Mint

Plugging holes in leaky buckets

Many managers think of their company's strategy as trying to fill a three-litre bucket. Current business fills the bottom third. The rest comes from future growth.

By Ashish Singh, Vivek Gambhir and Heidi Locke Simon

Published on July 02, 2007
min read


Many managers think of their company's strategy as trying to fill a three-litre bucket. Current business fills the bottom third. The rest comes from future growth: a litre of revenues from new products or services and a final litre from expanding into new markets. This perspective is fine as far as it goes. But it can also be dangerous. By assuming that growth must be poured in from the outside, companies can overlook less costly opportunities for preserving and expanding the revenue from existing markets. The fact is, most revenue buckets are leaky-dollars can drip away in a steady stream as companies fail to execute at key points of customer involvement, from the initial pitch to the final delivery of a product or service. These leaks can be hard to detect from inside the company. But if viewed from the customer's perspective, they can be found and plugged, leading to incremental growth at a relatively low cost. Dissatisfaction leak Consider the case of Grainger, the largest North American distributor of industrial supplies. For years, Grainger had a distinguished record of quality control and customer service. But, in the 1980s, it found that a significant percentage of its customers were taking their business to competitors. At first, Grainger had trouble diagnosing the problem. After all, it was fulfilling 98% of its orders flawlessly—a seemingly admirable achievement. But when it took the customer's perspective, it saw a very different picture. Even with a 98% error-free rate, a typical customer was still experiencing at least one botched order during the course of a year. And 68% of them said they had no intention of ever buying from Grainger again! To plug the leak, Grainger began benchmarking its customer service procedures against top competitors. That allowed the company to identify its relative soft spots from the customer's perspective, and work on improvements that gave existing customers fewer reasons to defect. Pricing leak Sometimes, customers are more satisfied than you think. And managers, too, often default to one set of prices, regardless of the differing values perceived by different customers. A business unit at a European industrial goods firm, for example, traditionally set standard prices because it lacked a clear understanding of how customers were using its products to drive their own cost reductions or sales gains. Once it took a closer look, it determined that 16 of 20 customers were paying beneath value. Raising prices selectively generated an additional $5 million in profits for the current fiscal year. A lack of customer understanding can also lead to cloudy marketing. Messages may not be reaching the right customers—or may be sounding the wrong notes—and promotions may not entice customers to give products or service a try. Innovation is the key here. Dutch consumer product giant Unilever, for instance, has opened a vast new market in rural India by recognizing that messages and tactics aimed at the urban middle class don't work in the nation's villages. Instead, the company's Hindustan Lever unit (soon to be Hindustan Unilever Ltd) has focused on what does work: enlisting local wagon merchants to sell its soap products; packaging its detergents, shampoos and even toothpastes in small, single-use packets that allow people with lower incomes to buy just what they need when they need it; paying attention to local customs like using a single soap to wash both hair and body and devising products that do both well. Such culturally sensitive tactics have built brand loyalty among a customer base other companies have ignored. And they have created a lively new source of growth for a mature global corporation. Coverage leak Even if you enjoy strong awareness, customers may not be buying your product or service simply because it isn't available when and where they need it. Part of Hindustan Lever's success was getting out in the villages and making its products available through the informal networks that cater to rural shoppers, such as women's self-help groups that reach out to millions of homes across the country. Likewise, smart retailers spend a lot of time thinking about where their stores are, constantly sifting sales data, purchasing patterns, and demographic trends. They can then site new stores to maximize add-on sales while minimizing cannibalization of existing stores. Other types of companies often apply the same thinking. Sales force territories, for example, can be adjusted to more effectively reach potential buyers of existing products and services. Or a distribution network might be fine-tuned to achieve better coverage. Point-of-purchase leak The most powerful moment in any customer relationship is the moment of purchase. Whether companies sell through stores or sales forces, call centres or websites, they routinely fail to exploit this golden split second. A company might not expand the set products or services offered to the buyer at the point of purchase. Or, customers might opt out at the last moment if their "check-out" experience is too much trouble. Starbucks captures plenty of sales by putting music, mints and other "impulse items" next to the cash register. But recognizing that some customers were baulking at long lines during peak hours, it invested heavily in worker training, automating pieces of its latte manufacturing process, and aggressively adding new stores in high traffic areas. New products and markets are obviously essential elements of new growth. But plugging revenue leaks by understanding customers can expand the top line quickly and profitably. Fixing a current business costs less than launching a new one. And that means revenue gains fall directly to the bottom line, not out of the bucket.

