How to get the most out of that bird in your hand

(Ten tips for growing profitable revenue with the customers you already have)

Straight Talk Book No.4

How to get the most out of that bird in your hand

(Ten tips for growing profitable revenue with the customers you already have)

Straight Talk Book No.4

“There is nothing so deceptive as an obvious fact.”

Sir Arthur Conan Doyle

Bird or bush 4

Seismic jolts 6

Potemkin villages 8

Big D 10

The profitability paradox 12

Bottom feeders 14

Meet Sybil 16

Ode to losing 18

When data is key 20

One at a time 22

Contents

Costs have been cut, assets shed. Technologyrationalized. And new investments squeezed.

You know the drill. The costcutting cyclerepeats. And repeats.

But what do you do when there’s nothing leftto cut?

The single most compelling business challengetoday is no longer how to squeeze more from less. It is how to escape the depressinggravitational pull of the downturn and getback on the upward path of profitable revenue growth.

So where should you start? With that bird inhand or the two in the bush?

The instinct of both client and consultant is tolook to the latter. Look for that breakthroughproduct or service that creates a mind-blowingcompetitive edge and opens the doors to ahost of new customers.

But amidst the buzz of the brainstorms, manyoverlook the straightforward, practical movesthey could make immediately with the birdthey already hold in their hand – their current customers.

These moves require little to no newinvestment and might seem obvious to some, which is probably why they are so often overlooked. Yet they’re some of theeasiest – and most reliable – ways to growprofitable revenues.

So the simple suggestion of this book: Beforeyou get too far with new products, services,channels, or markets, make sure you haveinvested in profitably growing the customersyou already have.

4

Bird or bush

Profit Tip #1: Grow your current customers first.

This book was prepared by Deloitte Consulting LLP.

5

Make the most of what you’ve got

Revenue growth

VolumePrice

realization

Acquire newcustomers

Retain and grow current

customers

Cross-sell/Up-sell

RetentionDemand & supply

management

Priceoptimization

Accountmanagement

Leverage income-generating assets

Strengthen pricing

Operatingmargin

Assetefficiency

Expectations

Focus on high-value/high-potential customers

Rationalizecustomerportfolio

Emphasizeaccount/relationshipdevelopment

Improveaccountmanagement strategies

Emphasizecustomersatisfaction

Focus on high-value/ high-potential customers

Focus on mostprofitableproducts andservices

Focus more oneffective salesand advertisingchannels

Focus more onexpansion ofcustomerrelationships

Focus on high-value/ high-potential customers

Emphasizecustomerretention

Createbarriers toswitching

Refocus/refineretention priorities andstrategies

Acquirecompetitors

Emphasizedifferentiatedproducts andservices

Focus more onprice-insensitivecustomersegments

Focus onproductinnovation

Emphasizesupply chainmanagement

Rationalize/refocus productand serviceportfolios

Emphasizedifferentiatedpricing acrosssegments

Focus onpricingeffectiveness

Convert free services to fee-basedservices

Increaseuse ofpromotions

Shareholder Value

6

If what’s essential today is growing profitablerevenues, how do you get your people in themood to do it? How do you overcome themalaise that comes from repeated cost cuts,layoffs, and downsizings?

Instead of looking to the usual company-widesales drive or multiphased culture changeprogram, try giving your organization a seismicjolt. A one-time, perspective-altering change inthe way things are done. A brilliant twist inpolicy that forces everything else into place.

A perfect example is Granite Rock, theMalcolm Baldrige Award-winning cement andasphalt company that generates 30 percentmore revenue per employee than the nationalaverage. How? It charges a premium for high-quality materials and unmatched service.

To hold itself to that high standard, GraniteRock instituted a short pay policy and added it to every invoice. If a customer wasn’tcompletely satisfied, she could simply not payfor the offending item.

