Profit by design takes a unique perspective on how organisations can deliberately shape the value of their customer portfolio by focusing on the customers that add the most value.
Typically, this value is measured by customer lifetime value and customer advocacy. Depending upon the context of the organisation there can be other factors.
Profit by Design is the guide for leaders and managers to design their business for long-term success by focusing on the right customers. Those customers where the optimal two-way value exchange between the business and the customer is in place. Where both the customer and the business share in the value created. Customers value what the organisation delivers and therefore stay with the business and tell their social networks. Businesses grow profitable customers and customer advocacy.
Profit by Design is the guide for leaders and managers to deliberately build a customer portfolio that is full of profitable promoters.
The game plan for business has changed
The world has completely changed in the last 10-15 years.
- The digitization and accessibility of information has completely changed how customers behave and this has triggered the ‘age of the customer’ and an experience economy.
- No longer can business leaders and managers rely on the ‘tried and true’ product centric business models that originated at the dawn of the industrial revolution.
- Today, savvy business leaders have worked out that it is the configuration of the customer portfolio that drives long-term, profitable growth for the business, not products.
- How customers interact with the product and services of the business provides insights into how some customers are not worth that much to the business and others represent significant lifetime value.
These changes demand that the organisation adapts to the new environment. Business models from the industrial age are losing relevance in the ‘age of the customer’.
Principle One – profitability is about customers, not products.
Some many organisations today still use the idea of providing a great product or service as the key to success. It can certainly be the start there. But to survive long-term the business needs to establish a customer portfolio that (a) is profitable and (b) is providing positive word of mouth to their social networks.
Mainly of the large and successful businesses, such as say Apple or Coca-Cola, are still product focused businesses, and it might seem to work for them. However, these businesses were developed in a product centric world, where as today we are in the age of the customer. (Read more about product centric vs customer centric).
Today it is all about the decision’s customers make, to buy, to repurchase, to subscribe and to provide word of mouth. Whilst businesses think they can influence customer decisions – we can to some degree – but the irrational, human customer is in charge. If we trick them into buying something they do not value, the business will pay in the long run, through cancelled orders and poor word of mouth.
Customers today do not trust advertising and actively resist sales approaches. They would rather do their own research online and trust the opinions complete strangers, who are customers.
Principle Two – the old game plan no longer works.
Pareto came up with the 80/20 principle just over a hundred years ago. It seems to be everywhere in our world.
When I mention to leaders and managers that, typically 80% of the profit they make comes from about 20% of their customers, they typically say, “yes, we sort of know that, Pareto’s principle”. (I have analysed dozens of customer portfolios, and 80/20 is easily the norm, but many are at 90/10!).
Question. Why do we create customer portfolios that only produce this much value for customers and the business?
Answer. Because managers and leaders focus on creating revenue from products and services, not profit from groups of customers.
We need to shift our focus from creating revenue from selling stuff to creating value for customers and in turn building a profitable customer portfolio.
Principle Three – Not all customers are equal.
From examining customer portfolios, it becomes quite apparent that not all customers are equal.
Customers are not the same in (at least) the following ways:
- What they value.
- How they describe value.
- The weightings they provide to various elements of value (such as function over experience and vice versa).
- How much word of mouth they are prepared to provide.
- How they provide word of mouth (directly to people they know, on social media etc).
- Their economic value to the business.
Each of these differences are very important for the business.
We need to know what customers value as well as how they describe it so that we can communicate that value for them.
The last two in this list though, advocacy and the economic value, are critical to knowing how to design the business for profit.
Principle Four – the Two-way Value Exchange.
You can read a more detailed description of this principle in this article, however, here are the key ideas.
- Some customers get more value from the business than the business gets. These are the large portion of a typical customer portfolio that don’t return much back. They can cost the business too much to serve. Maybe they ‘cherry-pick’ the value they want. Either way, the customer gets more than the business – economically and word of mouth.
- Conversely, there are some businesses that lock their customers in and extract more value (typically financial) from the customer than they return. These customers typically feel like captives of the business, rather than happy customers prepared to advocate on their behalf.
- The optimal position for long-term success is for there to be a fair exchange of value between the business and the customer.
Entrepreneurs have known this for thousands of years. Early entrepreneurs knew that their long-term success was dependent on their reputation for fair trade. Our obsession with ‘product’, has only been around for the last two-hundred or so years. The industrial revolution temporarily made product more important.
In this age of the customer it is critical for businesses to ensure a fair exchange of value. This will ensure a focus on the delivery of value, and result in profitable customers who are also advocates.
Profit by Design, page 55.
Principle Five – attract and engage with your customer on value.
Customer engagement is not about closing sales but opening relationships with promoters of what you do.
Modern marketing came in with the Wedgwood in the late 1700’s. The marketing ideas of ‘intrude and engage’ were dominant – “hey look we have this great product!”. Intruding into the customer space. Then, once that attention is gained, close the sale.
Today customers are in charge. They do not trust advertising. They will not be sold to.
(Read more about how customers have changed).
Customers make the choice. To buy, to renew, to re-subscribe and to provide word of mouth.
Today we have to attract our customers to us. Like a magnet, drawn to us by our values, by what people say about us, by the value we deliver and promises we keep.
Principle Six – design the activity to build a customer portfolio full of profitable promoters.
Once we have made the decision to make the organisation more sustainable by focusing on the customer portfolio, the first thing to do is develop a customer strategy.
The customer strategy I am talking about does these things:
- Identifies your various customer groups.
- Understands the two-way value exchange between you and these customer groups.
- Determines your intent with each customer group. Which one or two will you focus on growing. Which other groups might need re-engineering how the value exchange occurs?
This is an iterative process. Do not get bogged down in analysis paralysis. Move forward.
- Develop meaningful value propositions for each customer group. Why they should listen to you. Why they should engage with you.
- Now design the optimal model to align your systems, processes and people to deliver value.
- Monitor, measure, learn and fine-tune.
Profit by Design is a how to guide for leaders to design their business for long-term success by focusing on the right customers, those customers that get the value the organisation delivers and therefore stay with the business and tell their social networks.
Learn more about the Profit by Design book here.
You can read more about the Profit by Design approach here and here.
If you think you might want some help, get in touch and we can talk it through.
Profit by Design – Page 96