Strategic Planning Analogy #554: Organizing the Closet

THE STORY
Jessica and Amanda both owned a huge amount of clothes—so many that it became hard to find the right thing to wear. Therefore, Jessica and Amanda decided to get more scientific about how they organized their walk-in clothes closets.

Because having a color-coordinated outfit was so important, Jessica organized her closet by colors. All the reds were put together, all the blues were put together, and so on. Jessica was proud of her decision. “Now, putting together a coordinated outfit should be a snap,” said Jessica.

Amanda took a different approach. First, she separated her clothes by season. Then within each season, she separated dressy clothes from casual clothes. “This should make it easy to find an appropriate outfit for the season and occasion,” thought Amanda.

So who do you think had the easier time finding an outfit?

As it turns out, Jessica had the more difficult time. Sure, all the reds were together, but there were so many of them to wade through. There were summer wear in reds, winter wear in reds, dressy clothes in reds, casual clothes in reds and so on, all mixed up together. Most of what she had to sort through in reds was inappropriate at any particular time or occasion. It was difficult to find the appropriate red items at any particular point in time.

By contrast, Amanda’s approach to sorting made finding an outfit much easier. She knew what season and occasion she needed an outfit for before entering the closet. Then, she went to the appropriate area where those types of clothes were located. It was easy to make the right choice.

THE ANALOGY

Just because you organize your closet does not mean that it will help make your life simpler and more organized. Some organizational methodologies are just more helpful than others. Amanda, who organized by end use, had a superior system of clothes segregation than Jessica’s, which sorted by color.

The same is true in business. Businesses are told that things will be better if they segregate and specialize. However, not all segregation approaches are equally effective. Some are far more efficient than others. If a business chooses the wrong segmentation approach, it may deceive itself into thinking it is better off, merely because it went through the act of segmenting.

However, it may find itself in a situation like Jessica, with a segmentation scheme that provides no benefit, because it organized around the wrong factor (like color).

Therefore, before running your business through a complicated segregation and specialization program, make sure you are segregating and specializing on the most effective factors.

THE PRINCIPLE
The principle here is that a segmentation system based on end use and occasion (like Amanda) is almost always better than a segmentation system based on people/customers. At first, this may sound like heresy. After all, the majority of publications on targeted business segmentation will focus on how to target particular customer segments. But, as we will see below, that is not the best system for these times.

Push Vs. Pull

The targeted customer approach was developed a long time ago, before the advent of social media and consumer empowerment. The idea was that you would choose a particular customer segment and then pitch your product to that segment. It assumed that the business controlled the conversation, both in terms of who was involved and what the message was. It was called “push” marketing, because the manufacturer was pushing the conversation to its intended target. It was a controlled, one-way discourse. In such a controlled environment, segmenting by customer made sense.

However, that world has pretty much disappeared. Customers now want a dialogue, which includes not only a two-way conversation with the manufacturer, but also adding in other voices, like blogs, independent reviews, consumer ratings, and the opinions of their friends. The manufacturer no longer controls the conversation. It is merely one voice among many.

Now, we are in a “pull” environment, where the customers decide whether they want to get involved or not. If they decide to opt-in, then they pull the product towards them. If the customers don’t want to opt-in, the manufacturer is left out. Because the company has pretty much lost the ability to control who wants to be in the conversation, it seems a little silly to think they can control the segmentation of customers.    

Customers Have Multiple Occasions

But even if you could still segregate customers, it’s not the best choice. This is because people do not act the same in all situations. Take food, for example. Your choice for the most appropriate place to get food can change based on the situation/occasion:

• At the beginning of the month, when flushed with cash: A stock-up store.
• When out of a couple of perishable items, like bread or milk: A convenience store.
• When trying to impress a date or a boss: Higher-quality, more expensive food.
• When trying to stretch your money at the end of the month: a hard-discount cheap store.
• When needing a quick snack at work during a break: a vending machine.
• When in a hurry: a fast food restaurant.

As you can see, the person stayed the same, but the best option did not. The best option for the same individual varied by occasion. So if you target a particular consumer segment, what are you supposed to offer, since it varies by occasion? Am I to be a combination large stock-up, small convenience, high price, low price store inside of a vending machine that is also a restaurant? There really is no way to capture a consumer segment, because the consumer segment is not consistent across occasions. It really isn’t a meaningful segment.

Occasion Segmentation

This is why occasion-based segmentation is a much better choice. It was a better choice for Amanda’s closet and will be a better choice for your business. There are three reasons for this.

First, it allows a company to specialize and become “best at” offering the solution to a particular occasion. Rather than trying to be that combination food mess mentioned earlier, you can focus on just one of those occasions and truly become the best. That way, when someone is looking for a solution to the problem associated with that solution, you will stand out as the best option and get the business.

And this leads directly into the second reason to segregate and specialize based on a solution. In a pull environment, the customer is the one making the choices, and they make their choice at the time of the occasion. They will go out into the social media space to figure out what is the best option for that occasion and then pull in the best option. The only way they will choose you is if you have specialized in such a way as to be the best at that particular time and occasion. So to win in the new environment, you need to own the occasion.

