One of my clients has recently developed a new customer strategy. As part of the work the marketing department has developed a demographic and psychographic profile of the company’s ideal target customers and the finance team has evaluated what the sales and profit uplift will be when the company attracts more of them.
There is only one problem: these ‘target’ customers are very different to the company’s existing ‘best’ customers. They have different needs, demonstrate different behaviours and require a different offer. There is a real danger, therefore, that if the business was to pursue its new ‘target’ customers single-mindedly it could easily lose its existing ‘best’ customers.
So, what can you do when your target and best customers are different, and under what circumstances should you shift your customer focus? The answer depends on your answer to these two questions: (1) What is the level competitive advantage you have in respect of your existing ‘best’ customers; and (2) What headroom for profitable growth do these customers offer your business over the foreseeable future?
As the chart above sets out, answering these two questions will help you determine which of four possible approaches you should be pursuing, which are:
1. Re-focus your strategy and your organisation on your new ‘target’ customers. This strategy is appropriate where your existing sources of competitive advantage are limited and your headroom for growth is limited, and is what Ryanair did when the company changed its focus from business travellers between Ireland and the UK (its 1980s strategy) to becoming Europe’s leading low fare airline (its strategy since the 1990s). When the prize is significant and there is limited opportunity for success by continuing to pursue your existing customer strategy, this is a risk that can be worth taking. But, as Ryanair has found, this is likely to be a long, hard road.
2. Look for additional, complementary customer segments. In this case, you have clear competitive advantages but low headroom for growth. It would be foolish to throw your existing advantages away, so your focus should be on finding other customer segments where your advantages are likely to be well received. McDonalds, for instance, will never be able to attract highly health-conscious customers, but it has been able to provide salads and healthier choices to more diet-focused customers without alienating its existing ‘best’ customers or changing its operating model.
3. Build your advantages or seek new ‘target’ customers. In this instance your existing ‘best’ customers offer you significant new growth opportunities, but your level of competitive advantage with these groups is relatively low. Your first option should be to build and extend your advantages and continue to focus your brand and proposition on these high-potential customers. In the 1990s Tesco maintained its focus on mums with families as the UK grocer’s key customer group, and built a series of competitive advantages through its convenience, loyalty system, store portfolio and breadth of range. Sometimes, though, it is unlikely that you will be able to develop sufficient advantages quickly enough. The management of Whitbread, for example, decided that the company was unable to compete with the mega-breweries in the rapidly changing beer market and so sold its brewing division to focus on leisure, hotels and coffee shop businesses.
4. Maintain your focus on your existing ‘best’ customers. This choice is best made when you have clear competitive advantages with these customers and you believe that they are likely to continue to offer sufficient headroom for profitable growth. Until the last five years or so, for example, Apple has focused on individual customers and media customers, and ignored the corporate market, despite the obvious attractions of the corporate sector.
How strong are your competitive advantages with your existing best customers and what headroom for growth do they offer you? And do you think you should continue to pursue your ‘best’ customers or should you shift your focus onto a new ‘target’ group?
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