Category Archives: Business Development Strategy

Acquisition and Retention: The Yin and Yang of Customer Strategy

For customer retention, which of the following do vendors commonly perform:

  1. Provide outstanding service and loyalty benefits
  2. Impose switching costs through technological impediments and contractual restrictions
  3. Engineer convoluted pathways for customers who want to terminate services
  4. All of these

The correct answer, of course, is All of these. Every enterprise must retain customers. It’s a strategic challenge, and the path can be rocky. But two things are clear: 1) vendors have multiple tools at their disposal, and 2) customers don’t always benefit.

There’s a lot of confusion about customer retention. Some people ask, “which is better: acquisition or retention?”, implying that the matter is either-or. Some argue that companies invest too much on acquisition and too little on retention. Some assert that retention is preferable to acquisition because retention costs less. And finally, some mistakenly believe that retention tactics create only benign outcomes for customers.

With zealots on both sides, it’s easy to fall into the either-or trap, but it’s a false dichotomy. Without acquisition, there’s no retention. No business can survive long-term without acquiring and keeping customers. And as a practical matter, churn is inevitable: Business needs change, customers become insolvent, or they get acquired. Because revenue contribution from each customer is uncertain, companies must build sales pipelines to keep new opportunities flowing. On the other hand, profit margins from existing customers are generally higher than for new ones, so keeping customers is also very important.

In fact, every effective customer strategy involves:

  • Account acquisition: how do we identify, cultivate, and capture new opportunities?
  • Account retention: how do we keep our customers?
  • Account revenue growth: how do we facilitate increased spending or “share-of-wallet”?
  • Account win-back: how do we resuscitate past clients that can continue to benefit from our product or service?
  • Account divestment: how do we jettison customers that we can no longer support profitably?

At startup companies, acquisition and retention are immediate concerns. But as companies mature, customer strategies become more complex. Businesses can alter their core offerings or delivery models. In addition, customers can stop buying for many reasons – some preventable, some not. Along the way, once-lucrative accounts can become financially less attractive. Customer strategy isn’t complete unless it addresses all five challenges.

A key business development challenge for every organization is matching its capabilities with external opportunities, and customer strategy must address this mission. That defies relying on “industry standards” for guidance. I searched for “customer strategy best practices,” hoping for insight like “on average, machine tools manufacturers dedicate 28% of their marketing spend on capture, and 72% on retention.” Nothing. Nada.

It’s not hard to understand why. Customer strategies are based on corporate strategies, which are influenced by present and future product portfolios, competitive market position, market share, operating costs, cost of capital, risk capacity, risk tolerance, economic and regulatory forecasts, and industry maturity and growth rate – to name a few. Does Company X spend too much on customer acquisition and too little on retention? Devoid of context, it’s impossible to judge. The most useful clue is whether Company X achieved its quarterly revenue target. If so, they possibly had the right proportion of acquisition and retention. When you have next quarter’s achievement percentage, ask me again. There might be a different answer.

Even without industry standards, I took a swing at generalizations:

Acquisition-intensive companies tend to be

  • New business ventures
  • Companies that are pivoting their business model
  • Operating in young or emerging industries
  • Selling capital goods with low potential for add-on sales
  • Expanding into new markets
  • Services companies that recognize a large portion of revenue at the time of contract signing

Retention-intensive companies tend to be

  • Software-as-a-service (SaaS) companies
  • Offering other subscription-based products or services
  • Providing a low-cost entry product or service that can be readily expanded
  • Selling a product or service with high potential for ongoing consumption
  • Dedicated to supporting a key client or small number of clients
  • Expanding into new markets or developing products targeted toward their legacy accounts

Most companies are in between, confounding our ability to compliment – or assail – their approaches. Blue Apron, for example, must be equally rabid about acquiring new customers and preserving those they’ve signed. It’s a conundrum: for troubled Blue Apron, client retention depends on gaining economies of scale. And how do you achieve economies of scale? By acquiring new clients! Acquisition and retention, therefore, exist in a mutually supportive relationship. I know – it’s complicated. But it’s hardly rare.