The beauty is that you are now open to all modern customers, not just a segment. Whenever anyone falls into the occasion you are specializing in, they can be yours. And given the modern digital tools, they will find you. Isn’t that better than proactively telling people you don’t want their business because they are not in your “customer segment”?

Take the Kia Soul. It was originally targeted to a young “first car” consumer segment. However, one of the largest segments buying the car is retirees. As it turns out, retirees drive less, need to save money (on fixed incomes), and don’t haul around a lot of stuff or people. The Kia Soul is a great solution to the majority of the occasions retirees fall into. Why write off retirees and all of their business because of a push marketing segmentation directed to youth?

Finally, a specialization based on occasion typically leads to operational efficiencies. By not trying to be all things to a consumer segment, you can save all the expenses associated with that. Hence, the occasion-based focus can be a more profitable approach.

SUMMARY
In general, specialization and focus are good things. However, the benefits of specialization and focus vary depending on what you choose to focus on. In most cases, focusing on owning an occasion segment is more powerful than trying to own a consumer segment. Occasion-based segmentation is more in tune with pull marketing and the way consumers behave today. In addition, consumers vary their choices based on the occasion at hand, which implies that there really is no single way to please a consumer segment. Therefore, instead of focusing your business based on consumer demographics, focus on solutions for particular situation.

FINAL THOUGHTS
Every time you pick out your clothes to wear, remember that your choice is made based on the occasion for which you are wearing them. That way, you will never forget to run your business the same way—designed to be the best at providing a solution to a particular occasion.

Strategic Planning Analogy #541: Necessary for Whom?

THE STORY
I was in a business meeting recently where we somehow got on the topic of Southwest Airlines. I was explaining how Southwest had been so much more profitable than most other airlines for decades because of its unique business model, which in part included the avoidance of the hub and spoke model used by most of its competition.

Someone in the meeting objected to the praise of Southwest. He countered that the traveling world needs a hub and spoke business model. Since the hub and spoke model is necessary, it is not proper to praise a company which avoids this necessity.

In my mind, my reaction was “Necessary for whom?” Is it necessary for some business travelers? Yes. Is it necessary for Southwest? Absolutely not.

THE ANALOGY
Two of the key aspects of strategy are determining WHERE to compete and HOW to compete. Answer these concerns properly and success is more likely. Answer them wrong and success is nearly impossible.

One method businesses use to determine where and how to compete is by looking for necessity of demand. After all, if something is viewed as a necessity and demanded by a large sector of society, it must be a good place to be, right?

Just look at the illegal drug business. The junkies feel that getting their next fix of the drug is the most necessary thing they must do. And the suppliers of those illegal drugs make a lot of money off that perceived necessity.

The problem is that there is not a strong correlation between necessity of demand and profitability. It worked in the illegal drug business. It didn’t work so well for those satisfying the necessity of hub and spoke in the airline business.

Southwest chose its “where to compete” principally in the lower price, non-business portion of the airlines industry. Southwest chose its “how to compete” by doing a number of things differently, including the elimination of the hub and spoke model. These were very profitable choices for Southwest.

In fact, it was a more profitable choice than going after the demands of the business traveler, even though the demand for business travel is higher (and presumably more necessary) than for non-business travel.

Just because something out there in the marketplace is a necessity does not mean that you have an obligation to provide it. Like Southwest, it may be better to avoid it.

THE PRINCIPLE
The Southwest example illustrates a common situation in business. This is the principle that the highest profits are often found by avoiding the highest demand. This may seem counterintuitive at first, but there is logic behind this point of view.

Why High Demand Items Are Often Not Very Profitable to Supply

There are many factors which tend to lower the profitability of serving many high-demand segments. The first is that high demand segments tend to attract a lot of competition. Businesses like to flock to where the big sales potential lies. But when too many companies are fighting for those sales, the profitability of those sales plummet. Price wars suck the desirability out of those sales. You may be able to get a much higher return going after smaller, less competitive markets.

A second problem is that high demand necessities tend to attract a lot of government regulation. Food and health care are high demand necessities. Many governments get involved in significant regulation how those necessities are supplied. This often takes a lot of the profitability out of the system.

Just look at the results when communism gets involved in the necessity of supplying food. They impose all sorts of regulations and price controls. They often insert themselves into owing a lot of the food businesses. The net result is that businesses pull away and consumers are stuck with shortages and long lines.

A third problem is that high demand needs pull in the masses. And the masses do not always have a lot of discretionary income. They cannot afford to pay as much for their demands as other, smaller segments. You cannot charge more than they are able or willing to pay, no matter how much it costs you to serve them. Just look at the automobile industry. Those selling cars to the masses tend not to do as well as those selling cars in luxury or high performance segments. Customers in the luxury and high performance segments are willing and able to pay a lot more for their cars, making them more profitable, even if the segments are smaller than the mass segment. That's the reason why Tesla decided to start by targeting the high performance end of the electric car business.

