The following is from the December 2007 Drilling Down Newsletter. Got a question about Customer Measurement, Management, Valuation, Retention, Loyalty, Defection? Just ask your question. Also, feel free to leave a comment.
Want to see the answers to previous questions? The pre-blog newsletter archives are here.
Q: I have been asked to create a whitepaper on marketing strategy and tactics for a down or recessionary market. In your studies and travels have you come across any literature or have thoughts of your own that I may quote?
A: Well, I suppose someone has written something about it somewhere. The trades write about it for every downturn! But I don’t know of any primary work on the topic – case studies, research, etc.
I do know that when we get into a down / recessionary market my phone rings more and I work a lot harder. The “new client” customer retention business is counter-cyclical; people always wake up during the soft times and say, “Hey, if we can’t drive new customer volume, maybe we can sell more to existing customers!”. You know, the CEO or somebody read that somewhere…
The problem with this kind of thinking is, in most cases, it’s already too late to do anything about customer retention. That’s not something people generally want to hear. I then say, “The economy is cyclical. Do you want to be prepared for the next downturn?”
The people who answer yes to that question will often become clients; those looking for the “quick fix” generally won’t become clients – but they call again into the next downturn…
It’s a strategy thing, you know? Long term thinking? But I digress…
The insidious thing about customer defection is that it’s always there, eroding the asset base, wasting away the hard work. But people don’t see it until the flow of new customers shrinks, and then all of a sudden, the defection issue is laid bare.
This is why the retention business is so counter-cyclical; why “discovery” comes in the downturns.
What you normally find is whatever business change / policy / product is causing customer defection, it takes as long to build up the customer asset again as it did to destroy it. Here is a real-world example.
A retailer makes a significant change in the types of products it sells, because it wants to “attract more new customers”. For existing customers, revenue per customer starts to fall. This fact is masked on the revenue side by the attraction of new customers to the new products – for a while. But it ends up these new customers, in terms of revenue per customer, have a value about 30% less than the old customers. So even though new customer adds remain consistent, sales start to drop, and over time drop by 30% as old customers defect and are replaced by the new customers worth 30% less.
Two years into this process, a downturn in the economy causes more attention and analysis of the customer base, and this issue is exposed. Surprise! The newer kind of customers defect at a higher rate and in a shorter time than the old type of customers.
New management is brought in, and they decide to go back to selling more of the “older” product to attract the higher value customer. Once they make the switch, it takes just as long for sales to get back to where they were as it did to create this problem in the first place – 2 (very long) years.
And that’s why it is so tough to deliver a “quick fix” to these kinds of problems. They are systemic in nature and because you are talking about the value of a customer over time, take time to fix.
So, it may well be that your advice should ultimately be “use this downturn to prepare for the next one”, if you know what I mean. Investigate, learn, and understand what happens this time, so you know what to do next time. In terms of action items, a few:
1. Analyze the customer base, to understand the source of customer value. Who are the best customers, where do they come from? Which media, sales persons, product lines, services, geographies, etc. create the “best customers” for the business?
2. Analyze these best customers, and understand their behavior. What would be a warning sign that these best customers – who are probably responsible for the lion’s share of your profits – are cracking into the downturn? Slowdown in orders per month, average order size, number of contracts, whatever the relevant metrics are.
3. Track a handful of these customer metrics and see how they change as the economy slows. These metrics will be a map for predicting actual trouble the next time – predicting trouble even before everyone is already talking about “a downturn”. This gives you the extraordinary advantage of lead time over your competition in reacting to the downturn in business.
4. Complete the same 3 steps above for medium value customers and low value customers, if you have the resources.
5. Now, fully understanding what you have to work with (perhaps for the 1st time?), what is the strategy for a downturn? Generally, it would consist of a reallocation of resources away from lower productivity to higher productivity activity, in order of importance:
a. For best customers, how do we keep them?
b. For mid value customers, how do we grow them?
c. For low value customers, how do we reduce costs to acquire or service them? Note I do not advocate “firing” customers, but you certainly can cut back on acquiring as many low value ones.
For each group, you should have a specific (and probably different) strategy and set of tactics. What a lot of folks don’t understand is there is almost always a truly remarkable difference between these customer groups, and any “one size fits all” edict or direction is bound to screw up the business, just like the example of the “new customer” effort from the retailer above.
For example, we know that marketing spend generally softens in a downturn. Companies cut back on marketing because they feel like they are “pushing on a string”. They cancel or don’t buy advertising, they fire salespeople. This is the wrong move. The old saw about buying more marketing into a downturn to “grab share” can also be the wrong move, though has some “accidental” positive effects.
The company should invest in more marketing, but not across the board. They should buy the right marketing, the marketing that generates the best quality customers.
They should reallocate marketing resources away from generating “c” customers towards generating “a” customers. If you know trade shows generate leads which turn into “a ” customers and online ads generate leads that turn into “c” customers, you take the money you spend online and book more trade shows. You let go of salespeople that generate “c” customers and use that salary to bonus salespeople generating “a” customers.
Of course, this analysis and planning is an exercise that should be done all the time, not just into a downturn. A business should always be trying to understand where customer value comes from and how it is created. But unfortunately, this issue most often comes up going into a downturn.
You’ll have to excuse me now, the phone is ringing again…
Comments or questions? Does your company have a “downturn plan”? Or is it business as usual, just less marketing activity across all the channels?