May 13, 2021 | Branding, Customers, Marketing
Having a point of differentiation that is sustainable, and sufficiently valuable to customers that they are prepared to pay for it, is marketing’s holy grail.
Everybody seeks differentiation, the challenge is to do it effectively.
It seems to me there are three dimensions:
The first is the product itself, pretty obvious. The benefits that the various product features that add the differentiated value to customers are not easily replicated by competitors.
The second is the means by which you deliver those benefits, which is your business model.
A valuable differentiation is one that competitors cannot or will not replicate without great expense and effort. Some of these evolve out of a significant change in the prevailing business model, such as happened when Amazon started to sell books, but most happen incrementally.
It is relatively easy for a competitor to copy one or two things you do, and usually they will get it pretty right, even 99% right. However, when you do a whole lot of things together, it is harder to copy them all, and even if they do, getting 5 elements of your strategy copied at 99% accuracy, delivers only 95%. Few customers will opt for 95% without a significant discount.
The third is the choices you make that exclude some customers but have an impact on your ability to better service those who remain. This is a strategic choice you make based on the needs of your ideal customer.
Years ago, part of my sales responsibility for my employer at the time was for the regional distributors we used. Across NSW we had numerous small distributors, most of whom took small amounts of product on each delivery. The logistic costs were often more than the gross margin on the sales, but the sales revenue in total was significant. I took the decision to deliver only in 1/2 pallet lots of any product, and put in a staged discount for increased pallet numbers. After the initial yelling finished, most distributors moved to one of our competitors, along with the margin losses. We were able to increase the levels of support we gave to the remaining larger distributors, and they were able to significantly increase their sales, and our costs dropped accordingly. That segment of distributor customers suddenly became profitable after years of losses.
If you cannot figure out how to differentiate in ways that are meaningful to a cohort of customers, you are destined to be defined by price.
No future in that!
May 11, 2021 | Communication, Customers, Marketing, Sales
The old cliché that a picture is worth 1,000 words is disproved again and again, by all the pretty websites and dumb marketing collateral material out there, that is useless.
While pictures have a valuable role in grabbing attention, the real commercial value is delivered by the words that express the value proposition and call to action to the potential customers who turn up.
We are in a competition to gain and keep attention, then to move the reader to a decision. That decision may be that your product deserves a place on the ‘maybe’ list, or to the next point in the sales process. A successful sales process is always moving the potential customer towards the transaction.
Human beings scan their environment, instinctively leveraging their mental frameworks to filter out the stuff that does not matter. Our subconscious organises and filters information, leaving cognitive capacity to deal with the threats and opportunities that emerge. We do not see anything that does not have to do with survival, love, relationships, doing better, some sort of challenge, danger, unless for some reason, it is specifically relevant to us at that moment.
When someone sees our website or collateral material, their brain on autopilot filters out the stuff that is not directly relevant. Somehow, we need to cut through those automatic barriers that exist.
Story is the best way of doing so.
They are the evolved format that can deliver the information that reflects ambition, challenges, a plan to conquer the challenges, unexpected hurdles, and last-minute success. This is the standard format of every story, if you do not use it, or some derivation, the reader will skim over your site and not take in anything at all, effectively not ‘seeing’ it.
Formulas are the assembly of best practise; we use them because they work.
That is why stories work, it is the formula that feeds into the cognitive patterns used by our brains.
The key to a story is clarity. Who is the hero, what he/she must do to win, what happens if he/she does not win, what happens when they do?
What problem do they have, what does the outcome look like when the problem is solved?
Noise kills, the noise from inside and outside our business.
From inside, the clutter we spray around, the ambiguity of what we are saying confuses what others hear.
We need to clarify the message.
How many potential customers go elsewhere because they do not understand how you can help them?
When you need someone to help cut through your clutter, give me a call. It will be a worthwhile investment in clarity.
May 6, 2021 | Customers, Marketing
LCM: Lifetime Customer Margin.
There is lots of talk, mostly hype, about Lifetime Customer Value. When you look closely, it almost always means lifetime customer revenue.
Revenue is of little commercial value in the absence of margin, so the discussion is somewhat misleading.
Understanding the margin generated by customer segments, or in some cases, individual customers, is an immensely valuable metric. It enables you to focus activities where there is the most benefit to the enterprise. You can make both strategic and tactical decisions with a great level of confidence based on the margin delivered.
Customer margin is also an enormously useful metric elsewhere.
Salespeople are often rewarded on revenue, which can be gamed. Margin over time is much harder to game, and a far better measure of the effectiveness of a salesperson in delivering value to the enterprise. In any comprehensive key account management process, margin is one of the best measures of the impact of sales and marketing investments made.
Similarly, calculating the cost of acquisition of a customer gains traction when measured against margin rather than revenue.
One of my clients’ businesses relies on referrals as a major source of sales. Increasingly they are moving towards margin on converted referrals as the single metric that best measures the impact of their efforts.
It is proving to be a rewarding strategy.
Header credit: Dilbert and his mate Scott Adams.
Apr 30, 2021 | Customers, Small business
Cost plus pricing has always been the worst pricing strategy to employ, although the most common. It is because it is superficially easy, understandable, and requires little thought.
In my experience, the use of a cost-plus pricing model is an indication of a lazy, or uninformed and poorly advised management.
The chances are they have no idea of what the real costs are.
Such a pricing model indicates that there has been no effort to isolate the cost drivers and determine a strategy that reflects their competitive and economic context.
All that has been considered are internal factors that the customer has no interest in at all.
It is also often an indicator that the costing system is driven by accountants, who manage by variances from some mythical standard that rarely reflects the reality of a production process, but over which they can absorb overheads.