When you try to appeal to the masses, you often end up with “average” offerings. Unfortunately, there will always be competitors who specialize in targeting the smaller niches. The specialists will offer items that are cheaper, or of higher quality, or of higher prestige, or of higher functionality. These more profitable niches will eat away at your mass market, leaving you with some of the less profitable middle ground. This is what Southwest did when it specialized in the profitable low price, non-business segment (and firms like Virgin Airlines and Net Jets at the high end), leaving the other airlines fighting over the unprofitable middle.

Fourth, high demand areas are often in fairly mature businesses. Mature and aging businesses, by their very nature, tend not to be as profitable as businesses in their younger, faster growing stage. Look at Procter & Gamble. They completely divested out of the food business (an extremely high demand business). Why? Because it did not have high prospects for future growth and profitability. It was too mature.

Instead, P&G has been pouring money into beauty care. You can say that food is a necessity and beauty care is a more discretionary luxury (less necessary). Yet, beauty care is where P&G have better prospects for growth and profitability. P&G is doing a great job of choosing where and how to compete, even if it means walking away from a lot of high demand products. 

Choose Wisely

As a business, you have choices. Strategy is about helping you make better choices. Those choices need to consider more than just the size or necessity of demand. They also need to look at the profitability within that demand. Smaller segments can often be better strategic choices.

In most businesses, there is no law that says that you have to target unprofitable segments. Even if you think that a particular function is necessary to make the world work, that doesn’t mean you have to serve it. It’s okay to walk away from some businesses and leave it to someone else.

Others may have business models better suited to those situations. Keep in mind that when P&G has been divesting all of its non-desired businesses, it has been finding buyers for those businesses. Many of those buyers are companies who do things differently from P&G and are better suited for wringing value out of mature, slow growth businesses.

Is There a Moral Obligation?

There may indeed be some moral issues here. Is it right to only serve the profitable rich and ignore the masses? Can we ignore the poor because they are unprofitable? Businesses work within a society and they have some obligations to that society. But they also have obligations to shareholders, debt holders and employees.

If businesses choose to or are forced to take on bad business models, this is bad for everyone. If they cannot make an adequate return, employees lose their jobs, and equity/debt holders don’t get a return. More importantly, the companies don’t make any profits which can be used for charity or for taxes to governments to help solve these issues.

Strong, healthy businesses are in a better position to provide jobs and provide funding for social issues. Then the question turns from business models to social accountability.

SUMMARY
Strategy is ultimately about making choices, such as where and how to compete. These few strategic choices can have a bigger impact on business success than almost any other thing you do. Choosing what not to do is usually more important than choosing what you do. And some of the things you should not be doing are perhaps serving large “high necessity” demands. It’s okay to walk away from them and go in a direction better suited to who you are.

FINAL THOUGHTS
When you look at large, mass oriented businesses, there are usually only a small handful of winners (often only one or two). The rest struggle to stay alive. If you are not the winner in that mass space, it is usually better to walk away and switch to leading in a smaller segment. And that’s okay.

Strategic Planning Analogy #537: Three Questions (Part 2)

THE STORY
For as long as anyone can remember, there had been the ice brigade at the US Congress building. The 29 employees with this job had the responsibility of making sure every congressional office had a bucket of ice by its door before 9AM every morning.

Nobody remembers when it started, but the tradition pre-dates air conditioning and mini-refrigerators. The idea was that Washington, DC can get very hot. Ice could be used in a number of ways to help counter the heat, either externally or internally.

Of course, now that congress has air conditioning, mini-fridges and other ways to conquer the heat, those ice cubes were less necessary. Yet they still came, every day, like clockwork. Many of the ice buckets were just thrown away each day by congress people who did not want it.

Finally, in 1994, Republicans took over control of Congress and started a program to eliminate waste. They saw the ice delivery program as an unnecessary waste and the practice stopped May 1, 1995.

Another waste looked at during this time was the fact that even though every elevator in the building had self-service buttons which anyone was capable of pushing, each elevator had a paid employee to operate those buttons.

THE ANALOGY
Time changes things. Something which may have made perfect sense in the past may be foolish today. Yes, there was a time long, long ago when ice deliveries to congressional offices made sense. But times changed, making that no longer necessary or even particularly desired. Yet the practice continued for decades.

Similarly, when elevators were first invented, it made sense to have elevator operators. But the elevator technology advanced over time to the point where elevator operators had become unnecessary and obsolete. Yet they were still there, working away in congressional elevators.

We may see these as silly and obvious examples of being out of touch with the changing times. Surely, our business would not get that out of touch with the changes in the world around us, would it?

Well, there are business bankruptcies every day, and many of those bankruptcies are due to the fact that a company did not adequately adapt to the changing times. The digital revolution made a lot of analog businesses look rather silly and out of touch—leading to many bankruptcies. For example, Kodak was an expert at analog film. But in a world of digital imaging, they seemed as necessary as elevator operators or ice deliverers in congress. The social revolution is having a similar impact.

Therefore, we must always be on guard to ensure that the times are not passing us by and making us silly relics of the past. Even congress eventually figured this out and did something about the relics around them. I assure you that the marketplace will act quicker than congress. 

THE PRINCIPLE
This is the second of three blogs looking at the three questions businesses need to ask themselves if they want to prosper into the future. Those question are:

1. What problem are you trying to solve?
2. Why should the customer naturally prefer your solution over the alternatives?
3. What are you doing differently to prove your superiority?

In the first blog, we looked at the first question. We saw that successful companies focus on solutions rather than products. Multiple products can be focused on the same solution, and multiple solutions can be had for the same product. Therefore, if you want to win in the marketplace, you need a strategy concerning which problem you want your product to solve.

Now we will turn our attention to the second question. Once one comes to understand that consumers choose based on which product is best at solving their problem, one realizes that the goal of their company must be to supply the best solution to their customer segment. In other words, you need to get a consumer segment to prefer your solution over all of the alternatives.

Understanding the Alternatives

If you want to be the preferred alternative, then you had better understand who the alternatives are. As we saw in the last blog, alternatives can come from products quite unlike your own. For example, many luxury brands can solve the problem of providing prestige or status. This could be anything from fashion clothing to automobiles to the latest technology to trophy wives to the liquor you drink to exotic vacations to yachts to whatever.

The point is that being the best at your particular product may not make you preferred if other products are better at solving the underlying problem.

For example, there is a big difference between the way high school students act today versus when I was in high school. The underlying problem for most high schoolers has not changed over the years. They are still looking for ways to achieve status and fit in with the cool group. The preferred solution, however, has changed.

In my day, clothing was a key way of solving this problem. If you wore the right status clothes, you got an edge in achieving status and fitting in with the cool group. Today, however, clothing is not the preferred solution. Just look at firms like Abercrombie & Fitch who built their entire strategy around being the best status clothing for high schoolers. These firms are doing poorly in the marketplace because students are looking for status somewhere other than in clothing.

Instead, students have found that having the coolest technology is the preferred solution over coolest clothes. In order to afford the coolest technology, students have shifted their clothing purchases to value brands like H&M or Forever 21. In fact, I just read where thrift stores are a hot place for teens and young adults. So now, clothing is looked at as a place to solve the problem of saving money in order to afford cool technology rather than as a solution for cool.

This leaves Abercrombie & Fitch out in the cold. Even if they are the coolest clothing retailer, it is irrelevant if the preferred cool solution is from technology, not clothes.

So understand the full spectrum of options for your customer. If your offering is not preferred over these alternatives, either change your offering or change your solution. Even Abercrombie & Fitch is starting to figure this out and is repositioning its Hollister brand to be less of a cool solution to more of a stretching your money solution.

Staying Relevant

Since times change, technology changes, competition changes and consumers change, one has to continually monitor the marketplace to ensure that your solution remains the preferred alternative.

For example, think of all the ways the smartphone and all its apps have changed people’s expectations and behaviors. Much of this new behavior is because the smartphone and its apps are being seen as preferred solutions over the older ways of doing things. If mobile is not a part of your solution, you may becoming as relevant as ice men at congress or Kodak in imaging.

Alternative If You Are Not Naturally Preferred

Let’s say you have not created a clear preference for your solution. Perhaps you have parity with the leaders or near-parity. You may think that’s pretty good.

But here’s the problem: if you cannot win them over with natural superiority, then you have to win them over with artificial superiority, which I call bribery. I don’t mean the illegal type of bribery. I just mean you have to sweeten the value by offering large discounts or added goodies. In other words, you are essentially paying them to pick you, because the natural offering alone is not enough to create preference.

And we all know what those discounts and added goodies do to our profitability formula. They transfer the benefit from us to the customer. There had better be an awful lot of price elasticity in order to cover the loss of profits per item. Unfortunately, in a highly competitive marketplace, the competition will tend to match your bribery, so no advantage is had anyway. You just lowered the profitability for the entire industry.

Segmentation

The goal here is not to be preferred by EVERYBODY. That is unrealistic since people are seeking value in different ways. You cannot be the best at pleasing everyone with the same offering. Trying to please everyone usually means you are preferred by no one.

Therefore, the goal is to choose a consumer segment for whom you can create the preferred solution. The chosen segment should be large enough to satisfy your requirements.

SUMMARY
Of the three important questions, the second one is “Why should the customer naturally prefer your solution over the alternatives?” Preference is important because without natural preference, you have to lower profits through bribery in order to lure business. Worse yet, your solution may be so irrelevant that even bribery will not be enough to create preference.

Since times change, you have to be constantly on the lookout to ensure that your solution remains preferable through time. Otherwise, you may need to change your offering or change your solution.

FINAL THOUGHTS
Superiority is determined in the mind of the customer, not in your laboratory. When determining whether you are the preferred alternative, ask your customer segment, not your employees.

Strategic Planning Analogy #519: A Whole Foods Bag at Aldi

THE STORY
Last week, I was shopping at an Aldi supermarket. While there, I saw a shopper in the Aldi store using a reusable shopping bag from Whole Foods.

In case you are not aware, Aldi is a low end, no frills cheap store selling a limited assortment of private label products. By contrast, Whole Foods is a huge, high end store full of high quality organic and Vegan products. Whole Foods is such an expensive place to shop that it is often referred to by customers as “Whole Paycheck.” You could not find two grocery chains at more opposite ends of the spectrum.

But there it was before my eyes—a customer in Aldi who also apparently also shops at Whole Foods. She was well dressed and looked rather sophisticated—a cut above the appearance of many in the store. And she was purchasing low-end private label goods at Aldi using a Whole Foods bag.

I was thinking how strange that was until I realized that I was also shopping at Aldi. Maybe it isn’t so odd after all.

THE ANALOGY
A big part of strategy can be segmentation. Questions debated include “who should be my segment” and “how to appeal to that people segment.”

The problem is the “who.” Did that woman I saw at Aldi belong in the Aldi segment or the Whole Foods segment? It’s obvious that Aldi and Whole Foods are targeting two totally different segments of the grocery business. Yet this woman appeared to fit into both segments. Where should we put her? Which marketing message should she receive?

This is not just a problem for supermarkets. Problems like this crop up all the time in business, where individual consumers do not neatly fit into a single segment. In fact, large portions of the population usually defy simple classification into a single segment. They appear to exhibit seemingly inconsistent behavior, doing different things at different times in different ways. They seem so illogical—defying the logic of my segmentation scheme.

As we shall soon see, the problem is that we often focus on the “who” of segmentation when instead we should focus on the “when” of segmentation. Making this change will vastly improve the segmentation portion of strategy. The illogical will become logical again.

THE PRINCIPLE
The principle here is that superior segmentation is typically occasion-based, rather than individual-based. People react differently based on the situation or occasion. For example, the same individual may:

1. Buy one brand of beer when trying to impress others and a different brand when drinking alone.
2. Go to one kind of restaurant when eating with his/her kids and a different restaurant when eating with their boss.
3. Wear one type of clothing when going to work and another type when exercising at the gym.
4. Shop at a big stock-up grocery store at the beginning of the month just after getting paid, shop at a convenience store to pick up milk when running out in the middle of the week, and shop a cheap store at the end of the month when money is tight. 

Does this inconsistency in behavior mean that these individuals are illogical? Not at all. Every behavior is logical within the context of the particular occasion/situation.

1. When impressing others with beer, price is less important and image more important. Therefore, it is logical to buy a different beer than when drinking alone (when price is more important and image less).
2. A restaurant suitable and desired by children (kid-friendly food and environment) is not one suitable for business lunches with the boss (quiet and sophisticated), so one naturally chooses differently depending on who one is eating with.
3. A business suit makes no sense at the gym and gym clothes make no sense in the office.
4. The amount of money in one’s pocket, the size of the shopping list, and how much of a hurry one is in determines where one go for groceries. As these variables change, so changes the shopping destination.

Therefore, it is the wrong question to ask as to which segment I am in:

1. The image beer or cheap beer segment.
2. The child-friendly or boss-friendly restaurant segment.
3. The suit or sweats clothing segment.
4. The stock-up, convenience, or low price grocery segment.

I’m in all of these segments. It’s like the lady who is both in the high-end organic grocery segment (Whole Foods) and the cheap private label grocery segment (Aldi).

So does that mean that segmentation is worthless? Not at all. It just means we have to move from designing segments around “who” to segments around “when.”

If you look at the “when” of segmentation, then you are looking to own a situation or an occasion. You try to become the ideal solution for anyone whenever they find themselves in that chosen situation or occasion. At that point, that person becomes a part of your segment. And when that person moves on to a different situation, they fall out of your segment. You target the moment, not the person. When the moment is appropriate for your brand, you make your move.

Grocery Example

For example, I did not see that woman at Aldi purchasing any meat or fresh produce at Aldi. When she runs out of those products, that occasion probably prompts a trip to Whole Foods, because she values their extra quality, variety and emphasis on organic. And these attributes are important to her on fresh food.

But I suspect that in order to afford those expensive items at Whole Foods, she needed to save money on items where freshness, quality, variety and organic are less important. Thus, when the occasion comes up to buy basic staples, like rice or pasta or paper plates, she went to the store focused on low price—Aldi. This explains why I saw her in the pasta section at Aldi.

So the occasion/situation dictated which attributes were most important. Then the store which owned the attributes associated with that situation got the business—Whole Foods when the occasion required quality, variety and organic and Aldi when the occasion required saving money. As long as Whole Foods and Aldi continue to excel at their differentiated solution sets, they will win when a person’s occasion causes them to desire that particular solution set.

Steps to When-Based Segmentation

To succeed at when-based segmentation, you need to do the following:

1. Choose a situation or occasion where you can win (your position).
2. Build a business model that makes your brand the ideal solution for the problems most relevant to that occasion.
3. Let people know which occasion-based solution you are relevant for and why you are best qualified to solve the problems relevant to that occasion.
4. Do a good job of getting your brand inserted into the moments when the occasion is relevant.

For example, let’s say that you own a restaurant. The first step is to find an occasion to position yourself around. Let’s assume you choose to own the occasion of business lunches.

The second step is to build a business model that will give you superiority as a place for business lunches. So you start by doing research to learn what is most important when choosing a place for a business lunch. Perhaps the research says that the following qualities are most important: quiet area where you can hold conversations confidentially, close proximity to the office, ability to cater meals, food that has a sophisticated adult taste isn’t messy. Then you build your business to win on these attributes in terms of location, offerings, and skill sets.

Third, you make sure people are aware that you are “the best place for a business lunch.”

Fourth, you try to make sure you are inserted in the moments when that occasion comes up. For example, you may buy ads on search engines for terms like “business lunch.” After all, when people are looking up the term, they are probably entering that occasion. Perhaps you get in good with all the top administrative assistants in the offices nearby. After all, they may be the ones called upon to find their boss a place for a business lunch. If the admins control the choice, then you want to control them when the occasion rises.  

Finally, don’t get upset when all those business people drive home to their families in the suburbs and are not coming to you for dinner. Their situation has changed and they are no longer trying to solve the “lunch with boss” problem. They are no longer in your segment. Their meal needs have changed. And if you try to change your business model to meet these new situation needs, you can ruin your ability to win at the business lunch occasion.

Be patient. They will come back to work tomorrow. And many will need to solve the “lunch with boss” problem tomorrow. Just be ready when they drift back into your situation-based position.

SUMMARY
Segmentation is a key element of strategic planning. Usually, the best segments are those that are defined around situations rather than around individuals. The problem with individual-oriented segments is that individuals act differently based on the situation. Therefore, it is virtually impossible to create a solution that is best for all the situations a particular individual experiences. The better alternative is to choose a position revolving around a particular situation. If you own the best solution for that situation, then you will get the business whenever someone drifts into that situation. And don’t be upset when the customer drifts into a different solution and chooses someone else. Just be ready when they drift back into the situation where you can win.

FINAL THOUGHTS
Follow the solution to the situation, not the individual. If you follow the individual, you will become unfocused in what you offer as you try to be all things to all of their situations. By contrast, if you follow the solution to a situation, you will continue to get better at owning a point of focus.

Strategic Planning Analogy #329: Different Strategies

THE STORY
Early in my career, I was making a presentation in front of all the senior executives at a company. One of the items on the agenda was choosing the name for a new retail format. After my presentation of consumer research on store names, the CEO started off the discussion by saying he liked store names with the word “Mart” in them (like Wal-Mart or K Mart). His opinion had little to do with the research.

After that, we went around the room so that all the other senior executives could voice their preference. Almost without exception, every senior executive said that they also preferred names with “Mart” in them. Gee…what a coincidence that everyone liked what the CEO liked.

It was at this point in my career I learned that even though meetings can look like a democracy, they can really be a dictatorship. The CEO always got his way, so after that I spent all my time for future decisions focusing on persuading the CEO. I knew that if I got him on my side, the rest would follow like sheep.

THE ANALOGY
It usually doesn’t take people long to figure out who the key decision-makers are in a company. Once that’s figured out, those who want to get something approved focus their efforts on these key individuals. Like in the story, equal effort is not given to everyone. Disproportionate time is given to the executives who are most influential in the decision process. The “Yes-men” and the “Puppets” are basically ignored, as I started to do.

While this seems obvious and natural when working within a company, I have found that many forget this when working outside the company. Just as not all executives are created equal, not all customers are created equal. Some are worth a lot more than others.

Just as we don’t treat executives equally, we shouldn’t treat our customers equally. Our strategies should take into account the variation in customer power.

THE PRINCIPLE
The principle here is that a “one-size-fits-all” strategy should not be applied equally across all customers. Instead, different strategies (often radically different strategies) should be applied, depending on who the customer is.

Sure, a lot of you may say that you do some segmentation and treat some customers differently. But how radical are those differences in how you treat different customers? Are they as radically different as the customer base you serve? Consider the following data…

Not All Customers Are Equally Profitable
Back in 2001, Hax and Dean, in their book The Delta Project, said that on average, 35% of a company’s customers provide 146% of their profits. Worse yet, they found that about 65% of a typical company’s customers are unprofitable to serve.

A more recent study in 2005 by Deloitte Development LLC found something similar. Deloitte claimed that the top 20% of customers typically provide 175% of a company’s profits. The middle 60% of customers (as a group) were found to be breakeven, and the bottom 20% were unprofitable—often very unprofitable.

Although the figures between the two studies differ a bit, the conclusion is the same...over 100% of your profits come from a small sub-set of your customers. And if you are a typical business, a meaningful percentage of your company’s customers lose you a lot money. That’s a wide variation in customer contribution. Is your strategic approach as varied as your customer contribution?

And things are not getting better. Take, for example, the “freemium” business model used often on the internet. The freemium model works like this: The vast majority of the customers use the basic version on the internet, which is free. A very small subset pay money for a premium version. Virtually ALL the profits come from just those few people who buy the premium version. They need to pay the full weight of the costs for serving the vast majority, who use the product for free.

A good example of the freemium model is LinkedIn. The vast majority of those who use LinkedIn use the free basic version. It is only a small subset who pays for one of the premium versions—Business Version at $24.95 per month, Business Plus at $49.95 per month, and Pro Version at $499.95 per month.

As more and more of the economy moves to the internet—where many expect things to be free—more and more of a company’s profits will come from an even smaller number of customers. In fact, perhaps all the customers will be unprofitable and profits will only come from a small handful of advertisers. At this point, the advertising “customers” who DO NOT use your service (other than as a site to place an ad) may take on far more significance than those customers who use your service, but pay you nothing.

When this occurs, the people who use your product may almost cease to be customers in the traditional sense and instead be seen more as “inventory” to sell to advertisers.

Technology to the Rescue
The good news is that data management technology is getting pretty good at helping out in this process. The data management tools can help us do two things. First, they can help us discover the differences in individual customers. Second, they can help us provide a different strategic approach based on those differences.

Kroger gives a lot of credit for its recent success to Dunnhumby, its technology partner. Dunnhumby helps Kroger understand its customers at a more individualized level, providing insights that create different strategic approaches to its grocery customers.

It’s a different strategic approach than getting a few executives together for an annual off-site strategy meeting. Instead, it involves a room of around 200 Dunnhumby employees (many with statistics PhD’s) working every day, sifting through something like 300 terabytes of data representing 40 billion purchases made during 4 billion shopping trips by 42 million card-carrying Kroger shoppers.

Other Approaches
Not all strategic approaches need to be this data intense. Sometimes, it only takes a little bit of digging to find the key factors that make a customer highly profitable or highly unprofitable. In the freemium model, it is really easy to see who the more profitable customers are—it’s the ones who buy the premium service.

Once you segregate the customers, you can apply different strategic approaches. One can apply a more intensive strategy to appeal to the highly profitable segment, because it will pay off well. Then one can use a lower cost approach on the rest. More value (that is more customized) can be offered to the ones who pay the bills.

Keep in mind, that just because a customer is unprofitable does not mean that they should be encouraged to go away. They can still have value. For example…

1) If all the free LinkedIn customers went away, the product would be far less valuable to the premium customers. Without the free customers, there would be no reason for those premium customers to come to you.

2) Some customers may be unprofitable today, but have high potential later when their situation changes.

3) Even if a customer is unprofitable in total, as long as you can cover your variable cost serving them and make at least some contribution to the fixed cost, they are helping subsidize your business so that you can better serve your best customers.

4) If your model is based on advertising, more money-losing customers can result in more advertising income.

5) In the race to become known as a leader in a category, it helps to have lots of buzz about your brand. The additional positive buzz from unprofitable customers may be the difference between getting to #1 and ceasing to exist.

6) You may lose money giving away samples to key influencers (like mommy bloggers or celebrities), but if they like your product, they will influence a lot of profitable customers to patronize you. Like decision influencers in the office, these people are worth a lot of time to cultivate favor.

So don’t always try to get rid of the money-losers. Instead, use them to your advantage. Also, look for ways to make them less unprofitable—either by using a lower cost-to-serve model with them or by converting them to more profitable behavior. For example, when a profitable customer calls the company, they can get instant personalized service, but unprofitable customers are put at the back of the queue on an automated phone service.

The important thing is that you cannot do any of these strategic options if you do not understand how your customers are different and how that difference impacts profitability.

SUMMARY
Customers do not behave the same. Some behave in a way that is very profitable. Others behave in ways that are very unprofitable. These different customer types may require different strategies in order to optimize results. The smarter you are at understanding this (their behaviors, your costs), the better strategic decisions you will make. Recent advances in data management are making this easier and more desirable.

FINAL THOUGHTS
If your strategic approaches become too drastic in their variety, one may need a portfolio of brands in order to deliver the variety of options without destroying a particular brand image.

Strategic Planning Analogy #319: Take the “F” Out

THE STORY
At the exercise club where I work out, there are a series of TV monitors by the equipment, so that you can watch TV while exercising. Each monitor is set to a different channel. Some of the channels include a few of those political news cable channels.

It is interesting watching simultaneously how the different political cable channels report on the same news items. One would think they must be reporting from different planets, because their conclusions have absolutely nothing in common. Often, even their so-called “facts” of the situation have almost nothing in common. The “liberal” channels and the “conservative” channels each seem to live in their own little world.

I guess I shouldn’t be surprised. Emory University in Atlanta released the results of a political study back in January of 2006. Test subjects were given statements by a prominent conservative politician (a Republican) and a prominent liberal politician (a Democrat). The statements contradicted each other.

When shown these statements, both Democrat and Republican test subjects ignored the contradictions for their own party but saw the contradictions made by the other side. Worse yet, while going through the test, the test subjects did not show any increased activation of the parts of the brain normally engaged during reasoning. In other words, political opinions and mental reasoning appear to have nothing in common.

That explains a lot.

THE ANALOGY
One part of the strategic planning process is fact-gathering. Different people place different levels of importance on the fact-gathering phase. As we talked about in an earlier blog, some people become obsessed with “fact-based decision-making” as being a top priority.

However, as we saw in the story, one person’s facts may be another person’s fiction. And even if we could agree on the facts, the story shows that mental reasoning regarding those facts may not occur. As a result, opinions and behaviors may have very little to do with the facts.

Therefore, when you are trying to develop a strategy to get consumers to behave in a particular manner (to your benefit), facts may be irrelevant. It may be more important to align yourself with a particular opinion segment (something like a political party) than to align yourself with the facts.

THE PRINCIPLE
The principle here is that actions are more important than facts. Profit occurs when the right actions occur. Since actions are not necessarily determined by facts, then facts should not necessarily be the focal point of your strategy.

