Where do you get most of your revenue and profits? Where will you get most of your growth over the next 3 to 5 years? Most companies don’t know which customers provide the best answers to these questions. Let’s clear it up. Your Loyal customers are central to both of these questions and identifying those customers is critical to your long-term success.
If you’ve read anything written by the LRC over the years, you’ve probably seen some version of the following table:
The takeaway from this table is that customer relationships are strongly related to behavior. If you have strong relationships with your customers, you tend to get a higher percentage of critical behaviors from them. This pattern contributes to both higher profit and stronger growth. If you tend to have weaker relationships – and some industries do – you’ll get less consistent and/or weaker customer behaviors. This is the underlying motivation for measuring relationships.
If you’re a typical organization, Loyal customers provide most of the income, enterprise value, and growth potential. We’ve talked about this in several other writings. What’s unique about your Loyal customers? These customers are defined by having both a great fit with your business model and also believe your organization is doing a great job on performance. Let’s talk about what those things mean and how you can take advantage of them.
First, your organization has a business model – whether you consciously designed it or not. That model produces streams of benefits of different types. These benefits flow from your pricing structure, your product design, your customer service, your sales practices, and other activities that may be idiosyncratic to your business. Further, the design of your model produces stronger benefit flows for some experiences relative to others. Because of this, your model tends to “fit” better with customers that have a preference for those benefits you execute well. These are choices that you’ve made in your business.
Case example: Several years ago, the LRC worked with a manufacturer that provided products into hardware stores. Their product category was considered a commodity by both customers and retailers. Their business model focused on providing exceptional in-store sales effort to assist the product category and store manager. This took many forms. The sales effort was highly valued by smaller hardware stores. It helped them be more successful in sales and overall productivity.
However, the same in-store sales effort was not valued by Big Box chains. In fact, many of these retailers put a negative value on the effort because it interfered with their own business model. Since in-store sales effort was the key component of our client’s business model, these Big Box chains were a poor fit.
To summarize, a large percentage of the smaller hardware stores were a great fit for this company while a very low percentage of Big Box hardware chains were a good fit. This offered the first insight into their Core Customers.
You can think about the example in the following way:
This company really stood out with their in-store sales effort. It was a unique effort for the industry. They concentrated on that component and not much else in their business model stood out. Fortunately for them, a high percentage of their customer population placed a high value on this effort.
Second, customers evaluate the performance of your organization. They examine key aspects of your organization and form evaluations of your performance relative to other solutions available to them – usually organizations you would consider to be direct competitors. Although we prefer to use a performance scale to obtain these evaluations, several options work.
From an overall perspective, how do your customers – and prospects – view your performance? From an overall perspective, your performance could look like this:
Putting the two together helps define the Loyal customers in your population.
How does this help the client?
- If the issue is performance related, the focus should be execution.
- If the issue is fit related, the focus should be design.
For a given level of customer fit with business model, Loyalty measures how your organization is executing against the design of the business model. Using the hardware example, the following table shows the percentage of retailers currently doing business with them in each cell.
What does this tell us?
- The segment of Small Retailers – mostly having a strong fit with this manufacturer – has a strong Loyalty Profile with the company. Nearly half of them, 47%, are classified as Loyal and a small percentage are classified as Vulnerable. To improve with this segment, the client must improve on execution. Look for inconsistencies in their performance of in-store sales effort.
- Alternatively, a very low percentage of Big Box Retailers, 8%, are classified as Loyal and a far higher percentage as Vulnerable. For this segment, the issue is design. The in-store sales effort – no matter how well they execute – will not win over these customers. If the company wants to do more business with this segment, they must find another lever to put into their business model. In this situation, they found issues in logistics – including just-in-time delivery.
I challenge you to look to your own customer database. Which customers tend to spend more with you? Which relationships seem to be stronger? How do you think these groups of customers would rate their experiences with your product, sales team, customer service? Mapping these out in tables like you see above will help you define your customer base and give you the foundation to make better-informed decisions in the long run.