Case Study
Customer Strategy in Action
Revenue – Up 36% …. Operating profit – Up 45%
The Company & Market
The business is a recognised brand operating in the non-food retail sector in the UK. Whilst it has already invested in a sophisticated online platform, more than 90% of its sales come from its network of branches. It also operates a loyalty scheme and has data on customer transactions.
Growth in customer spending in the sector is weak. Increased competition from niche operators continues, particularly online-only operators with low overhead costs.
Revenue has grown very modestly over the past three years, and market capitalisation has fallen by 40% over the same timeframe. The company has already reaped the benefits of a period of restructuring and cost reductions, and with limited scope for further cost reductions, operating profits have come under pressure.
Business Objectives
The company wants to improve its financial performance. The focus of the senior management team is on revenue and operating profit, whilst major shareholders want to see a substantial increase in the value of the business (its enterprise value).
This example sets out some steps that show how we can apply the principles of customer value to develop customer strategies capable of achieving significant improvements in financial performance.
Step 1 – Which are the best customer performance measures to focus on?
Following an analysis of various customer performance measures, and taking management’s views on the customer challenges the business faces into account, it was agreed that the following three measures be the focus of this brief:
- Average customer spending per transaction (basket size)
- Frequency of customer visits to a store
- Visits that do not result in a sales transaction (%)
Step 2 – How do they impact the financial objectives?
Links were made between these customers performance measures and the key financial metrics.
The impact of improving these performance measures was calculated, and is summarised below.
| Customer Performance Measure | Current | Target A | Target B |
| Average value of transaction | £ 28 | £ 30 | £ 32 |
| Visits per year | 3.5 | 3.75 | 4.0 |
| Visits but no purchase | 68 % | 62 % | 60 % |
| Impact on Financials | |||
| Revenue | – | + 36 % | + 63 % |
| Operating profit (est.) | – | + 45 % | + 75 % |
Return of Investment
The calculations show that there is a significant return in identifying and evaluating customer strategy options to improve these customer performance measures.
As there is nearly always a customer strategy to achieve any realistic target, the initial focus is on what elements are required to achieve the options identified.
Competing returns on investment can be assessed (and trade-offs considered) once we add in other factors such as the time, ease, resources etc.
Step 3 – Seeing from the customer’s perspective
Effective customer strategies are in sync with how target buyers think and behave, what they see, and how they feel. To do this we need to convert situations into the customer’s perspective.
That means we need to deepen our understanding of:
- Customer’s motives (e.g. why they do (or don’t) act in a certain way)
- Customer’s language (e.g. how people express what they value)
- Perceived customer value (the currency customers use to assess choices and preferences)
This process is made easier by applying the principles of customer value and buying behaviour to understand and explain a customer’s decision and spending profiles. These principles help us to identify the common patterns amongst buyers that warrant a strategic response.
These principles also help identify and investigate the differences between the business’ view of customers and market and the customer and prospect’s view of suppliers to uncover quick wins, bigger wins and game-changers.
A good starting point is to ask some searching questions. The benefits of doing this are not just about starting to form important pieces of the picture, but also to pull together whatever information is already available or could be developed, and to identify what critical gaps exist.
In addition to wider questions relating to customer preferences and how customers distinguish between different suppliers, here are a few of the questions relating to the specific customer performance measures:
Step 4 – Developing customer strategy options
Here is one of the strategies identified to improve each of the customer performance measures under focus.
a). Customer performance measure – Average value per transaction
Assessing the size and range of transactions revealed the first surprise. As was being assumed each customer did not typically spend very different amounts each time they purchased depending on their needs, their mood and what caught their eye on the day. Instead it was shown that those customers with the largest transaction values tended to have large transaction values most of the time, and so too for those with typically small transaction values. Something deeper was going on – and that’s the piece we are interested in. Asking why.
Deeper investigation revealed customers’ different motives at work in visiting a store. The customer strategy response was to identify the best customers to target and expose to the motives of customers with higher transaction values.
b). Customer performance measure – Frequency of customer visits to a store
A valuable insight here came from identifying products that offered such a high perceived value to certain customers that they warranted a specific trip to the store. These products were not volume leaders and therefore could not be identified by analysing sales. Deeper customer insight was required.
