Mission Critical: Understanding Customer Needs and Value

Understanding your customer’s needs for your products or services, and (when relevant) the value they create for the customer or customer’s customer is the starting point for Profitability Analytics. This is true when formulating strategy, validating strategy by building causal operational and financial models, and executing strategy. Understanding customers is not just a marketing or sales function, it is an essential need, or skill, throughout your organization. If one set of knowledge should be marked as “mission critical”, this is IT! And this knowledge needs to be active and dynamic, future success requires thinking beyond today’s needs and creating an engaging future for customers with new products and services that provide greater satisfaction, profit potential (for them), efficiency, or whatever set of characteristics they value. Furthermore, your customers are not homogeneous. They are segmented and have different needs, interests, and value propositions. Some will pay for additional attributes, some want basics at a low price, and there is a range in between.

Customer understanding and analysis should be incorporated into every element of Profitability Analytics. Let’s take a quick look at the six pillars of Profitability Analytics and examine how customer knowledge applies to each.

Formulate Strategy: Clearly customers’ current and future needs are driving this element since the organization is quantifying expected demand, the capability required to produce/serve, and the investments needed to meet future demand. While there are many other constraints and considerations, customer/market needs must be the overriding focus.

Validate Strategy: This phase is often thought of as a mechanical modeling effort where causal operational and financial models are adapted to evaluate strategy scenarios. However, this process is full of potential discoveries about operational capacities and capabilities, cost to produce and serve, process changes and improvements, etc. Looking at each of these discoveries in light of their potential impact on customer needs/values enables more innovative feedback to the strategic planning process.

Execute Strategy: Once the strategy is being executed, things change…reality happens. The changes can be positive or problematic. However, by looking at operating decisions through the lens of customer/market knowledge, decisions are made that focus on supporting customers and achieving the organization’s strategic objectives. This can happen across the organization from selling decisions to production/service delivery decisions to administrative decisions. Some component of a customer interacts with almost every part of the organization, they should all seek to improve customer satisfaction and value with every interaction. We have all shifted business from a vendor with something as minor as annoying billing or collection practices, poor order-taking, or sub-par delivery practices…every element of a customer interaction counts.

Markets – Revenues: Clearly this pillar, by definition, should be all about customers, but it is often constrained by the information we have at hand and how we have done things. It is important that we are future oriented and examine all the potential revenue management levers. Have we explored expanding features to customers who are willing to pay for a premium product or service? Are their features that could be eliminated profitably allowing more sales to low-price oriented customers? Where are our customer’s customers headed and are we helping our customers meet those needs? Where is the bleeding edge of the market going and how should we respond and adapt? What types of customers are we missing or not selling to…and why?

Operations – Costs: Employees that provide services or build products for customers are often in the best position to provide practical examples of what customers need and value. The more everyone in the organization knows about customers and markets and has access to an effective communication channel for innovation and improvements, the greater the possibility of identifying large and small “wins”. Additionally, an effective causal cost model can provide the data to support incremental and marginal profitability analysis to allow fast and effective operational decisions about making adaptations to orders, products, or services.

Resources – Investments: The Profitability Analytics Framework looks at both intangible and tangible investments – in capital and capability. This means new processes to understand and predict customer behavior can be as critical an investment as new plant and equipment. Many of today’s most valuable ideas require investments in knowledge and capability which don’t find their way to the balance sheet. As knowledge and innovation in design, manufacturing, communication, logistics, network management, sales channels, and every other aspect of business become more critical, investment in continuous sensing and change capability across the organization is essential.