It is pure fiction to imagine that the impending recession is going to disappear soon.
The typical reaction to such misfortune is what Andrew Lorenz in the Financial Times describes as “anorexia industrialosa,” an excessive desire to be leaner and fitter, leading to emaciation and eventually death. Yes, of course, there is a necessity for cost-cutting, but it has to be done sensibly, as I shall spell out later
But if this is the only response to a recession, it is doomed to failure, mainly because it results in even worse service to customers, and customers will not stand for this anymore.
Why is this?
Perhaps we need to remind briefly that the rules of competition have changed. The “make and sell” model has been killed off by a new wave of entrepreneurial technology-enabled competitors unfettered by the baggage of legacy bureaucracy, assets, cultures, and behaviors. The processing of information about products has been separated from the products themselves, and customers can now search for and evaluate them independently of those who have a vested interest in selling them.
Customers now have as much information about suppliers as suppliers have traditionally accumulated about their customers. This new state has created a new dimension of competition based on who most effectively acts in the customers’ interests. So this is the backcloth against which we face this new challenge in the early part of 2020
I have 120 pieces of scholarly research to prove that long term successful companies take the trouble to segment their markets. Segments are groups of customers with the same or similar needs, not sectors. They work hard at understanding these needs and behavior patterns. They prioritize these segments according to their likelihood of enabling the company to achieve its profit objectives, and they then develop appropriate product/services packages for each. They are ruthless in times of recession at focussing their attention on the segments they intend to keep in the long term, and they prune out those which are a drag on their resources. Only then is cost-cutting and downsizing justified.
I am, of course, referring to Pareto’s Law (the 80/20 “rule”) About 20% of your customers will deliver about 80% of your revenue and profits, so trying to delight everyone with all of your offers guarantees average service that will please no-one. By identifying your core market of primary customers and delighting them with selected differential offers, you will successfully preserve a resilient customer base.
Here are some guidelines for managing this COVID-19-driven recession
1. Remember that customers are attracted by promises, but are retained through satisfaction. This means that, if you can’t describe the value required by customers, you certainly will not be able to deliver it. So, make a special point of understanding their needs.
2. Do not try to cover too many markets, segments, and customers. Focus on the ones you want to be with in the long term.
3. Reduce your product portfolio, i.e. do you have too many products, services, pack sizes, etc.?
4. Look carefully at your distribution network. Has it grown too big?
5. Improve the productivity of all your promotional spending, but especially that of the sales force.
6. Get your costs down in unproductive areas of the business. This includes costs associated with serving unprofitable markets and customers.
7. Work out your banker (key) customers. Take them away from the sales force and give one to each of your best managers.
8. Don’t let the sales force do big deals. Unless they are totally professional, there is a danger that within days everyone will have maximum discounts.
9.Selectively attack (focus) on competitors’ key customers that are attractive to you. Don’t worry if you lose some of your unprofitable customers.
10. Keep the heart of the business – essential products, key markets, and key customers.
The problem, of course, for certain types of businesses with massive fixed costs such as airlines, is on an entirely different scale, and while the principles are the same, this short article is not intended for them.
Marketing through the Covid-19 Recession - Part 2
If Goldman Sachs and Morgan Stanley are right, then we are heading for a recession and we must, therefore, prepare ourselves for very challenging times ahead. My colleague, Professor Malcolm McDonald, provided some sober advice on how to market through this in his recent article.
In this part, I will build on his ideas and provide more advice on how to use great strategic marketing principles to get you through the looming storm. The good news is that there is often plenty of opportunities to grow revenue streams even while still pruning back. Indeed, the two go hand-in-hand.
So, here are my five tips for recession-proofing your business:
Cut surplus value.
A quick-win in cost-cutting can be areas of your products or services that deliver little or no value to customers. A classic example of this is when we spoke to large corporate customers of our client and asked them if there were any aspects of our client’s service that they found had no value. “Oh yes,” they replied. “Those health and safety reports that they send to us every month are not much use. They are in a big .pdf attachment and just sit in my inbox.”
On further discussion, we found that if the reports were in a web-portal in a way that could be interrogated they would be much more useful to the customers. So, our client switched to this online approach, saved a lot of money pulling them together and also improved the value of its service. This is also called over-engineering and firms are often guilty of it.
I keep a list of over-engineered products which range from cell phones that are too thin to hold, to over-specified nuclear programs that have cost the UK Government hundreds of millions of pounds. Look for areas where you are over-engineering a product or service either above customer needs or far above competitor's offers.
