Do You Truly Know Your Core Customer?

Do You Truly Know Your Core Customer?

Who is your Core Customer?

In working with many clients on improving their business and developing a growth model, we soon get into the issue of their “Core Customer.” I have realized that many have not given this much thought and cannot easily define their “Core Customer.” Your Core Customer is the customer you are targeting, the customer that is preferred, and the one that your marketing and sales efforts are focused on. A Core Customer has the following attributes:

  • A real person with wants, needs, and fears.
  • Will buy for optimal profit.
  • Has an unique online identity and behavior.
  • Pays on time, loyal, and refers others.
  • Exists today among your customers

Not knowing your Core Customer is not a terrible problem, as we can quickly work through a session to put a definition in place. However, a more complicated issue is knowing their Core Customer but unable to define their “Economic Engine,” or profitability per customer. Lack of good data is always a severe problem! If you can’t measure something, then your performance is purely an assumption, and down that road is chaos.

Profit per Customer

If you don’t know your profit per customer, the customer you consider your “Core Customer” may generate sub-par profits pulling down the company’s performance. During a recent conversation, a CEO told me their metric was revenue per employee. While that would generate top-line revenue, it does nothing for profit, efficient customer targeting and marketing, or market differentiation. The business adage, “We are losing money on each item, but will make it up on volume,” seems to be the driving force.

Many companies I have worked with cannot tell me the profitability per customer and so work on the assumption that they are performing well, but cannot understand why they cannot scale and have profit and cashflow issues. Also, often their data is corrupted by the “Flaw of Averages.” So to paraphrase the proverb, “First get your data.” Sometimes getting good data on project costs is difficult, but without there cannot be:

  • Knowledge of performance;
  • Plans for improvement;
  • Measurement of improvement.

And “Hope is not a strategy.”

Select the Right Core Customer

Once we have data showing your Core Customer’s profitability, we can determine if they generate optimal profit. Since a requirement of a Core Customer, as mentioned above, if your Core Customer is not generating optimal profit, then there are one of two choices:

  1. Change your economic model so that they do, or
  2. Change your Core Customer.

When examining the data, many companies have found that the companies they were targeting as their “Core Customers” were their less profitable customers and ones that everyone in the market was fighting over. Targeting a different segment of customers that generated optimal profit could increase its profitability and differentiate itself from its competition, a great “Blue Ocean” strategy.

Lake Truck Lines, a Gravitas client, was focused on large customers. However, when analyzing its data, Lake Truck Lines realized that everyone was targeting those customers so there was pricing pressure and low margins. By make mid-sized customers its Core Customer, the company was able to operate with less competition and generate the optimal profit per customer. Similarly with Build Direct, focusing on young women seeking to do DIY, it was able to realize a much higher margin and operate in “Blue Ocean” waters compared to when it was focused on supplying general contractors.

The time spent analyzing your clients, their profitability, and your Blue Ocean possibilities can result in you operating at higher margins with less competition.

Profit / X

I have discussed the “Economic Engine” before, but it is the concept of “Profit/X,” Profit/X is the crucial part of your strategy, and it must:

  • Tightly aligns with your BHAG®
  • Be the fundamental economic engine of your business
  • Be a single overarching KPI to scale your business
  • It must impact revenue while controlling cost.
  • More X must be desirable.
  • It must be unique within the industry – you have to differentiate yourself from your competition.

What is critical is finding a Profit/X that is unique within your industry. If you choose the same Profit/X as everyone else, you are all competing on the same drivers, and you cannot differentiate yourself from your competition. Having identified our Core Customer, the appropriate Profit/X can be identified. Picking the wrong Profit/X given your Core Customer again will lead to sub-optimal results. These two concepts are interconnected and for you to achieve the best results, you need to determine both and have them connected.

Having the Right Profit/X

If your Profit/X is defined as profit per employee, you have only three ways to achieve this: increase the price, improve employee performance or cut the product’s quality. Since price should be driven by value creation, not employee profitability, raising prices may be difficult. We do not want to cut value delivery, and driving employees harder is no recipe for success. Thus a better metric may be profit per customer.

With customer size, if you are servicing large customers it may require longer larger projects compared to mid-sized companies. If mid-sized companies have more set up and administrative costs then your Profit/X must be different between the two.

There are many examples of Profit/X from Southwest Airlines’ profit per plane to a dry cleaner who measured it by profit per delivery truck. The key is to find the one that drives your business and will also differentiate yourself.

