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ADDING VALUE TO CUSTOMERS IN TODAYS ECONOMY

The current economic crisis, the effects of which have been manifested across all sectors of the Greek economy, has put pressure on all companies to cut costs and to reduce themselves in order to survive. Several companies are closing due to poor competitive positions, rigid internal cost structures and dropping demand, and the Greek banks are experiencing a rise in defaults from businesses of all sizes, from very small corner shops to very large companies. This unprecedented situation has understandably shifted the focus of most managers and business owners to survival tactics: cost reduction, cashflow improvement and suspension of all non-critical and many times even critical investments. Additionally, in a desperate effort to secure revenue, most companies resort to price reductions, either permanently or temporarily through special discounts and offers. The impetus from this article comes from this last phenomenon. Having recently seen several Greek companies in different sectors lowering prices in order to meet the current demand drop, it occurred to me that most of these companies companies dont have a complete, organized way to determine exactly what value their customers gain from their products or services, and to devise ways of increasing this value without necessarily dropping their price. This lack of a clear Value Strategy or even a complete view of the market can result in serious misperceptions of the current crisis, its effects on a company, and the ways in which it needs to act in order to address it. For instance, I was recently having a discussion with a retailer who was blaming the falling market for its revenue decrease, only to discover through a simple exercise that it holds less than 5% of the overall Greek market! Clearly, this company was looking at the wrong problem (a falling market) when it should be looking at a great opportunity (larger competitors and a chance to win market share).

Is lowering prices a bad idea? Clearly, there are several instances where lowering prices is the best available option especially when the profit margin of your product or service is unreasonably high. In fact, there are several sectors in the Greek economy (from real estate to tourism to coffee shops) where the very high prices charged are unjustified, and these sectors have partly contributed to the current lack of competitiveness of the Greek economy. However, lowering prices to meet falling demand without a good analytical view of demand, competition, and the value chain of its sector is definitely the laziest, and probably the most detrimental solution for the company, as it directly transfers profit from the company to the customer; instead of increasing the value of the product, price drops give away some of the value currently kept by the company to the consumer, hoping to maintain demand. The obvious hazard of price drops is the possible competitive reaction of every other player in a companys sector: if I begin dropping prices in order to keep my customers, there is nothing to stop my competitor from doing the same thing, and this can easily lead to a price war without any significant shift in the market shares of the different players, which are just making lower margins. This is a very familiar story, which has been seen across several markets from the tobacco industry in the US in the 1980s, when Marlboro dropped the price of its cigarettes only for Camel to follow suit the next day (resulting in a lower-price equilibrium and the firing of the Marlboro Marketing Director) to the passenger travel business in the Adriatic Sea, where the entry of a new, low-priced competitor resulted in a serious price war which made business in the area completely uneconomical.

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The more subtle argument against across-the-board price cuts is that by doing so a company is telling its customers that it does not believe in the value of its products, or that it was overpricing in the past. Even in the current climate I have heard strong voices saying that if major retailers can afford to give 80% discounts during the August sales season, they are clearly ripping people off during the rest of the year; while this may seem unreasonable and harsh, several studies have shown that by paying less for an item a customer is likely to value it less, and to resist paying more for it when times are better. The US retail group Saks Fifth Avenue encountered this exact trap during the 2001 US recession, implementing deep price cuts that temporarily boosted revenues but undercut its high-quality status for many customers. As a result, its sales were slower to recover than those of its competitors.

How do we keep our customers by adding value? My company has worked with several large and small clients to redesign their commercial strategy in order to keep their customers or even improve their market share in this very difficult and uncertain economic climate. The challenge we have had to face has always been how do we add value to our customers while simultaneously decreasing our marketing costs? From our experience and also from several international best-practice accounts, we have determined six key elements which are completely essential in order to achieve this challenge. In the following paragraphs I will try to briefly describe each element and how it can be achieved: Element 1: Understand your customer base and select the ones with the most value to you Most companies have a limited understanding of their customer base, lacking even the basic analysis of which customers or segments are most valuable to them. Estimates of customer value are often confused (the largest clients are considered most valuable, or the oldest ones are), or incomplete, lacking significant cost elements such as customer service costs, financing costs, distribution costs etc. In order for a company to adapt to the current downturn it must objectively and relentlessly evaluate its customer base, focusing on the ones with the highest value. After measuring the value of its customers, a company should not be reluctant to differentiate between its high-value customers and other segments, or even decide that certain existing customers are loss-making and should not be serviced. This last decision (to actually stop servicing existing clients) is one of the hardest one I have seen business owners have to take, especially if they have traditionally been focused on bringing revenue and increasing their business. However, its absolutely necessary in order to free up resources and to focus the company on its most valuable clients. After all, it should not be any surprise to people familiar with the Pareto principle that usually a small percentage of clients bring the largest percent of value Element 2: Communicate with your higher-value clients in an honest and open way This second element may seem obvious: after all, these are existing valued clients, and a company ought to be able to understand their needs in order to service them. However, from our experience in the market we have found several reasons why the usual supplier-customer communication can be very shallow and often misleading: It is limited to the transaction (purchase, service provision) and not to the whole value chain of the customer It is often conducted at the wrong organizational level (between salesman and buyer), with both sides having little incentive to look beyond the actual sale It is often one-way: the customer learns only what the salesman feels would help the sale, and does not fully understand the provider company