Flawed accounting? For most companies, acquiring customers consumes a sizable chunk of the marketing budget. In B2B, buying lead times can drag on for months or years, and conversion rates (ratio of prospects who become customers) can be frustratingly low.  “Depending on which study you believe, and what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one,” wrote Amy Gallo in Harvard Business Review (The Value of Keeping the Right Customers, May 2014). In fact, every executive I spoke with for this article shared that their company’s customer acquisition costs consistently exceed retention costs.

But “cost analysis regarding retention requires sophistication, and results vary widely between companies,” CFO-turned-novelist Pat Kelly told me. “There are many [retention] cost drivers,” and not all of them are aggregated into overall retention costs. For example, much of what companies spend on software development and logistics operations are crucial for customer retention, but most companies don’t categorize them as retention costs. On the other hand, marketing, sales, and lead generation are easier to parse. Many companies know their cost/lead down to the penny. Little wonder that spending on acquisition appears so lopsided. “It’s worth the effort to get better at tracking retention costs, but companies will never get to the right answer,” Kelly said, adding “it’s more important to be directionally accurate.” That’s solid advice. We can endlessly debate the accuracy of acquisition-retention multipliers, but acquisition almost always costs more than retention. Still, for most companies, whatever benefit precision provides doesn’t change the fundamental fact that you still can’t retain a customer that you haven’t first acquired.

Recommendations:

  1. Balance is key. Companies that get heavily invested in a single component of customer strategy risk harming stakeholders. Comcast abused a customer that they clearly couldn’t afford to relinquish. Solar energy companies inflated acquisition numbers to appear more attractive to investors. And American Express Foreign Exchange offered impossibly low rates to prospects, only to raise them without proper disclosure.
  2. Never use cost considerations as the dominant rationale for favoring retention. Acquisition, retention, growth, win-back, and divestment strategies must first align with the strategies of the organization.
  3. When defining your customer strategy, consider the right measurements. These should include minimum churn rate, expected churn rate, industry growth rate, enterprise revenue growth target, actual revenue-per-account, forecast revenue-per-account, economic forecasts, and foreign exchange rates (for international companies).
  4. Know the right customer for your company, and if that’s too difficult, at least know the wrong one. “Think about the customers you want to serve up front and focus on acquiring the right customers. The goal is to bring in and keep customers who you can provide value to and who are valuable to you,” said Jill Avery of Harvard Business School.

“If you do a good job, your customers will refer new customers, and that’s vital for every organization,” another CFO, Stan Krejci, shared with me today. But he cautioned executives not to see retention as isolated policies, processes and procedures. “Retention is a performance issue,” he said. A company’s obligation to its customers is to consistently fulfill its promises and to provide ongoing reciprocal value. A company that can do those things won’t likely resort to staffing customer call centers with Retention Specialists, and contriving technological and contractual handcuffs to reduce churn.

Acquisition, retention, growth, win-back, divestment. The elements of customer strategy are inter-dependent. “Retention feeds acquisition, and acquisition feeds retention.” Krejci said. “It’s circular.”

Sears: Bankruptcy through Management by Magazine

Sears, the company that gave the world Kenmore appliances, Craftsman tools, Sears houses, and catalog retailing “limped into bankruptcy” on October 15, according to The Wall Street Journal (Sears, Once Retail Colossus, Enters Painful New Era).  As one who grew up near two Sears anchor stores, this is astonishing. Never mind that for years, “the handwriting was on the wall.” It wasn’t always that way. Sears was the first major retail chain to build parking lots for cars and to offer store hours on Sundays. Talk about innovation!

The bankruptcy will affect nearly 70,000 Sears employees, and threatens the financial security of 100,000 Sears pensioners. “Employees are our greatest asset!” – until they’re not. In 1925, when Sears opened its first store in Chicago, the “limped into bankruptcy” part of their story was unimaginable. I wonder how Amazon’s epitaph will read, and when.

Over the next year, there will be copious Sears-related analysis. Stern-faced investment analysts will appear on TV. Wizened B-School faculty will lecture classes about the company’s missteps. And armchair quarterbacks like me will proffer reasons for the company’s demise, and post them online.

“In the end, Sears just didn’t . . .”  Almost any crucial corporate outcome or result you’d care to include at the end of that sentence will ring true. Management flew an already-troubled company into the ground in every sense of the word.  “It’s an American tragedy and it need not have happened, said Arthur Martinez, Sears CEO from 1995 to 2000. Amen.