Conclusion

Many CEOs and Business Owners are salespeople and are not interested in digging into the financials and getting to the data I have discussed above. However, the effort is well worth it, as once you have a clear understanding of where you are, you can:

  • Target marketing towards your Core Customer;
  • Differentiate yourself from your competition;
  • Ensure that all projects, services, or products meeting your Profit/X to ensure profitability; and 
  • Position yourself for growth and profitability. 

Get your CFO, your team, and a coach and spend a day or two to determine the ideal results. The payoff will be huge.

 

Copyright (c) 2021 Marc A. Borrelli

Does Your Financial Model Drive Growth?

Does Your Financial Model Drive Growth?

Working with many companies looking to grow, I am always surprised how many have not built a financial model that drives growth. I have mentioned before a financial model that drives growth? Here I am basing on Jim Collin’s Profit/X, which he laid out in Good to Great. So then we have to delve into what is Profit/X. This is the key financial metric that drives profitable growth by defining some profit number per some “X” that results in:

Passion. Your employees are passionate about the “X” and excited about increasing it.
Empowerment. Your employees are empowered to make decisions to ensure the baseline Profi/X is met.
Drive. It drives behavior to generate profit and growth.
Discipline. It provides the financial discipline to ensure that the organization remains profitable as it grows.

Thus is it is your Economic Engine that will enable profitable growth.

Many people look for a quick answer in determining Profit/X, but there is no quick answer. It is an iterative process that will get there, but no something you necessarily come up with on the first try.

Profit can be:

  • Gross Profit,
  • Operating Profit,
  • Net Profit,
  • Gross Margin,
  • Operating Margin, or
  • Net Margin,

to name a few.

“X” is very variable and can be:

  • “Product/Service,”
  • Customer,
  • Invoice,
  • lb,
  • pallet,
  • truckload, or
  • plane.

For a better understanding of Profit/X, my video below may help explain it better.

Profit/X

It is well worth your time to develop your Profit/X and get your employees to understand it and embrace it. The discipline it provides combined with the drive and empowerment it delivers makes a very strong economic engine and ensures continued profitability through your growth.

 

Copyright (c) 2021 Marc A. Borrelli

 

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CEOs Identify the Most Significant Leadership Challenges They Face Today

CEOs Identify the Most Significant Leadership Challenges They Face Today

Vistage’s Chief Research Officer, Joe Galvin, presents Vistage’s Q2 CEO Confidence Index Survey recapping our members’ opinions on the economy, financing, and the prospects for their own business. You can see the report here – “The First Steps of the Hard Climb to Recovery Begins.

 

The survey shows that while CEO Optimism was one of the three lowest ever recorded, most CEOs are experiencing an increase in activity with the lifting of lockdowns. However, the survey data is before the initial wave was increasing in the South and West. I feel that we are “At the end of the beginning, rather than the beginning of the end.”

 

CEOs identified the most significant leadership challenges they face today, which fall into the following four categories:

 

  1. Morale. The most common theme shared by CEOs was maintaining and building morale with their leadership team and employees. It has been a very stressful three months for everyone, personally and professionally. The next three months won’t be any easier, which will challenge leaders to motivate a workforce with diverse needs. Priorities for leaders include keeping employees focused and positive, avoiding executive burnout, and inspiring the organization for the hard climb.
  2. Back to Work/ Work from Home. The pandemic has changed the workplace forever. CEOs have to redesign the workplace with physical health and safety as a priority, and also creates a feeling of protection for those employees returning to that workplace. Compound that with the broad acceptance of remote working as a proven option, which forces leaders to adapt their culture and communications to incorporate remote workers, engage in hybrid meetings, and accept that work-from-home is a permanent fixture in the new reality.
  3. Growth. Leaders need to crank the growth engine back on from a cold start. For 80% of businesses, revenue is down at some level since customers shut down or postponed non-essential purchases over the last three months. Creating new demand, re-engaging with customers, and rebuilding opportunity pipelines are all prerequisites to rebuilding business volume. Quickly adjusting to changed customer behaviors and shaping messages that connect to their new reality will accelerate the return to the growth curve.
  4. Uncertainty. Undercutting everything is the uncertainty leaders feel and face in every direction. There has never been a business scenario like this except in classrooms. Uncertainty about the pandemic’s length, the economic outlook, and the unknown impact on their markets are some of the difficulties facing leaders. Forecasting has become a black art once again, as pre-COVID financial models have lost relevance. The absence of data or clear direction will force leaders to rely on their instincts and judgment to make the best decision and be prepared to adapt quickly.