This seemingly small policy sent a seismic joltthroughout the organization. Whenever aninvoice wasn’t paid, the responsible employeewent out of his way to root out the problem,find the cause, and make sure it neverhappened again.

Every company’s jolt is different. Find the onelurking out there that could dramatically movethe mindset of your organization and drive awhole new set of profit-reaping behaviors.

Credit to Jim Collins for the Granite Rock example.

Seismic jolts

Profit Tip #2: Reignite your people’s passion for growth.

7

A sampler

Objective

Increase your margins

Increasecustomerretention

Improvequality

Increaseinnovationand reducecosts

Seismic jolt

Give customers a line item veto.

Invite customers to short pay any invoice if they arenot completely satisfied.

Pay your sales force for keeping customers, not justgetting them.

Don’t pay your sales team the entire bonus whenthe deal is closed; save the lion’s share to rewardthem for keeping the customer happy.

Pay your people for perfection.

Every day you don’t have an error, or every monththat goes by accident-free, everyone gets a bonus.If there’s one error or accident, nobody gets thebonus.

Put your people in business for your customers.

Assign diverse teams from supply, manufacturing,delivery, service, and sales to a single customer.Reward them for finding ways to improve thecustomer’s experience or reduce the cost to serve them.

Impact

Ensures product and servicequality that warrants higherprices.

Your sales people stay focusedon important customers longafter the sale.

Your people exert pressure oneach other to do the highestquality work possible.

Your people create value for the customer and thecompany.

8

Ever heard of Count Potemkin? He was asuccessful man in 18th century Russia. Fromtime to time, Catherine the Great, his regionalmanager, would come down to check on thegrowth of his territory. Potemkin would takeher down a route lined with splendid trees andimpressive new villages. And they’d stop alongthe way to chat with all the loyal, happy,productive subjects.

After the tour, C the Great would congratulatehim for successfully growing his territory, andgo home pleased by the progress in this part of Russia. Potemkin would promptly tear downthe fake villages he’d built and send home theactors he’d hired to man the facades.

Believe it or not, there are Potemkins at workin almost every organization. You announce acustomer, store, plant, or office visit, and yourpeople go about preparing for your stay. Wallsget painted, machines get washed, delightedcustomers get invited to meet you, and thebest employees are put on shift to greet you.

Your people, with every good intention, will tryto show you things not as they are, but howthey think you want them to be. Customersand suppliers may do it too, especially if you’re a high-ranking executive.

But if you’re going to grow your currentcustomers, you need to know exactly how they feel about doing business with you. Usethe tips on the facing page to see beyond your Potemkin Villages and get to the cold,hard truth.

Potemkin villages

Profit Tip #3: Obliterate the barriers thatprevent you from understanding what it’s liketo do business with you.

9

Village wrecking balls

Principle

Goodintentionsare not goodenough

Use an agent

Celebrateparanoia &suspicion

Theunexpectedquestions

Situation

Every new executive announces that she will stayclose to her customers. The road show starts…something comes up… something else comes up…and POOF – a Potemkin Village appears.

Funny thing about people – they don’t like tobring you bad news. They don’t, however, havetrouble telling someone else bad news (about you).

Andy Grove of Intel says: “Only the paranoidsurvive.”

Every piece of customer information can be biased.True performance can be masked. It is easy to misswhat customer satisfaction is really about.

When you do meet with a customer, you can askthe safe questions:

How are we doing? – Good.

Are you satisfied? – Yes.

Anything we can do better? – Lower your price.

Action

Stay out there. Make time withcustomers the one part of yourschedule written in permanentink.

Sometimes it takes an agent to pry loose the truth. Andwinning requires, first andforemost, a fundamentalrelationship with the truth.

Believe nothing until theyshow you the wounds.

Ask the unexpected questionsinstead:

What do our competitors dobetter than us? – Hmmm.*

If we lost your business, whatdo you think the cause wouldbe? – Hmmm.*

If you were us, what wouldyou worry about? – Hmmm.*

*Hmmm is good. Trust us on this one.

