Strategic Planning Analogy #553 Part 2: Revenue Statement

BACKGROUND
In my last blog, I discussed why the traditional financial statements (income statement, balance sheet, cash flow) are inappropriate for planning. In this blog, we will look at one of the documents to use in their place—the Revenue Statement.

THE REVENUE STATEMENT
The purpose of the Revenue Statement is to provide a strategic framework for predicting sales. Yes, the income statement also has a line for sales. However, the income statement doesn’t tell you why that number was chosen and what the strategies are to reach that number. In addition, as mentioned in the last blog, the sales line in an income statement is disconnected from the other lines which directly influence it, like marketing. To remedy these weaknesses, I designed the Revenue Statement.

Since there are so many different types of business models out there, the Revenue Statement would need to be tweaked a bit to fit each type of industry. But a rough example can be seen in the figure below.

1) The Baseline

The first part of the Revenue Statement is used to determine the baseline. This is what sales would be if nothing changed and there were no new strategic initiatives.

To calculate the baseline, one needs to make two calculations. First you need to project a baseline for the overall industry. This number would be based on anticipated demand and competitive response to that demand. This number would come from insights from your industry research.

Second, you need to project what portion of that demand (market share) you will get if you stick with your current status quo approach.  In other words, if you do nothing new, what portion of the business should you expect to achieve. In the example, we see that the baseline sales is expected to decline over time. This is not unusual, since if you do nothing to the business there is a greater risk of becoming less relevant and losing share to astute competition.

That is one of the reasons why strategic planning is so important. It helps a company find initiatives that will increase sales beyond the baseline.

2) Pricing Decisions

One area where strategy can improve sales is with pricing decisions. How should you charge for your offering and how much should the charge be? Should you use a Freemium model, where most pay nothing and only the premium customers are charged (like Linkedin)? Should you have tiered pricing like the airlines? Should pricing be raised? lowered? Should pricing be bundled like fast food combo meals (or unbundled)? Who do you charge for services (in health care it can be patients, insurers, government, etc.)? Is my strategic position anchored on low prices or something else?

Remember, sales is based on how much money you get for what you offer. Pricing decisions have a huge impact on how much money comes in. This can be very strategic.

It is a good idea to review your pricing strategy when planning and this is the place to do that. So in the second section of the Revenue Statement, you would state any changes to your pricing strategy. Then you would calculate the impact on your sales.

The impact could be threefold. First, your pricing decisions could impact overall demand for the product. For example, back in the 1980s, it could cost close to $100 to buy a prerecorded video of a movie. As a result, most people rented movies rather than buy them. But in the 1990s, Warner Brothers decided to slash the price its videos to $20 or less. Suddenly, the demand for purchasing videos went up astronomically.

The second impact is what a pricing change could do to your market share. If your change makes you more or less competitive in the marketplace, it should impact your market share (although keep in mind that competition may retaliate on their own pricing and mitigate some of your impact).

Finally, your sales will change at a different rate from your units if you change prices. For example, if you used to sell something for $1 and now you sell it for $2, your sales per unit double.

All of this gets calculated in the second section.

3) Marketing Decisions

Your baseline sales assume a baseline marketing expense. Any changes to that level of marketing should have an impact on sales. After all, you probably wouldn’t increase marketing spending if you didn’t think it was going to improve sales.

So in this third section, you put in the baseline marketing expense and the anticipated change in marketing expense. Then you calculate how you expect the change in marketing expense to change sales.

4) Sales Force Decisions

Similar to marketing, changes in salesforce expenditures should have an impact on sales. Therefore, similar to section 3, this section looks at baseline sales force expenditures, changes to the baseline, and how the changes to sales force expenditures impact sales.

5) New Strategic Decisions

Almost every new strategic decision is made in order to improve the company’s long-term position. And most of the time, that improvement includes an impact on sales. So in this fifth section, one calculates the anticipated impact on sales from each strategic initiative (each covered separately in this section).

In a sense, while sections 2 and 3 looks at the changes in the QUANTITY spent to improve sales, section 4 looks at the changes in the QUALITY of what you do to improve sales.

In a simple example, if a strategic initiative is to add a new product line, the impact to sales is rather straightforward. You add in the sales of the new product and subtract out the cannibalization of the old product.

If the initiative is to improve the quality of a baseline product, then one must estimate how improved quality will impact sales.

