Be clear about who is in your target segment, and say “no” to those who don’t fit.
Focus your resources on developing the customers in your target segment, building strategic bridges through semi-customized packages of products and services, and most often serving them through multi-capability teams.
Set your service standards to always keep your promises. Promising fast, complete service to everyone is a recipe for chronically angry customers.
As part of our series about the five things a business should do to create a Wow! customer experience, I had the pleasure of interviewing Jonathan Byrnes.
Jonathan Byrnes is a senior lecturer at MIT and founder and chairman of Profit Isle, a SaaS profit analytics software company. Jonathan is coauthor of the forthcoming book, Choose Your Customer: How to Compete Against the Digital Giants and Thrive.
Thank you so much for joining us! Our readers would love to “get to know you” a bit better. Can you tell us a bit about your ‘backstory’ and how you got started?
I studied supply chain management in business school because I was very interested in how transportation innovations changed markets and the spatial configuration of business. Earned a doctorate in this field from Harvard Business School, and I have worked in the field ever since.
Can you share a story about the funniest mistake you made when you were first starting? Can you tell us what lessons or ‘take aways’ you learned from that?
I was working with a client in Mississauga, Ontario (just outside of Toronto). I had a new assistant, and when the client called saying I should meet the management team in Mississauga, she thought they said “Montreal”. When I arrived at the company’s DC in Montreal, we all were surprised. Fortunately, I caught a flight to Toronto, and we all had a good laugh.
Lesson learned: pay attention to every detail.
None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story?
I worked closely with Steve Doyle, a classmate from Harvard Business School, on several projects. Steve was an authority on sales management. Through Steve, I learned the subtleties of sales, and in return, I taught Steve the subtleties of supply chain management. Together, we figured out that the customer relationships that these two critical areas shared required that the managers work in surprisingly parallel ways.
When I invented vendor-managed inventory (supplier manages the supply chain for its products inside the customer up to the point of use), I understood that in intimate customer relationships the sales and supply chain managers had to team to select the right accounts, develop the right relationships, and make them work.
Tragically, Steve passed away a few years ago. Thanks to him, I’ve taught both account management and supply chain management to graduate students and executives during my 30 years at MIT.
Thank you for that. Let’s now pivot to the main focus of our interview. This might be intuitive, but I think it’s helpful to specifically articulate it. In your words, can you share a few reasons why great customer service and a great customer experience is essential for success in business?
The prior century (about 1900 to 2000) was the Age of Mass Markets. National transportation networks developed, and markets integrated. The key to success was to get big, because companies had economies of scale in every business function (e.g. production, distribution, marketing), which meant that the more they sold, the lower the unit cost, and the lower the price, leading to more volume increases.
In this period, companies sold largely all-the-same products (with little real product differentiation) to as many customers as possible, and tried to keep all costs low. Command-and-control organizations were effective, and aggregate metrics like revenue and costs were appropriate.
All this began to change around 2000, with the development of the internet and the rise of the digital giants.
Amazon, for example, is the poster child for digital giant success. Amazon has a laser-tight strategic focus: providing information-rich arm’s-length services to small customers. The company has literally turned this strategy into a science with relentless constant improvement. The heart of Amazon’s strategy is using captured customer information and algorithmic recommendations to micro-segment and capture this small customer market. The core of Amazon’s strategy is deploying scores of highly-automated distribution centers, linked to sets of dense, rapid delivery routes.
Ironically, Amazon’s stunning success is rooted in its strategy of serving the millions of small, low-profit customers that incumbent companies already had, but had rarely focused on developing. While Amazon was penetrating and developing this market, stripping these customers away from full-line companies, many of these incumbents were left pouring precious resources into the futile task of retaining and reclaiming these firms. Most of these misguided firms failed.
As the digital giants rapidly capture market share, capable incumbent firms need to move into defensible higher-service segments for profitable growth. Quasi-integration measures like vendor-managed inventory enable them to build close ties with their premier customers that Amazon and others cannot match. For example, MSC, an innovative distributor, has adopted the tagline, “Built to Make You Better”. Customers in these higher-service segments want semi-customized packages of products and services, which further fragments markets.
Customer service in the Age of Mass Markets meant being good at broad-market measures like good quality products and on-time deliveries. Today, these are still important, but they are the ante. The winning customer service strategy is to target a market segment that is defensible and offers high profit growth, choose only those customers that fit the target profile, and focus all of your resources on developing semi-customized packages of products and related services appropriate for your target market segments (even individual customers), and serve them through dedicated multicapability teams. Tried and true broad-market approaches to customer service are completely inadequate to win in today’s fragmented markets.
We have all had times either in a store, or online, when we’ve had a very poor experience as a customer or user. If the importance of a good customer experience is so intuitive, and apparent, where is the disconnect? How is it that so many companies do not make this a priority?
Many managers do not understand the real meaning of customer service. They promise fast, complete service to all customers. When they fail to perform, the customers demand faster and faster service, which they cannot produce.
Outstanding customer service means keeping your promises 100% of the time. But it does not mean that you have to make the same promises to all customers for all products. This allows you to provide ultra-fast service to your prime customers, and longer order cycles to others — which enables you to always keep your promises, but at a reasonable cost.