As I read about the various Hail Mary’s Sears tried to save itself, I detected a strong aroma of Management by Magazine in the C-Suite. I saw how Sears executives flung themselves onto the life-ring of The Next Great Management Fix, and along the way, how they strangled the company beyond hope of resuscitation.  “Sears said in court papers if faces ‘catastrophic consequences’ if it can’t repair its unraveling supply chain. Some 200 vendors have stopped shipping goods to its stores in the past two weeks, and it faces potential liens if it can’t pay logistics companies owed millions of dollars over the coming weeks,” according to The Wall Street Journal.

Sears CEO Eddie Lampert resigned his position on October 15th. Here’s what he tried along the way. Below each, I’ve included counterpoints that by now, I’m sure Lampert wishes he read:

1. Cut costs, increase profits!

Analysis: the right strategy, done the wrong way.

“[CEO] Eddie [Lampert] inherited a difficult situation, but he made the operating performance worse,” said Steven Dennis, a former Sears executive who left the company in 2003. “He cut costs in places that hurt the company and didn’t reinvest in the stores.” Mr. Lampert’s strategy included cutting advertising spending. Predictably, goods wouldn’t sell, former executives told The Wall Street Journal. He also limited merchandise purchases to the point where stores routinely had empty shelves and outdated products.

Counterpoint: A Better Way to Cut Costs.

 

2. Create transformational change!

Analysis: the right strategy, done the wrong way.

“We chose transformational rather than traditional change,” Lampert said. “Some efforts gained traction while others did not, and there were external factors that have severely hurt the company.”

Counterpoint: Transformational and Incremental Change: A False Dichotomy?

 

3. Diversify, or die!

Analysis: the wrong strategy.

“Industry executives say Sears planted the seeds of its demise nearly 40 years ago when it diversified from socks into stocks with the 1981 purchases of the Dean Witter Reynolds brokerage firm and real estate firm Coldwell Banker,” according to The Wall Street Journal. “That was their first mistake,” said Allen Questrom, a retired retail executive who ran JC Penney. “They took their eye off the ball.”

Counterpoint: To Diversify or Not to Diversify

 

4.  Fail fast!  “Mr. Lampert would green-light a project, then quickly shut it down if returns didn’t materialize. That applied to investments other executives saw as necessary, such as store upgrades: Some stores had holes in the floors, broken fixtures and burnt-out lights.”

Analysis: the wrong strategy.

Counter-point: Why Fail Fast, Fail Often May Be the Stupidest Business Mantra of All Time. 

 

Lampert ran Sears via teleconference from his home in Florida. He visited the company’s Illinois headquarters “once or twice a year” according to former Sears executives. For those who believe senior executives lead by demonstrating their commitment to the company, it’s hard to miss Lampert’s message: “we’re toast.”

Three Myths about Customer Loyalty

We’ve met the characters in the HBO series Silicon Valley in real life. The sardonic, whip-smart software developer Gilfoyle. The dweebie, hoodie-wearing tech entrepreneur Richard Hendricks. The Type A-on-steroids venture capitalist Russ Hanneman. The over-the-top greedy, predacious CEO Gavin Belson. Most of us can name similar people within our own orbits, though maybe as extreme.

While they are believable personalities, we also know them as caricatures.  Not all tech entrepreneurs are geeks. Not every VC is a fast-living cocaine addict. And not every CEO gladly sells his or her soul to elevate their net worth. Yet, when it comes to customer loyalty, we mistakenly spin occasional facts into proclamations of consistent truth. This is how myths are spawned.

Three myths. When used as a basis for strategy or tactics, the following proclamations can be deleterious. Just like the caricatures on Silicon Valley, they can be true, but they are not universal, as others suggest. Yet, I see them often:

1) loyal customers buy more and spend more. Loyal customers can be plenty loyal without ever being heavy users or big spenders. An occasional traveler can have a strong preference for a specific car rental agency. That does not mean he or she invents reasons to rent more cars, routinely springs for a fancier model, or splurges on upgrades.

2) loyal customers advocate for the product or brand. To illustrate just one reason this doesn’t always happen, visit your local drug store or pharmacy, and look at every product in the personal care aisles. Then, ask yourself whether loyal consumers of [name or type of product] broadcast that they use this item, and elaborate on their experiences.

