Time to shift the focus to your customers

Customer-centricity has become a “motherhood-and-apple-pie” ideal that every company pays lip-service to. Even Kmart, which recently became the biggest retail bankrupt in history, had “creating a customer-centric culture to better satisfy and serve our customers” as one of its key strategic imperatives.

Look a little closer, however, and we quickly discover a befuddling Tower of Babel. Some companies see customer-centricity in terms of touchpoints: as well as providing product choice, you need to provide channel choice. The challenge is to integrate activities behind the scenes so that customers get a consistent, seamless experience no matter which channel they choose.

Others equate customer-centricity with customer relationship management (CRM). The need to merge separate data from isolated product silos to create a single view of the customer. By doing this, companies can generate more relevant communications, target cross-selling and up-selling activities much more effectively, and so on.

Yet others see customer-centricity as just another definition of good marketing: looking at things from the customers’ point of view. Closely related is a focus on culture. Marketing is too important to be left to the marketing department, instead companies must encourage the whole company to think like marketers; get staff to think and act in terms of “customer delight”.

And there’s more. A new book, called Angel Customers and Demon Customers by Larry Selden, professor emeritus of finance and economics at Columbia Business School, defines customer-centricity in terms of lifetime customer value: identify the most profitable customers and build everything you do around them.

So which is it?

Here’s one possible take. “Real” customer-centricity may well embrace much of the above, but at its root it points to a different understanding of the company: how it organises itself, and how it makes its money.

Most companies see themselves as portfolios of products looking for customers. They organise themselves around the most efficient way to make and sell their particular products or services. All their internal measures (and therefore decision-making priorities) are driven by the underlying concept of a “profitable product”. They obsess about the margins they can levy on the sale of their products, and define successful brands in terms of the premiums they earn.

A customer-centric company, on the other hand, sees itself as a portfolio of customers looking for value. It structures itself not around product lines but customer segments – different permutations and combinations of value. Its reporting lines therefore revolve around customer segment or category managers, not product managers and its measures focus on customer profitability.

Knowing that 17 per cent of your customers make you 93 per cent of your profits, as Royal Bank of Canada does, (and that a good proportion of the rest positively lose you money) focuses your mind on a completely different problem: not how to make a “product line” more profitable but how to make a customer segment more profitable.

As far as measurement is concerned this creates new challenges. Calibrating customer profitability is completely different to calibrating product profitability. New considerations, such as total product holding per customer, cost to acquire and serve and retention span enter the equation. And these measures in turn point to different objectives. Do we really want to increase market share (that is, sell more of the same product to more people)? Or do we want to increase our share of customer?

Many companies have started grappling with these issues – at the edges at least. “Single customer view” is a phrase that’s come to haunt many IT and marketing departments as huge corporations wrestle at length (and often in vain) with incompatible legacy systems just to get to a decent starting point: knowing that Mrs Smith buys X and Y from you, but not Z. Life-time value is now a central concept driving many marketing strategies.

Yet, time and again, customer-centricity has been taken up not to effect real change but simply as a better way of achieving the same goals. No sooner have new tools and concepts been embraced than they’re used to push the same old products more efficiently and more effectively.

That’s the problem with this halfway house. No matter how massive the change internally, the danger is that customers don’t notice any change at all. What’s in it for the customers? If customer-centricity doesn’t dramatically improve the value proposition, is it worthwhile? Do customers actually want customer- centric companies?

The answer, according to John Caswell of Group Partners, is that ultimately customer-centricity requires the delivery of new levels of customer value. We’re moving from a world of “vendor-efficient supply” to one organised around “customer-efficient demand”, he suggests.

Vendor-efficient supply is a product of yesterday’s pressing economic necessities. How best to get stuff out of the ground or from the field, process and transform it to make something useful, and then sell it. This focus creates a world of specialist, parallel supply chains. What it takes to make and sell flour efficiently for instance, requires completely different infrastructure, skills and processes to what it takes to make and sell cheese.

Customer-efficient demand on the other hand focuses on how best to realise customers’ desired outcome: it’s organised around customers’ economics. If the desired outcome is a delicious pizza, for example, customer- efficient demand focuses on the infrastructure, costs and processes needed to acquire, process and combine ingredients, and deliver the final pizza when the customers want it, where they want it. Making and selling flour and cheese more efficiently is a completely different business to delivering ready-to-eat pizzas. Likewise, helping individuals manage their finances better is completely different to selling loans more efficiently.

Real customer-centricity in other words not only requires internal changes, it also requires the delivery of new levels of value – addressing the customer integration, co-ordination, customisation and go-to-market tasks in the case of our pizza, for instance. Companies that focus on just one side – increased customer profitability – while failing to address the other side of increased return on investment for the customer are on a hiding to nothing.

So it’s not only a new way of organising and measuring – it actually changes the way the company makes its money. No wonder companies are finding it so hard. It’s an extremely delicate balancing act: use deepening customer knowledge to identify and address new aspects of customer-efficient demand that can generate extra rewards in terms of increased share of purse, retention rates and so on.

When a company talks about being customer-centric, the best advice is to take it with a huge pinch of salt. On the other hand, the pressure is real. Customers are looking for more customer-efficient demand, and more of the same simply doesn’t rise to this challenge. Meanwhile, new information technologies are giving us the tools to actually start addressing long-standing value gaps, for the first time. Difficult as it may be, the race is on – whether companies like it or not.

Alan Mitchell, asmitchell@aol.com