Since strategic decisions are often made for long-term benefit, there may be a short-term decline to sales during the transition. That is why, in my example, I show a negative impact in year one from the strategic initiative (but larger improvements later).

6) Net Results

The sixth and final section looks at the net impact of the first four sections, both in terms of impact on sales and impact on sales-related expenses. Basically, you take the baseline and add to it changes from pricing, marketing, salesforce and other strategies. The end result is your estimated sales and the estimated sales-related costs to get there. When you subtract those costs from sales, you get your “Sales Contribution”: the money you have left to pay for everything else.

BENEFITS
The benefits from using a Revenue Statement are as follows:

• It proactively links all of your activities to their impact on sales. It makes sure that when you change your approach, the appropriate change to sales is also made.
• It separates all of the components of sales, so that you can critique each one for reasonableness.
• It provides the ability to look at the more indirect influencers of sales, like changes in product quality, product features, service levels, repositionings, etc.
• It makes sure that the benefits and costs of each strategic initiative are incorporated into the plan (at least the sales portion).
• It forces one to reconsider issues like pricing and the expenditures for marketing and sales forces.

SUMMARY
To more comprehensively understand the sales portion of a strategic plan, it is recommended that some form of a Revenue Statement be used. A Revenue Statement has six sections:

1. Calculation of Baseline Sales
2. Impact of Pricing Decisions
3. Impact of Marketing/Advertising Decisions
4. Impact of Sales Force Decisions
5. Impact of Other Strategic Decisions
6. Net Results

FINAL THOUGHTS
Sales is too important an element of strategy to be left as a single line on an income statement.

Strategic Planning Analogy #473: Multiple Choice

THE STORY
When I was a child in school, I preferred multiple choice tests over true or false tests.  With multiple choice tests, I found it relatively easy to guess when I did not know the answer.  In nearly all cases, the correct answer would be the option that had the most words in it.  So when I didn’t know the right answer, I’d pick the wordiest option.

True or False answers were harder to guess.   You either wrote a “T” for true or an “F” for false.  One was not wordier than the other.  For awhile, I tried to perfect the writing of an answer that looked half-way between a T or an F.  It sort of looked like it could be either a T or an F.   My hope was that the teacher would be biased towards correct answers when grading and that my half-way letter would be interpreted as the correct answer due to that bias.  But that method was not as reliable as the multiple choice guessing method.

 

THE ANALOGY
In the business world, it often seems as if executives look at sales as being like a true or false test.  The question goes something like this:  “Did you get the sale? (T or F).”  And from the point of view of the executive answering the question, this seems logical.

The problem with this approach is that it does not provide any insight into the selling process.  It doesn’t help us answer a variety of essay questions, like:

1. Why did we get (or not get) the sale?
2. What would cause us to get more sales?
3. What is causing us to lose sales?
4. What approach should I use to get the next sale?
5. How can we make our sales more profitable?

Worse yet, I think the true or false approach wrongly distorts the way we look at the selling process.  Yes, from the company’s perspective, getting the sale is a true or false event.  However, from the point of view of the potential customer, the event is much more like a multiple choice question. 

The consumer has lots of choices for how to spend their time and their money.  To them, the choice is rarely binary—it is not “Do I buy your product? (yes or no).”  Instead, the question to them is “Which of my many options is the best choice for how I spend my time and money?” 

The alternatives to the consumer are many.  It can be between very similar products such as “Brand X” soup versus “Brand Y” soup.  It can be a choice between related products, like eating soup at home versus going out to eat at a restaurant.  It can also be between vastly different products.  An extreme example could be a young woman’s choice between going back to college or having a baby.

Choices between extremely different options happen all the time.  For example, a teenager may want to be popular at school.  To get there, the teen may consider a number of different options, like spending their money on the latest clothing fashions, or buying the latest technology gadget, or buying drugs. 

The multiple choice answers are quite varied.  And unless you frame the question properly to understand the real problem being solved (“What will make me popular with my peers?”), you will not understand what is going on in the mind of that person when they are making that choice.    For example, if you sell teen clothing, your biggest problem may be in convincing that teen that your clothes will make them cooler with the in-crowd than the latest smartphone. 

That is why it is so important for executives to look at sales as a multiple choice exercise for the consumer.   It helps orient executives towards understanding:

1.      What problems the customer is trying to solve;

2.      What is the vast array of options that can solve that problem; and

3.      How can I make my product become the best answer for that multiple choice question.

And, as I found out as a child, the best multiple choice answer usually has the most words. Or in this case, the customer chooses the answer with the most attributes related to solving the problem.  And you won’t know which attributes are relevant unless you understand which multiple choice question is being asked.