3) it costs more to acquire customers than to keep them. Many give this as rationale for investing in loyalty programs. But not every prospect needs an expensive marketing campaign to convert, or to solidify a habitual brand preference. Not every new customer grinds through a tedious, protracted process before buying. Depending on the industry, company, and selling model, some customers can be converted for darn cheap. It’s keeping themthat’s sometimes difficult, elusive – and expensive. While loyalty programs can be strategically valuable, it’s fallacious to cite marketing cost advantages as the reason for having them. Loyalty programs – and the processes surrounding them – must also make sense for business strategy.

Silicon Valley entertains us with more than personality caricatures. It also satirizes companies whose executives become intoxicated on false assumptions and misguided expectations. The show teaches us why it’s vital to maintain clearheaded understandings of cause and effect. That includes what customer loyalty produces, and what it doesn’t.

Ethical Selling: American Express Offers a Teachable Moment

“Every ethics question a business person could face comes down to a question you face on your very first sale: what are you willing to do for a buck?”, Philip Broughton wrote in his book, Mastering the Art of the Sale.

The question needs to be asked at every company. From the mom-and-pop Custom Cupcakes by Diane, to this week’s ethical letdown, financial behemoth American Express. The Wall Street Journal reported ongoing sales chicanery at the company, and traced its roots back to 2004 (American Express Gave Small Business Customers One Rate, Then Secretly Raised It), July 31, 2018).

Perhaps it began even earlier. AmEx reaped the benefits through 2018 – around the time Wells Fargo was accused of the same distortion. When it was publicly called out, an AmEx manager got nervous, and “told salespeople they would need his approval before offering prospective clients a margin of less than 0.70 of a percentage point, according to an email reviewed by the Journal. Current and former employees said the price changes were common knowledge within the forex business . . . Amex’s foreign-exchange international payments department routinely increased conversion rates without notifying customers in a bid to boost revenue and employee commissions,”  Journal reporter AnnaMaria Andriotis wrote in the article.

AmEx spokeswoman Marina Norville, responded, saying, “We constantly reinforce the importance of acting in the best interest of our customers.”

Current and former AmEx employees voiced a different take. They “describe an environment focused on bringing in as many new clients as possible and squeezing revenue out of them before they depart. Employees were told that the average forex [foreign exchange] customer did business with AmEx for around three years. ‘Who cares if they come or go? Let’s make money while we have them,’ one current employee said, referring to the attitude within the division,” according to the Journal.

Well, Amex, which is it? – because it’s not both.

The article describes AmEx’s tactics: “The salespeople didn’t inform customers that the margin, a markup that AmEx tacks on to the base currency exchange rate, was subject to increase without notice,” current and former employees were quoted as saying in the article. “Some time later, salespeople would increase the margin without informing the customers . . . Managers directed salespeople to keep the details of the payment arrangements hazy when speaking with potential customers and to avoid putting pricing terms in emails,” according to current and former employees.

This reveal got me wondering: how does this American Express division recruit salespeople? How do their online solicitations represent their selling culture and expectations?

This June, 2018 post for FXIP Manager popped up first in my search:

“FX International Payments (FXIP) is a cross-border payments solution developed to meet the foreign currency payment needs of small to mid-size corporate and financial institution clients. www.americanexpress.com/fxip.

The FXIP Manager reports to the Director FXIP Americas and is responsible for managing a portfolio of existing corporate clients. He/she will develop and maintain relationships, drive expansion sales of new product solutions, and make outbound calls to encourage transaction activity. The incumbent is responsible for achieving client revenue targets and overseeing the effective management across the end-to-end client life cycle, including, early engagement, loyalty and retention. He or She will work closely with colleagues in sales, marketing and operations to deliver superior service to our clients. This role includes a broad range of responsibilities, including: business development, relationship management, portfolio analysis, and requires interaction with both internal and external partners. This position will own and drive work streams and strategic initiatives to increase overall portfolio performance.

The candidate will have demonstrated success in proactively driving organic growth, client retention, revenue obtainment and related metrics in a foreign exchange environment focused on profitable expansion in a time-sensitive, well defined compliance and risk conscious environment.