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It is often short-term focused: most discussions between customers and suppliers focus on the next transaction, or at best the next contract, but not the long-term relationship It is tainted by a routine bargaining, adversarial mentality, with both parties looking to get the most out of the discussion and not to understand each-others situation

Given the above issues with day-to-day communication, it is essential especially today that each company conducts an honest, open discussion with its most valuable clients, with one main issue in the agenda: how can we collaborate better in order to increase the value we generate from our relationship? While I realize that in the beginning this conversation may once again be reduced to issues of price or payment terms, there needs to be a persistent facilitator that leads the discussion to deeper, more creative and more significant issues. Element 3: Be sensitive to changing tastes and consumption habits As the CEO of a large company recently told me, in this new world of constant change and uncertainty, it is not enough to have a good understanding of your customers; you need to develop the mechanisms and feedback loops to keep track of them as they change consumption habits and preferences, and ideally to be one step ahead of them. In practical terms, this means that companies must develop ways to constantly listen to their clients, understand their requirements and change their own product or service offerings to meet these new requirements. After all, who could predict one or two years ago the increasing significance of private label goods, the number of people in social media, or the emergence of Green banking as a strong customer requirement? Of course, there is no use in establishing feedback and measurement tools to track changing consumer habits if the company is not agile and open-minded enough to drastically change its ways of working in order to meet these changing habits. In other words, it is not enough to constantly listen to your customers and to try to understand how their needs are changing; it is also absolutely essential to let these changing needs take the highest priority in quickly changing your companys brand image, product portfolio, ways to market, supply chain and overall organization. Element 4: Creatively look for lower-cost alternatives Looking for lower-cost alternatives is not the same thing as dropping your price. Rather, it is creatively looking for different ways to meet the customers requirements through products or services with lower purchase cost or total lifecycle cost (maintenance, use, resale etc.) for the customer. One of the most famous examples of the application of this is the meteoric rise of IBM in the US during the Great Depression, which was mostly because of the fact that IBM, realizing that its clients could not afford to invest in its business machines, chose to allow companies to rent them. In todays world, the onset of digitalization and the proliferation of web- and mobile-based applications has provided ample opportunity to offer lower-cost alternatives. One only has to look at the way web-banking has both improved customer service and helped lower banking costs, or the gradual replacement of even venerable newspapers with digital versions which cost less and deliver more (video, 24 hour news and customization). Element 5: Relentlessly re-evaluate and focus your sales and marketing resources One of the most critical elements that a company must examine is the way it spends and uses its marketing resources and the way it motivates, guides and monitors its sales team. While the natural reaction of all business decision makers today is to cut costs, they should also look to see where they can re-focus their resources in order to make the most impact in their sales and market position. Some of the key questions that should be answered are:

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Are they using the most effective ways to contact their customers? (for instance, according to current studies a sales contact by telephone costs a company less than 10% versus an on-site visit) Are they targeting and motivating their salespeople correctly, giving them clear incentives to spend the most time dealing with the most valuable customers? (examine how many companies are still giving bonuses to their sales team based on sales, and not based on profitability or customer retention) Is every EURO they spend on marketing and promotion focused towards the appropriate audiences, using the most effective media and conveying consistent messages? (for example, using social media and the internet to promote your company can have tremendous impact with much lower costs than traditional advertising)

These three and many other questions need to be asked and answered by every company that finds itself having to sell more with fewer available resources and the traditional ways to market must be relentlessly re-evaluated and re-focused. Unfortunately, I have seen many companies keep doing what they were doing, either because they are afraid to try something innovative during a difficult time, or because their advertisers and marketing team are entrenched in the way theyve always done things. However, in the face of a drastically changing market, harder competition and evolving customer needs, the only sure path to revenue decline is doing the same things as before. Element 6: Maintain an optimistic and aggressive mentality Finally, it is critical for companies to avoid cultivating the miserly and defensive attitude that this is a crisis; lets stay where we are and wait until it passes, as if they have to stand still under a roof to avoid a heavy downpour. While the natural and often correct reaction of any business owner and manager would be to cut costs and avoid taking risks, this cannot be the only way a company reacts to the current climate there has to be a clear forward movement, an aggressive spirit, and a conscious effort to discover new opportunities to protect or even improve a companys market position and revenue base. In fact, having acted as an advisor to more than 500 companies ranging across all sizes, sectors and locations, I have consistently found that those which withstand the worst parts of a crisis are the ones that keep moving, stay aggressive, find ways to take advantage of it and grow while their competitors cower. The message that all the companys employees and stakeholders must hear is that the company is strong and agile, that it has valuable assets (brands, people, technology, sales channels) and a strong market position, and that it will adapt to the changes in the environment in order to emerge even stronger. After all, Economic downturns such as the current one are primarily Darwinian events in the marketplace and as Darwin is often quoted to have said, It is not the strongest of the species that survive, nor the most intelligent, but the ones that are most adaptable to change.

Yanni Spiropoulos is the Managing Director of OCTANE Management Consultants, a boutique consulting firm staffed by a team of experienced consultants and executives, whose ambition is to help Greek companies become more competitive through practical, real-world advice and implementation support delivered in a fast and efficient manner. For more information about OCTANE or the ideas in this article please see www.octane.gr or call 210.3617.190.

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