This is especially critical today, when pandemic-based shortages abound, and you need to allocate products. If you simply put everyone on allocation, and run a first-come, first-served operation, everyone will be disappointed. But if you put your most profitable customers on full allocation, and your money-losing customers on, say, 80% allocation — and always keep your promises — all of your customers will perceive that they received great service.
Do you think that more competition helps force companies to improve the customer experience they offer? Are there other external pressures that can force a company to improve the customer experience?
Competition definitely forces companies to improve the customer experience they offer, but it can be very difficult and painful when competitor like Amazon strips away a segment of your customers. The right response is to realize that you have to focus on developing a defensible higher-service strategy that Amazon can’t follow, and focus your resources on develop a winning strategy to capture those customers. The problem is that you almost certainly will have to walk away from the customers who don’t fit anymore.
Importantly, when you move into the higher-service segments, you will find that the value-creation process is a joint journey of discovery you share with your customers. When you innovate, you educate your customers, and thoughtful customers will pressure you for even more, better innovations This is a wonderful cycle: when you meet your customers’ requests, you are a good vendor, but when you partner with your customers to develop new ways to meet customer needs that even the customers didn’t know they had, you are a strategic partner.
Exhibit A: Federal Express under Fred Smith. Exhibit B: Wal-Mart under Sam Walton. Exhibit C: Microsoft under Bill Gates. Exhibit D: Apple under Steve Jobs.
Can you share with us a story from your experience about a customer who was “Wowed” by the experience you provided?
When I developed the vendor-managed inventory I mentioned earlier, customer costs dropped by over 20%, and sales skyrocketed by over 35% in the highest-penetrated accounts in the country.
Did that Wow! experience have any long term ripple effects? Can you share the story?
Vendor-managed inventory (VMI) has become a standard cornerstone of supply chain management in most industries. The problem is that it only fits certain customers (high margin, good operating fit, willingness and ability to partner), and not others. Many companies do not qualify their accounts carefully and wind up losing money.
Ok, here is the main question of our discussion. Based on your experience and success, what are the five most important things a business leader should know in order to create a Wow! Customer Experience. Please share a story or an example for each.
- Be clear about who is in your target segment, and say “no” to those who don’t fit. See the reply above for an example.
- Focus your resources on developing the customers in your target segment, building strategic bridges through semi-customized packages of products and services, and most often serving them through multi-capability teams.
- Set your service standards to always keep your promises. Promising fast, complete service to everyone is a recipe for chronically angry customers.
- Understand your real profitability. Broad aggregate metrics like revenue, cost, and gross margin tell you whether you are profitable, but not where you are profitable. Instead, use new “transaction-based profit metrics” that create an all-in P&L on every transaction line (our SaaS company, Profit Isle, can do this in a few weeks using general ledger entries). This will enable you to link every increment of revenue with the actual cost of producing it. In our experience, gross margins never predict net profit, and the essential profit levers, like order frequency, are rarely monitored. For example, for beer distributors, most craft beers have high margins so they are featured. However, transaction-based profit metrics show that they have low net profit or even substantial losses. Why? Because small customers like corner groceries order them several times per week. While the gross margin percent is high, the gross margin dollars are low because of the low volume. Instead, if they were delivered weekly, the entire category would flip into high profit.
- 5. Don’t get distracted by trying to hold onto all your customers. People often ask how to compete with Amazon; the answer is “don’t” — you will get run over, and spend all your resources in a futile attempt to stem the tide. Instead, you should have the discipline to identify a defensible, high-profit segment and focus your resources on winning that segment. Realize that the urge to hold onto all revenues is an artifact of the fading mass market era when all revenues were good. In fact, most of the customers who are defecting to Amazon would be very unprofitable for you to serve because you can’t match Amazon’s high-scale operating systems. Stick to your knitting. After all, that’s the secret of Amazon’s success — and Apple, Microsoft, Google, Federal Express, Wal-Mart, Target, and all the other success stories demonstrate this.
Are there a few things that can be done so that when a customer or client has a Wow! experience, they inspire others to reach out to you as well?
Get known for what you choose to do best. Customers with similar needs will find you, and your success will breed more success. Do fewer things better, and don’t try to be everything to everyone.
My particular expertise is in retail, so I’d like to ask a question about that. Amazon is going to exert pressure on all of retail for the foreseeable future. New Direct-To-Consumer companies based in China are emerging that offer prices that are much cheaper than US and European brands. What would you advise retail companies and eCommerce companies, for them to be successful in the face of such strong competition?
Be like Amazon: identify a defensible market opportunity and focus all of your resources and innovation on developing it. That’s what Amazon did, and you can do it too. After all, hundreds of studies of the most profitable industries in the industrial economics literature show that the most consistently profitable industry structure has several competitors all with different strategies, each making money with its own unique strategy, and not dissipating their resources fighting over the same customers with the same value proposition.
As Socrates once said, “Know thyself”, and as Wayne Gretzky once said, “Skate to where the puck will be.”
Good luck, and much success!
You are a person of great influence. If you could start a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. 🙂
In your own way, be a teacher. Help others and your life will be enriched.
How can our readers follow you on social media?
This was very inspiring. Thank you so much for joining us!
Thank you for inviting me.