PART TWO: THE CRITICAL PATH STARTS WITH YOUR CUSTOMER
The critical path does not start with the company’s product or service. It starts with the customer. The movie Field of Dreams popularized the fantasy that “if you build it, they will come.” But it rarely turns out that way. If you start out at the wrong end of the critical path, you are handicapping your chances of success.
Instead, the business must start with the customers’ needs, wants, and desires. Then you demonstrate that you can fulfill one of those at a price the customer finds acceptable. Sometimes you are the first or only supplier; other times you are trying to break into an already competitive market against established competitors.
So, Part Two starts by getting to know the customers. Sounds simple, but in our experience, knowledge about the customers is not well disseminated within most companies. In fact, most employees, including top management, have only a cursory understanding of their customers. This undercuts their ability to improve the critical path to serve better those customers. It is not surprising, then, when customers defect to other suppliers more focused on their critical paths, or that disruptive competitors arrive to sweep their customers away.
Lesson 12: To Increase Revenues, Know Your Customer
Let’s refocus on the critical path. As seen in the figure, it’s the link between what your company provides and the customer.
We have just discussed the fact that this relationship begins with the customer. The focus of this part of the book is thus on the customer, and this lesson begins with the deceptively simple idea that a company should know its customers.
One key idea to take with us as we go along is the notion of value. We will return to this idea from different perspectives: from the organization’s, from management’s, and from the perspective of the value the individual employee brings to their position within the organization.
For now, though, let’s consider what value means to the consumer. We define it as getting more of what he or she wants at a price that is equal to or lower than the customer was willing to pay for that good or service. This value is what becomes the company’s “brand” in the customer’s mind.
Recall the earlier example of Vernon Hill, who started Commerce Bank and later Metro Bank in the UK with a customer-centered approach. Do your company and you:
Help create products or services that customers want to buy?
Make products or services that people actually buy?
Interact with customers so that they become repeat customers?
Use technology to better serve your customers and make them more satisfied?
Re-design how customers interact with your organization (physically, technologically, and interpersonally) so that it is more customer-centric and customer satisfying?
Save your customers money, time, and/or hassles?
Help your customers meet their goals and solve their problems so that you become their supplier of choice?
Give the customers reasons to spend more and to give your company an increasing share of their wallet over your competitors?
Treat your customers in such a way that they become obsessed fans for you, giving your company free word-of-mouth advertising?
Increase the positive reputation of your company’s brand?
To answer these questions, what do the company and you know about your customers? Write down who your top customers are and everything you know about them. What do you know about their:
Demographics: location, financial health, age, etc.?
Psychographics: self-image, social values, aspirations?
Needs: why do they purchase your product/service and what do they use it for?
Decision-making: why do they purchase from you and not competitors (or vice-versa)?
Actions: who do they buy from now and what would make them change their supplier mix?
“Sacrifice gaps” due to unmet needs: what and how do they buy now vs. what and how would they prefer to buy in their ideal world?
“Satisfaction gaps”: how delighted with you (or your competitors) are they now and what is their likelihood to re-purchase from you or your competitors?
Long term loyalty: what is your customers’ stickiness to you versus to your competitors? What share of their purchasing do they give to you and how likely is it that you can increase that amount in volume, revenues, or re-purchasing?
Advocacy: how willing are they to recommend you to other potential customers?
I once asked the top 60 executives of a Fortune 500 company to identify their top 3 product lines. Then, I asked them to name their top 5 customers in each product line and the percent of sales for which each accounted.
Only 3 of the executives—all in sales—could do this task, and those 3 could only do it for their product lines. A lot of embarrassing laughter ensued when they saw how little they knew about the people who paid their salaries.
This is more than sad. This is unfathomable and, from a shareholder’s perspective, should be unacceptable. When I told them they probably should be fired, they bristled and started to defend their poor performance, using excuses such as:
“My product line consists of commodity products which we sell to consolidators who then pool every suppliers’ products together to ship to downstream customers.”
“Our product is just like everyone else’s. Customers just buy on lowest price, nothing else.”
“I work in finance and it’s not my job to serve the customers. I just have to get the numbers right.”
“Sales does their job and I do my job. If we all do our jobs right, then the company should be successful.”
So it went for 10 minutes or so, till they ran out of excuses. The fact still remained that these executives at the very top of the company had customers and that they knew next to nothing about them: who they were, how much they purchased, why customers bought from them instead of their competitors—the list goes on.
More importantly, if they didn’t know their customers, how could they possibly know the critical path, since the customer is the whole point of the critical path?
For example, for the commodity product line, the consolidators ARE the customers. They pay for the product. It’s unlikely that they buy every supplier’s product. So, how do they decide who to buy from? Price probably pays a big role, as one executive suggested. But reliability of supply likely is important as well. Ease of doing business might make a big difference. Maybe you get them tickets to the Super Bowl? That’s just to name a few factors; price is hardly the only consideration a customer takes into account. Every top-level executive should know why their customers are, in fact, their customers.
From another perspective, these same executives should know why other consolidators do NOT buy their product. What would it take to become a supplier of choice for these prospective customers? What do their competitors offer that this company doesn’t?
Many commodity manufacturers mistakenly believe that price, not relationships, is the major factor. But, the relationship with the firm is hugely important. Because the customer can buy basically the same product from any supplier at about the same price (hence, why it is a commodity), they need a strong reason to buy from your company. This is where the set of relationships with your people comes into play. The customer might like dealing with your salespeople, they might like having access to your technical people, and they might trust the word of your production people. In a commodity business, human relationships are important. These intangibles can make or break the sale and cement a long-term win-win between your firms.
In fact, I could make the argument that relationships are as, if not more, important than they are in what are commonly considered the “high contact” professional fields, such as law or banking. Look at lawyers, for example. We tend to think that people pick lawyers on the basis of how much they like them. While this can be the case, lawyers often sell their competence, which can be de-linked from their personality or professional manner. If 5 people whose business judgment you respect all tell you to use a certain lawyer for your high-stakes litigation because she is by far the best, you will probably select her even if her personality happens to rub you the wrong way. Why? Because you want the most favorable litigation outcome more than you want to like your lawyer. In a commodity business where the tangible product is the same, the relationships might make more of a “win-or lose” difference than in the lawyer and litigation case example, and far more than even high-level executives tend to think.
You may be thinking that this is only a problem for old line industrial companies which is why so many of them have fared poorly over the past couple decades. However, I have asked top executives in banks, software, healthcare, airlines, high tech, consulting, and many others to identify their top 5 customers along with the percent of revenues each represents. Almost none can do it. When I ask mid-level managers, they really don’t have a clue. How can they truly understand their critical path without knowing this crucial information? This underscores why companies need a critical path revolution.
Critical Path Action Items
Who are the top five customers of your business?
How much and what percent of your total revenue do they provide?
What is their perception of the “value” they receive from you?
What do you know about their needs and purchasing habits?
How loyal are they to your company?