  

THE PRINCIPLE
The principle here is that if you want to increase sales, and do it profitably, you need to have a strategy which makes you the best option to a multiple choice question asked by a large segment of the population.  There are only two ways to create that superiority—natural advantages or bribes.

Natural Advantages

A rational natural advantage occurs when your product or service inherently has features making it meaningfully superior to the alternatives in solving a customer’s problem.  For example, if a consumer has a need for durability in their bicycle, the manufacturer making the most durable bicycle has a natural advantage over others trying to sell to that segment.  It is the natural preferred choice because the durability is a key part of the nature of that bicycle.

Natural advantages come in two varieties:  rational and emotional.  A rational natural advantage would be like that durability in the bicycle.  Durability is a rational excuse for preference.  It can also be rationally shown that the parts of a particular bicycle are stronger and longer lasting and more reliable.

By contrast, an emotional natural advantage occurs when your product or service provides makes consumers feel better about themselves. Usually, that means that your offering provides a superior feeling of self worth over the alternatives.  For example, a status-seeking woman would choose a Louis Vuitton handbag over others because that brand image provides a superior sense of self worth to her.  It’s really not about the durability of the handbag.  It’s the image and reputation of Louis Vuitton which transfers to the owner of the brand, making her feel better about herself.

Sometimes rational and emotional advantages can become intertwined. For example, if you have a movie star known for playing rugged, durable movie roles endorse the bicycle, some of the emotional connection with the actor will transfer to the bicycle, reinforcing the durability advantage.

WARNING: A natural advantage is not the same as a strength.  For example, you may be strong in “quality,” but that is not an advantage if:

a)      There is insufficient demand for quality as a solution with your market; or

b)      Others have a similar level of strength in quality (your quality is not meaningfully superior in the mind of the customer).

Therefore, the goal is not to become strong, but to become different and meaningful.  In other words, a strength must also make your solution superior to alternatives AND relevant in solving the particular problem faced by the customer.

Any efforts in areas which do not lead to difference or relevance are a waste of time.  Therefore, you strategy should emphasize trade-offs in the direction of difference and relevance.

Bribes

If you do not have a natural advantage over the alternatives (or cannot create one), then the only way to sell your product is to layer on incentives, like deep reductions in price or gifts with purchase.  I refer to these added incentives as “bribes.”  In other words, if you cannot find a way to be “better” than the alternatives, then you need to bribe people to choose you by being cheaper or more convenient than the alternatives.

Bribery is the more difficult path to sales, because it is costly and easily neutralized by price-matching.  Look at Apple.  It has created strong natural advantages.  It has created rational superiority in ease of use and features.  It has created emotional superiority with the “Cool Factor” and the pride and self worth which comes from owning the Apple brand (big emotional attachment).  As a result, Apple can sell millions upon millions of units at a premium price.

By contrast, the competition has had difficulties creating natural advantages over Apple.  As a result, the competitors have to sell their products at a significantly lower price than Apple.  In essence, the competitors are bribing people to forgo the natural advantage of Apple because the price differential is big enough to shift the value equation.

Of course, that price reduction is a high price to pay to get sales.  It makes the competition far less profitable than Apple.  Less profitability makes it harder to keep up in innovation.  And if the competition ever starts getting closer to narrowing Apple’s advantage, all Apple has to do is lower its price a little to get the advantage back.

Therefore, the best sales strategy usually revolves around natural advantages rather than bribery.

Relevancy

So how do you create the natural advantages which lead to a rise in profitable sales? Two actions must take place.  First, you need to fully understand which problems people are trying to solve and all the factors going into how they choose amongst the wide variety of alternatives.  In other words, if you want to be the superior option for the multiple choice question, you need to know what the question is and how the person thinks about the solution (e.g., are my teenage clothes creating superior acceptance over smartphones with the peer group?).  Only after taking these steps will you know which strengths are worth pursuing.

Second, the only way to typically become superior in these strengths is to focus on them more than anyone else.  Given limited time, money and manpower, gaining superiority in one area means forgoing superiority in other areas.  It is a matter of trade-offs—do less in a non-relevant area in order to do more in a relevant area. 

The first step tells you what is relevant and the second step makes you relevant.

