When Suppliers Value Their Customers

You’d think I’d be writing about when suppliers value and love their customers. But I’m thinking more literally than that. I’m talking about what happens when suppliers actually place a monetary value on the amount a customer could potentially spend with them (or how much a group of customers could spend on average). It’s usually called Customer Lifetime Value, or CLV. What happens?

We’ve seen this approach with banks and their wealth management divisions. They’ve segmented their customers by their assets or wealth (and therefore value to them). Segments include Ultra High Net Worth, High Net Worth and Mass Affluent. There are broadly three different types of segmentation. You can segment customers by:

  1. value, i.e. the amount of revenue or margin you can earn from those customers
  2. characteristics, i.e. the features of each customer (in this case including the source of someone’s wealth)
  3. behaviours i.e. their attitude to the service and how they use it (in wealth, they could be disinterested, self-directed, demanding etc)

When suppliers consider the features and characteristics of their customers, you often see this empathetic approach being reflected in the service provided. If they focus on behaviours, they can provide service that respects those customer wants and habits. And I’d argue that focusing purely on value leads to certain customer segments being ignored or marginalised. In a world where suppliers are competing fiercely for the best customers (people with “ultra high net worth” and “high net worth”), you can see what’s happening to those in the “mass affluent” segment. There are few suppliers willing to provide quality service, leading to customers self-directing their investment decisions (the DIY approach).

Now, I have some sympathy for banks on this point. The sheer weight of legislation, and the impact of the Retail Distribution Review (launched in June 2006 and still having a huge impact) has meant that suppliers can’t make enough profit with those less-wealthy segments, unless brilliant technology and slick interactions make their process efficient and service valuable.

What seems to be happening is that fewer people are getting good financial advice. This is a societal risk. If people fail to get advice, too many will make mistakes with their investments and pensions. They may, for example, take additional risk to try and bolster their shrinking pension pot. Mistakes mean loss and potential hardship. If hardship means relying on others for financial support, that’ll be a burden on all the central and local government services. So it’s down to reputable firms to find a way to service these customers, and still make money, before this situation becomes societal. That will require systematic innovation.

Now I’ve focused on wealth management, where arguably the effect of segmentation is most dramatic. But the same principles apply elsewhere. When I worked in risk, I was involved in a huge change programme led by a “big-four” consultancy. On the face of it, we segmented our customers using buying characteristics. We actually used only their “book value” i.e. their spend with us. We moved the least-valuable customers to a new division, set-up to service these customers in a different way. And we lost all but two of those customers within twelve months. That’s what happens when suppliers value their customers. Segmentation requires something more intuitive.  Segmenting by value, characteristics and behaviours is a much more intelligent approach.

But I Still Hate Algebra

Ok, so I like maths. But I hate algebra. When I was eleven it gave me a mental block, and I needed some additional coaching. It’s a positive story, because I went on to win the school maths prize at thirteen. Yet even now algebra leaves me cold – but strangely I have an odd fascination with equations…

When I was creating Meritology, that fascination had me looking for an equation to calculate value. By “value,”, I mean the specific value people and companies add to their customers, colleagues and communities. Bigger brains than mine have created some brilliant ways to define value. For example, Henley Business School’s own Andrew Kakabadse (Twitter: @Kakabadse) has developed an evidence-based way of defining whether a senior executive is a “value-delivery” leader. His worldwide research, of almost 15,000 boards and top teams, produces a defined success formula. This shows that a senior executive’s value is driven by:

  1. how much employees are engaged, and
  2. to what extent the organisation is aligned

with the strategy that executive creates for the business. I’ll leave Andrew to explain the formula in more detail, and my take is simple – it means that senior directors can create the best business strategy around, but it will fail if there is poor engagement and alignment. By implication, even a reasonable strategy will produce great results, if there is near-perfect engagement and alignment. To prove the point, think of successes like Apple and Amazon, and failures like Phones4U (where suppliers and and stakeholders were very apparently not aligned with strategy).

But is there a more universal equation that can be used to calculate value? Can we develop something simple and straightforward that we can apply to all situations? Research and experience tells me there is definitely a method. And so we have developed a new methodology to define, describe and discuss personal and organisational value. It recognises that calculating value is a science and an art.  It’s part equation, and part perception. There are hard factors and soft factors.  We call it The MERIT Method, and the five factors are:

  • Memory (how people remember you, and what drives their perceptions)
  • Emotion (why they connect to you, and their reaction to what you say and do)
  • Results (what you deliver, and the methods you use)
  • Innovation (where you have increased your value, or solved individual and specific problems)
  • Time (when value is recognised, and how that changes – including the “right time, right place” principle)

It’s a working framework, rather than a static model. And we know that every situation is different, making each factor more, or less, important. The fun comes from thinking about each factor, and what you should be doing to increase your today and tomorrow value – making you and your company #standout.

So that fascination with equations helped me create this new method. But I still hate algebra. Someone I know confesses that she has “a little place in my heart just for simultaneous equations”. Thank goodness for that.  When my son is struggling with his algebra homework, I know who he’s asking for help!

Let Them Eat Cake?

Meritology is always looking for examples of where people add great value to customers. So congratulations to Richoux in St John’s Wood for some #standout service yesterday (it’s a great place for a grown-up lunch, by the way). They proved it’s easy to bring innovation to even the most basic service. Here’s the story.

We’ve been there before, and were confused by the vast array of desserts and pastries on offer. We went for a look, didn’t know what to choose, and ended up saying no. This time, the server brought to our table a wooden tray of various desserts. It was the 2015 version of bringing round the dessert trolley. And, not surprisingly, we both had dessert*.

I have no clue whether the tray is a “corporate” instruction, or the idea of one of their staff. And I don’t really care.  It came across as a simple and smiling way to encourage us to take dessert. Good for us, and good for takings. Last time their approach was to “let them eat cake” (passive). This time, the attitude was to “help them eat cake” (active). Maybe that doesn’t seem like such a big deal, but anything that makes the customer say “wow” has to be a good thing. And it was so simple. And impressive. And memorable….

“Innovation opportunities do not come with the tempest but with the rustling of the breeze.” – Peter Drucker

* And in case you’re interested, I took the perfect apple strudel and my wife had a slice of the fantastic black forest gateaux (very “eighties”!). We’ll be back to try the others…!