Succeeding in a consumer-driven environment

The Internet tips the playing field towards the consumer. Performance management helps level it. 

By Gary Cokins

Performance management, defined narrowly by most as merely better strategy, budgeting and control, is increasingly becoming recognized as a much broader concept. Performance management runs end to end as the complete, closed-loop planning, design, marketing, selling and customer order-fulfillment cycle. One of the critical components in the portfolio of performance management methodologies is customer relationship management (CRM), executed via decision process automation (DPA). Why is CRM now so critical to performance management?

A shift of power from sellers to buyers
Organizations have realized they must be increasingly focused on customers in order to stay in business today. This power shift is due to slimmer margins, commoditization of offerings and the availability of information for the customer – especially through the Internet. For businesses to survive, they:

1. Need higher customer retention. It is relatively more expensive to acquire a new customer than to take the steps needed to retain an existing one.  
2. Must shift away from commoditized products and toward value-added service differentiation for customers and prospects as the source of competitive advantage.
3. Need to boost customer profitability through increasing the number of customer segments and better targeting efforts. Micro-segmenting of customers helps businesses focus on customers’ unique preferences, a departure from traditional, spray-and-pray mass advertising and selling that has shown very little return.

These forces should not keep organizations from attempting to acquire new customers. But they should balance their use of financial and human resources between growing sales with higher-potential, existing customers and acquiring high-profit customers who share characteristics with their existing, high-profit customers. 

The Internet has shifted power from suppliers to buyers because shoppers can instantly view comparative pricing from a broad range of vendors while collecting more information from Web-based product and service-line resources.

Just imagine the shopping experience of a forgetful husband the evening prior to his 10th wedding anniversary. Once he realizes on his drive home from work that he has forgotten a gift, he types – or even speaks – these five words into a search engine on his Internet-equipped cell phone: “10th wedding anniversary wife gift.” In less than a second, his phone provides a list of gifts other husbands have purchased, ranked in order of popularity. With a click, he can view price ranges. And once he further specifies his price range, he can locate nearby stores complete with driving directions, and he can even immediately phone each of those stores to talk to a salesperson. If he had been prudent enough to remember his anniversary only a few days earlier, he could have been directed to Web sites where he could have purchased the item for far lower than retail price and have had the gift wrapped and shipped.

How can retailers gain a competitive edge?
Some retailers overreact by becoming customer-obsessed when they attempt to transform themselves away from developing innovative new products and services and motivating their sales forces to sell them. Most eventually realize that they should work backward by first understanding the unique buyer preferences of the types of customers and prospects they want to serve. There is a difference between being customer-focused and customer-obsessed. The latter approach may cast too wide a net and capture savvy, high-maintenance, price-driven, non-loyal buyers who ultimately yield little profit margin in the long term.

As a retailer increasingly micro-segments its customers and sales prospects, the company will need more accurate intelligence on the current and future potential profitability of its products, service lines, channels and customers (see Figure 1). The idea here is not just to know which types of customers to grow or acquire and which not to, but also how much to spend growing and acquiring the desired types. If you bribe loyal customers and prospects with unnecessarily deep discounts and excessively costly differentiated services, or if you neglectfully fall short with offerings or services to non-loyal customers and prospects thus risking their abandonment, then you destroy shareholder wealth. The spending and investment of sales and marketing is ultimately a financial optimization problem. This is why an effective managerial accounting system is another one of the key components of the performance management portfolio of methodologies.

Gary Cokins, CPIM, Global Product Marketing Manager for Performance Management at SAS