Following this description, AmEx lists desired qualifications – eleven of them. Usual stuff: demonstrated experience in . . . strong knowledge . . . high proficiency . . .

Then, this one, halfway down the list:

“Must understand the individual and group responsibilities impact to department profit and revenue targets,”

And this,

“Demonstrated strong negotiation and influencing skills in order to handle objections [to] convert and activate prospects.”

Except for “deliver superior service to our clients” in the job description, this is a Revenue Focused job with a capital R, and a capital F, not unlike most sales positions. But this posting hints at the AmEx sales culture:

Drive organic growth . . . profitable expansion . . . revenue obtainment [sic] . . . Impact to department profit and revenue targets . . . Strong negotiation . . . influencing . . . handle objections . . . convert and activate . . .

Make no mistake: this is a high-pressure selling environment. If you like serving customers and relish a pat on the back for doing so, AmEx might not be the place for you. Unless, of course, you’re making goal.

What are you willing to do for a buck? And, what aren’t you willing to do? Two straightforward questions with complex answers that might vary, depending on a company’s momentary situation. Or, the sale rep’s.

This case offers a teachable moment for sales managers and salespeople to engage in conversations, and to answer further questions:

  1. Which conflicts of interest exist between AmEx and its customers? Do the same conflicts occur in our sales engagements?
  2. How might the conflicts be mitigated?
  3. Is intentional omission of facts during the sales process equivalent to lying?
  4. In the AmEx scenario, who is responsible for misleading customers? Management? Salespeople?
  5. Is it justifiable for salespeople to execute management requests, even if they perceive those requests are morally or ethically wrong?
  6. How would you resolve a conflict of interest if it happened with one of your customers?
  7. How should companies balance achieving revenue targets, and preserving the best interests of customers?

“This ought to be a moment when people stop and remember how dangerous the system is when you don’t have the proper protections in place . . . This is a wake-up call. It should remind all of us and firms that culture and compensation make a difference . . . How you reward people, how you motivate people and what values you hold people to matter,” former US Treasury Secretary Jack Lew said. He was talking about Wells Fargo.

No company is immune to the corrosive impact of dishonest and unethical sales practices. If you’re not already discussing the issues, the time to start is now.

Revenue: MiMedx Shows How to Fake It Till You Make It

Suppose your company pioneered a product able to improve the health of millions of people. Suppose that over the past five years, you reported at least 50% year-to-year revenue growth. To cap it off, suppose Fortune recognized your company as the fifth-fastest growing public company in the US. How might your company’s revenue prospects appear to investors, and what would be the impact on its stock?

If you were prone to making understatements, you’d say the share price would increase. And that’s exactly what happened for MiMedx , a company that makes human skin grafts for surgical use, and whose market value once reached $2 billion. Then, in June, 2018, a load of financial poop went airborne, and traveled into the company’s twirling fan.

That’s when “the company said an internal investigation had shown that its reported financial results going back to 2012 were no longer reliable and would have to be restated,” according to a Wall Street Journal article, Highflying Medical Firm Falls to Earth, Its Sales Questioned (July 24, 2018). As of this writing (July 27), the market cap for MiMedx was under of $464 million. MiMedx’s president, Parker “Pete” Petit has resigned, and an interim executive now runs the company. His specialty: “restructuring troubled businesses.” I’m reminded of Icarus, yet again. Those ancient Greeks – they sure understood human foibles. Somehow, they did it without the benefit of social media, AI, predictive analytics, and all. Amazing.

Stories about companies that tanked after achieving soaring revenue seem commonplace. Often, it’s the result of scrappy competitors who saw an opportunity, and seized a cash cow that a company was contentedly milking. Sometimes, it’s the result of self-satisfied, complacent management, who paid little heed to oncoming trains that demolished their business strategy. “We’re going to get flattened? . . . I thought you said ‘fattened!’”

MiMedx suffered from none of these mistakes, and that’s part of the tragedy. “No one has suggested that MiMedx’s products are faulty,” the Journal says. According to a company statement, “[MiMedx] is operating its business as usual as it continues to grow, invest in its product pipeline, and focus on serving healthcare providers and their patients.”

“Business as usual.” A sound bite that analysts, customers, and prospective employees sometimes like to hear. But it turns out that there was a bit of revenue hanky-panky going on.

