Do you understand your customers?

The purpose of this article

  • Help the board of directors and C-Suite establish a common understanding of their customers and users.
  • This article provides an overall framework.

You may download a PDF of this article from: Do you understand your customers

Why am I writing this article?

  • I have observed that the majority of companies, both startups and established companies, have limited understanding of their customers and users. There are often opinions and assumptions regarding the customers. Frequently these assumptions and opinions are undocumented and not commonly understood and agreed upon.
  • A McKinsey survey of board directors revealed that “Only 16 percent said directors strongly understood the dynamics of their industries, just 22 percent said directors were aware of how their firms created value, and a mere 34 percent said directors fully comprehended their companies’ strategies.”1
  • Your company will fail if you base your understanding of customers and users on hopes, dreams, and opinions.

What is the process to understand your customers and users?

  • The seven-phase process is set out below.
  • The most critical part of the process is listening to what the customers and users are saying and observing what they are doing.
  • You start out by listing your assumptions.
  • Then you validate these assumptions via customer and user input.

Phase 1 Analysis of market data

  • What have been the historical trends?
  • What is the existing aggregate analysis of target segments e.g. geographic, social characteristics, demographic?

Phase 2 document your assumptions, whether or not you have customers and users

Step 1: Define who your customers and users are

  • Identify the key members of the customers’ ecosystem? Users are most common.  There can also be influencers, recommenders, blockers, etc. e.g. Google’s cash paying customers are advertisers.  Google would not have customers if there weren’t a large number of free users doing searches.
  • Who are your target customers and customer segments e.g. geographic, social characteristics, demographic?

Step 2 What does a day-in-the life of the customers and users look like?

  • What are the points of the day when they have urgent problems, pains, needs which your solution may be able to help with. Rank these in terms of intensity and frequency of occurrence.
  • What are the points of the day when they could expect benefits from your solution? What will make them happy? Rank the relevance in term of relevance and frequency of occurrence.
  • What value would the customer achieve as a result of solving problems of gaining benefits? g. time saving, saving money, making more money, reducing frustration, increasing happiness, increasing social standing, etc.
  • At which points do they touch or become aware of your solution? These include: friends, colleagues, social media, conferences, publications, website, app, email, customer service, etc.
  • How do the customers and users perceive the value of your solution vs the current situation and competitors?

Step 3 What is the market size?

Market size requires customer who realize they have an urgent problem or need, are willing to spend money to solve it, and can afford the spend the money.

  • How many cash paying customers, and what would be the revenue, if you receive 100% of customer spending, regardless of distribution channels, and geographies?
  • How many cash paying customers, and what would be the revenue you receive 100% of customer spending, with your current distribution channels and partners?
  • What is your current market share? How many cash paying customers do you have, and what is the revenue? If you’re a startup, what are your assumptions for years 1,2,3?

Phase 3 Validate your assumptions

  • Interview and survey your customers and users, in a series of iterative and learning steps.
  • You’ll need to do thematic analysis of your interviews.

Phase 4 Additional input if you have customers and users

The single most important question is asking  “Would you recommend our solution to others?”  This metric is known as NPS (Net Promoter Score)2.  Follow on questions could be “If so, why?  If not, why not?”

A more detailed question would be: “How would you feel if you could no longer use our product or service?”3

  • Very disappointed?
  • Somewhat disappointed?
  • Not disappointed – it’s not really that useful?
  • I no longer use it.

At least 40% of your target customers must say “very disappointed”.  If it’s less than 40% you need to reposition/change your solution.  One approach can be to segment the answers to find a customer segment where the response is above 40%.

You must understand the group above 40%.  The 5 questions to ask them are: 1) who are you (demographically) 2) why did they seek out your product/service?  3) how are they using it 4) what is the key benefit 5) why is that benefit important?

Additional sources of customer input include:

  • Follow up emails after customer and user interaction, customer purchase, or customer/user exit.
  • Analysis of live chat discussions.
  • Analysis of sales call logs.
  • Analysis of app or website interaction.
  • Analysis of customers and users postings in social media, including review sites.
  • Survey kiosks at physical events.

 

Much of the customer input require thematic analysis, because it will be qualitative and unstructured data.

Phase 5 Analysis of company data

  • What % of customers and users do you lose each month?
  • What is the lifetime profit of a customer?
  • What is the customer acquisition cost?

Phase 6 Combine all of the above data

  • All of the above data may be combined and analyzed.
  • Different customer and user views include: by cohort, customer/user segment, geography, channel, partner, etc.

 Phase 7 Continue the above 6 phases on an ongoing basis

  • Understanding customers and users is an ongoing process not a one-time event.
  • There are rapid and ongoing changes to: customer and user problems and needs, the competition, market sizes, regulation, the economy, new technology enable solutions, etc.