Rubbish system, and here’s why:
- Standard costs. Most operations have a standard COGS system in place that is revised up or down against a schedule, often annually. In the meantime, variances are theoretically tracked and explained, but they tend to get lost in the chaos of day-to-day operations, and a budgeted gross margin.
- Costs included in a standard system are wrong the day after they are put into the ERP system. It may be a year before they are updated, and even then, remain inaccurate.
- Cost variability. Real costs will go up and down, often daily, and even hourly, depending on a range of factors, Factory throughput, supplier price changes, overtime, WIP losses and a host of other factors all impact actual cost. At the very least, you need to know if you are winning or losing at Gross Margin because of these changes.
- Sales management is compromised in the absence of robust gross margin analysis. Depending on the degree of autonomy the sales force has, they can be ‘generous’ to customers for a range of excuses, normally associated with sales budgets expressed in volumes, rather than gross margin dollars and percentages. This enables all sorts of ‘gaming’ of sales to exist.
- Increasingly in a commoditised market, value is delivered by intangibles rather than the physical product. It is geometrically harder to put a price on this value to a customer, so the potential for sub-optimal pricing is magnified by poor product costing.
- Customers do not care about your costs at all. Not a whit!. What they care about is the value delivered to them. Price for that value, just make sure you can make a sustainable profit on the way through.
At the very least the P&L should be broken up into cost of goods sold, further broken into customer and product categories, trading variable costs, and fixed costs. At least then you have the chance of identifying where the cash is leaking out, as it is leaking.
When you need some outside expertise to maximise your profitability, call me.
Apr 26, 2021 | Customers, Sales
Our sales efforts are often focussed on what we perceive to be customer pain points. Solve a problem for them, remove the pain, and you have a sale. So, the logic goes, and as far as it goes, it is pretty good.
However, an analytical look at the pain points of customers rather than just making broad assumptions can pay dividends. Such an analysis is a part of every useful key account planning session I have ever constructed.
As with most examinations, a frame of reference adds to the value of the discussion. It usually evolves that pain falls into a few categories.
Financial pain points. The most obvious and common. You can save them money, either by offering cheaper alternatives, or by increasing the productivity of the option they are already using. The latter strategy is always better, as ‘cheaper’ can quickly become a slippery slope. I would never use the term ‘cheaper’, always ‘better value’
Process pain points. You can help them build their productivity by helping optimise their processes, to get more out of the same investment, Always a welcome outcome.
Sales pain points. When you can assist a customer of yours to increase their sales, they will be forever grateful, and reward you with their ongoing business.
Strategic pain points. The most severe pain is often not self-inflicted, it comes from outside, from things that cannot be controlled. The best that can be done is to anticipate and plan your response. Assisting a customer to survive and prosper by helping them identify and consider their response to emerging pain points, always works well as a sales strategy.
The key is to put yourself in a position so that you can identify their pain points. This can take a considerable amount of research into the company, and their competitive and strategic domain. By this means you can add value to their efforts by application of the solution to the problems that emerge. This applies equally to existing customers, as well as key potential new customers, although emphasis on ensuring existing customers remain in the tent is almost always more productive..
In my experience, this customer research pays great dividends, tactically and strategically.
Feb 1, 2021 | Customers, Marketing
I regularly see and hear people suggest that ‘thinking from first principles’ is a great thing, a foundation of success. Often when these people are flogging a product or service of some sort, their offering somehow becomes a function of a first principle.
‘This marketing automation stack is built from first principles‘ is a claim made by a vendor to an acquaintance who runs a modest but long-lived SME. The business is constrained by IT limitations of various types. A combination of lack of cash, underdeveloped understanding of the tools available and how they work both individually and together, and general wariness about florid claims about the returns that will arrive, magically, on installation,
What should we mean by ‘first principles’?
Aristotle defined it as ‘The first basis from which a thing is known’. Philosophers since have added their own wrinkles, but it comes down to the few single facts that provide the foundation of whatever idea you are considering. When you break a problem down to this level, it enables you to, sometimes, reassemble from a different set of possibilities, ideas from different fields, and end up with something new.
Thinking from first principles is challenging.
Our brains have evolved to reduce the cognitive load as a survival mechanism. Fight or flight must kick in quickly, automatically, just in case the rustle in the weeds is a sabre-toothed tiger. We therefore have mental models, or patterns we use unconsciously to classify things we see and set out to think about. Even when we set about thinking carefully, we are still subject to the mental models we have built up, the analogies and experiences we have that enable us to respond with the minimum of cognitive energy.
John Boyd used the evolution of the snowmobile as a demonstration of ‘First principles’. A snowmobile combines the body of a boat, the tracks of a tank, motor and controls of a motor bike, and skis, to deliver a machine that gives mobility on the snow. Similarly, Elon Musk used first principles to build his own rockets for SpaceX. He broke up a rocket into its component parts, then built his own rockets with parts sourced independently. Musk’s whole business empire is based on reimagining something and rebuilding from first principles. Arthur Conan Doyle via his character Sherlock Holmes, advocated the same approach. ‘When you have eliminated the impossible, whatever remains, however improbable, must be the truth‘. William of Ockham in the 14th century wrote similar words that have been passed down as the wisdom of Occam’s razor.
When you apply this thinking to marketing, and consideration of what it is that makes a successful business, you come down to one simple first principal.
Happy customers, who willingly and spontaneously refer you to others.
When you have happy customers, little else matters beyond a competitive capability to supply the product or service at a competitive price that returns an industry average gross margin.
What are the first principles of your business model?
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