What every business should do in a recession. Focus on potential customers
Hard times, a crisis or even a deep recession could be an opportunity to win the loyalty of more customers, increase productivity, and strengthen market position.
I am going to show in this study how retail executives can respond to a downturn in their business and emerge from it even stronger than before.
There’s a list of recommendations which I am going to try and go through , companies that are responsive will discover that a larger universe of growth and productivity opportunities is open to them than they might believe.
Even more in most cases , they don’t need to overhaul their entire business model to tap into these opportunities; they just need to alter their operating rules.
Assess, evaluate and act upon.
In difficult times, managers instinctively rush to put in place a bunch of new programs and initiatives, for example they extend employees hours (or cut them back), reallocate warehouse space or store space if they operate in retail , introduce or extend loyalty programs, special promotions,discount , relook at marketing and operations.
However without a clear sense and understanding of where the opportunity for retaining market share is, managers engage in too many initiatives that produce too little impact.
That can prove expensive, perhaps fatal, at a time when resources are suddenly more limited and getting the highest return on those resources is paramount.
To avoid that easy mistake , they need to understand where your true business is made of, and use that information to plan a targeted response.
I will call that the center of your business, with the understanding that you need to have clear the market share you do not have and mostly likely you’re not going to gain in recession times.
Customers who are loyal to your competitors for instance represent market share you don’t have and will likely not gain.
Customers who are loyal to you represent market share you already have and protecting those is an obvious priority in difficult times.
But if , due to the situation , they are suddenly spending 20% less, most of that will come directly out of what they spend in your business.
The center of your business , therefore, can be identified with customers who are loyal neither to you nor to your competitors
We can identify them as potential .
They might only spend in your business only 20% of their budget,but increasing that to 30% will represent a net advantage even when their total budget drops by 25%.
Based on the statement above, we have to focus on the sizable group of potential customers those who spend their budget with us and with the competition.
We need to give these customer more than they need and exceed their expectations in terms of product,support, services and so on.
Potential customer can be identified in many different way by category, by local market, by where or how customers shop, or even by competitor.
Whatever the analysis and approach used, generally speaking, is proven that over two-thirds of any given brand opportunity for new market share is concentrated in only one-third of its business.
That said, that most of the initiative that management put in place are focused where there’s less margin to acquire the above mentioned potential customers.
Close the gap between offer and demand
Is almost true, the statement that , most businesses have a lot of customers who could be spending more money with them compared to what they are actually doing.
The challenge we face is to attract them to do so.
This is both easier and harder than it would seem.
It’s easy because all you need to do is give them what they want. But it’s hard because what they want is not more of what you’re currently providing.
To fill the gap between what they’re looking for and what you’re offering, you must leave behind the incremental “last season results , more or less ” optimization approach that may have worked well in regular market times.
To survive a downturn, businesses must constantly work to identify and close their demand -offer gaps to win as much of their potential customer as they can.
This is how they recover extra market share and offset the sales they must inevitably lose when their most loyal customers reduce spending. The majority of businesses nowadays can track what items are selling, and often even to whom and when during the sales campaign.
But while this information has led to much greater efficiency in inventory management and purchasing, it conditions vendors to focus on what’s selling well and slow down on what’s not ( which sounds logical)
However this can lead to big gaps between a company offer and what customers want precisely where the group of potential has more opportunities , since it says nothing about what those customers might be buying elsewhere.
Chase bad costs within your organization
“When sales shrink , businesses confront an unpleasant choice:
Cut costs or accept lower margins.”
Most choose to take out costs to preserve as much of their margins as they can.
It’s obvious what the good costs are, they’re the ones essential to producing what customers value and are willing to spend their money for.
Perhaps these are costs associated with providing convenience, a particular shopping experience, a distinctive service, or a better range of goods than competitors offer.
Taking out good costs might improve margins initially, but sooner or later revenues will begin to suffer and margins will come under further pressure, which is why good costs were cut off initially.
The true bad costs are those that add nothing to what customers are ultimately willing to pay for.
The businesses that do the best job of chasing their bad costs while preserving their good costs will have the best chance of both protecting their sales and margins in a downturn and building for the future.
Most businesses are tracking costs in ways that does not enough to establish two critical connections : the link between cost and each aspect of the product offer, service levels, and so on and the link between each aspect of the offer and the customer benefit it produces, at the end that benefit is what the customer
(either loyal or potential) is willing to pay for.
Businesses typically control their costs through the annual budgeting process and become trapped in the way they’ve always done things.
Costs are looked at either of being all necessary or all bad and tend to be raised or lowered all together, incrementally, rather than in a targeted manner.
In difficult times, there is often the mandatory need to take out costs. But with the right level of insight, retailers can tie their costs to the benefits that customers are willing to pay. That at the end is an important tool for managing expenses more precisely.
Reshape basic processes
To find potential customer , expose demand to offer gaps, reduce bad costs, requires changes to all processes that are core to managing every business: customer research, merchandise planning, performance management, and strategic planning.
When sales slow and margins shrink,decision tend to become more inward looking.
The customer research process must help to prevent this from happening.
Traditionally, such research asks :
• Who is buying?
• What do they buy from us?
• How satisfied are they with us?
• Who are our most profitable customers?
These are fine questions, but it would be much better to ask:
• Why are customers buying from us?
• What do they buy from competitors ?
• What are their needs compared to what we offer?
• Who are the most profitable potential customers?
Answering these kinds of questions is what will give the business the information they require to find and exploit their potential customers pool and determine which costs they can cut to protect margins without undermining sales.
Performance management in a recession should also indicate where they stand in capturing potential customers , closing demand and offer gaps, and taking out bad costs.
Strategic planning in market difficult moments every area of the decisions that management is taking should go where the potential customers are, closing the gap between what they are demanding and what’s the offer and finally cut bad costs that are not supporting this process.
Raffaele Felaco |2020