Surgically cut costs in the worst segments.
In his article, Malcolm discussed the importance of proper needs-based market segmentation as a way of deciding where to focus resources. Rather than cutting costs across the board, try to cut costs in your worst product-customer segments. These are combinations of the hard products/services that you are selling and the soft warm-blooded people that buy them. For example, we did some work for a chain of hairdressers and found that one particular product-market segment (scissor-cuts for men) was only 11% as profitable as the best segment (treatments for young professional women).
It would be senseless laying off hairdressing staff in this scenario, based on their wage costs. Instead, it would be better to surgically cut costs for that segment and lay off only those staff that are primarily focused on men’s scissor-cuts. If that is not enough, then move on to the next, least profitable segment.
The key here is to pick segments that have relatively bad futures ahead of them. These are segments where, over the next few years, the competition will be strong, margins will be low, that is stagnant or shrinking in size, that no longer fit our strategic direction and where we are fundamentally uncompetitive.
Fortunately, there is a good marketing tool to help you prioritize segments properly, called the Directional Policy Matrix. I urge you to find it, understand it and use it. It could well be your best friend for the next few months at least. However, a word of warning: before using it you will need to have developed a good product-market matrix of your market, with all the segments on it.
Invest with laser precision in the best segments.
The payoff from surgically cutting costs in your worst segments is that you now have an additional budget to spend in your best segments. These are segments that offer the best prospects for growth and margins. Even in the toughest of times, there are opportunities. These are segments where the competition will be weak, margins will be high, that is growing in size, that fit our strategic direction and where we are fundamentally competitive (other factors may apply to your business as well). Even if you hold your market share in a growing segment, your revenues will rise and so should your profits. If you are faced with a landscape of shrinking segments then still invest in the ones that are the most attractive (e.g. shrinking the least and/or will bounce back the quickest). If you can grow your market share, faster than the segment is shrinking, you could still increase your sales – and as you may be the only firm investing, while others cut back, you may find it easier than you think. Finally, look at segmenting your market in new ways to identify new customer segments that no one else is focusing on. The book Blue Ocean Strategy by Kim and Mauborgne provide many examples of companies that have done this.
Leverage the assets you already have.
You may already have an asset that you are overlooking which you can sell to your existing customers. Assets are not just factories, offices, equipment and products. One of our clients was a vehicle remarketing firm which disposed of vehicles at the end of their lease. Its customers were large vehicle manufacturers and vehicle leasing firms. The CFO of one vehicle manufacturer mentioned that what scared him was that he could not actually say where every one of his thousands of cars was actually located. Some would be with the original lessee/driver, some would be on a transport truck, some would be at an auction site, some would be parked somewhere on an old airfield. His stock was worth millions of dollars and if he tried to find any particular vehicle it could be a week before it was found. Our client, therefore, allowed him access to their online tracking system, linked to GPS, which showed exactly where each car was. They also charged him a monthly fee to access it. He was so pleased with it that he expanded his company’s spend with our client and told other suppliers to work with the client so all of the remarketing systems could be tracked. This is a great example of how data that you may already have can be a very valuable asset. In another one of our clients, a large energy company, they realized that with all their assets in the field maintaining their own infrastructure, they were actually very good at maintaining facilities. So, this energy company created a new Facilities Management business unit which was eventually sold for millions of pounds. In fact, there are at least 12 different assets that you could be exploited better.
Just implement better!
A few years ago, we did some research for a new book we were writing about implementing marketing plans. What surprised us was how much profit was being lost through poor implementation.
On average, it was 13% but many said it was over 20%. The interesting thing about this is that many of the barriers are internal so you do not need to wait for customers to buy. They are due to internal issues like conflicts, priorities, culture, competencies - and ultimately - leadership. So, here is an opportunity to make more profit just by sorting out your own house.
Find out what was stopping you from hitting your sales targets before you even heard of Corvid-19. Be open-minded and try to find the root cause (e.g. a poor reward system) rather than the symptoms (e.g. a lack of effort). Some issues will be easier to crack than others. Even if you cannot find quick implementation wins to deliver better profit now, fixing the issues while the market is quiet will allow you to at least bounce back faster, later.
As Malcolm mentioned at the end of his article, some companies will find the above advice easier to act on than others. However, even those companies that are facing a complete shut-down of their markets should use this time to plan how to grow better as we come out of the recession.