Your next steps

  • Document your current situation, based on what you’re currently doing or not doing in the above 6 phases.
  • Assess the gaps and the risks associated with those gaps.
  • Does the board of directors and CEO believe some or all of those gaps are urgent to correct? Most of the startups I’ve met and many of the established companies I’ve met do not believe it is urgent to have a fact-based understanding of customers and users.
  • If the decision is made that there are urgent gaps, then prepare a company specific plan to close those gaps and establish an ongoing process.

Footnotes:

1 Eric Kutcher, “Corporate Boards need a facelift”, McKinsey May 4, 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/corporate-boards-need-a-facelift

2The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

 3 https://medium.com/swlh/in-search-of-a-better-way-to-measure-product-market-fit-584fa41d3840

 

What is a value proposition?

Overview

  • A value proposition is the customers perception of value.
  • The value proposition = (All the customer achieved benefits) / (All the customer incurred costs)
  • You need to understand both the customer and the competition.
  • Your growth and survival in the marketplace requires helping your customers achieve a compelling value proposition.

A value proposition is the customers perception of value.

This perception can be influenced by: facts, emotions, family & friends, social media, etc.

The value proposition = (All the customer achieved benefits) / (All the customer incurred costs)

All the customer achieved benefits can include both financial and non-financial (e.g. time savings, convenience, status, etc.)

All the customer incurred costs can include financial (purchase costs, costs to switch to your company, other adoption costs, and ongoing costs) and non-financial (time, inconvenience, loss of status, etc.)

You need to understand both the customer and the competition.

  • What is the reason the customer wants or needs something?
  • How can you help the customer with what they need or want?
  • Do your customers believe your value proposition is more attractive than the customers’ current situation?
  • How do your customers perceive your value propositions’ competitive differentiators? And weaknesses?
  • How do your customers perceive your competitors’ value propositions differentiators and advantages? And weaknesses?

Your growth and survival in the marketplace requires helping your customers achieve a compelling value proposition.

  • You must take market share and business away from competitors.
  • Enable customers to stop dealing with current suppliers and start dealing with you.
  • You may be creating a new market (e.g. Apple with the iPad)

Your next steps

Download the following one-page slide to enable discussion with your board of directors, C-Suite, and advisory board.

What is a value proposition?

 Further reading

Thomas Ripsam and Louis Bouquet, “10 Principles of Customer Strategy”, PWC Strategy& website, https://www.strategy-business.com/article/10-Principles-of-Customer-Strategy?gko=083a5

 

What do you do if you’re losing customers?

The first and most important question is: What is happening to the size of your target market?  If the market size is shrinking, then you may need to rethink your target market.

The second most important question is: What have the customers started spending their money on?  In other words, are their needs still the same but a competitor has a better perceived value proposition OR have target customers’ needs or priority of needs changed?

Let’s assume market size and customer needs are not the issue.

Then you need to further hone in on customers’ perceptions:

  • Why are potential customers making one of three potential decisions? Why have they not bought from anyone? Why have they not bought from you?  Why have they not bought from your competition? or from your competition?
  • Why are your current and past customers making one of three potential decisions? Why did they buy from you?  Why are they staying with you?

There are two ways to understand customer perceptions:

  • Analytics can provide insights into customer behaviours and actions (e.g. who are customers buying from). You need to get deeper understanding – why are customers making decisions?
  • Listening to them can provide you with the underlying reasons for actions and behaviours. Customer decision-making is both emotional (trust, brand, fashion, etc.), and rational.  Emotions often drive decision-making.

It is hard to listen to customers.  The 2017 Edelman Trust survey for Canada showed only 36% of respondents believe companies listened to customers.  It is far easier to make assumptions and guesses as to what customers are thinking, rather than focusing on the “words out of their mouths” as well as behaviours and actions.

There are two ways to listen to customers:

  • Passively – what customers ask and tell you in person; via emails they send; via questions, reviews and comments on your website or other social media; what they talk about when contacting customer service, etc.
  • Actively – you proactively engage with your customers, e.g. one-on-one interviews, focus groups, surveys, etc.

The single most important question to ask the target customer is “Who would you recommend?”

Your understanding of the customer results in quantitative and subjective metrics.

You now have some understanding of why you’re losing customers.  What sorts of changes are you going to make to people, processes and technology in order to impact the decisions made by current and potential customers?  The business case will identify both the value of the changes as well as the costs.

So far you have been addressing an urgent issue – the short-term loss of customers and immediate plans to address this issue.  Now you can step back at look at the longer-term issue. How will you ensure you won’t get into this situation again?

  • How will you understand your customers better than the competition does?
  • How will your customers perceive they receive a better value proposition from you rather than from your competitors?
  • What changes do you need to make to your board of directors, advisory board and C-suite?
  • What other changes are required to people, processes and technology?

To enable discussion with your board of directors, advisory board and management, download the following one-page slide:

What do you do if you’re losing customers?