Thought Leaders I
Exploit the "Incumbent's Advantage": Tap Customers and Employees for Organic Growth
In an economic downturn, companies often frantically cut jobs to reduce overhead. But the company's employees, who often have a deep understanding of its customers and capabilities, can be a source of new ideas to grow the business. "Look at people in the company who are underemployed at the moment and treat them as resources rather than costs," MacMillan says. "If you treat them as costs, you lay them off along with their valuable talent. But you can apply their talents to help come up with highly profitable product variations or new products and services."
Tastes Great, Less Filling
Look at people in the company who are underemployed at the moment and treat them as resources rather than costs. If you treat them as costs, you lay them off, along with their valuable talent. But you can apply their talents to help come up with highly profitable product variations, or new products and services.
Ian MacMillan, The Dhirubhai Ambani Professor of Innovation and Entrepreneurship; Professor of Management; Director, Sol C. Snider Entrepreneurial Research Center; Faculty member, Advanced Management Program
In addition to tapping into employee knowledge, companies should follow a disciplined process for constantly revisiting customer segments and creating new variations of offerings that better meet ever-changing customer needs. MacMillan, in work with Larry Selden of Columbia Business School, says the large customer base of established firms can create an "incumbent's advantage" if they are well utilized.
In developing new products, for example, there are often tradeoffs that will appeal to specific segments. An ice cream company could create a super-premium offering with high fat and sugar content, to appeal to a segment looking for the best taste; or it could make a low-fat version to appeal to customers who are willing to sacrifice some flavor for reduced calories. Similarly, MacMillan and Selden conducted research with a ready-mix concrete company that considered tradeoffs between formulas that offered greater strength or were easier to pour. By understanding what customer segments need, companies can better understand how to design products and services to balance such tradeoffs.
Identifying Growth Opportunities
The choices about which segments to pursue also require careful analysis. To mine customers for organic growth opportunities, MacMillan and Selden recommend the following process:
- Pinpoint the most profitable customers: There are huge opportunities in just recognizing your best and worst customers. The top 20 percent of your customers typically generate more than 150 percent of current annual profits. These are the customers to keep happy. It is very costly when they defect. On the other hand, the lower 20 percent of your customers typically lose an amount equal to your company's total profits. If you just can break even on these customers at the bottom, you can double your company profits. You need to be able to distinguish the top 20 percent from the bottom and know how to serve these segments.
- Identify customer segments: To better serve these customers, you need to understand their behaviors and demographic characteristics. Using the behaviors and characteristics associated with profitability in the top 20 percent can help identify opportunities in the bottom 20 percent. For the ice cream company, differentiating between customers seeking low fat and sugar and those seeking taste allows the company to create different offerings or to focus its innovation where it is most profitable.
- Create strategies to boost profits: These include strategies to reduce defections from the most profitable customers and reduce the losses from "profit-eating" customers. A distribution company, for example, found that it lost money from small contractors who took months to pay because of delayed payments from their own customers. The distribution company offered them a discount for earlier payment or their agreement to pay somewhat higher prices for delayed payment. By understanding the segment's behavior, the company was able to make its business significantly more profitable.
- Allocate resources profitably: Once the company understands the most profitable and least profitable customers, it can put its resources into innovations that focus on the customers who produce the most profits.
"For every customer in the top 20 percent who defects, you have to acquire 10 to 25 new customers of average profitability," MacMillan and Selden say. "Your customer records contain a wealth of information about what customers need and what will make them more profitable to you. If you can tap this knowledge, this can offer a tremendous advantage over rivals."
Your feedback is valuable to us. Please let us know if you consider this:
