Editor’s Note: The author is an expert and practitioner of the growth strategy framework, Delta Model. The Delta Model is based on the teachings of MIT professors Dean Wilde and Arnoldo Hax. It aims to change your strategic thinking, identify new sources of revenue, and transform your overall organization. This article is based on the business principles taught in the Delta Model framework. You can download a free overview of the Delta Model here. To learn more about the Delta Model, please have a look at the author’s documents on Flevy here.
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Who is the customer?
This is a very central question. The most obvious answer is that the customer is the one who pays. The relevance of this answer is evident, since it identifies who is directly responsible for generating our economic benefits. Therefore, we have to include the buyer as a critical element of our customer base. However, often we shouldn’t stop there, because the customers of our customer, is either as important as, or even more important than, the buyer. We need to relate to that base for two reasons. First, we would like to help the customers to do a better job with their customers. Second, final consumers could be the most critical element in the economic chain. If they stop buying, everything stops. For example, think about the auto industry where are two critical types of customers: dealers and consumers.
Moreover, if we regard the Extended Enterprise as the most relevant entity, we might expand the definition of the customer to include all of the remaining constituencies, meaning particularly suppliers and complementors. In the broadest sense, the relevant customer is everybody who should be the focus of a differentiated value proposition, because that is the foundation of a well-articulated strategy. Having said that, in most of what I write, the customer will be identified as either the buyer, or the consumer, or both.
Why are customers different?
This is also a very critical question, because it will define the segmentation criteria that will be used in our analysis and that will lead to the development of the value proposition. The conventional way of segmenting the customer is using demographic characteristics, such as age, levels of income, geographical locations, and the like. Another conventional way is to group them according to some generic business characteristics, such as size, vertical markets, levels of profitability, and others. We have found that, with very few exceptions, these criteria are not the most appropriate to characterize the differences across customers. They are useful in segmenting the “markets” but not the “customers,” which is quite a different task. Remember that each resulting customer segment will be the subject of a distinct value proposition.
Suppose that you choose to segment the customers by the size of the enterprise, say large, medium, and small, and even worse, either explicitly or implicitly assign priorities accordingly, meaning that large customers are better than medium-sized, and those in turn are better than small. Two fallacies result from this. One is that we will be treating all large customers the same. From a strategic point of view, that seldom makes sense. We are indiscriminately putting together customers that could have very different needs for support. Second, the priorities might be totally wrong. In fact, it is often the case that large customers are the least desirable ones, because they are totally self-sufficient and, therefore, they tend to commoditize us. On the contrary, medium and small companies can offer us great opportunities for the development of exciting value propositions based on the Total Customer Solution option.
Who is the most attractive customer?
The test of the value proposition that we have just completed provides the basis to address the question, “Who is the most attractive customer?”
The one who has the greatest gap between its needs and capabilities, and we are in a best position to close that gap.
- The one who receives the highest value added.
- The one who has the most positive attitudes towards us.
- The one with whom we can jointly define a unique sustainable high value-added proposition leading towards an unbreakable bonding.
If these conditions are met, these customers should also be the most profitable.