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?