All businesses crave sales growth – it is typically the quickest, cheapest and most sustainable way to increase the profitability and value of a business.
Few businesses are clear about the paths they will take to sales growth – or the order they will take them in.
In our last article, we started to look at the ten runways to growth. We took a closer look at customer experience, using the example of Ritz-Carlton. This time, we will look at the next runway, Customer Penetration, selling more products to customers you already have.
Customer penetration
The best customer is the customer you already have.
Winning new customers is expensive, difficult and uncertain. The costs are rising, especially in consumer-facing businesses. The battle for customer attention is high, and online advertising costs and increased understanding of customer profitability encourages companies to spend ever more on acquiring new business.
It is easier to sell to existing customers. The probability of selling to an existing customer is 60% to 70% percent; the probability of selling to a new prospect is 5% to 20% percent. Existing customers (by definition) know you, trust you and are happy with you.
Increasingly, businesses are taking more time to understand their customer acquisition costs (CAC), and are comparing this to their customer lifetime value (CLV). It is easier to calculate these numbers now than ever before. In the past, if a customer bought your product in the supermarket, you had no idea whether it was your advert, your brand awareness, your instore promotion or a competitor out of stock that drove the sale. Now, you can track each visitor to your website, and know the channel by which they arrived.
However, whilst many businesses have clear sales plans (and large budgets) to win new business, there is often not a plan or a budget to retain existing customers or to sell more to them.
It is also true that winning a customer (once) and keeping a customer buying from you (again and again) are two very different things. According to a Bain and Company Study, 60% to 80% of customers who describe themselves as satisfied do not go back to do more business with the company that initially satisfied them. This is a huge missed opportunity.
How to think about it
Selling more products to existing customers is a real win-win. You can simultaneously find additional growth opportunities at minimal acquisition cost, increase your customers’ loyalty, and prevent your competitors from stealing them away. And it is one of the least risky runways, because you are working with a customer you already have.
To do it effectively, you need:
An existing customer base
Sufficient understanding, insight and data about your customers
The organisational will, systems and resources to do it properly
A plan
In particular, you must understand what it was about you that first attracted the customer to you. If it was offering the lowest price, then you will not succeed in selling more to them unless you continue to do so. Assess the size of the opportunity – what proportion of your customer’s needs for your products are you fulfilling?
Consider the right approach to take. Remember the old adage: businesses don’t buy from businesses, people buy from people. If you have a few very valuable customers, take a personalised approach. Understand their business issues and needs, but also their personal preferences. Create a plan: who will you contact when; what will you talk to them about? Even in the Covid era, face to face meetings are the best way of building human relationships.
If you have a large number of low value customers (as in most consumer businesses), how can you replicate a personal approach? Use all your available data to group and segment your customers, and consider how best to create meaningful communications. The difference between an email deleted as spam and one that is opened and read is relevance.
A comment we have often heard from businesses is that their oldest (and most loyal customers) know least about their business. New customers will have had the most up to date information on your offer. What don’t your old customers know about you? You may be surprised by the opportunities which surface. Just like marriages, relations between two companies can go stale unless they are worked on. What can you do to revitalise the relationship?
Let’s look at a company which did this well.
Case study: McDonalds
We love McDonalds, and not just because they have the best fries… The business provides such fertile ground for learning, even for those who don’t like burgers.
Background
It all started in 1952 when a fifty-two-year-old salesman walked into a hamburger stand in San Bernardino, California, to sell the two brothers who owned it a milkshake machine.
What he saw blew him away; he had never seen anything like it. Hamburgers were produced in a way he’d never seen before: quickly, effectively, and identically. Best of all, anyone could do it.
It became apparent to Ray Kroc that what the MacDonald brothers had created was not just another hamburger stand but a money machine. Soon after that first visit, Ray Kroc convinced Mac and Jim Macdonald to let him franchise their method. Twelve years and several million hamburgers later, he bought them out and went on to create the largest retail food distribution system in the world.
Nearly seventy years on, Ray Kroc’s McDonald’s has become a huge business, with 38,000 restaurants worldwide serving food to more than 69 million people every day in over 100 countries, and is the world’s second largest employer.
What was the secret to this? After all, there is nothing special about burgers – anyone can make one. And Kroc didn’t have the cash to drive the expansion that he wanted.