10

Here’s an interesting tidbit: No one in businesstoday has operated in a deflationaryenvironment. In fact, the most recent period of deflation came at the end of World War I.

So you’re not alone if you find yourself longingfor the days when you could grow revenuessimply by raising your prices.

But those days are gone.

Welcome to the less-than-wonderful world ofdeflation. Where prices get cut, competitorsfollow suit, and customers get used to it. Soprices get cut further. And next thing youknow, it’s a fire sale.

What’s the right thing to do with prices in themidst of a deflationary dip?

Try bucking the Big D with a little pricingdiscipline:

Recoup all the costs of making goods andserving customers.

If your competitors drop prices, make sure youunderstand why (they may just be trying tomove excess inventory).

Invest in real-time information for sales andinventory levels, and use it for dynamic pricing.

Protect your product from commodity pricingpressure with unique features and privatelabeling.

Carefully track changes and special requests,and charge a fair price for them.

Keep an eye on volume commitments made at time of sale, so you’re not giving awaydiscounts without receiving your quid pro quo.

Big D

Profit Tip No.4: Buck deflation by puttingdiscipline into your prices.

11

Professor Steidtmann’s deflation history lesson

Consumer price index

1800 1840 1880 1920 1960 2000

10

.1

1

War of 1812 Civil War

WWI

Today

Source: U.S. Bureau of Census

Like inflation, deflation tends to be self-reinforcing. Once deflationary cycles start, they tend to persist. Over the past 200 years, the global economy has experienced an extended deflationary cycle during threeseparate periods:

The first came after the end of the Napoleonic Wars in 1812; prices fell for nearly 50 years.

Contrary to today’s gloom and doom, the second period of deflation came during the period of extraordinaryinfrastructure and technology expansion in the early 1870s and continued up to the beginning of World War I. New businesses thrived and the standard of living rose dramatically, with ever-higher levels ofproductivity. High productivity led to an oversupply of goods, and prices took a steep downward dive.

The most recent period of deflation came at the end of World War I and was both the most severe and themost destructive (leading up to The Depression).

Deflation did not follow the end of World War II, because governments around the world embraced deficitfinancing and took responsibility for macro-economic management.

Now it’s our turn.

Adapted from Carl Steidtmann, “Deflation: The Oversupply of Everything,” A Deloitte Research Economic Viewpoint, 2002.

A lot of companies measure customerprofitability. As they should. Problem is, manyuse the wrong measures.

Ideally, your approach should take intoaccount:

What your customers actually pay (afterdiscounts, promotions, rebates, and write-offs).

How much it costs to sell to them (including all commissions and incentives).

What it takes to serve them (ranging fromdistribution to after-sales support).

But be realistic. Tracking those costs andlinking them to customers can cost more ineffort than it generates in dollars. Be preparedto use proxies. But consider yourself warned:Proxies can be misleading.

Consider the hotel chain that figured frequentguests were their best customers. They built anaffinity program around them. Only to findmost of those guests booked online and werepaying lower prices than everybody else. Sothe company was rewarding its least profitablecustomers.

Call it the profitability paradox:

Direct measures can be costly, so companiesuse proxies.

Proxies can be misleading, so companies turnto more direct measures.

Proceed with care. Sort out your profitabilitymeasures. Which do you need? Which can youafford? And for those that are too costly, whatproxies can you really count on?

12

The profitability paradox

Profit Tip No.5: Understand what really addsup to profit (and loss). Measure that.

13

Get the picture?

Once you’ve calculated each individual customer’s profit, take some time to plot your Curve of CumulativeProfitability.

Often called the Whale Curve, the plotted data paints a very clear picture of your customers and their impacton your growth. And it’s almost always the same curve, much like the one above, where the most profitablecustomers (top 20%) can contribute up to 300% of profits, and the least profitable customers (bottom 10%)can drain up to 200% of the very same profits.

