February 20, 2022
"From each according to his ability, to each according to his needs"
This was a famous communist principle referring to free access and distribution of goods & services. Its core message can be interpreted by pandemic impacted companies faced with declining revenues and struggling to meet profitability targets. While all enterprise functions within these companies must contribute to cost reduction efforts, it is the front office which plays the most important role. The fine balance between growth and profitability can be upset if the right approach is not adopted by the Front office. On the other hand, companies that are able to optimise front office costs in a manner that revenue is not impacted, can build a sustainable competitive advantage.
Separate the wheat from the chaff
The principle here is to know the economics of each customer so as to separate the wheat from the chaff. Then channel the precious investments in only the most profitable ones. It all starts with understanding the profit contribution of each customer segment and the strategic value that they are creating. While this profit-based segmentation may not be mainstream historically, it’s the need of the hour in today's world. Consumer Behaviour has significantly altered since the COVID 19 outbreak. The signals are out there for the marketers to decipher which segment to pamper and which ones to eliminate. EY in its 2020 future customer index identified 4 customer categories based on consumer behaviour observed since the COVD 19 outbreak- “Cut deep” - which is spending less across all expense categories as the pandemic impacts employment; “Save and stockpile” - those who feel pessimistic about the future and focus on saving Vs spending ; “Stay calm, carry on” category - continuing to spend as normal ; and “Hibernate and spend” - actually spending more across the board.
Define the right CX and price points for each customer segment
Optimising Front office costs should start once profitability of the entire customer base has been classified into distinct segments. While determining the profit contribution, it is important to calculate the total cost-to-serve including acquisition, sales coverage, customer service, billing and logistics costs among others. A data driven approach supported by the right analytics platform can determine the incremental value created by each customer segment. Once the profit margin and strategic value for each customer segment has been accurately captured, the organisation can define the outcomes they want to drive for each of the segments. The outcomes will determine the CX and price point that needs to be created for each segment.
Focus on the most profitable customer segment which is creating maximum strategic value
The most profitable customers need to be accorded special treatment. This is the segment which will drive growth by being advocates of the brand. Hence the chunk of the front office budget needs to be reserved for this category. The segment on the opposite side of the spectrum which do not even deliver the revenue to cover the cost to serve them needs to be eliminated. Front office cost savings need to be garnered from this segment. The segments which fall in the middle of these extremes must be looked at in great detail. For the ones that have the potential to be moved higher up the profitability ladder, it is worth investing resources. But for the ones where such efforts are not going to translate into results, it is best to redirect the resources to other segments. Both these segments of highly unprofitable customers and large volume low profit customers can drag down the entire company’s profitability hence it is imperative to address them with the right interventions.
All customers are Gods, but some are Godlier than the others
So while marketers maintain that Content is King and Customer is God, it's time to follow what the Pigs proclaimed in George Orwell's famous book- Animal Farm -" All animals are equal but some animals are more equal than the others". A customer can certainly earn the right to be treated like a King if he moves up the profitability ladder. However, if he is at the lowest rung of the ladder, then companies can certainly take away the royal treatment and reserve it for the real kings. Once the Front office, rebalances the Customer experience to align with value created by the real kings, it can have a huge impact on profitability.
Vikram Mohan is a Digital Marketing and Strategy leader with extensive cross industry expertise in planning and implementing Design led digital transformation projects. He is based out of Dublin in leads digital transformation and marketing projects in the Healthcare & Life-Sciences industry for IBM across the EU region. An alumnus of JNU, New Delhi and XLRI, Jamshedpur, Vikram has several years of experience in working with various global Fortune 100 clients helping them in their journey on Digital Transformation.
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