Well, a lot of hanky-panky – if the allegations are true. “A Wall Street Journal review of company emails, court documents and internal complaints, plus interviews with current and former employees paint a picture of a company seeking to grow at almost any cost.” Where have I heard this before? Sounds so familiar . . . Bells Cargo? . . . Fells Wargo? Help me out . . .

In the Wall Street Journal article, employees describe a potpourri of revenue inflation tactics. I can’t call them innovative – some have been around for decades – but what makes MiMedx especially disturbing is what happened to employees who blew the whistle. Among the techniques former employees described in The Wall Street Journal article:

  1. Channel stuffing. “MiMedx sometimes shipped more skin grafts than had been ordered, and booked them as sales . . . MiMedx sales records show the company recorded a shipment of 135 oversized skin grafts to a Las Vegas plastic surgeon’s office, which former employees said is way beyond the 10 or so smaller pieces in a typical physician order. The shipment was recorded at 8:00 pm on September 29, 2016, just before the end of a quarter. No one in the surgeon’s office had ordered the goods, according to a former employee of the office.””
  2. Browbeating the sales force. “What else can u ship by end of month?” read one message to a rep, which continued, “Need all u can put in today up to $100k if possible.”
  3. Booking consignment inventory shipments as sales. “Several former employees said that at times, near the end of a quarter, the company would book as sales some of the goods sent to hospitals on consignment but not yet used.”
  4. Mislabeling products for medical uses that receive higher reimbursement from insurance companies.
  5. Providing advisory services to physicians on how to maximize reimbursement for the company’s products.

Customers have the unfortunate habit of directing their ire about bad selling behavior toward salespeople. I understand. The front-line rep is a conspicuous target. Most customers never meet the Sales VP who hatched an incentive plan that encourages revenue production over anything else. They don’t hobnob with the VP of Human Resources who carries out heavy-handed sales management policies, especially the punitive firing part. If they did, they’d learn about the high-pressure manipulation under which salespeople work, and how that penetrates their customer conversations. They would understand that the objectionable behaviors salespeople display are almost always result from what management encourages, and ultimately, what employers pay salespeople to do.

But many salespeople are principled and resist adopting practices that compromise their morals and ethics. Or, violate the law.  But for some, pushback comes at a cost.  With MiMedx and Wells Fargo, management concocted penalties to ensure employees kept quiet, which allowed their devious machinery to continue operating. Both companies eventually poisoned themselves. Time will tell whether the dosage was lethal.

It would be easy to attribute the transgressions at MiMedx to good old fashioned greed, and leave it at that. Why attempt to fix what you can’t change?

But MiMedx illustrates a preventable problem. Four root causes:

  1. Flawed proxies. In the case of MiMedX, the flawed proxy was revenue growth, which investors often confuse as a sign that other things they covet are present: talented management making smart decisions, fast-growing industry or market, killer business strategy, great products, rapid customer adoption, loyal repeat customers. MiMedX demonstrates that revenue is a weak proxy because a growing company can be infected with problems, and revenue is easy to spoof.
  2. Misplaced and outsized financial rewards. As with Wells Fargo, when executive compensation plans put heavy emphasis on stock price increases, nobody needs to guess how managers will direct their energies.
  3. Ethics absent from corporate culture. Tom Tierney, a former MiMedx Regional Sales Director, described the company’s culture as “a mind-boggling level of sales and accounting irregularities,” which he characterized as a “win at all cost” company culture.
  4. Lack of safety for employees when reporting fraud and abuse. “MiMedx provided employees with a way to report issues that troubled them. Eight ex-employees said they were fired after they spoke up,” according to The Wall Street Journal.

There are plenty of sound reasons to pursue rapid revenue or market share growth. For companies that are first to market with an innovation, rapid revenue growth enables them to establish platform or production standards for an industry. It helps them build economies of scale, which raises barriers to entry. It gives them bragging rights as the market leader. All of these have positive strategic consequences. With MiMedx, the quest for rapid revenue growth appears to have backfired because its primary purpose became apparent: to line the pockets of the company’s owners.

I blame analysts and investors. We have better, deeper metrics than revenue growth to assess the future vitality of a company. It’s time to start trusting those numbers, because as we’ve learned by now, revenue is wicked-easy to fake.