You need a resilient business model to survive this resurgent crisis. But is it really possible to “crisis-proof” your business? In part 2 of this series, we discussed how to get back to growth and restart your commercial strategy. In this article, we explain how to add resiliency to your business on two fronts: profit orientation and customer loyalty orientation.
Since the start of the coronavirus crisis, there have been numerous prominent examples of companies filing for bankruptcy, spanning across countries and industry verticals; from North America to Asia, from entertainment to engineering, and even in some more corona-resilient industries such as communications. You might initially blame demand that suddenly and severely broke away in these industries. However, there is one factor all of these companies have in common, and that is inadequate profit orientation. No company has ever gone bankrupt from making profits.
Profit orientation is a core dimension of economic resilience. The other is an orientation toward customer loyalty. With the economy increasingly defined by a customer-led market, it is crucial for companies to think through the customer life cycle and provide value at every step.
This resurgent crisis will become an ongoing stress-test for companies’ economic model. Yet, despite really tough times and dwindling demand, there will be successful companies that emerge as winners from this crisis. The secret to success? The resilient business model. Resilient companies not only have a loyal customer base, their revenue model extracts value and profitability from customers, too.
When consultants talk about the two dimensions, you know what's coming: a matrix. In our recent webinar poll, we asked business leaders to assess their company based on their customer loyalty orientation and profit orientation. The results showed varying levels of resilience:
- Over invested: 25 percent of respondents considered their companies to be very customer loyalty-oriented, but not very profit-oriented. For example, software and tech companies can become over invested from all angles. They invest in acquiring and retaining customers, but if you ask them about profit, you usually get the answer “That's the next step for us.”
- Under invested: 29 percent of respondents saw their companies as very profit-oriented, but not very customer loyalty-oriented. These businesses tend to generate good profits thanks to the heritage and quality of their products, but still have a way to go in terms of locking their customers in.
- Risky: There’s a significant risk in being neither customer-loyalty-oriented nor profit-oriented, and this is how 18 percent of respondents assessed their company. Here, market share usually trumps profit. It can also be difficult to connect the loyalty dots if the business is built around one-time transactions and selling indirectly to the customer, e.g. the automotive industry.
- Resilient: The most successful companies build a loyal customer base and grow their margins with product innovation and new revenue models. The good news is that there are some companies already here: 29 percent of respondents saw their company as having a strong orientation toward customer loyalty AND profits. The challenge is to stay there at the top.
For all industries there are of course single companies positioned in a very different way. Think about your business and your levels of customer loyalty orientation and profit orientation. How does your company perform in terms of resilience?
Your first reaction to the example above might be “not Apple again” or “my business is nothing like Apple.” But Apple is not the only company that is both profit and customer loyalty oriented. Companies that have successfully transformed their business include tech giants like Amazon that moved to web services, and Microsoft with its intelligent cloud. Then there are also traditional, industrial companies that have moved into new growth areas, such as Siemen’s Digital Factory initiative and Schneider Electric’s IoT-enabled solutions. Today, these new areas, often based on a recurrent revenue model, account for a big chunk of their sales.
Four key lessons from profit-oriented companies
1. They instill a profit mindset
That means focusing on profit over market share, emphasizing cash flow, and managing costs. In our experience, companies lacking profit orientation typically focus on market share or volume growth, while resilient companies target specific profit KPIs, e.g. the net retention rate and recurring revenue rate. In resilient companies, top managers not only know the revenue targets and actuals, they also can readily quote you their profit numbers in any meeting. Sales people carefully consider profit impact when making a deal. Everyone at all levels always has a clear and current view on the company’s profit situation.
2. They protect the core business
It’s easy to say we want to be Apple. We need profitable products that everybody loves and values. But what steps are you taking to ensure your core offering is and remains attractive in the eyes of the customer? Resilient companies regularly invest in the business and have sensors on the market to ensure they build their products around the price, and not the other way around. They are also aware of low and unprofitable products and services, conducting constant reviews and discipline measures to cease any offerings that fail to meet their profitability targets.
3. They protect their prices
Resilient companies know that price is by far the most important profit driver. They understand that achieving price generates profits, defending price protects them, and cutting prices (without costs) damages them. That’s why resilient businesses are equipped with data before any price move. They model the impact on customers, the market, and competitors. They understand cannibalization effects, make differentiated price moves, and ensure price increases are properly enforced. Even when they have to give discounts or run promotions, they still defend profitability by first making “smart concessions” that add another layer of value rather or ask for something in return, rather than immediately attacking price.
4. They eliminate cross-subsidization
Resilient companies are rigorous when it comes to cross-subsidization between products and business units, with a strict discipline to axe the unprofitable. There may be strategic cases where they decide to go in at a loss with some customers or products, but they ensure the whole package is net positive and comes with a beautiful bottom line. Not every product or customer can be strategic. Only maintain those on a clear pathway to profitability
How to turn one-time customers into loyal ones
Albert Einstein was asked to name the most powerful force in the universe. He thought for a minute, and then replied. “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
It is certainly true that compound growth is one of the most powerful forces that a business can harness. However, many companies find themselves on the wrong side of the equation. They are unable to bring customers back or get more money from their existing customers, and find themselves in a position where they have to acquire and acquire to acquire. They're constantly bailing water on their metaphorical ship at sea.
In contrast, the companies that benefit from compound growth have positive net retention, meaning every year the same group of customers generates more and more income. These businesses can shut their doors to any new customers and not only be profitable, but also grow. Now, you may say that's only true for tech companies, subscriptions, and SaaS. But there are many businesses with repeat customers. Think about fast-moving consumer goods. Even if purchases are transactional in nature, a customer loyalty orientation can generate recurring revenue.
Let’s bring this to life with a case study. Before becoming a Partner at Simon-Kucher, Eddie Hartman founded LegalZoom, an online legal technology company which provides services for small businesses and individuals. Hartman explains how LegalZoom began with an exclusive focus on "transactions" but moved to recurring revenue after studying customer needs was able to change the internal mindset:
Resilience and the direct road to profitability
Achieve both customer loyalty orientation and profit orientation, and you’ve got a resilient business. Entire new industries have sprung up through this mindset, and they succeed because their products are in line with customer needs, tap into willingness to pay, and take them on a direct road to profitability.
It’s easy to say for a tech company, where there’s profits to be had. But what if your entire sector is under threat?
Think about neighboring business areas. We’ve seen successful automotive suppliers offer battery charging, and industrial companies provide digital solutions. A move to a recurring revenue model can also be made through servitization, such as monetization of data. Even if your whole business is breaking away, in the future you will need to find something in a new space, but in a resilient way from the very beginning.
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