Dec 9, 2014 | Customers, Marketing, Small business
Know your customer. www.strategyaudit.com.au
One of the absolute foundations of successful commercial activity is to be able to define your primary “customer” in considerable detail. The more the better.
Years ago I watched as market researcher asked a group to define the brand we were researching as if it was a person walking through the door. The insights gained were enormous, and it is a practise I have used ever since.
However, like most good ideas, they evolve with use.
I now use a quadrant, with the customer in the middle.
- Demographics. This is as far as most go, defining customers by age, sex, financial and social measures, with or without children, homeowners or renters, and so on. Necessary, easy, but very limited analysis.
- External drivers. What are the things in the environment over which the customer does not have control, that impact on their behaviour. Answering this question requires choices to be made, as a 30 year old single woman working full time will behave entirely differently to her married twin sister who is at home looking after a couple of rug-rats, and you must choose which you want to appeal to. The range of variables to be considered is huge, as are the potential responses.
- Internal factors. The sorts of things that people can manage and respond to for themselves, their goals, aspirations, questions they face, and the choices they will be making in their lives. Understanding the psychology and personality of your customers helps you talk to them. No surprise there, because you can talk about they things that value and like to talk about.
- “Who” are they? The fourth quadrant is the behavioural picture you can draw by understanding the nuances and interactions of the first three. Jumping to this quadrant without intensively interrogating the first three will almost inevitably leave holes, but having said that, this quadrant does evolve as you iterate in marketing activity and understand better the behavioural changes that come from differing combinations of messages and service delivery.
I like to be at the point in this process where you can actually visualise the person, and associate them with someone you know well, someone whose behaviour you can anticipate. At that point, the communications you are writing, irrespective of the means of delivery, you can have that person you know well in your mind, and write for them.
The definition of your primary customers should be a constant on marketing agendas. It can easily become complicated by market structures and many other factors, so should be consistently under active consideration. Several of my clients are small businesses who sell to retailers of various types. By necessity, they need to consider both the retailer, who is in fact their customer and to whom the sell, and the consumers, to whom they market as separate.
Dec 8, 2014 | Customers, Marketing, Small business
1932 Rolls Royce Phantom 11
I bang on about “Value” a lot, in all sorts of contexts, and using all sorts of examples and metaphors.
Defining the components of value is challenging, as value to every individual is different in differing contexts.
Value can be described as the difference between the price of an item or service, and the utility the buyer derives from delivery of those goods or services. It is made up of a myriad of variables, speed and reliability of service, timeliness, design, warranties, intrinsic cost of the components, and many, many others unique to the individual and the circumstances they face.
The core challenge of an analysis of Value is that price is quantitative, but everything else is qualitative. Every persons calculation of value will vary according to the relevant factors and the weighting allocated in any set of circumstances.
So what?
Well, the conclusion must be that defining the behavioral characteristics of your target market as closely as you possibly can is essential to maximising the mix of factors to be delivered that the customer will count positively in their calculation of “value”.
Specifying the factors that they will include in a calculation of quality, and understanding the weighting they may allocate in differing circumstances will significantly assist you to craft messages that will engage them in some way.
Often the value derived from an item is in the way of a reward, the pleasure derived from use. A $15,000 KIA is just about as reliable a set of wheels for a journey from point A to Point B these days, but wouldn’t that journey be far more pleasurable in a Ferrari, or BMW, or 1932 Phantom 11 Roller?
There is value in the pleasure, and the imagery usage delivers, and often it is way more important than any quantitative utility derived from use, it is just hard to define.
Assisting with the process of defining the behavior drivers of customers, a Customer Value Audit, is a core part of the StrategyAudit process, going as close as possible to quantifying the components of value for each individual.
PS. Spooky. Bernadette Jiwa, a really accomplished marketing thinker, even though she is a “sand-groper” today posted on Value, as I did. A thought provoking example, and I cannot but wonder at the co-incidence.
Great minds Bernie??
Dec 4, 2014 | Category, Marketing, Operations, retail, Small business
Data management & analysis
The second of 10 ways to beat the supermarket gorillas at their own game, after understanding the way the supermarket business model works, is to be savvy with data.
Supermarket retailing is heavily data intensive. These days, any retailing beyond the archetypical lemonade stand by the side of the road is data intensive, but particularly supermarkets. Commonly a supermarket range is up to 30,000 Sku’s across a number of different formats and geographic and demographic locations, and several thousand suppliers, all with their own focus and story to tell.
