Great Businesses Are Built on Great Customers

Most business leaders want to run an enterprise that is truly “great.” Some are satisfied with running a “good” business, and in many circumstances there is nothing wrong with that. Over the long haul however, there’s a problem with just being “good.” As Jim Collins will tell you, businesses over time break one way or the other. Eventually, the few become great, and the rest will ultimately — go away. Consider the fact that of the largest and most venerable businesses in the Fortune 500 in 1955, about 90 percent don’t even exist anymore. For most executives, this is a sobering reality worth consideration and reflection. “... of the largest and most venerable businesses in the Fortune 500 … about 90 percent don’t even exist anymore ...” Here are just a few iconic brands that today seem like dinosaurs — or perhaps more appropriately, the fossil records of dinosaurs: American Motors Brown Shoe Studebaker Collins Radio Detroit Steel Zenith Electronics National Sugar Refining All are Fortune 500 businesses — the biggest most powerful brands — and none of which exist today. There are a number of reasons companies become great. They do one thing — very well. They are relentlessly focused on the customer. Or, as Warren Buffet says, “on delighting the customer.” They face the harshest unvarnished current realities and take action to change them. They have great people who can deliver on a great vision. Many of these points are well-developed in Jim Collins’ seminal work “Good to Great.” On “delighting customers,” there is another perspective — as evidence suggests that is great companies don’t only delight their customers, but also have great customers. This has traditionally been couched as “knowing the customer,” or being driven to “service the customer.” Yet our experience shows there is another crucial dimension — knowing the customer also means knowing who the customer is and is not. In our work with dozens of brands spanning two decades, we’ve consistently found that almost all brands are carried by a surprisingly small number of customers; usually between 10 percent and 25 percent that generate the vast majority of revenue and profit — quite literally up to 75 percent. ‘Great Customers’ Have Fringe Benefits So while “great customers,” it seems, can carry good companies, great companies have identified a product or service that deeply satisfies and, therefore, attracts a materially larger proportion of “great customers.” That satisfaction can be best measured effectively through simple approaches like Net Promoter Score, where a brand simply asks “how likely are you to recommend us to a friend or colleague?” Research has illustrated that evangelistic customers are a deep well of profit for a brand, as they attract those like them through referral. Yet many growing brands struggle to acquire customers cost-effectively and at-scale. Customer value/quality, which we might consider a proxy for a great “customer fit,” is second-string to gross revenue. How can a brand decide to focus on customer auality when gross revenue is the No. 1 requirement? The answer, as it stands, is fairly simple. The right customers for any brand are the ones who exhibit behaviors that truly value the brand, its unique value proposition, products and services. These are customers who bring not only the much-needed gross revenue, but the profits generally reserved for truly great companies. That affinity is ultimately expressed through trial, repeat purchase, higher order size and referrals from other customers who are bound to spend similarly. While it’s evident that these behaviors are correlated highly with great products, customer service, pricing and distribution — the unique value proposition is defined in the eye of that customer — which can be objectively defined, targeted, acquired and grown. Strategic Implications of Adding Higher-Value Customers The implications of achieving high-value customer growth are much more than adding good customers alone. Growing the depth and breadth of high-value customers is a requirement in making a company a fundamentally superior business to its competitors and peers. Consider the following chart where an organization's “right customer” (AKA, Most Valuable Buyers) is acquired scientifically, rather than acquiring customers en masse with minimal consideration — or without consideration of the quality of the customer in the first place. That is to say that the customers organizations are adding are disproportionately more valuable than the “average” customer in their customer base at the start of the period. In this real-field, proven example, a “Most Valuable Buyer (MVB)”-targeted campaign produced customers with 420 percent, or 4.2x, the revenue than that of the average buyer in their customer base. While this surely is impressive, there is a strategic implication beyond the high return on high-quality customer acquisition. As the volume of high-value customers increases, the percentage of “MVBs” in the customer base continues to grow. The rate at which their sales and profit volume grows is faster than the rate of customer growth alone. Not Just Profitability, Profit Volume The key to growth and longevity is developing a competitive advantage that is not easily replicated in the marketplace. The secret is not to cut costs as many companies often do in the short-term; rather, it is to grow profit volume. In the example above, we can see the dramatic scaling of profits as the percentage of high-value customers, or “MVBs,” increases. As the brand continues to acquire higher value and higher-performing customers, the total profit volume grows, as well. How do you grow profit volume? The formula is simple. Find the “right customers” who are high-value for your business and continue to get more of them at-scale. Those customers will be unique to you and distinct from your competitors. Over time, this formula becomes a sustainable, competitive advantage for your business. At that point, your business moves from an average, or “good company,” to the profit profile of a “great” company with “great customers.” Like Jim Collins concluded many years ago, “Those that become great stay, and those who don’t — go away.”

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Great Businesses Are Built on Great Customers

Mike Ferranti

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Mike Ferranti