An interesting thing you’ll learn in this exercise: Your largest customers will congregate at one end of thespectrum or the other, but rarely in the middle (that is, they’ll be either the most profitable or the leastprofitable of your entire customer base). You can’t lose large amounts of money with small customers; youdon’t do enough business with them. Only a large customer, working in a particularly perverse way, can be alarge loss leader.

350

0

50

100

150

200

250

300

Cumulativeprofits (percent oftotal profits)

Customers (sorted from highest to lowest profitability)

curve of cumulative profitability

Unprofitable customers are the pariahs of thebusiness world.

Or so conventional business theory would haveyou believe.

Weed out your bad customers and aim loyaltyprograms at good ones.

On the surface, this makes sense.

But in this day and age, customers are scarce.Writing one off simply because it’s unprofitableis at best rash and at worst counterproductive.

The question you should be asking yourself isnot, “How can we shed unprofitablecustomers?”

Rather, “How can we make money off thecustomers that everyone else is shunning?”

Consider Paychex, Inc., a payroll processor thatbuilt a multi-million-dollar business by servingsmall companies – ones that previouslyestablished players had ignored on theassumption that they couldn’t afford theservice. Paychex now serves 390,000 U.S.customers, each employing an average of 14 people.

Or Progressive Insurance, who found a way tomake money off customers the competitionrejected – young people and drivers with poorrecords. Between 1991 and 2001, Progressivesported an average underwriting profit of4.5%, compared with an average loss forother U.S. auto insurers of 3.0%.

Both companies found that with innovativenew business models, they could turn a profitoff unattractive customers. Can you do thesame with yours?

Adapted from article by Deloitte Consulting professionalsDavid Rosenblum, Doug Tomlinson, and Larry Scott, “Bottom Feeding for Blockbuster Businesses,” Harvard Business Review, March 2003.

14

Bottom feeders

Profit Tip No.6: Scoop up the customers therest of your industry shuns.

Organization

CharlesSchwab(a start-up)

Enterprise Rent-A-Car(a start-up)

Paychex(a start-up)

ProgressiveInsurance(establishedfirm)

WellPointHealthNetworks(establishedfirm)

Product/serviceand customersegment

Retail stockbuyers

Consumers whoneed temporaryreplacementcars

Small-businesspayroll and HR services

Auto insurancefor high-riskdrivers

Healthinsurance forindividuals andsmall businesses

Cumulative net profit over last five fiscal years

$2.26 billion

(privately held)

$961 million

$1.6 billion

$1.49 billion

15

Pariah or profit?

Business model breakthrough

Phone-based stock purchaseswithout investment advice

Stay out of the business travelersegment and expensive airport locations; strong referralarrangements with auto dealersand repair shops

Low-cost payroll services for small-business clients through newapproach to data collection andmarketing

Serve customers deemed high-riskby others through superior riskand pricing analysis

Multiple insurance products fordifferent customer segmentssupported by separate front- andback-office processes

She bursts through the door and reintroducesherself. Four times.

“Hi, I’m your customer.”“And your supplier.”“And your partner.”“And your competitor.”

Meet Sybil. The customer with multiplepersonalities. She’s a veritable marketplace ofrelationships.

But how can you possibly have a goodrelationship with her when she buys from you,sells to you, goes to market with you, andcompetes with you?

Is it time to appoint a Head of CustomerRelationship Integration? A Chief CustomerPsychiatrist?

Not quite.

But it is time to analyze all the relationshipsyou have with her so you can identify the onewhere your biggest growth opportunities lie.

Not because you can only have onerelationship per customer. But because youmay want to give a little in one area to get big gains in another.

Make those multiple personalities work hardfor you.

You might even find yourself mining your listof competitors, suppliers, and partners to see ifyou can find more like Sybil.

16

Meet Sybil

Profit Tip No.7: Exploit growth opportunitiesin companies where you have multiplerelationships.

