Design your lean business model on growing your customer base
To enter the world of lean you must first change your mind about a fundamental assumption of how to measure the value of a company. A company’s value is not, as financiers would have it, a monetary multiple of its earnings – this would be like driving a car by looking in the rear mirror – it is in fact the size of its user base (the people who trust the company with doing its job) and how much cash each user is willing to let the company have on average, and for what value in return.
We can look at a company in terms of its True Potential, and what really happens. The True Potential is what we can do on the best hour of the best day of the best month: what can you sell on your best day? If you apply this number to all days of the previous twelve months: what would your turnover be? Then look at what your real year-to-date sales are, and analyze the gap: why would a customer looking for something not buy what you have to offer?
- They haven’t found what they want in your line-up
- They’ve had a bad quality experience with a previous purchase
- They find the price tag too high
- They don’t like your company’s policies
- They think your business has no future or is unethical
Over the past half-century, management thinking has become dominated by managing-by-numbers. On paper, managing by numbers seems simple and sensible. Any activity delivers a benefit (you charge it to someone) at a cost, and what is left between price and cost is profit. Surely, if you maximize profit in all you do, overall you’ll get maximum profit – and a bonus for outstanding performance.With that in mind, running a business should be easy. All we need to do is increase income and reduce costs. This means selling more or more expensive at lower cost.
Why would people buy more of what you have to offer or pay more for it? Price is a reflection of value – but what do people value? The first step to understand the value part of the business model is to realize that customers don’t value the same product or service the same way at all times. Anyone seeks out a product or a service for two essential reasons: feeling good or solving a problem. They will look at available options within their price range (what we want always feels slightly more expensive than we had planned to pay), within their available time for search (first solution available or do we have time to look more broadly and compare options), and ethical positions (fair trade, environment friendly, good reputation, etc.):
- Feel good
- Solve a problem
- Within their budget and ethical choices
As they go about purchasing products or services, customers however also go through a time-cycle: wanting, using, learning.
Value evaluation will be different in each phase of the cycle:
- Wanting: the wanting phase is very much about expectations and the trade-off between the expected pleasure or use we’ll get from our purchase against the price we normally expect to pay for it. Marketers are constantly inventing new tricks to use biases in our how our minds work to tip this balance towards more perceived value, by making things seem more attractive with advertising, by giving them higher prices and then larger discounts, by increasing social proof (look: everyone is choosing this brand) and so on. Wanting is very much about price and availability: if I see it at an affordable price and immediately available, I’ll take it.
- Using: using is when expectations meet reality – does it do the job? Was it worth what you paid for? Most new product launches fail in astounding proportions – numbers vary from 95% to 65%, but whichever study you read the failure rate is very high. Why? Simply because products and services seldom live up to their hype. Households typically by repeatedly the same products (about 150 items) and it’s very hard to get a new one on the list – it has to be good. Good means that it does the job and does so consistently. The product or service needs to be robust to the unlikely use cases people will take it through as they use it in their unique circumstances. Using is very much about quality – both handiness and robustness. How cool is it to use? How well does it solve the problem? How low is the hassle cost?
- Learning: the main reason new product introductions fail so repeatedly is that customers learn. They purchase because they feel like it – they convince themselves they need it, they need it now and the price is tolerable. But then as they use the product or service, they will compare it to their alternatives and progressively make up their minds about whether it was good value for money – and thus worth purchasing again – or a dud and on the “never again” list. Once they dislike a product, they start bashing it and bad rep then affects wanting and creates a downward spiral. Strong customer service and quick responsiveness to customer opinions – fixing issues – will make the product co-evolve with customers usage and inscribe it in their repurchasing habits (and telling their friends about it). Constant efforts to reduce cost of ownership and purchase price will increase overall volumes. This learning phase is where the attachment to the product or the brand builds up – or not.
The division of labor in specialized branches creates an asymmetrical problem. The “increase income” part of the equation requires cooperation between disparate specialisms: supporting the customer “want” (marketing, sales and supply chain), delivering on usage (product design, manufacturing and purchasing) and co-learning with customers (all departments together). On the other hand, cost cutting can be pursued department by department, budget by budget (reduce marketing spend, increase cost pressure on cost centers, lower engineering headcount, price pressure on suppliers, stop training, etc.)
Measuring spend is easy, cost is more of an estimate, and customer capture a complete crystal ball exercise. Yet, profit first comes from price and volumes: how much customers pick, like and recommend what we do. Every company that has tried to kill its costs without addressing customer acquisition has gone down the same path of early on paper gains leading dismal failure. A workable, sustainable business model can’t separate the customer front end from the cost back end – both need to be considered in parallel and balanced at all times.
By contrast, a lean business model is built on making sure that every one-time customer becomes a lifetime customer, which has deep structuring consequences:
1. A company’s worth is its customer base and, to succeed, a company’s main effort should be to satisfy all customers with a wide line-up of products and adapting to the challenges of the times.
2. Variety’s cost premium can be offset by improving flexibility which can turn into a capital productivity gain. Focusing on lead-times and lead-time reduction (to avoid stagnation) leads to different capital expenditure decisions and superior engineering choices which deliver both efficiency and adaptability to market short-term changes.
3. Customers choose quality first and quality can be achieved without additional costs by building it in product and process design through prioritizing quality issues and focusing on solving them then and there.
4. Cost advantage can be achieved by reducing friction in operations rather than seeking all cost pressure opportunities on suppliers and staff. Developing a culture of kaizen, continuous small step improvement, leads to teamwork and an ideal of smooth and seamless work that both reduce the overall cost basis and make the business more flexible in dealing with short-term crises and long-term challenges.
5. Employees’ effectiveness is linked to how shrewdly they interpret their work, which in turn rests on their will and skill. Constant focus on simultaneously training and engaging all staff leads to smarter engineering solutions and shrewder day to day work and forms the secret sauce that makes the lean business model perform.
Lean is not a bunch of tools and tricks you can apply to your existing business model hoping to reduce its costs – this “operational excellence” is nothing else than old fashioned taylorism in a new dress – and nothing to do with lean.
Lean is rethinking completely the business model to build the company around customer satisfaction and then reap the benefits of steady, sustainable and profitable growth. Start with happy customers served by happy staff with everything they need to do their work well and go from there.