Armed with intelligence on a modest set of these products, a two-pronged strategy was developed to:
- Introduce some of these products to customers who did not currently buy any of them, but have a similar profile to customers who did
- Introduce other products in this ‘special’ set to customers who were already buying one or more
For the latter group it was also recognised that such a customer strategy would also impact frequency of visit and had the potential to increase the transaction value from customers already making a special trip.
c). Customer performance measure – Prospective buyers who leave without purchasing
Having seemingly done the hard part of attracting and having the attention of a prospective customer, it is disappointing (and costly) to see them leave without purchase. Why were they doing that? And where were the best opportunities to improve things?
Part of the answer here was the role of both the internet and the store in the purchase process. A deeper understanding of these dynamics and their implications could be used to affect all three of these customer performance measures (and others).
However, we concentrate on a more interesting insight here. And it begins with motive, the reason they are there. Stripping out situations which would be most difficult to influence, we were left with a fascinating group. This group could be defined as latent buyers, mainly because the reason they are there is because they have accompanied someone else. And they are often bored, whether they would openly admit it or not, so many are open and receptive to ideas that would relieve this if something were to capture their attention. A customer strategy was developed to actively engage this group, which comprised around 25% of non-buyers.
Modest success with this group would therefore make a significant improvement on this customer performance measure.
Step 5 – Turning customer differences to your advantage
How many customers spend or behave like the average? Sometimes ‘close-to-average’ customers represent only a small percentage of possible buyers – sometimes customers matching the average customer profile don’t exist at all!
Effective customer strategies don’t just go beyond the idea of the average customer, their ability to improve customer profitability lies in understanding differences amongst customers and using these to gain advantage by better tailoring strategies to specific target groups.
Examples of the customer groups we found included:
- Those who always had the business/brand on their shortlist, but little brand preference within the list
- Those who perceived a wide variety of suppliers as largely interchangeable
- Those who had a strong preference for the business/brand, and would invariably go there first
With each of these customer groups there were many similarities in buying behaviours and spending patterns, yet the profiles between the group were quite distinct.
It is worth noting that these groups are independent of age, income and other demographics. Instead the most important differences come from how they perceive the offer and brand choices available.
Step 6 – Finding the best combination of customer performance targets
Here we consider the likely impact of ideas or strategies on each of the customer performance measures, and evaluate these against a set of criteria.
The most important criteria in this case were:
- Ease of piloting
- Ease of implementing across store network
- Speed of implementation and showing improved results
- Return on investment (ROI) in current year
Here, the customer strategy options on the shortlist are evaluated and trade-offs considered to find the best combination and agree target levels and timescales for the customer performance measures and business results.
Step 7 – Making it Happen
This step is critical. It is where all the previous steps are woven together and translated into practical, actionable steps capable of delivering the targeted results.
This step may be critical, but it is also where many senior executives will openly admit that things can often go wrong. It is worthy of special attention and deserves a dedicated proportion of any investment with the aim of ensuring that much of what is possible is achieved in practice.
At this stage, the time spent engaging and winning buy-in from relevant directors and their senior managers across the business pays dividends.
Another important area is the consideration that should be given to how customer strategies may impact (or be inhibited) by existing process and systems. Identifying and navigating the integration with existing operations will play a big part in minimising disruption or dilution of results.
Finally, there is what we call ‘mission creep’, where the internal perspective starts to re-shape ideas away from their original intent (i.e. how they add value to the customer).
A couple of examples in this case include:
- A deeply-held belief which stereotyped target customers in terms of age or income, rather than the different ways they perceive value and the value proposition, which is the most meaningful way to turn customer differences into business advantage
- Believing the lowest cost option for implementing X was in the best interest of the business, rather than assessing options against the likely value-add to the customer and their impact on the customer performance measures
This underlines how important it is to keep true to the customer’s perspective and perceptions upon which the success of the strategy to deliver results is based or seriously put results at risk.
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