17

When customers become competitors (and vice versa)

you competitor

customer customer

Give up a customer to a stiffcompetitor…

…to gain favor as a supplier to that same competitor…

…to gain position as their jointventure partner with an evenbigger customer.

you competitor

customer customer

you competitor

customer customer

While you’re counting up your currentcustomers, don’t overlook one of the mostimportant customer groups – the ones that gotaway.

Winning affirms all the things you’re doingright. But losing can be a far better teacher.And a more accurate road map to futurerevenue growth.

So why don’t companies spend the time andenergy required to understand why they losecustomers?

Why? Because successful business people hatelosing. Instead, they move on. To the nextconquest. And the next elusive win.

But don’t let your losses become a lostopportunity. Open a corporate equivalent ofthe National Transportation Safety Board: anindependent team charged with investigatingevery lost sale.

The beauty of the NTSB is that it has no ties toany organization, and no emotion wrapped upin the subjects it investigates. So it can coldlyand objectively examine mistakes, and issuesafety recommendations that will preventfuture losses.

There’s no reason this model can’t work in yourorganization.

Ask yourself:

“Do we really know why we lose?”

“What kind of program do we need to put inplace to gain this insight?”

“How can we turn that knowledge into betterrelationships?”

In your rush toward the next win, don’t doubleyour losses by not learning from them.

18

Ode to losing

Profit Tip No.8: Relish your losses for whatthey can teach you – and put them to use insecuring future wins.

Ask while it still stings

Place of honor on theexecutive agenda

Check your defenses with your coat

Deal with the fear factor

Share the failed-play playbook

Time blurs stuff. You need to have a quick strike program in place tospeak to customers immediately after a loss. Fresh wounds tell moreabout the injury.

Look at your Executive Management meeting agendas. Is there afixed slot titled “Why We Lose”? If not, put it there.

When you walk in the door to hear why you lost, check your defenses – all those perfectly good reasons why you lost. There is nothing to learn from them. Assume you are to blame. Ask hard questions:– How did we fall short of your expectations?– What went wrong from your point of view?– What reasons did we give you not to go with us?– How has it changed your opinion of us?– What will it take to repair that?– What would you have done differently?

Then listen even harder.

One of the biggest barriers to getting good “losing insight” is thefear that the point person will be exposed as the problem. Punishingpeople who bury and repeat problems will help. Rewarding peoplewho uncover and fix problems will help even more.

Make the lessons from losing widely available so others canincorporate the fixes into subsequent pursuits. It’s bad not to learn from your mistakes, but it’s even worse not to use what youhave learned.

19

A loser’s playbook

Okay, so profitable revenue is everyone’s job,right? But your CIO might just be holding thekeys to the profitable growth kingdom.

Why? Because he can tell you:

Who your customers are.

How much they spend. Where they mightspend more.

And how to encourage them to do that.

Who comes back. Who doesn’t.

How long it takes you to deliver orders to them.

What it costs to serve them.

Whether you’re getting your costs back from them.

And what they contribute to your profit.

Jingle, jangle. He holds the data. And data is key.

What would happen if you took him offtechnology implementations and put him ontoprofitable revenue growth?

What would happen if you demanded that he turn all those IT specialists into growthadvisors – doubly armed with the answers to your profit questions and their deepknowledge of what technology can do to help?

They’d begin to see their technology initiativesfrom a different point of view.

You’d avoid running down dead-endtechnology alleys.

And, ultimately, you’d end up with ITimplementations that actually tie back to your profit objectives.

20

When data is key

Profit Tip No.9: Sign up the IT department foryour profitable revenue growth program.

21

IT – on the hunt for profits (Moving from a cost center to a profit producer)

To help the business achieve its profitable revenue growth objectives, use this checklist.