The supermarkets physical space needs to be allocated across the Sku’s chosen to be on range in the way that best delivers a return on their investment in the particular store and strategically across the chain.
SME suppliers to chain supermarkets usually are playing from a position of weakness, as they lack the scale to have the data and category management resources that supermarkets demand. However, their strength is that they can be far more agile and market sensitive that their bigger rivals, often SME’s can develop and launch a product before a multinational can get the first development workshop together.
Whilst supermarkets have a wealth of data at their fingertips, both their own, and that supplied by their large suppliers, they recognise that not every piece of data is worth the digits it is written with. Data is only of any value if it leads to some sort of actionable insight, and it is here that SME’s have an advantage despite the disadvantage of small size. Making the connections between differing seemingly disconnected data points is where the gold is hidden.
There are several points at which data can be collected, from which insights can be gained. Internal, observed and purchased.
- Sales and margin history. No SME should be without a robust and detailed sales and margin analysis of their own sales history, and thus ability to forecast with some certainty. Every SME has a sales history in their accounting package, most do not use it. Most use the “Office” package, which included Excel, but many do not use the power of the tools in excel. Pivot tables are the most underutilised and useful tool I have ever seen for SME’s. If you are one of the majority who do not use them, wake up, spend 30 minutes on YouTube figuring out the basics, and start generating insights. Also in excel is the V-Lookup tool, which can be enormously valuable to SME’s to keep accurate track of a whole range of variables in their business.
- Sales intelligence. SME’s are usually in a position to have unfiltered market intelligence in the hands of decision makers easily and quickly. Usually the people best positioned to see change as it is evolving are those in direct contact with customers and consumers, often the lower paid front line staff. Being engaged with these staff, or indeed as is the case for many, being that staff as a part of the role of the SME business owner puts you in a position to see shifts as they occur, if you are watching. Finding a way to turn these random conversations and insights into data points that can be connected and acted on can build into a significant competitive advantage. There is no substitute for the insights gained by simply watching and understanding the drivers of consumer behaviour, then crafting an offer that adds value.
- Agile operations. Scale brings its own momentum, despite the huge improvements over the last 20 years by the adoption of Lean practises. Large suppliers to supermarkets, with large factories, fixed planning cycles and extended supply chains are often caught short by the unexpected and unplanned. Agile suppliers can often fill the gaps created, but do so they need to be able to make very quick decision on costs, time frames, and operational priorities and limitations. To make these decisions, they need absolute understanding of their cash and financial position, costs and decision drivers like break even points, the impact of discounts, and negotiation trade-offs they can make. To be truly agile, you need accurate and detailed financial and operational data that is easily useable to make well informed decisions, then track the outcomes of those decisions.
- Be experimental. Having good data enables experimentation on a scale that offers great insights, but minimises risk. The supermarkets are increasingly amenable to enabling SME’s to experiment with all sorts of offerings as they learn as well from the activity. However, you cannot just walk in and expect to be taken seriously without a history of sensible innovation and a relationship with the individual decision makers in the retailer. Having robust, realistic and well understood strategic and operational planning in place is a must if you wish to be experimental and stay in business.
- Purchase syndicated data. Scan data can be purchased in many forms, and to varying degrees of analysis and detail. There is a significant cost to this information, firstly the purchase costs, but more importantly, the data analysis capabilities. Increasingly scan data is being matched to the behavioural data emerging from store loyalty cards to add another dimension to decision making, and this trend will only accelerate. SME’e can dip in and out of this data, taking a slice here and there to provide insights without the significant investment of being fully engaged. Treated sensibly, it can be used a bit like market research, taking a small and well defined sample and using it as representative of the whole picture.
None of this is easy, which is OK, because if it was, everyone would be doing it. However, many SME’s simply think it is all too hard, and stay away, effectively walking away from 75% of the volume in the market. For many, this is a sensible decision, but for some, those SME’s with a genuine opportunity to become larger businesses, building solid capabilities in collecting and leveraging data is essential.
Dec 1, 2014 | Management, Small business, Strategy
www.strategyaudit.com.au
Time, as is often pointed out, is our most valuable and non renewable resource. Using what we have productively is a challenge we all undertake in our own way.
We all have exactly the same amount of it available to us, the differences emerge when we examine what we do with our time.
For most, we respond to the email, phone call, text message, distractions at the water cooler, to all sorts of stuff that really makes little difference, but has the ring of urgency.
