaders today is making the right decisions that will ensure their organizations succeed, survive, and remain competitive in an increasingly uncertain and complex environment.

A recent post, The best way to lead in uncertain times may be to throw out the playbook, by Strategy+Business has several good points.

The article is about the COVID-19 pandemic, how global companies navigated through the crisis, and how best to prepare for future disruptions. Here are some key points and my comments.

  • Rather than follow a rigid blueprint, executives must help organizations focus on sensing and responding to unpredictable market conditions.
    • Comment: Senior leaders play a vital role in providing clarity about the organization’s strategic direction, creating alignment on key priorities to ensure the achievement of enterprise objectives, and ensuring the business model is continuously evolving to create and capture value in the face of uncertainty. They must not rest on their laurels and stick to the beliefs and paradigms that got them to where they are today and hope they will carry them through tomorrow. Regulatory changes, new products, competition, markets, technologies, and shifts in customer behavior are upending many outdated assumptions about business success. Thus, the businesses you have today are different from the ones you will need in the future hence the importance of continuously sensing changes in the global economy. Employees and teams often feed off the energy of their leaders and tend to focus their attention where the leader focuses attention. If the leader is comfortable with current business practices and rarely embraces the future or challenges the status quo, then the team is highly likely to follow suit.
  • When it became clear that supply chains and other operations would fracture, organizations began scenario planning to shift production sources, relocate employees, and secure key supplies.
    • Comment: Instead of using scenario planning to anticipate the future and prepare for different outcomes, it seems most of the surveyed organizations used scenario planning as a reactionary tool. Don’t wait for a crisis or a shift in the market to start thinking about the future. The world is always changing. As I wrote in The Resilient Organization, acknowledge that the future is a range of possible outcomes, learn and develop capabilities to map out multiple future scenarios, develop an optimal strategy for each of those scenarios, then continually test the effectiveness of these strategies. This does not necessarily mean that every change in the market will impact your business. Identify early warnings of what might be important and pay closer attention to those signals. In other words, learn to separate the signals from the noise.
  • The pandemic forced the organization’s senior management team to re-examine how all decisions were made.
    • Comment: Bureaucracy has for a very long time stood in the way of innovation and agility. To remain innovative and adapt quickly in a fast-changing world, the organization must have nimble leadership and an empowered workforce where employees at all levels can dream up new ideas and bring them to life. Identifying and acting on emerging threats and potential opportunities is not the job of the leader alone but every team member. To quote Rita McGrath, in her book Seeing Around Corners, she writes, “Being able to detect weak signals that things are changing requires more eyes and ears throughout the organization. The critical information that informs decision-making is often locked in individual brains.” In addition to the internal environment, the leader must also connect with the external environment (customers, competitors, regulators, and other stakeholders), looking for what is changing and how.
  • It’s worthwhile for leaders of any team to absorb the lessons of sense-respond-adapt, even if there is no emergency at hand.
  • Sensing: Treat the far-flung parts of your enterprise as listening stations. The question leaders must ask is, “What are we learning from our interactions beyond the usual information about costs and sales?” Train your people to listen for potentially significant anomalies and ensure that important information is not trapped in organizational silos.
    • Comment: Cost and sales data are lagging indicators that reveal the consequences or outcomes of past activities and decisions. Although this information can help leaders spot trends by looking at patterns over time, it doesn’t help understand the future and inform what needs to be done for the numbers to tell a different story. In addition to lagging indicators, pay attention to current and leading indicators and understand the relationship between these indicators and outcomes.
  • Responding: Improve communication across intra- and inter-organizational boundaries. Leaders should view business continuity as an essential function that acts as connective tissue for the enterprise.
    • Comment: In addition to creating mechanisms that allow the free flow of information both inside and outside the organization, decision-makers should also be comfortable receiving information that challenges their personal view of the world, even if it’s not what they want to hear. Create a culture of psychological safety where people are not afraid to share bad news for fear of getting punished, but rather are acknowledged and rewarded for speaking up. Leveraging the diversity of thought enables leaders to anticipate the future as an organization, decide what to do about it collectively, and then mobilize the organization to do what’s necessary.
  • Adapting: Challenge assumptions, and question orthodoxies. There’s always the temptation to mitigate threats simply by applying existing practices harder and faster. One way to get at those deeper issues and encourage double-loop learning is to ask, “What needs to be true for this to be the right approach?”
    • Comment: In an increasingly uncertain environment, it’s difficult to survive and thrive with an old business model or outdated technologies. Many businesses fail because they continue doing the same thing for too long, and they don’t respond quickly enough and effectively when conditions change. As a leader, stay curious and connected to the external environment, look for market shifts, understand what needs to be regularly refreshed and reimagined, adopt new technologies and capabilities, and adapt in ordinary times but also during times of transition. Unfortunately for many leaders, it’s just more convenient for them to continually downplay the fact that conditions are changing than take the appropriate course of action that drives business success.

How are you preparing your organization for potential future disruptions?

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The Collaborative Organization

These days the term collaboration has become synonymous with organizational culture, creativity, innovation, increased productivity, and success.

Let’s look at the COVID-19 pandemic as an example. At the peak of the crisis, several companies instructed their workers to adopt remote working as a health and safety precautionary measure.

