Un­ex­pected switch

Finweek English Edition - - BUSINESS -

In re­cent ar­ti­cles I dis­cussed how con­cen­tra­tion of sup­pli­ers (for all busi­nesses) and cus­tomers (in the B2B en­vi­ron­ment) can rad­i­cally in­crease risk to the busi­ness. Yet what about cus­tomer risk in the B2C en­vi­ron­ment? If you have many con­sumers as cus­tomers, where does the risk come from?

The key risk is sub­sti­tu­tion – where a con­sumer switches from buy­ing your prod­uct to some­thing else that ful­fills their needs, typ­i­cally a prod­uct from a di­rect com­peti­tor. Some­times the switch is tem­po­rary and some­times per­ma­nent. A dom­i­nant com­pany with a long track record against es­tab­lished com­peti­tors would ar­gue that its cus­tomer base is loyal and un­likely to de­fect, but it hap­pens.

As an ex­am­ple, I’d like you to con­sider a time of ex­treme eco­nomic un­cer­tainty, a time of po­ten­tial ex­is­ten­tial threat to many, a time when po­lit­i­cal power strug­gles took place around a ne­go­ti­a­tion ta­ble yet also saw prom­i­nent lead­ers gunned down by ex­trem­ists. Po­lice couldn’t con­trol the pop­u­lace so the mil­i­tary was called in. Or­di­nary ci­ti­zens car­ried guns, some moved towns or even em­i­grated, seek­ing safety else­where. The pri­vate se­cu­rity in­dus­try boomed. Those with­out a Plan B stock­piled foods, pro­tected their homes and pre­pared for a lon­glast­ing siege.

Could this have hap­pened in the USA when a hur­ri­cane f looded parts of a ma­jor city, de­stroyed homes and left many with­out elec­tric­ity for weeks? Could it have been Greece dur­ing the height of the euro cri­sis? Bos­nia? The Czech Repub­lic? Syria? Egypt? Libya? It could have been any of th­ese, and the re­al­ity is that such events could un­fold close to you and with very lit­tle warn­ing. How­ever, the ex­am­ple I will dis­cuss comes from 1994 – in the months pre­ced­ing South Africa’s gen­eral elec­tions – the elec­tions that would mark the tran­si­tion to our coun­try’s peace­ful democ­racy.

The con­sumer switch hap­pened dur­ing the elec­tions, but it took a while to fig­ure out that a last­ing change had hap­pened, which meant that nearly a year af­ter the event I got a call from a client ask­ing for help in un­der­stand­ing a prob­lem. The client’s sales in the rel­e­vant cat­e­gory had dropped around the time of the 1994 elec­tions (ie ‘ex­is­ten­tial cri­sis’), and his mar­ket share hadn’t re­cov­ered. The busi­ness had gone from be­ing dom­i­nant in that cat­e­gory to be­ing the sec­ond big­gest player, hav­ing lost 30% mar­ket share. The client’s cal­cu­la­tions showed that the com­pany had lost this share in just one quar­ter, on a busi­ness that had been very pre­dictable over the 30 years of its ex­is­tence. So what had hap­pened?

My client’s com­pany sold pow­dered milk. Pow­dered milk com­petes with fresh milk and long-life milk (and of course soy prod­ucts, but they rep­re­sent a very small slice of the pie). With the cri­sis of the elec­tions loom­ing, the com­pany’s in­ter­na­tional par­ent had adopted a wait-and-see at­ti­tude that in turn had been adopted by the lo­cal branch. Given that many fore­saw a pro­longed civil war, this wasn’t en­tirely a bad de­ci­sion. So, many com­pa­nies kept pro­duc­tion go­ing but didn’t make any new in­vest­ments into new ma­chin­ery or push sales. Mar­ket­ing cam­paigns were kept on the back burner – af­ter all, what’s the point of in­vest­ing in mar­ket­ing when the world is about to end?

Most con­sumers took a dif­fer­ent ap­proach: they stock­piled at least some re­serves of es­sen­tial items. Milk is pretty high on this list but you can’t stock­pile fresh milk. So they stock­piled their old favourite alternative – the pow­dered milk made by my client. Then stocks ran out. Any re­tailer will tell you that a stock-out can be dis­as­trous be­cause you risk los­ing a sale that you’d oth­er­wise have made. In this case the con­sumers couldn’t find what they wanted, so they bought the alternative – long-life milk. This new prod­uct had been re­leased about five years pre­vi­ously with lim­ited success, since most con­sumers weren’t really try­ing it. The re­tailer didn’t lose a sale, but my client did. The con­sumers bought some­thing they were un­sure of un­der the duress of a po­ten­tial ex­is­ten­tial threat.

What hap­pened next, as we now know, is that the elec­tions came and went peace­fully. Pro­duc­tion of all dairy prod­ucts con- tin­ued, but pow­dered milk never re­gained its pre-elec­tion mar­ket share. The rea­son is that con­sumers who had bought long-life milk had had a taste of it and were sur­prised to find that it was very good and that they pre­ferred it to pow­dered milk. So they per­ma­nently switched prod­ucts and never went back.

Even with the elec­tion and the stock­pil­ing, con­sumers wouldn’t have switched if there had been suf­fi­cient stock of their old favourite, but a lack of stock gave the con­sumers enough mo­ti­va­tion to try a com­pet­ing prod­uct and that per­ma­nently changed the for­tunes of two com­pa­nies in the mar­ket, with one suc­ceed­ing at the ex­pense of the other. A big busi­ness with steady rev­enues and sta­ble growth lost 30% of its mar­ket share in a sin­gle quar­ter to an es­tab­lished com­peti­tor.

So how low-risk is your busi­ness? What would it take for your con­sumers to switch to an alternative prod­uct or brand? Will it take an ex­is­ten­tial cri­sis or some­thing far less threat­en­ing and far more com­mon, like a new ad­ver­tis­ing cam­paign or bet­ter pack­ag­ing? Which long-term threats will prove to be op­por­tu­ni­ties for you: cli­mate change, ris­ing en­ergy costs, the rise of the hy­per­con­nected world, or the shift in power to­wards China?

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