He realised that a franchise model could be the way forward. But he knew most small businesses failed. He had two key insights:
Firstly, he began to look at his business as the product, and at the franchisee at his most important customer. If McDonald’s was to fulfil his dream, he needed to make sure it worked better than any other business product around.
Secondly, for McDonald’s to be a predictable success, the business would have to work flawlessly, because the franchisee, if left to his own devices, would probably fail.
Armed with this realisation, he set about the task of creating a foolproof predictable business: a systems-dependent business, not a people-dependent business. Unlike most small business owners before him, and since, Ray Kroc went to work ON his business, not IN it.
He began to think about McDonald’s just like Henry Ford must have thought about his production lines and the model T. He asked himself:
How could the components of the business be constructed so that it could be assembled at very low cost with totally interchangeable parts?
How could the components be constructed so that the resulting business systems could be successfully replicated over and over again.
The turnkey franchise was born.
We would encourage any business owner to look at his business this way. If you were to create a turnkey franchise out of your business, what changes would you have to make – so that someone else could pick up an instruction manual and replicate it perfectly? How could you take your processes and ways of working and whatever makes you special – and capture them?
Need for growth
But, despite its huge growth and success, by the early 2000s, the most famous chain in the world was beginning to show its age. To many it became a symbol of an unhealthy, hurried, over-refined way of mass-producing food, epitomised in Morgan Spurlock’s 2004 ‘Super Size Me’ documentary. McDonald’s staff had been trained to sell more to existing customers – by asking them to increase their order size. Could they find a better way?
Sales growth ground to a halt; McDonalds responded by divesting itself of Chipotle, Boston Market, and Donatos Pizza, and focusing on its core market of hamburgers and French fries.
It then devised a strategy of growth by expanding its product offering. Its goal became to sell more to existing customers whilst at the same time hoping to attract new ones. During this period, the menu swelled by 75%. The result: between 2013 and 2015, McDonald’s share price did not move and the company lost 500 million visits.
Choice overload is a well-known phenomenon, described in Lyengar and Lepper’s classic jam study and replicated many times since. In essence, study participants were much more likely to buy a jar of jam when they were given six flavours to choose from than 24. McDonald’s had also swamped its kitchens, franchisees and employees, resulting in a decline in Customer Experience.
Ironically to turn this around McDonald’s decided to listen to its customers. The answer was the all-day breakfast, shrinking its menu and providing its customers with what they wanted all day.
Now comes the hard part. What had to change prior to rolling out the All-Day Breakfast Menu in 2015? McDonald’s focused on the sequence of steps required prior to launch. It scaled down the size of its menu to improve customer wait times and at the same time convinced more than three thousand owner-operators to upgrade and reorganise their kitchens to accommodate breakfast alongside burgers and fries.
McDonald’s rolled out its All-Day Breakfast in October 2015, ten years after it had first found itself in growth stall. In 2017 it started eleven consecutive quarters of comparable sales growth.
The answer on how best to resolve the systemic issue of slow to no growth had been staring McDonalds in the face since its inception. When Ray Kroc first saw the brothers working together, there was even in those early days a big difference between how the brothers ran things and the other few outlets at the time. The brothers kept the menu small and focused whilst the others kept on expanding what they sold; the latter didn’t work.
Customer Penetration is about selling more of your existing products to existing customers, but that doesn’t mean you have to continue to sell the same number of products.
Conclusion
The McDonald’s story is a perfect example of how to use combination and sequence effectively. The growth strategy to launch the All-Day Breakfast menu, which included products it already had (specifically, the Egg McMuffin) significantly reduced time to market. The growth runways taken were a combination of Customer Penetration, Customer Experience and Market Development (selling existing products to new markets). The sequence was also timed to ensure that each location would be able to update its kitchens to accommodate the new menu without negative impact to operational efficiency.
Does your business have an opportunity to sell more to your existing customers? What do you need to know to enable you to do this? What people, processes and investment will you need to target existing customers effectively? Who owns this runway? What steps do you need to take? What do you need to do first?
igesia Consulting helps businesses and the people in them to become peak performing. We understand what the very best organisations do, and work with companies like yours to give you the skills, plans and structures to do the same.