Urgent but not important.
By contrast, at the other end of the scale, we tend to put off things that are difficult, challenging, and often uncomfortable. That time necessary to really flesh out the assumptions underpinning the strategic plan, consideration of the nature of the business model that will see the enterprise commercially sustainable amidst the change all around us, or the culture and work patterns of those entrusted with the implementation.
Important but not urgent.
Every waking moment is spent in some way. The really productive people amongst us focus on the things that are important, they make a difference in the medium to long term, and they treasure their time.
Can you imagine Warren Buffet, Bill Gates, or Steve Jobs watching “Big Brother”?
For them, that would be an hour a day that they will not only never get back, but that adds no value whatsoever to anyone.
Commercial and personal sacrilege.
Where is the balance in your enterprise, and your life?
Nov 27, 2014 | Branding, Category, Change, Marketing, retail, Small business
A short while ago, I posted “10 strategies for SME’s to beat the supermarket gorillas at their own game” which generated quite a bit of comment and feedback. Amongst the feedback were a number of requests to go into more detail on each of the strategies, and so this is the first of the series, focussed on understanding the business model of the supermarkets.
I deliberately used the word “Gorillas” because of the extraordinarily concentrated nature of Australia’s supermarket retailers, with Coles and Woolworths between them holding over 70% of FMCG sales depending on the category, and whose numbers you believe.
You know the old question: “where do the 500kg gorillas sleep?”
Answer: “anywhere they bloody like”
That was the way it was, a comfy duopoly, however, more recently there have been some major strategy alterations by Coles which has dramatically lifted their financial performance, and Aldi has successfully carved out a growing niche as a third retail presence. In addition, there are still some very good independent retailers around operating out of the wholesaler Metcash, who also competes with some of their own and franchised retail outlets.
This mix, combined with the opportunities suppliers have to sell into food service and institutional markets and increasingly direct to consumers via the net and other means makes for an environment where the agile and insightful suppliers can be very successful despite the obstacles, but it is a very challenging environment.
The concept of business models is well known, in summary, it is the expression of how a business makes money. It always involves a matrix of revenue generated, the fixed and variable costs of generating that revenue, and the choices that the business makes about its customers and how they will be serviced, and the way they incur the costs of that servicing.
Supermarkets are a great example of a number of seemingly similar competitors that have slightly differing business models. At a macro level they have strong similarities, relying on volume, price, and shopper numbers to succeed, but everyone who shops knows that Woolworths is not Coles, is not Aldi.
However, they do have some common building blocks.
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- Revenue generation. Supermarkets generate revenue on both sides of the equation.
- Shoppers buy products, paying at the checkout.
- Suppliers “pay” for shelf space via a range of charges levied for every variable the retailers can dream up. Volume discounts, payment terms, promotional levies, preferred shelf positioning, promotional slots, access to sales information, and a host of others. Some are items for which suppliers receive an invoice, others are taken as discounts off the invoice price, increasingly applied automatically as a part of the trading term package.
- Cost management. Supermarkets work on very low percentage margins, relying on the volume to generate the cash margins.
- Fixed costs are a significant part of retailers total costs, made up of the provision of the retail floor space, the logistics infrastructure and personnel. Supermarkets attack their fixed cost base aggressively using their scale as negotiation tools with landlords and logistics suppliers, while keeping a very substantial proportion of front line retail staff as casuals rather than permanent employees so they can better adjust staff levels to match activity. The sorts of choices retailers make are between high density shopping centre locations Vs stand alone locations. There are costs and benefits to each which are considered as a part of their strategic decision making.
- The biggest variable cost is the cost of good sold, and they similarly use their scale to manage those costs downward. Tactics vary between retailers, but the core game is to maximise their margins while keeping prices as low as possible to attract the volume buyers. This is an extremely delicate balance.
- Transaction costs are usually pretty well hidden in most businesses, but are really significant in the case of supermarkets simply due to the number of transactions they make. For example, there is a cost to managing the buying relationship with a supplier, but the larger the supplier, the less is the total costs/unit of sale of managing that relationship. This has led to a dramatic reduction of the number of suppliers supermarkets have in any category over the last 15 years or so a trend further accelerated by the increasingly common strategy of limiting the number of proprietary brands in any category substituting house-branded products, and reducing the number of relationships to be managed. This has made negotiating shelf space increasingly hard, and because of scarcity, increasingly expensive for suppliers, in turn putting extreme pressure on small suppliers.