 
SUMMARY
To the customer, purchase decisions are the result of answering a multiple choice question:  Which alternative best solves my problem or makes me feel better about myself?  If you want the customer to answer that question by purchasing your offering, then you need to provide superiority on the factors most relevant to the problem being considered.  That is best accomplished by determining the natural attributes which contribute to relevancy and then making the proper trade-offs needed to achieve superiority on those attributes.  Otherwise, you are stuck with the weaker option of bribery.

 

FINAL THOUGHTS
Relevant superiority in natural attributes does not happen by chance.  It requires forethought and a focused approach to trade-offs.  That only comes by having a strategy.  So if you want strong, profitable sales, start with a great strategy.

Strategic Planning Analogy #456: Who Do They Love?

THE STORY
When I was in college, I was a DJ on the college radio station.  Every day the radio station used to get a pile full of new albums from the record labels.  I was shocked by the huge amount of music being issued.  And pretty much all of these albums were selling at least in some quantity to the public.

I understood why most of the top selling albums sold.  It was pretty good music.  What baffled me were the less popular albums.  Who was buying them?

At first, I thought there just must be a lot of people out there with unusual tastes, who loved a different kind of music than the mainstream.  And to a small degree, this was true.

But when I did my investigation in the sales of these lesser albums, I found out that most were not sold to people who loved these bands more than normal people.  No, most of the people buying their records agreed with the majority that they were lesser albums.

The difference was that these people really, really loved music and loved buying music.  They happened to buy more music than normal people.  As a result, these people first bought all the popular music and still wanted to buy more, so they also bought the lesser albums (because that is what’s left to buy after you already have the popular ones).

So, for the most part, people weren’t buying music from these lesser bands because they loved these bands, but because they loved having as much music as possible.

I don’t think that information would have encouraged those lesser bands.  It implied that even though they sold a bit of music, they really didn’t have many avid fans.  They were just getting money from people who would spend it rather indiscriminately on almost ANY band.  So they didn’t get the money out of love, but out of convenience.   

THE ANALOGY
In the business world, a successful business needs a stream of income.  That’s why we get so happy when sales go up.

But let’s not fall into the trap of thinking that every purchase of our goods and services is an indication of their undying love for us.  As we saw in the story, lesser bands weren’t receiving a lot of love with their sales.  Their customers still loved the popular bands more.  The lesser bands were just getting some of the leftover money from heavy spenders after they had already purchased music from the bands they loved more.

In fact, people often make purchases from companies they hate.  For example, when AT&T was the only service connected to the iPhone, people who loved the iPhone purchased their mobile services from AT&T, even though many of them hated the AT&T coverage and service levels.

So, when considering the sales component of your strategic plan, don’t automatically assume a direct correlation between sales and love.  Otherwise, you may create the wrong strategy.

THE PRINCIPLE
The principle here is that just because your business has an income does not mean that people love you.  And depending upon the type of love relationship you have with your customers, you may need a different strategy.

Let’s face it.  We can’t all be the best or the most popular.  We can’t all even be above average.  And if your offering is not the best, then “best at” strategies won’t work.  For example, if you are not the lowest cost operator, it doesn’t make sense to pursue a lowest price strategy.  It won’t work for you.  Strategies designed to exploit strengths don’t work very well if you do not have a strength to exploit.

So what should you do if you find yourself in such a situation?  Listed below are four tactics to consider doing and two tactics to not do.

“To Do” Option #1: Connect to Another Love

If people don’t love you, then find ways to get yourself associated with something people really love.  As we saw earlier, in order to get sales AT&T connected itself with the iPhone, something people really loved.  AT&T hid themselves in the package.  If you wanted the much-loved iPhone, you had to take the “unloved” AT&T. 

The more and the tighter you can bundle yourself into packages with other items people love, the better you are.  Kmart is not one of the most loved retail brands, so it tries to tie itself to brands that are more loved.  It has done so over the years by creating exclusive selling arrangements with names more loved than its own, like Sesame Street, Martha Stewart, Jaclyn Smith, Selena Gomez, and Sofia Vergara.

“To Do” Option #2: Become Most Convenient

Sometimes being “good enough” is good enough.  That occurs when you exceed the minimum threshold of acceptance and are more convenient than superior offerings.  In other words, it you create barriers making it more difficult to get the superior product, people may say the extra effort isn’t worth it and then settle for your slightly inferior offering. 

For example, you can pursue a distribution strategy which makes it easier for customers to stumble upon your product than the competition.  You can try to tie up shelf space in the most popular stores to block ease of access to competitors.   You can buy up all the key words on search engines to make it more convenient for people to click to your site.

If you are not loved enough to get people to come closer to you, then go out to become closer to them.  For example, those unloved bands can sell more music and more tickets if they get closer than other bands to where the music lovers are.  They can hang out at the music festivals where you can find the people who have more desire for and are more in the mood to spend on music.  Seeking out these people will work better than waiting for them to seek you. You imposed more convenience through your efforts to get closer.

In both option #1 and #2, the idea is to make it harder for a customer to substitute a competitor’s product for your own.  Product bundling, exclusivities, and other such tactics can often serve both purposes—get you closer to where customers want to be and make it harder for competitors to do the same.  

“To Do” Option #3:  Find a Niche

Sometimes, if you narrow your focus, you can find a way to become the best alternative to a niche audience.  You won’t be the best option for everyone, but if the niche is large enough, you will be the best with enough people to make a good profit.  You can then use a “best at” strategy within that targeted niche.

To do so, you may need to change your business model a bit.  You may need to move away from more conventional approaches and make bigger trade-offs.  This could even make you less desirable to the masses.  But if it makes you more loved by a niche, then it can be worth it. 

Many retailers found they could succeed against Wal-Mart by going after the niches Wal-Mart left behind in areas such as superior quality, superior service, a higher level of fashion taste, etc.  Becoming best for a niche ignored by Wal-Mart was a better strategy than being an inferior Wal-Mart imitator. 

“To Do” Option #4: Exit the Business

One of the first questions I like to ask in a strategy session is this:  Why should anyone naturally prefer your offering over the competition?  If you cannot think of a meaningful reason for people to naturally prefer you, I have a second question:  Why, then, should you stay in business?   If you are unloved now, and the first three options aren’t viable, the best option may be to exit the business.

“Not To Do” Option #1: Get Overconfident

If you think that your sales are there mainly because people love you, then you may try to exploit that love by raising prices, cutting features, etc.  But if that love is not really there, then attempts to exploit it could backfire.  For example, if one of those lesser bands charges too much for their music, the money will go to a different lesser band.

Most of the time, customers have alternatives.  Even if you think you have a monopoly, there can still be alternatives.  For example, even if you own 100% of the rail business, people can use other forms of transportation, or maybe telecommute via Skype.  And if you haven’t been using the options mentioned above to curtail alternatives, these alternatives may be even more abundant with easier switching than you think.

Therefore, think it over carefully before trying to exploit the love you think you have. 

“Not To Do” Option #2: Assume Unwavering Loyalty

The marketplace continues to evolve; circumstances change over time.  If you are not well loved, those changes could work against you to cause massive customer defections from your offering.

For example, you may be the most convenient option now, but that does not mean it will always stay that way.  Blockbuster video rental stores used to be the most convenient way to get video.  But then Redbox put video vending machines in far more convenient locations and Netflix let you download video from the convenience of your sofa.  Suddenly, Blockbuster went from most convenient to less convenient.  And since Blockbuster did not have much of any superiority anywhere else, people switched away from Blockbuster in droves.

Similarly, AT&T lost sales opportunities when the iPhone became available on other systems.  Kmart lost business when Martha Stewart took her brand away from Kmart and put it in Macy’s. 

Since preferences are more fickle with unloved brands, one needs to be more vigilant in holding on to whatever small advantage one can maintain.  If convenience is your advantage, keep on top of any developments that can become even more convenient.  If tie-ups with others is your advantage, make sure that you are always tied up with the best deal of the moment.

Never get comfortable in thinking the loyalty is locked in forever.

SUMMARY

If your offering is not the best in the industry, then don’t try to win with a “best at” strategy.  Instead, look for ways to bundle with others more popular, become more convenient or create a niche.  

FINAL THOUGHTS
It’s human nature to think well of our own offerings.  We may love the products and services we sell.  But our opinion is not the one that matters.  In many cases, the consumers may hold a much lower opinion of them than we do.  So pay attention to their opinion and don’t get caught up in your own sense of loyalty.

Strategic Planning Analogy #300: On a Mission

STORY
There’s an old story about a man watching workers build a church. He goes up to each of the workers to ask what they are doing.

The first worker says he is laying bricks. The second worker says he is laying panels for the floor. The third worker says he is building a place to worship and glorify God.

Guess which worker is probably doing the best quality of work.

THE ANALOGY
All three workers were doing a small part to help build a church. But they viewed the nature of their work differently. Two defined their work by the particular task they were doing—laying bricks or laying a floor. One, however, saw the big picture and defined his work a being part of what he viewed as a noble cause—building a place to glorify God. And of course, the one with the nobler definition of his work is the one who will tend to produce the greatest outcome, because he sees a deeper importance/significance to his performance.

Businesses have the strategic option of defining themselves just like these workers. They can define the work as being a mundane task—like manufacturing widgets—or as part of a larger, more noble task—like making the world a better place.

And the more you imbue a task with a noble purpose, the better off you tend to be. Strategic planning has an important roll in helping to frame a company’s mission so that it imbues the business with a noble purpose.

THE PRINCIPLE
The principle here is that companies with a noble business mission can tap into benefits than mundane missions cannot.

1) Additional Sources of Revenue
Noble companies have three additional sources of revenue. First, they can typically charge more for their products. According to the 2009 Corporate Citizenship Study, people are willing to pay more for products from socially responsible companies. Forty percent said they would spend between 1% and 10% more for a product from a socially responsible company.

Consider TOMS Shoes. TOMS Shoes was founded on a simple, noble premise: With every pair you purchase, TOMS will give a pair of new shoes to a child in need—one for one. To this, they also add the idea of having vegan shoes—no leather (save a cow).

TOMS’ shoes are not cheap. Their simple canvas shoes are about $50. I can go to Wal-Mart or Target and get a simple canvas shoe for half that price (or even less). Yet people are willing to pay a premium for a TOMS shoe. Why? They like the noble idea that whenever they buy a shoe, a person in need gets a free shoe. That is worth a premium price.

Second, a noble cause provides new sources of revenue. Who says you have to earn all of your income from your purchase price? That purchase price can be subsidized with additional income from other sources.

Consider many cause-related media companies. It is getting harder to be profitable in the magazine business these days. Many publications are calling it quits and shutting down because subscription and ad revenues are not enough to remain profitable. However, one cause-related magazine I subscribe to has started a new campaign with its subscribers. It is touting the noble purpose of the publication and asking for additional donations beyond the regular subscription price. It says that it is worth giving extra to keep the noble magazine and its important message in business. I’m sure that extra money is coming in. This is something that a mundane magazine cannot tap into.

If your cause is really noble, there are opportunities to tap into government funds, charitable funds/endowments, or sponsorship ties with other companies that will pay you in order to associate themselves with your noble endeavor.

An example would be St. Jude’s Children’s Research Hospital. In many ways, it is a hospital just like any other hospital. Yet, on top of this, they have imbued a greater sense of nobility to the hospital business. It does more cutting edge research and never turns away a child due to an inability to pay.

As a result, St. Jude’s taps into a lot of additional revenue sources more successfully than many other hospitals. It is strongly promoted by many in the acting community. It has a nationwide charitable program. It has a partnership program with many retailers, including Target, Kmart, CVS, Williams-Sonoma, Dollar General, Brooks Brothers and others.

The third revenue benefit of a noble mission is that there are the added revenues which come from having loyal customers who volunteer to be an advocate for your company. TOMS, for example, has a DVD describing their noble cause and encourages customers to hold DVD parties at their homes to spread the word. TOMS also encourages and helps customers set up parties in their homes to customize and decorate TOMS shoes. On April 8, 2010, they are encouraging customers to bring attention to the noble cause by going a day barefoot. And of course, there are all the web 2.0 opportunities with Twitter, Facebook and the like to build a strong, loyal TOMS community.

Loyal customers will buy more from you and act as evangelists to get others to buy from you as well. And this loyalty is stronger, the more noble the mission of the company.

2) Additional Ways to Lower Costs
Not only does increased nobility improve the top line. It can also reduce costs, further improving the bottom line.

Going back to the 2009 Corporate Citizenship Study, they found that people highly value the idea of working for a socially responsible company. Fifty-six percent said that it would make a positive difference for them. Even more telling, 40% said they would be willing to take a small pay cut to work for a socially responsible company.

For years, private schools with noble causes (principally religion-based) have traditionally paid their teachers less than those working for public schools. This idea does not have to be limited to just schools. Bring a greater nobility to the cause at your business. Not only are the employees who desire to work at noble companies more motivated, you do not have to pay top dollar to get them. The privilege of spending the day feeling a part of a larger, more noble purpose is worth sacrificing for.

This idea can also be used as leverage with your suppliers to negotiate lower costs. They may give you a break if they realize that their lower price to you is contributing to a greater noble cause.

Finding Your Nobility
Perhaps your sense of nobility is not as great as what was seen in some of these examples. But that doesn’t mean that you cannot change your business model to become more noble. St. Jude could have used a more conventional hospital business model, but they chose not to. You can change your business model to become more noble as well.

You could perhaps do a one for one program like TOMS on your product/service. You could be like Target, who gives 5% of its income to charities in the markets where it has stores. Best Buy is getting more involved in sustainability issues with the products it sells, accepting returns of old electronics items and working with its suppliers to help design more sustainable products. Wal-Mart is getting ever more active in environmental causes. The change in Wal-Mart’s reputation has improved significantly once they took a more noble approach and I believe it has helped them in many ways. The list goes on.

The way you define your strategic mission has a lot to do with how your employees, customers and other stakeholders view the company. It can not only change the perception, but also the reality of how noble a company you really are.

Consider these mission statements:

Google: To organize the world's information and make it universally accessible and useful.

Proctor & Gamble: Provide branded products and services of superior quality and value that improve the lives of the world's consumers, now and for generations to come.

Johnson & Johnson: To provide scientifically sound, high quality products and services to help heal, cure disease and improve the quality of life

Herman Miller: Herman Miller, Inc., works for a better world around you. We do this by designing furnishings and related services that improve the human experience wherever people work, heal, learn, and live.

And it cannot just be hollow lip service. The mission needs to be more than just words on paper. It has to be lived every day by senior management, supported by where the capital is spent, evidenced in how employees and customers are treated, and a key element of the discussion on all major decisions. In other words, it must be fundamental to the strategy. If done properly, not only will you do well (quality of social responsibility), but you should also do well (enduring, profitable company).

SUMMARY
Companies with noble missions have access to many advantages. Customers are more loyal and act as advocates for your company. You can get away from competing only on price (and perhaps raise prices a little). You can tap into more sources of revenue. You can attract highly motivated workers who do not necessarily need to be paid top dollar. And you can feel good about not only building a strong business, but also a better world.

FINAL THOUGHTS
Now you may be saying to yourself that your business really is rather mundane and that there is not a lot of nobility in what goes on. Yet consider the investment banking industry. Currently, many see investment bankers as the scum of the earth. Large sectors of the population see nothing noble in the way they operate.

However, listen to the way Goldman Sachs CEO Lloyd Blankfein defines his work (from The Sunday Times, November 8, 2009). “We’re very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle. We have a social purpose.” He is, he says, just a banker “doing God’s work.” (something like the attitude of the church builder in our story?)

I’m not saying that you need to agree with Blankfein’s assessment. However, if he can find a way to put such a noble spin on what he does, I would think that you can do the same for your business.

Strategic Planning Analogy #256: Thin is In?

THE STORY
Suppose that you had to choose your future spouse from three who are behind a curtain so that you cannot see them. The only thing you know about them is their weight.

Let’s say there are three men behind the curtain—one is of average weight and two have above average weight. At first, you might be hesitant about picking one of the men who has above average weight for fear of choosing an ugly, fat man. However, the man could also be overweight because he is a hunky, muscular guy who could be quite appealing.

Both extra muscles and extra fat can create above average weight. By just hearing what the weight is, there is no way of knowing if it is fat or muscle. The best and the worst choice could have the same weight.

Now, suppose there are three women behind the curtain—one is of average weight and two are below average. At first, you might be inclined to choose one of the women with below average weight, thinking she could have a beautiful fashion model appearance. On the other hand, below average weight can be caused by being sickly and bedridden—near death.

Just knowing the weight will not let you know if the lower weight causes the woman to look like a fashion model or a sickly person. Again, the best and the worst choice could have the same weight.

By only knowing the one attribute (weight), it is very hard to make a proper choice.

THE ANALOGY
In strategic planning, one often has to make choices—how to position the brand, who to target, what the appeal is, and so forth. For example, in creating a sales strategy, it is common to try to target specific types of customers to go after.

A problem arises if you define your target by just one variable. As we saw in the story, if all you know is one variable (weight), you may be placing both your best and your worst choice in the same target group (higher weight for men, lower weight for women).

For example, let’s say you want to target heavy spenders. As we will see in this blog, a single variable like “heavy spending” can cause problems, because both some of your best customers and some of your worst customers can be heavy spenders. This makes the target ineffective.

THE PRINCIPLE
The principle here is to avoid targeting based on only one variable. To illustrate this point, we will look at the flaws in targeting “heavy users,” based only on the single variable of sales volume with your firm.

At first, this might seem like a logical metric to target for sales. After all, people who spend a lot with you probably like you (or your products), and it shows they have the financial means to buy a lot from you. People who like you and have money to spend sound like a good target for getting additional sales, right?

Maybe yes and maybe no. As in the story, that single attribute can be deceiving. Just as an overweight man can be ugly with fat or handsome with muscle, a customer currently spending a lot with you can either be a desirable target for increased sales or an undesirable target. A best and worst target choice could have the same sales volume with you.

Here are some examples of high volume customers who would make poor targets for additional sales.

1. Those Who Know How to “Game” the System
There are many reasons why someone might buy a lot of product from you. One reason could be because they know how to “game” your system. By this, I mean that they know how to cherry-pick your offerings in a way that makes them extremely unprofitable to serve.

Perhaps they only buy your loss leaders. Perhaps they only buy when you clear items out below cost. Perhaps they are heavy users of your added services, making lots of costly demands that wipe out the profitability of their purchases.

Sure they love you. They love you because they know how to take advantage of you and get a better deal than you can afford.

I used to work with a company that was one of the largest purchasers of consumables in the United States. Just by looking at sales volume, you might think that this was a good target for getting additional sales. However, this company was an expert at gaming the system. They almost never paid anything near full price to the manufacturers of mass consumables. Additional business from them would not necessarily be profitable.

There’s the old joke about the salesman who goes to his boss and says, “I’ve got good news and bad news. The good news is that I just got Wal-Mart to purchase from us. The bad news is that I just got Wal-Mart to purchase from us.” The point is that even though selling to Wal-Mart may create high sales, the demands Wal-Mart makes for pricing and services could make that business undesirable.

If most businesses were to plot sales by customer against profits by customer, they would see that high volume customers are often among their most profitable and most unprofitable. Like in the story, the best and the worst choices can look identical on a single variable.

Therefore, when targeting customers, perhaps add some variable which help you to know how profitable they are. Profitability is more important than mere volume.

2. Those Whom You’ve “Tapped Out”
One reason why a customer could be spending a lot of money with you is because they are already buying 100% of their need for that product from you. Once you get 100% share of a customer’s business, there is virtually no potential to increase sales with them. You already have all that they are going to buy.

Therefore, if you offer these types of people all sorts of sales incentives and discounts to purchase from you, the volume of business from that customer will stay about the same. What will change is the profitability of that business. They will be buying the same amount (100% of their need), but now they will be buying it and getting your incentives and discounts. All you have succeeded in doing is lower the profit on business that was already yours in the first place.

So instead of looking at just one variable (sales volume), it probably makes sense to also look at your share of their spending in the category (share of wallet). If you already have near 100% share of their wallet, trying to get more sales out of them would most likely be unproductive. Instead, you should be looking to target customers who like you enough to spend quite a bit with you, but still are spending some of their money on your competitors. Then you can target additional sales from them by getting them to shift a higher percentage of their business with you. You will not be able to separate out this more profitable target if you only look at the single variable of sales volume.

3. Those Who Buy Differently
Not everyone is motivated in the same way. A tactic which increases sales with one type of customer may have no appeal to another. Some may appreciate price discounts. Others may prefer value-added services. By lumping all heavy users together, you are classifying them by similar end behavior (purchase volume). However, this group can have all sorts of dis-similarities when it comes to why they purchase and what motivates additional sales (intermediary behavior).

If you try to use the same sales-boosting strategy on this segment, it will probably be effective on some and not on others, depending upon whether that type of strategy appeals to them.

It would be better if you added motivational factors in your definition of segments. Then you could target the most appropriate motivational tactic separately to each segment. That way, everyone would be spoken to in the most appropriate language.

SUMMARY
Setting customer sales targets based on a single variable, like sales volume, can be a mistake, because both good and bad targets can have similar sales volume. Other factors to consider include customer profitability, share of wallet, and motivation variables.

FINAL THOUGHTS
Niche businesses can often provide a better return on investment than businesses targeted at the great masses in the middle. As a result, even the strategic goal of trying to increase sales a lot may be a mistake if it destroys your success with the niche. Narrow sales targets (based on multiple variables) may at first look limiting, but it may help reinforce your success within your niche.