There are very few businesses that aren’t looking for growth. By growth, we mean organic top-line sales growth that results in bottom line expansion: the most valuable growth for any business. But many businesses are not clear about how they will achieve it, or the options available to them.
Over the next few months, we will look at the different ways that growth can be achieved, which we call ‘runways’. We will see some case studies of businesses who have used these runways. By the end, you will have a clear understanding of what the runways are, how to use them, and how to employ them in the right order for your business. In essence, this is a complete model for growth.
But first, a caveat: in a Bain survey, 94% of leaders of large companies said that the biggest barriers to achieving growth are internal, not external.
The 10 runways to growth
We recognise ten runways for growth. Many of these will be familiar, such as the product strategies which were developed in the Igor Ansoff matrix of the 1950s, others less so. They are:
Customer experience
Market penetration: selling more existing products to existing markets
Market development: selling existing products to new markets
Product development: selling new products to existing markets
Diversification: selling new products to new markets
Customer retention
Improving the sales engine
Creating alliances
Collaborating with competitors
Disruption
Prior to selecting any of these, you need to have a deep understanding of both your business and the market context in which your business operates. You need to be open-eyed as to the state of your own processes, people, products, ability and willingness to invest and take risks. You also need to understand your current and future sources of competitive advantages, your customers’ needs and the likely direction of travel that the market as a whole will take, especially with new and disruptive technology. Armed with this knowledge and insight, you will be able to make the right decisions.
Customer experience
We will start by looking at customer experience, as this underpins all the other runways, and makes all of them more effective. Nine out of ten customers say they will pay more for a better customer experience. Think about your own recent wins from your competition; we would be confident that the majority of them have come to you for a better experience, not lower prices. Let us know if that’s not been the case! Even Ryanair have been forced to make concessions on customer service, recognising that without it, growth is difficult, even with the lowest prices.
Customer experience is about the feelings that arise once customers engage with your products, employees, and various sales, service, and marketing channels. We remember feelings much better than facts (such as prices), whether positive or negative. A customer that’s had a poor experience will be hard – and expensive – to win back to your brand. And with so many reviews now available online, it’s never been more important. It used to be said that a customer with a poor experience would tell ten people; now, they tell the world.
Why it matters
Customer experience is a point of differentiation in its own right. We talked about it when we discussed how to build a strategy. We have all interacted with companies that have built their whole success on it: Virgin Airlines, First Direct, Starbucks. In fact, a few articles ago, we looked at how Starbucks had a crisis in 2008: they had let their customer experience slip. When Howard Schultz stepped down from chairman to CEO, one of his first acts was to reinstate it.
Businesses that follow this route ask: who is the customer? This may not be the same as the buyer – who is the customer when your fridge orders milk automatically?
Businesses that are great at customer experience have a deep understanding of their customers and their needs. They talk to their customers constantly; they watch how they use their products; they analyse their data; they create avatars of different customer types.
They then create a shared understanding of what a compelling customer experience actually looks like. What does a customer journey through the business look like? How can the customer be wowed? Which parts of the business are most important in delighting the customer? We covered some of this when we discussed building a sales engine. Generally, the sales team needs to be first class, with a strong customer service team. By contrast, the product itself can be average.
Their whole business is then built around delivering this; it is embedded in the organisation’s culture. If a business is to adopt this runway successfully, there needs to be clear alignment with its Core Purpose and Values. All parts of the business need to share the same body language: they ask how their invoicing can reinforce the impressions delivered by advertising, social media and the sales team.
A single clear owner is assigned at a senior level. Who would this be in your business? New systems and processes are written and trained out. Measurements and KPIs are created and monitored. If you have no measures at the moment, start with Net Promoter Scores (NPS) and more traditional measures such as Customer Satisfaction and Voice of the Customer. These measures can flag up the need for corrective actions, but you should also be continually looking to introduce improvements.
Case Study: Ritz-Carlton
Background
Over a hundred years ago, a herdsman’s son from a family of 13 began working in the hotel industry. While learning his craft, he was fired from various jobs and was even told by one employer that “in the hotel business you need an aptitude, a flair and you haven’t a trace of it.” From those humble beginnings, the “hotelier of kings and king of hoteliers” Cesar Ritz completely revolutionised the luxury hotel industry. Starting with the Ritz in Paris and the Carlton in London, Cesar Ritz emphasised the guest experience, created opulent physical environments, innovated hotel design, produced settings of uncompromising quality, and established what has become the Gold Standard for luxury and the epitome of service excellence. His marks of distinction have found their way into our lexicon with phrases like “putting on the Ritz.”