Two years into the pandemic, they are now asking their employees back to the office full time or are planning to adopt a hybrid model.

The need to preserve our collaborative culture and accelerate innovation are two of the top benefits being cited by organizational and team leaders for bringing workers back.

Collaboration is indeed essential for the achievement of team goals, functional objectives, and the overall success of the organization.

Today’s breakthrough innovations are emerging from many interacting teams and collaborative relationships.

When teams, functions, and organizations collaborate, the whole is greater than the sum of its parts; group genius emerges, and creativity unfolds.

But, what makes a successful collaboration? What are the key enabling conditions?

  • It extends beyond the boundaries of the organization. Business success is a function of internal and external relationships. Instead of viewing your business in vacuo, understand that you are part of an ecosystem. External to your organization, who do you need to partner with to enhance your value creation processes, achieve/exceed your objectives, or successfully execute your strategy?
  • Ensure the objectives are clear and there is shared understanding by everyone. Unclear objectives are one of the topmost barriers to team and organizational performance.
  • Foster a culture that encourages opinions and ideas that challenge the consensus. People should feel free to share their ideas and not hold back for fear of others penalizing them or thinking less of them. Collaboration is hindered when one or two people dominate the discussion, are arrogant, or don’t think they can learn anything from others.
  • Groups perform more effective under certain circumstances, and less effective under others. There is a tendency to fixate on certain topics of discussion amongst groups which often leaves members distracted from their ideas. To reduce the negative effects of topic fixation, members of the group should be given periods to work alone and switch constantly between individual activity and group interaction.
  • Effective collaboration can happen if the people involved come from diverse backgrounds and possess complementary skills to prevent conformity. The best collective decisions or creative ideas are often a product of different bodies of knowledge, multiple opinions, disagreement, and divergent thought processes, not consensus or compromise.
  • New technologies are making collaboration easier than ever, enabling us to increase our reach and broaden our network. Although new technology helps, it will not make your organization collaborative without the right culture and values in place. First, define what you want to achieve through collaboration then use these tools to promote creative collaboration.

How else are you championing collaboration within your organization to create value and succeed?

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Preparing for Geopolitical Shocks

Geopolitical instability has steadily increased over the past years, and uncertainty in the global economy is at an all-time high. Thanks to globalization and advances in technologies, we now live and work in a tightly interconnected world, one in which the boundaries that previously separated domestic from global issues have disappeared.

Threats are no longer confined to traditional political borders, social structures, and geographic boundaries. Geopolitical shifts have dramatically altered the global economic landscape and brought politics and business together.

The rise of China as an economic and politically influential power has threatened the dominance of the United States as the world’s largest economy. Although the opening of China and a market of 1.4 billion people have benefited both countries, it has also intensified competition and sparked U.S. economic and technological espionage accusations against China, leading to strained relations between the two giants.

U.S. companies operating from China have felt the impact of this tense relationship. The opposite is true for Chinese companies in the U.S.

Across Europe, national populism is on the rise and now a serious force. In 2016, the United Kingdom shocked the world when it voted to leave the European Union, generating reverberating effects across markets.

Banks and financial services companies that once benefited from the EU passporting system have had their cross-border banking and investment services to customers and counterparties in the many EU Member States impacted, causing them to reimagine their value proposition models.

The recent invasion of Ukraine by Russia is another example of a geopolitical event that has had devastating effects on human livelihood and businesses. Although the conflict between the two countries has risen over the years, I think it’s fair to say that few political analysts, governments, and businesses predicted a war to happen.

The war has created a humanitarian crisis, rattled global commodity and energy markets, caused prices to soar, and forced many international companies to temporarily suspend their Russian activities or completely cut ties with the country.

Global supply chains which are already fragile and sensitive due to the COVID-19 pandemic are now facing new challenges in the aftermath of the Russia-Ukraine crisis. Multilateral economic sanctions have been imposed on Russia. A state of affairs that was unthinkable months ago and is now threatening to derail the nascent global economic recovery from the COVID-19 pandemic.

Given the global domino effect of geopolitical events and the shrinking of the distance between markets and politics, the need to better understand and more effectively mitigate geopolitical risk has become more urgent. The business impacts, whether direct or indirect, vary by company type and industry sector.

Your company may not be able to prevent wars between nations, but you can anticipate and better prepare for geopolitical shocks:

  • Integrate strategy, risk, and performance decision-making. Consideration of risks to business success is an important part of the strategy selection and execution process, not an afterthought.
  • Develop a better understanding of geopolitical trends and how they are changing. For example, what are the megatrends in business, politics, and technology that are making geopolitical risks more diverse, prevalent, and consequential?
  • Assess the links between these geopolitical events and business performance. What are the events that matter most to your business? For example, how might current global political trends pose physical, business, and reputational risks to your parent organization?
  • Anticipate how these trends are likely to play out in the short, medium, and long terms, and develop mitigation strategies for each geopolitical scenario. Proactively anticipate and plan for radically different worlds, instead of reacting to problems as they arise
  • Review your mitigation strategies as the world changes. Are they effective enough in case of a major shock?
  • Develop capabilities for continuous learning to anticipate, address, and recover from geopolitical crises.

What do you think?

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