- Customer service and relationships. The retailers have each made choices about the pricing, location, ranging, and service strategies that sets them apart from each other, and more subtly, they have back office strategies that differ. However, their common aim is to have as much market share ass possible, as volume is the profit generator.
- As in any market, no retailer can be all things to all people, so each makes the choice of the “ideal” customer, and markets towards them, grateful for any overlap. Increasingly the marketing is being supported by customer loyalty cards and the data mining and personalised promotional opportunities that technology is delivering, but the fundamental measures of success remain unchanged: number of shoppers, share of wallet, and basket size.
- The two major retailers have very large marketing budgets which they spend in a wide variety of ways, across all channels of communication with customers and potential customers, and often in joint activity with their suppliers, which inevitably, the suppliers end up funding in return for volume. The smaller the retailer, the less “mass market” they are, so the tactics tend to differ, although strategically, finding willing supplier partners is a core part of every retailers marketing mix.
- Consumers generally want choice when they are in a supermarket, the more the better, in any category. Woolworths and Coles stores carry 12-20,000 Sku’s (Stock keeping unit) depending on the size and location of the store, a typical IGA might carry 8-10,000, while Aldi carry just over 1,000. The sku’s carried in any store also reflect of the demographic and cultural mix. The Woolworths store in Auburn in Sydney has a significantly different product mix to the Woolworths of a similar size in Double Bay.
- Every retailer uses some form of category management disciplines as a means to monitor, adjust and locate their inventory onto the sales face in the way that best meets their customers needs and maximises impulse pick-up. This is always a data intensive mix of the volume and margin of the individual Sku, (such as Ski strawberry yoghurt 200gm) group of similar Sku’s (all strawberry 200gm yoghurt) subcategory (all strawberry yoghurt) and category (all yoghurt) and between categories. They make choices about how many brands and types to keep in stock, where they put them, on shelf and in relation to other yogurts, and indeed other chilled products. A facing of yoghurt added is a facing of some other product gone, as the sides of the stores are not elastic. At the core of the category management activities is the need to best satisfy consumers, whilst competing effectively and delivering maximised margins.
Being agile, persistent, and prepared to experiment are about the best qualities a supplier to supermarkets can have.
Nov 24, 2014 | Change, Governance, Management, Small business, Strategy
Roman baths. Bath UK. photo courtesy www.guardian.com. No matter how fancy the building, it will not last on dodgy foundatons.
I talk to small businesses all the time, have done for 20 years, and it makes me cry how many of them do a great job at their passion, the reason they stated the business, but a lousy job of making money from it.
A simple analogy.
When you drive around a bit, you use petrol. Everyone knows that when the gauge gets low, you need to put more petrol in, or the car will stop. Basic common sense, but how many use the same sort of common sense with the basic gauges in their business, and stop now and again to look at the levels, and recharge when necessary? Nobody can make you look at the gauge, and take the necessary action, you have to do that yourself, just like driving into a petrol station before the car stops.
There are four really simple questions to be asked that represent the “gauges” of your business, they represent the foundations of profitability and longevity. For many small business owners, motivated by the passion of what they are doing, it is too easy to ignore the basics of what will build the foundations of the busness that will allow them to keep doing what they love.
Take this road at your peril.
However, the good news is that much of this can be automated, and outsourced, so you can spend a few minutes a week, and be sure that the foundations are in place.
So, to the four questions.
- Will you have enough cash to pay your bills? Many small business owners just look at the balance in their bank account, and answer “yes” or “no” to that question. Mobile banking apps have made it even easier, but that is not enough. Cash is the oxygen of business, cut it off, and you die, very quickly. You should know if there will be enough cash to pay the GST bill in 2 months, or the long service leave entitlement of Suzie the receptionist in three months when she goes to Europe with her husband. For that you need to track your cash-flow, the money you anticipate coming in, and going out over the next three months. The formula for a cash flow forecast is pretty simple, and takes only a small amount of time, but can save your arse.
- Pick the period. I recommend a rolling 3 month forecast, updated weekly.
- List all the cash you expect to come in, and when you expect it in. Not sales, cash coming in. Similarly, list what cash will be going out, and when, as you pay the bills that come in. This is the reality of the cash flow through your business, just like the petrol flow to your car engine driven by the mechanics of the motor as it turns over.