In 1983, the Monarch Hotel Group bought the rights to use the Ritz-Carlton name for an estimated $70 million. Its president, the dynamic Horst Schulze, grew The Ritz-Carlton Hotel Company from four US based hotels in 1983 to 40 properties in 2000. However, despite Horst’s steadfast leadership, an economic downturn from the 1980s cut deeply into the hotel industry with magnified effects on the Ritz-Carlton, given its aggressive expansion (eight new hotels in 1990 alone).
After a series of financial challenges and crises, Marriot International purchased a 49% stake in Ritz-Carlton in 1996. Today The Ritz-Carlton Hotel Company is a wholly owned subsidiary of Marriot International. By the end of 2019, Ritz-Carlton has 106 hotels spread across the world.
Through a willingness to be routinely audited by representatives from world-class businesses and a commitment to continually rework quality processes, Ritz-Carlton became the first company to win on two occasions the Malcolm Baldrige Award for quality management. Additionally, leadership has positioned the company to receive every major award bestowed in the hospitality industry and by leading consumer organisations. Ritz-Carlton properties have consistently been honoured with Mobil Five Star Awards, AAA Diamond Awards and various Best Hotels of the World Awards.
So, what is the essence of this iconic company? What is the Ritz-Carlton experience?
Ritz-Carlton General Manager Tony Mira describes it as “a Wow experience”, like no other. It is one that you walk in and you know, whether you are a guest or an employee, that you are treated like no one else in the industry.
How have they done this?
Becoming an industry leader and standard-bearer for customer service did not happen by default. We see five key steps:
Define and refine
Empower through Trust
It’s not about you
Deliver wow, and
Leave a lasting footprint.
Define and refine
While many companies have finely tuned statements of vision, purpose and values, few business leaders can rival Ritz-Carlton when it comes to roadmaps and cultural anchors at the top-of-mind of their staff. They call this the Gold Standards.
Given the daily reinforcement of the content of the Credo you would be hard pressed to find a Lady or Gentleman (as Ritz-Carlton refers to its staff) who cannot immediately articulate their Credo, the Motto and the Three Steps of Service.
For example, the Three steps of Service are:
A warm and sincere greeting.
Anticipation and compliance with guest needs.
Fond farewell. Give them a warm good-bye
This is backed up by an Employee Promise and the famous Ritz-Carlton 20 Basics, a rule book for how staff are to behave.
Throughout the Gold Standards, Ritz-Carlton addresses not only how staff behave toward each other and guests, but also how the institution will behave toward them. This is not a one-sided admonishment about how to serve customers. This is a social contract between the institution; the people who work for the institution, and the people the institution and its employees serve. Very few organisations make their social contract this explicit, and none that we know of except Ritz-Carlton puts it in a form that employees are expected to carry with them day in day out.
Empower through trust
Most of Ritz-Carlton’s competitors define jobs by function, responsibilities, and limits on authority; Ritz-Carlton defines jobs in terms of the ideal outcome for guests. Disney does this, too. A growing number of companies are recognising the need to move from exceptional customer service to exceptional customer experiences.
Recruiting and Selection is critical to find the right people. New employees are recruited into 120 hotel-specific standard job positions available using a highly predictive instrument known as ‘character trait recruiting’. The tool is used to determine the capability of a candidate to meet the requirements of the job applied for. It is based on the attributes of employees who have been successful in that role in the past.
New recruits are carefully inducted into the business. Recruits attend a two-day orientation and pass their appropriate certifications for the job. The certification process is task-specific as well as philosophical; they must demonstrate that they can do the job and that they understand that they understand and are committed to the Gold Standards. Furthermore, many of the hotels invite new employees to stay at the hotel as a guest so they can experience great service and thus know what it looks and feels like from a guests’ perspective.