We need to get the “F” out. In other words, instead of focusing on “facts,” we should be focusing on “acts” (facts without the F).

This is not to imply that we should lie to our customers or intentionally deceive them. Not only is this wrong behavior, it is ultimately stupid behavior over the long haul. The global banking industry is feeling a lot of negative pressure and new restrictive regulations because of the perception that they deceived the public.

Losing the trust of your customer base can be a death sentence. And in today’s internet-connected, socially-conscious climate, bad corporate deeds always seem to find a way out into the public eye to your detriment. (Even if the facts aren’t 100% accurate, the damage is done).

Therefore, the idea is not to throw away the facts (and deceive), but rather to give higher preference to the mindsets in particular activity groups.

For example, let’s assume you want to sell lawn care products/services. You could dig up all the facts around the most productive way to care for a lawn, but this may not result in the ideal lawn care strategy. When you look at actions, what you will probably find is that there are two distinct types of actions regarding lawn care. One group hates lawn care—sees it as a burdensome chore—and wants as little activity as possible. Another group sees lawn care as a passion—like a pleasurable hobby—and enjoys their time in the activity.

The first group wants to do less than what the facts would say are ideally productive. The second group wants to do more than what is necessary. Neither is looking for the factually most efficient. Instead, a good strategy would be to pick a segment (no matter how “irrational” their actions seem) and appeal to the way they want to act. Either position your strategy as “the brand that minimizes the chore” or “the brand that enhances the satisfaction of the hobby.”

Another example could be cat food. If one were to look at the facts, one might come to the conclusion that the most appropriate food for a cat would be one that is high in meat, fat and bone meal. However, many of the people who put a high priority on their pets (and are willing to pay a premium to feed them) behave as if their cats were miniature people. They want them to eat what they believe is a good people diet, full of lean protein, grains and vegetables.

If you want these folks to act in a way that gets them to purchase your brand of premium cat food, you probably need to cave in to some of these pre-conceived notions and behaviors and put in some vegetables. This is like the political candidate who can only get elected by his party if he agrees to some of the party’s long-held notions.

So how can we apply this to the fact-gathering stage of strategic planning?

1) Put more emphasis on what people do than on what people say.
One of my favorite cartoons has someone going door-to-door taking a survey about what people are watching. One man goes to his door and tells the survey-taker that he only watches educational documentaries. In the background, you can see a TV set showing a low-brow comedy program. The moral of the story: Don’t believe what people say, but what people do.

This is why a behavior-based system to determine what people watch, like Nielsen (who has a box connected to your TV set) will get a more accurate reading than asking people what they watch (like in the cartoon).

The old joke used to be that nobody knew who Playboy was selling all those magazines to, since nobody claimed to be buying them. And if you did find someone who admitted to buying the magazine, they would claim they bought it for the articles, not the photos. If that were the case, why does Playboy bother to put photos in the magazine? Don’t trust the “facts” of what people say; trust the facts of what they do.

Rather than getting bogged down in endless pre-product scenario testing with consumers, get a prototype out there in the real world to test. One of the beauties of the digital age is that it is so easy to get a beta test out into the field. This allows you to get feedback based on actual activity.

If you want to develop a product to help people in doing their work, watch how they work at their place of work. If you want to improve the meal-making process in the kitchen, watch how people act in the kitchen.

2) Understand that different segments operate under a different set of “facts”—Pick One
Just as Democrats and Republicans seem to operate under a different set of facts, so do other segments. We saw this also in the lawn hobbyists versus the lawn-work haters. These segments have a different way of looking at the world.

It is nearly impossible to build a political position that would be equally loved by both Democrats and Republicans. They love totally different things. Similarly, it is nearly impossible to win by trying to pick a business strategy which tries to make everyone in the market happy. Broad middle-of-the-road strategies are rarely as successful as those which target specific segments or niches.

If you target a like-minded, similar-behaving segment, you can focus on specializing in exactly what they are looking for. You can appeal to their set of “facts.” You can speak their language. You can be a clear “winner” in the eyes of that segment. By contrast, if you try to appeal to conflicting points of view, you end up being the best option for nobody. So pick a segment for your strategy.

3) Interpret facts via a chosen filter
Once you choose a segment, try to see the world through their eyes. Filter the facts through the same filter they use. Don’t try to force them into buying what you think they should want. Give them what would make the most sense within their view of the world. Even something as simple as different views on lawn care can create heated battles among neighbors—as heated as political discussions. So don’t assume your business is too mundane to be beyond having different filters. Take heed or they may rebel against you.

SUMMARY
The world is not a homogeneous mass of people sharing a similar point of view. Not only do we have different opinions, we often cannot even agree on the facts. Instead of being homogeneous, the world tends to cluster into a number of segments based on how one acts. Therefore, when designing a strategy, pay more attention to how people act than fretting over the precision of various facts.

FINAL THOUGHTS
Even if your targeted segment seems irrational, it only appears irrational because you are looking at the behavior through the wrong lens. Through their lens, it seems perfectly logical. Find the lens that helps you see the “logic” that they see.

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.