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Want to Grow Your Business: Consider a Board of Advisors

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Many privately owned businesses don’t have Boards of Directors since they don’t have outside shareholders there is no need to. However, having a Board of Advisors has been shown to result in a 3x greater growth in sales and profits than companies without them.

 

What is a Board of Advisors?

A Board of Advisors comprises 3 to four high-level executives who provide the CEO with advice and are focused on the CEO’s success. However, unlike a Board of Directors, the CEO doesn’t have to take their advice. Their role is to:

  • Hold him and the management team accountable. We all believe we can hold ourselves accountable but fail miserably;
  • Act as a coach;
  • As the difficult questions or the questions no one is asking;
  • Enable the CEO to focus ON the business and not IN the business – to stop the tyranny of urgency taking precedence over the important;
  • Validate the CEO’s ideas and strategy; and
  • Bring their experience to the company.

Many CEOs are dealing with their business their business issues and fighting fires. As a result, they don’t get a chance to focus on the business and discuss ideas and strategies with people who have a lot of experience and can guide them. There is that old saying, “You don’t know what you don’t know” and a Board of Advisors can help the CEO navigate through such areas.

What is a Board of Advisors not! It is not a group of people to make introductions to potential sales targets.

 

Who should be on the Board?

The Board of Advisors is there to help you and should not have other interests, so it should not include advisors or consultants that you already use, i.e. your accountant or lawyer. Also, it is not necessary to get a marquee name that has retired. More useful is to get middle to upper management that has real experience with the issues the CEO is facing and from a range of industries. That way he can get the benefit of best practices across all industries and learn of new solutions to problems in the industry. As times change and the company faces new issues, the board should change to have a membership with experience with such issues.

Like a marriage, you need the right partners. These are people the CEO can rely on to provide good advice and like your doctor will see you “naked”. Ideally a group with different skill sets that complement the CEO’s skills and deal with issues currently facing the company.

 

How should they be compensated?

People often joke that Board of Advisors is just paid coffee, water and a bagel. Typically they don’t work for much; however, it is advisable to pay them a stipend, i.e. $20k, even if it is a contribution to a charity in their name. Why? Because you are asking them of their time and commitment, and if compensated, they are more likely to return that urgent call when you have a crisis. Also they should all be paid the same.

Sometimes they also get equity; however, since many of the companies seeking a Board of Advisors are private, the company doesn’t want to give equity. However, synthetic equity works such instances. In addition, if you have a Board of Advisors and are raising equity capital, all the Board members need to have purchased equity in the business, as most Angel and Venture Capitalists will not see it as positive the Board of Advisors is not willing to invest.

 

How often should the Board of Advisors meet?

Typically, they should meet between four and six times a year. Not less than four, and if over four maybe the additional meetings should be telephonic. The meetings are often 4 hours as well as some preparation time of maybe 10 hours, so if you are asking for six meetings per year, you are asking for a commitment of 84 hours a year or two weeks.

 

When do you need them?

A small company can always use the independent outside input; however, they are especially useful when going through inflection points in the company’s life, or the marketplace is changing dramatically. When dealing with something the company has not faced before, the Board of Advisors can be invaluable to the CEO as he navigates a new course. If you realize you need one it is often too late. However, most important is that the CEO must believe that they will be beneficial, and the CEO must be coachable. If not there is no point!

 

Who should attend?

The senior management I believe to be best. However, not necessarily all at once! They can each attend as their area is discussed and reviewed. As a result, they are receiving coaching too, and the benefit of the Board’s expertise as strategies are proposed and discussed. However, there should be just a time for the CEO as there are only things that can be discussed with the CEO, i.e. the perceived performance of a senior manager or the CEO’s failure to live up to his deliverables.

 

Should there be agreements with them?

While they are not a Board of Directors, you should have agreements with them. These agreements need to set out, among other things:

  • Pay – They know what they are getting.
  • Time Commitment – They know what they are committing to.
  • Liability – They know what to expect.
  • Term – They can let them go when the company needs different skills with no difficulty
  • Nondisclosure terms and non-competes as relevant – protects all parties.

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Do You REALLY Know Your Business Model?

Do You REALLY Know Your Business Model?

Bringing clarity to your organization is a common theme on The Disruption! blog. Defining your business model is a worthwhile exercise for any leadership team. But how do you even begin to bring clarity into your operations? If you’re looking for a place to start, Josh Kaufman’s “Five Parts of Every Business” offers an excellent framework. Kaufman defines five parts of every business model that all flow into the next, breaking it down into Value Creation, Marketing, Sales, Value Delivery, and Finance.