The pandemic has changed the business environment dramatically, both for B2C and B2B companies. Consumer behavior has shifted from in-store to online, and to a significant extent, it . The flood of home deliveries has bankrupted scores of firms who traditionally relied on in-person interactions, with midsize companies (with limited resources) hit especially hard. In the B2B markets, buyer behavior has shifted just as dramatically. Electronic orders have displaced sales calls in many companies; one industrial distributor, for example, has seen its digital business climb steadily, now reaching over 60%.
Xổ số miền nam hàng ngàyThe digital giants have benefited from this shift and have grown in size and capability. , for example, is rapidly taking over huge swaths of the furniture market, and is relocating its local distribution facilities to enable two-hour deliveries of its various products.
All companies have to adjust — but in particular, midsize ones, who are very vulnerable but also potentially very agile. Their vulnerability stems from having fewer resources than their giant competitors and less diversification to shield against the impact of price wars. They can be agile if they have the resources to reposition and less-entrenched bureaucracies, which makes it easier to innovate and change.
When the pandemic hit, Edison Furniture had a problem. Like most furniture retailers, Edison (not its real name) made most of its profits selling mattresses. Internet sellers and off-price local stores were steadily eating into those profits.
The company surveyed its large customers and found that most were price buyers. As a midsize retailer with a half-dozen large, costly stores, it was stuck in a price war that seemed hopeless. As the pandemic drove customers away from shopping at stores, profits plunged.
Xổ số miền nam hàng ngàyIn response, Edison’s management decided to try analyzing its profitability in a new way suggested by one of its directors: They created a database of their sales transactions, and rather than allocating costs on a blanket basis, they assigned their actual costs to each transaction. What they saw was amazing:
- About 20% of their customers accounted for half of their revenues but produced over more than 130% of their profits (i.e., “profit peak” customers).
- About 30% of their customers accounted for a third of their revenues but drained more than 50% of their profits (i.e., “profit drain” customers).
- The remaining 50% of their customers accounted for about 20% of their revenues but produced less than 10% of their profits (i.e., “profit desert” customers).
When Edison’s managers saw this profit segmentation, they realized that their price-war strategy was a response to their profit drain customers’ demands, and they were essentially ignoring their high-profit customers.
They quickly sent a brief survey to their large customers, separating the profit peak customers from the profit drains. They found that the profit peak customers were very retailer loyal and often had a favorite sales rep. While they weren’t necessarily wealthy, they were relatively insensitive to prices. The profit drain customers, however, were price shoppers. They started by shopping at Edison’s store, then comparison shopped on the internet, and finally returned to Edison to demand that they match the price. This was the big problem — and opportunity.
Edison’s managers took several steps to address their problem:
- They created icons in their Salesforce system representing each customer’s profit segment (e.g., profit peak customer) so they could recognize these premier customers when they entered the store and send them to their favorite reps. They offered them special services like off-hours shopping, priority on special sales, and focused internet deals.
- They instructed their sales reps not to bargain with the profit drainers, whom they could also recognize from Salesforce. They were surprised to find that most of these customers bought from the store anyway to avail themselves of Edison’s renowned service.
- They instructed their merchandisers to develop private-label lines, which the profit peak customers preferred and which were also more profitable. They changed their advertising theme from low price to high quality and high service.
- They stationed their “master” drivers, who excelled in customer service, in profit peak customers’ neighborhoods and had the other drivers shuttle loads to them. These master drivers handled all of the key customer interactions and scouted for their additional furniture needs while making the deliveries, leading to multiple sales.
Edison’s profits skyrocketed, and in the process, they carved out a defensible, high-growth strategy that the digital giants and off-price competitors couldn’t match with their low-service, low-price strategies.
Xổ số miền nam hàng ngàyMany midsize business leaders look at the growth of Amazon and the other digital giants and worry that there’s no place for them to prosper. In fact, those giants have a very focused strategy — arm’s-length services to small customers — which leaves a large, wide-open playing field for incumbent firms to reposition. Edison’s successful story highlights the three steps that midsize company leaders need to take for success in post-pandemic markets.
Step 1: Choose Your Customer
Xổ số miền nam hàng ngàyEdison succeeded by identifying and developing a high-profit, defensible strategy that the digital giants could not follow, and it said “no” to customers that didn’t fit its target profile.
Xổ số miền nam hàng ngàyFor midsize companies like Edison, focusing their strategic positioning and driving focused growth in today’s rapidly changing environment is a life-or-death necessity. This involves choosing your customers to target defensible, profitable market segments while avoiding those that are vulnerable to digital giant incursion; aligning your scarce resources to capture and grow your target segments; and managing your organization to meet your diverging and changing customer needs within your target segments.