- Simply subtract the cash out from cash in, and carry the total over to the following week, “rinse and repeat” for every week in the rolling three months. A very simple spreadsheet will do it for you, so long as the numbers are put in, either from your accounting system, or for micro businesses, from the pile on your desk/in your inbox, that you often manage to ignore.
- If you have a cash shortfall forecast at any time, you have the time to do something about it. Ever gone to the bank and asked for an extension to your overdraft activated tomorrow? They will laugh at you, but go to them and ask for an extension because you will need it in 6 weeks, and chances are they will give it to you.
2. Are you making a profit? Pretty basic question that many small business owners cannot answer. To answer the question you need an “Income Statement” or as it is often called a “Profit & Loss” statement. This should be done monthly, and as with the cash flow statement, is essential to maintaining business health, and to continue the petrol analogy is a bit like knowing that your petrol gauge is accurate, and that there is not a leak in the tank, or the youngster down the road is not sneaking in at night to keep his tank full at the expense of yours. Again, the formula is pretty simple.
- Total booked sales less expenses incurred. Sales are pretty simple, although I like to track gross sales, before any discounts, and record discounts as an expense.
- Expenses come in two forms, fixed expenses, those that happen irrespective of sales, like rent, salaries, insurance, and many others. Secondly variable costs, those that occur that enable you to make the sale such as discounts, commissions, freight, advertising, and usually most importantly, the cost of the goods you have sold, which could be manufacturing costs, or some sort of acquisition costs, commonly called “Cost of goods sold” (COGS).
- Simplistically the formula is: Sales – COGS – Variable costs – fixed costs = Profit. When you do an income statement monthly, and build up a bit of history, it becomes very easy to see what needs to be changed, and the impact that even modest changes can have on the profitability of your business. As with the cash flow, a simple spreadsheet can offer great insights and direction. What happens to your profit if you increase your sales by 5%, or decrease your COGS 2.5% when you are working with a 40% margin? Easy to calculate, and then you set out to do what is necessary to move the percentages around, although sales always remains at 100%.
3. Are you creating or destroying wealth? This question is more longer term that the P&L or cash flow statements, and is often done just twice a year. It has less immediacy than either, although if you go to your bank because you will be short of cash in 6 weeks, they will always want the most recent balance sheet. Partly this is hard wired into banker DNA, and partly it is reassurance that the longer term health of the business means they will get their money back, with interest. Again, the formula is pretty simple.
- When you start, you in effect make a loan to the business, and in return take equity in, or ownership, of the business.
- The business then uses those funds to make sales, pay all the business costs, borrow more money to operate, buy/lease equipment, and hopefully create the wealth that can deliver an return on your initial investment.
- The in principal formula is: (Fixed assets + liquid assets) – (long term liabilities + short term liabilities) = Equity. It is not usually expressed this way in financial statements because equity is technically a liability of the company, but this simpler way is easier to see and understand for those “number-phobics” out there. It is also complicated by all sorts of differing treatments of all the variables that can occur, such as the treatment of depreciation, and how much of Suzies long service leave has been brought to account over time. Perhaps the best example to use is the equity you have in your house. Your equity is the difference between what you owe on the mortgage, and what the house is worth if you sold it, which is rarely what you paid for it.
4. Do you have a plan? George Patton once said “unless you have a plan you are just a tourist” which is absolutely true. If you do not know where you are, or where you are going, any route can get you there. Having a plan is so essential, it is left off many lists, and to many others, it is just an exercise in extrapolation, which although easy, is not what it is all about. Good planning is all about the examination of the assumptions that underlay your business, the assumptions about costs, customers, markets, and competition. At the very least, it offers as my old marketing mentor, Jim Hagler of Harvard used to say, (or rather rumble) “at least you know the point from which you departed”
Most of the help you will need that shows you how to do all this stuff is available on Youtube, and all electronic accounting systems, no matter how simple, have as a core part of their reporting the first three reports. They just need some setting up, and once done, so long as they are maintained, will continue to deliver the numbers essential to the insights needed to make profits.
The last, you need to do in a much more hands on manner. Whilst there are many templates which can be of value, there is no template I have ever seen that will create a plan by itself. You need to do the numbers and research, make the enquiries, incorporate the testing that offers the chance to learn, and then most importantly, implement, measure and adjust.
The response to these questions offers an insight into the strength of the foundations of a business. We all know that any structure lasts better on a solid foundation, and no matter how fancy the edifice, it will not last on quicksand.
To build a really solid foundation, you may need the assistance of someone who has done it all many times, and knows the right questions to ask.