Many managers think of their company's strategy as trying to fill a three-litre bucket. Current business fills the bottom third. The rest comes from future growth: a litre of revenues from new products or services and a final litre from expanding into new markets. This perspective is fine as far as it goes. But it can also be dangerous. By assuming that growth must be poured in from the outside, companies can overlook less costly opportunities for preserving and expanding the revenue from existing markets.

The fact is, most revenue buckets are leaky-dollars can drip away in a steady stream as companies fail to execute at key points of customer involvement, from the initial pitch to the final delivery of a product or service. These leaks can be hard to detect from inside the company. But if viewed from the customer's perspective, they can be found and plugged, leading to incremental growth at a relatively low cost.

Dissatisfaction leak

Consider the case of Grainger, the largest North American distributor of industrial supplies. For years, Grainger had a distinguished record of quality control and customer service. But, in the 1980s, it found that a significant percentage of its customers were taking their business to competitors. At first, Grainger had trouble diagnosing the problem. After all, it was fulfilling 98% of its orders flawlessly—a seemingly admirable achievement. But when it took the customer's perspective, it saw a very different picture. Even with a 98% error-free rate, a typical customer was still experiencing at least one botched order during the course of a year. And 68% of them said they had no intention of ever buying from Grainger again!

To plug the leak, Grainger began benchmarking its customer service procedures against top competitors. That allowed the company to identify its relative soft spots from the customer's perspective, and work on improvements that gave existing customers fewer reasons to defect.

Pricing leak

Sometimes, customers are more satisfied than you think. And managers, too, often default to one set of prices, regardless of the differing values perceived by different customers. A business unit at a European industrial goods firm, for example, traditionally set standard prices because it lacked a clear understanding of how customers were using its products to drive their own cost reductions or sales gains. Once it took a closer look, it determined that 16 of 20 customers were paying beneath value. Raising prices selectively generated an additional $5 million in profits for the current fiscal year.

A lack of customer understanding can also lead to cloudy marketing. Messages may not be reaching the right customers—or may be sounding the wrong notes—and promotions may not entice customers to give products or service a try. Innovation is the key here. Dutch consumer product giant Unilever, for instance, has opened a vast new market in rural India by recognizing that messages and tactics aimed at the urban middle class don't work in the nation's villages. Instead, the company's Hindustan Lever unit (soon to be Hindustan Unilever Ltd) has focused on what does work: enlisting local wagon merchants to sell its soap products; packaging its detergents, shampoos and even toothpastes in small, single-use packets that allow people with lower incomes to buy just what they need when they need it; paying attention to local customs like using a single soap to wash both hair and body and devising products that do both well. Such culturally sensitive tactics have built brand loyalty among a customer base other companies have ignored. And they have created a lively new source of growth for a mature global corporation.

Coverage leak

Even if you enjoy strong awareness, customers may not be buying your product or service simply because it isn't available when and where they need it. Part of Hindustan Lever's success was getting out in the villages and making its products available through the informal networks that cater to rural shoppers, such as women's self-help groups that reach out to millions of homes across the country. Likewise, smart retailers spend a lot of time thinking about where their stores are, constantly sifting sales data, purchasing patterns, and demographic trends. They can then site new stores to maximize add-on sales while minimizing cannibalization of existing stores. Other types of companies often apply the same thinking. Sales force territories, for example, can be adjusted to more effectively reach potential buyers of existing products and services. Or a distribution network might be fine-tuned to achieve better coverage.

Point-of-purchase leak

The most powerful moment in any customer relationship is the moment of purchase. Whether companies sell through stores or sales forces, call centres or websites, they routinely fail to exploit this golden split second. A company might not expand the set products or services offered to the buyer at the point of purchase. Or, customers might opt out at the last moment if their "check-out" experience is too much trouble. Starbucks captures plenty of sales by putting music, mints and other "impulse items" next to the cash register. But recognizing that some customers were baulking at long lines during peak hours, it invested heavily in worker training, automating pieces of its latte manufacturing process, and aggressively adding new stores in high traffic areas.

New products and markets are obviously essential elements of new growth. But plugging revenue leaks by understanding customers can expand the top line quickly and profitably. Fixing a current business costs less than launching a new one. And that means revenue gains fall directly to the bottom line, not out of the bucket.