Xổ số miền nam hàng ngàyMidsize companies also have to act quickly and decisively, because if they lose their target markets to competitors, they may not be able to recover them. Potentially getting in the way of this is that many midsize company managers instinctively try to cling to all revenues and cut all costs, instead of carefully aiming and aligning their companies. Doubling down on the traditional strategy of choosing all customers — which is no strategy at all — coupled with across-the-board belt-tightening is a recipe for disaster.
Step 2: Align Your Resources
Edison aligned its resources around the processes and technologies that supported its chosen customers. Successful realigning of resources requires accurate, granular profit analytics that show the profitability of every nook and cranny of your company and enable you to project the consequences of potential market changes and competitive incursions. Strategic repositioning requires a detailed understanding of which customers and products are in your current profit core (i.e., your profit peaks), along with a projection of how the changing environment and aggressive competitors are altering the profit potential of your markets. And, as competitors vie for repositioning success, you only have one chance to get this right before your options evaporate.
Today’s business environment creates both a huge opportunity and a major problem. The opportunity is that companies have the ability to carve out new businesses that are completely defensible against price-cutting competitors who have sophisticated digital marketing and a lower cost structure (because they simply send their products to their customers).
The rise of the digital giants originated with their ability to market directly to customers, which enabled them to create micro-segments and configure offers to individuals at scale using big data and algorithmic recommendations based on captured customer information. It’s extremely hard to win against these focused giants in a head-to-head contest. Yet many managers, especially in midsize companies, try to do this when they attempt to defend their broad market strategies, instead of repositioning to dominate the defensible segments of their markets.
The problem is that in the high-service realm where most of these opportunities reside, customer needs are fragmenting rapidly: Different customers want different packages of products and related services. Historically, most companies sold and delivered only a relatively narrow set of products and services to as many customers as possible in homogeneous mass markets.
Step 3: Manage Your Organization
Edison developed effective new transaction-based metrics and managed the coordination of its key functional areas — sales, products, and customer relationships — to produce the services their target customers wanted. The best news was that this repositioning didn’t require a large investment. The money they saved avoiding discounting paid for the whole program and produced ample profit growth.
When managers try to calculate the profits from their expanding variety of customers and products in order to choose their targets and track their success, they encounter a big problem: Traditional accounting systems cannot match each revenue increment with the actual cost of producing it. Standard metrics, like revenue and cost, show the company’s average profitability, but not the profitability of particular segments of customers and products.
Xổ số miền nam hàng ngàyThe problem is that traditional accounting categories tell you whether your company is making money, but not where it’s making money.
Companies now require a completely new way to analyze profitability below the averages of their traditional P&Ls, all the way down to the invoice-line level, which we call transaction-based profit metrics and analytics. Using new state-of-the-art software, managers carefully assign the appropriate costs to each transaction (invoice line), creating an all-in P&L for each order line (the actual costs can be derived from a company’s general ledger).
Because each order line has a set of unique identifiers (for example, customer, product, store, sales rep, delivery), it’s possible to combine and recombine the relevant transactions on a monthly basis to show the actual profitability of every segment of the company, down to each product bought by each customer each time. This is especially important because it shows a company’s rapidly shifting profit peaks and drains, which were hidden by the average metrics, and it enables managers to identify their emerging opportunities and risks quickly.
Surviving in a New Era of Business
We’ve entered a new era of business. We’re experiencing the end of the mass market era and accelerating into a new one, which we call the “age of diverse markets.” In the age of mass markets, which lasted through most of the previous century, the development of roads, mass production, and mass communications integrated the nation’s markets and created strong economies of scale. In response, companies sold relatively narrow product lines to as many customers as possible to maximize revenues and minimize costs. In the age of diverse markets, which started accelerating around 2000, digital companies increasingly used the internet to micro-segment and fragment their markets, selling directly to consumers. In response, savvy incumbent firms increasingly shifted to higher-service strategies, which further fragmented the markets. The pandemic has accelerated this change.
The key to survival in the post-pandemic period and throughout this new era is to use the data you have readily available to identify your profit peaks and profit drains and strategically align your organization around your profit core (both current profits and your projected defensible market positioning) in order to build dominance in your target market segments. The three steps to midsize company success will provide a proven pathway to sustained, defensible profit growth in the post-pandemic period and throughout the era beyond.