Focus IT on profitable growth

Close the gap between business and IT

Celebrate and share insights learned

Share insights and profitbreakthroughs across teamsand divisions to demonstratethe potential of IT

Move the IT mindset fromupdating applications toproviding managementinsights

Make revenue growth a keymetric for CIO compensation

Make business objectives a part of IT’s daily decision-making process

Educate IT staff in whatwould be usefulmanagement information

Assign IT staff to businessunits and customer segments

Deliver regular updates tothe business about who’sprofitable and who’s not

Hold business leadersaccountable for respondingto IT insights with customerstrategies

Create teams of IT/businessstaff and give bonuses forprofitable growthbreakthroughs

Agree on common profitobjectives for business andtechnology

Pricing, profitability, and Potemkins. Where onearth should you start?

With one really important customer. Notnecessarily your biggest. But one that offersthe most opportunity for growth.

Decide who that is. Then quickly:

Get to know them well.

Measure your cost to serve that customer andits resulting contribution to profit. Factor inlifetime value and growth opportunities.

Set an aggressive agenda for growth (takinginto account multiple relationships).

Implement your growth plan – raising prices,reducing cost to serve, or improving thatcustomer’s experience.

Add the jolts, processes, technologies, ortraining needed to make your growth plan stick.

Repeat with your next most importantcustomer.

Conventional segmentation might tell you tostart out with groups of customers.

But that involves a long, drawn-out processwith a far-away payoff that might be irrelevantby the time you get there.

Instead, pick one customer and work throughthis process in 100 days.

That way, you’re seeing results quickly. Buildingmomentum. And making major changes, onereally important customer at a time.

22

Profit Tip No.10: Grow your revenues onecustomer at a time.

One at a time

“The easiest kind of relationship is with 10,000 people – the hardest is with one.”Joan Baez

23

Start here

Grow your currentcustomers first

Get first-handknowledge of thecustomer experience(marketing, sales, service)

Examine multiplerelationships, if they exist

Assess competitor threats Work with IT to assesscustomer profitability:

– Price – Discounts, commissions,

rebates – Volume – Operating costs– Cost-to-serve– Lifetime value

Choose growth strategy:

– Reducing cost-to-serve– Improving value – Increasing prices– Increasing volume – Maximizing multiple

relationships Implement jolts necessary to change

Assess people, process,and technology changes that are necessary

Prioritize quick hits to show progress

Select oneimportantcustomer

Measure cost-to-serve and profit

Set a growth agenda

Implement yourgrowth plan

Repeat with nextmost important

customer

Get to know them well

This book presents 10 practical tips for growing profitable revenue with the customers you already have. Ten seemingly obvious things you should be planning to do, be doing now, or have already completed.

Which begs the question:

Why aren’t they done?

Perhaps it’s too easy to put off the obvious.

Our advice: Don’t.

24

Restating the obvious

25

Profit tips

No.1: Grow your current customers first.

No.2: Reignite your people’s passion for growth.

No.3: Obliterate the barriers that prevent you from understanding what it’s like to do business with you.

No.4: Buck deflation by putting discipline into your prices.

No.5: Understand what really adds up to profit (and loss). Measure that.

No.6: Scoop up the customers the rest of your industry shuns.

No.7: Exploit growth opportunities in companies where you have multiple relationships.

No.8: Relish your losses for what they can teach you – and put them to use in securing future wins.

No.9: Sign up the IT department for your profitable revenue growth program.

No.10: Grow your revenues one customer at a time.

25

26

About this bookHow to get the most out of that bird in your hand is the fourth in a series of books dedicated tomaking your experience with consultants more positive and productive.

To request additional copies of this book, or to order previous editions, go to:www.deloitte.com/straighttalk.

Talk to us At Deloitte, we believe that great relationships create lasting value for everyone involved. And inour experience, those relationships almost always start from good conversations. We look forwardto hearing from you and learning what you think about the ideas presented in this book.

For more information about how we can help you grow profitable revenues, please contact ourglobal practice leader, Jonathan Copulsky (jcopulsky@deloitte.com).

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