Ritz-Carlton’s second of the “Three Steps of Service” is to anticipate and comply with guest needs. The operative word here is anticipation. Former COO Horst Schulze said: “The main thing is to have a vision of purpose, not a vision of function. A chef’s function may be to prepare food, but that is not his purpose; a desk clerk’s function may be to check guests into and out of the hotel, but that’s not her purpose. Leonardo Inghilleri, a former VP of HR, explains further:
“There are three types of service. Bad service is what you get when your wishes are not complied with, when you want something and don’t get it. Ordinary service happens when you ask for something and get it. i.e. you ask for a glass of water and you get it. This type of serviced is either mediocre or very good but is still based on compliance with the customer’s needs. The third type of service is the extraordinary one. This happens when service instils the “wow” factor through the anticipation of customer needs. The hotel or service provider fulfils your wishes before you have a chance to express them. Extraordinary service is accomplished in part through technique, but technique is never enough. You need employees who have a “desire” to do so!”
Staff can only deliver this third level if they have the freedom and autonomy to do so. This is why the ground rules (the Gold Standards) are important – they act as a frame of reference for staff when making decisions. Giving staff this level of freedom can be scary for many businesses.
It is not about you
Businesses like Ritz-Carlton that are known for their emphasis on human factors typically fall short when it comes to process-driven quality improvement. However, quality processes are what ensure that the fundamentals of top service delivery are consistently maintained worldwide (see our previous article on processes here).
To keep its sight on the customer, Ritz-Carlton leadership looks beyond daily operational concerns to garner data that can be used to benefit all customers, employees, managers, business partners, and shareholders. Rather than focusing on incremental improvements in existing internal processes, corporate leaders pay attention to the voice of their customers, the wisdom of world-class businesses, the ideas and feeling of their Ladies and Gentlemen, the input of their business partners, and the wishes of the hotel owners.
When Ritz-Carlton studies other businesses, it takes a disciplined and strategic approach, and the most common way it mines for best practice of other companies is through multiday site visits at businesses chosen on their reputation for driving organisational change and innovation.
Deliver wow
Customer satisfaction is not enough to ensure business success. Recent research has shown that customers who are only “satisfied” with a company’s service are far less likely than customers who are “extremely satisfied” to remain loyal to that business.
Obviously, the easiest and most cost-effective Wow experiences emerge when staff members find customer needs that routinely go un-served at competing businesses. For example, many hotel guests prefer to exercise outdoors to using gym facilities on the property. While many other hotels don’t anticipate the needs of others, Ritz-Carlton goes out of its way to do this.
Additionally, leadership stresses the value of seizing the opportunity to make a memorable connection through a fond farewell. A guest at The Ritz-Carlton, Half Moon Bay, California, shows how simply, elegantly, and genuinely people can be wowed even as they leave a hotel. “When we retrieved our car from the valet to go home, they had a little note in the car thanking us for staying, another card listing the local radio stations and directions to the freeway, plus two bottles of water for us.
Leave a lasting footprint
The true test of an organisation’s success and the significance of its leadership extend well beyond wow stories, current economic performance, or even offering products that address the immediate preferences of consumers. Increasingly, businesses are judged for the lasting nature of the footprint that they leave on individuals, communities and other businesses.
Myopic companies focus on short-term profitability instead of ecological sustainability, or they prioritise advertising over efforts to train and grow their people. The Ritz-Carlton company was founded on a different set of values. The organisation’s strategic statements include the idea that “Ritz-Carlton” will be known as a positive supportive member of the community and will be sensitive to the environment. Former President Horst Schulze explains the rational for including this philosophy early in the company’s development. “A business is only as great as its focus. If you focus narrowly on the bottom line, you leave a legacy only for investors.
Great businesses grow their people, their communities, their customer base, and their profitability. From the day we opened our doors at the Ritz-Carlton, all we wanted to be was a truly great company.”
Conclusion
Ritz-Carlton knows that its entire business model is based on the customer experience it creates. It appreciates that only the best people will allow them to deliver this – even though hotels do not pay high rates. It has built its whole business around this concept – it is fundamental to it. The biggest danger to Ritz-Carlton now is internal – is its parent (Marriott) still giving it the autonomy and freedom it needs to stay ahead of the rest? There are those that think not.
How central is customer service to your business? What should you be doing differently? Let us know!
igesia Consulting helps businesses and the people in them to become peak performing. We understand what the very best organisations do, and work with companies like yours to give you the skills, plans and structures to do the same.
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