Hospitals face difficult patient decisions. For example, inner-city emergency rooms are used as a typical doctor’s office where people show up with colds, the flu, or earaches. The patients go there because they don’t have a regular doctor. However, some customers can’t pay at all for the services they receive or they use Medicaid, which provides hospitals with lower reimbursements than other forms of insurance. This is particularly problematic for gang-related gun-shot victims. Unlike many other ER patients, they do not go through the accounting screening process before they are treated. Instead, they are rushed into the operating rooms to save their lives. These customers are very expensive to treat both in the ER and later in the hospital, and they often don’t have any insurance or other way to pay. So, the hospital gets stuck with the bill.
Compare this with a suburban hospital. Their customers generally have their own local doctor to meet ordinary medical needs. They also are likely to have insurance coverage. A big emergency, like a heart attack victim, will be treated like the gunshot victim in the example above. However, these customers are then likely to be scheduled for a heart operation, which can be quite profitable for the hospital.
The inner-city ER loses money for the hospital; the suburban one makes money. Setting aside the social responsibility and ethical issues this comparison raises, it is not hard to understand why some inner-city hospitals have closed their emergency room. They bled so much money that it threatened the hospital’s financial survival.
An example like this one illustrates the necessity of understanding where your business stands vis-à-vis the customer. Once you know how your company fits into the customer’s value chain (both what “job” you do for them and how that job impacts their customers), it’s critical to then understand how that customer or customer category perceives you. Are you perceived as a “free” service, like Facebook or YouTube (or the inner-city hospital) or an expensive service, like a Four Seasons hotel?
Of the entire set of possible customers for your goods or services, which customers would place the most value on what you do? Who needs it the most and how much are they willing to pay for it?
Of those that value you highly, which ones can you serve well over a long period of time versus those that are too difficult or costly to serve in the long run? How loyal will they be if you are doing a good job for them?
Looking at the answers to these questions allows you to target a segment of customers that can sustain and grow your business.
Then, you need to learn about the economics of your chosen segment:
What is the purchasing cycle? People buy appliances, like washing machines and dryers, every 7 to 10 years. For groceries, it’s weekly. Where does your good or service fall on that scale?
What is the profit pattern? Groceries have very slim profit margins, while vitamin pills and a glass of wine in a restaurant have substantially higher margins.
What is the Customer Lifetime Value (CLV) for your segment? For example, an average grocery shopper is worth around $5,000 to $7,500/year. Over 30 years, that’s $150,000 to $225,000 (which is why it’s economic suicide to fight with a customer over a $3 refund for spoiled milk).
Do they prefer one exclusive supplier or multiple suppliers?
Then consider how your “ideal customer” would interact with you and what you need to do for them:
Would you want or expect them to only do business with you and give no business to a competitor? This may be possible in a grocery store, but probably not in a restaurant.
Would they buy only high-margin products, discounted products, or some combination?
Would they buy more often?
Would they become word-of-mouth advocates for your business, helping you bring in more customers?
You can then try to discover your chosen segment’s current behavior:
What products/services do these customers really want today and tomorrow? In Seven-Eleven-Japan’s Suzuki’s language, what do they really want, as opposed to what they buy because what they really want might not be available?
From whom do they currently buy? Who gets all or most of their business and why? In Coke’s Roberto Goizueta’s language, which of your competitors has what share of wallet?
What products/services do your competitors offer them today and tomorrow?
How can you decrease the customer’s “sacrifice gap” between what they really want vs. what they are currently getting from your competitors and/or you?
What is the retention rate for you and your competitors for your chosen segment?
Are there any switching costs that might interfere with your chosen segment leaving their current supplier and becoming your customer? Are they locked into long-term contracts? Are there geographical, social, or political constraints? Can you overcome those switching costs?
Finally, you must evaluate how you can attract your chosen customer segments. How do you woo them away from the alternatives and choose to give their business to you?
What is the best way to attract your desired customers and discourage undesired/unprofitable customers?
For example, how will you use pricing, ads, promotions, social media, discounts, guarantees, and other tools to get customers to notice you and to try you out as a supplier?
How will you select and screen potential customers so that you do business with your “ideal” customers and discourage your undesired customers?
For example, many retailers use loyalty cards to learn the demographics of their customers and if they are attracting their desired customers.
Airlines and hotels give added perks to frequent business travelers, while withholding them from economy class customers.
For example, a hair salon in Pittsburgh decided to specialize in shorter hair styles, targeting men and women who prefer these shorter cuts. The owner noticed that other salons charged these customers the same as every other customer, even though they required less work and less time. Also, at other salons, customers often have to wait as the stylist gets behind schedule, mostly due to longer cuts or hair coloring. Shorter cuts, he realized, are easier to keep on schedule. They also need to be cut more often to look good which means repeat business more often. So, he cut the price in half to attract customers who were tired of overpaying in both time and money, knowing he would see them much more often than longer haired customers. Simultaneously, he turned away anyone who wanted a longer style, perm, dye-job, or other typical salon service. Customers who wanted to be in-and-out under 30 minutes kept his salon busy all week long.
Critical Path Action Items
How well do you “know” your customers and how they behave as customers?
What are the economics of your customer segments?
Who are your ideal customers and what would be the ideal way you would want them to interact with you?