How To Focus On Your Most Profitable Customers

Savvy managers are realizing that the new disruptors are not winning by doing old things better but instead, by doing new things that incumbent companies are simply not capable of doing.

Every year, managers at companies large and small find it harder than ever to compete with the likes of Google and Amazon, who are muscling into their businesses, stealing their customers, and cornering every conceivable market and service. But according to Jonathan Byrnes, the legendary MIT-based expert on profits, pricing, and strategy, and John Wass, a key member of the team that made Staples a major national brand, there is a way for companies to survive—and win—in this era of digital behemoths. The following is an excerpt from their new book, Choose Your Customer, a consumer-targeted guide to help managers level the playing field.

Several years ago, the front page of the New York Times reported that two Columbia University geophysicists had found clear evidence of ancient villages lying beneath hundreds of feet of water on the seabed of the Black Sea. Their investigations, later narrated in a fascinating book, Noah’s Flood, revealed that a sizable portion of what is now the Black Sea had once been a giant freshwater lake, filled with meltwater from Asian glaciers.

About 7,600 years ago, as the last ice age waned and the waters rose, the Mediterranean Sea breached a high mountain barrier, and a monumental flood rushed through the Bosporus valley, running through what we know today as Istanbul. Ocean water poured into the lake with historical force, destroying and submerging all life in the area, and formed the Black Sea. This was the actual event that storytellers memorialized as the biblical flood.

Today, business is transitioning from one major era, the Age of Mass Markets, to another, which we call the Age of Diverse Markets. The two ages could not be more different, and the change is as inevitable and disruptive as the flood that created the Black Sea. While the transition began some time ago, it is rapidly accelerating, and the seismic shift is leaving managers scrambling for a practical pathway to succeed in a new, very different world.

A New Era

The Age of Mass Markets, which extended through most of the prior century, was characterized by fast-growing homogeneous markets. Railroads and roads integrated diverse geographic markets, and many large national enterprises emerged. This was the age of the “generals”—General Electric, General Foods, General Motors, General Dynamics—and this management paradigm continued into the 1980s and 1990s, with big-box retailers like Walmart, Best Buy and Staples.

These companies were characterized by massive economies of scale in nearly every business function (production, distribution, advertising, and so on), which ensured that as they increased their sales, their unit costs dropped, giving them ample profits to invest in getting more sales and in further reducing their costs by increasing the efficiency of their production and distribution systems. Both prices and distribution costs were relatively uniform, so reporting tools based on averages—like aggregate revenues, costs, and gross margins—were sufficient.

The key management imperative was to get big fast. The rules of thumb were that all revenues were good and all costs were bad. Companies segregated their functional departments to individually optimize their revenue-maximizing or cost-minimizing objectives, and they coordinated them at the top through periodic planning sessions and period-end financial reports.

Today’s Age of Diverse Markets, which began its widespread acceleration around 2000, is completely different. Today, there are very few mass markets, while there are more and more diverse markets where product offerings, pricing, and service packages are uniquely configured, if not by individual customer, than at least by highly segmented target markets.

Today, markets are heterogeneous and fragmenting down to the individual customer in many cases. Throughout our economy, pricing is becoming much more varied, both within market segments and even between one customer and the next. In parallel, the cost to serve each customer is becoming increasingly diverse, depending on the customer relationship, product-service mix and other factors. This change has already overtaken the business-to-consumer (B2C) markets, and it is rapidly transforming the business-to-business (B2B) markets as well.

In the Age of Mass Markets, products were “king.” To a large extent, companies succeeded by selling the same products to as many customers as possible. In the Age of Diverse Markets, in contrast, customers are “king.” Companies succeed by micro-targeting particular customers and tightly specified market segments and providing them with tailored packages of products and related services.

In the prior era, companies won with top-down management processes that kept their revenue-maximizing and cost-minimizing functions separate. Today, companies win by choosing customers who fit their strategic positioning and serving them with highly integrated sets of products and services that are delivered through decentralized organizations and processes—while at the same time remaining flexible and adaptable to all types of change. In the past, managers needed only aggregate metrics, while today, they need to understand the relationship between revenue and cost for literally every product sold to every customer every time.

The rise of the digital giants originated with their ability to market directly to customers, which enabled them to create micro-segments and to configure offers to individuals at scale using Big Data and algorithmic recommendations based on captured customer information.

Today, as the Age of Diverse Markets tsunami rushes in, industry after industry is being disrupted by digital giants like Amazon, Uber, Google, Facebook, Apple, and Alibaba and by savvy incumbents that have staked out a strategic high ground and generated sustained profit growth.

The wave is gathering speed and is pushing through the consumer landscape and into the B2B markets. Amazon is experimenting with placing Alexa, its voice-controlled device, throughout hospitals and in key manufacturing plants where supplies are ordered and used. Uber’s rapidly growing Uber Freight is displacing many traditional trucking companies. Google acquired Fitbit, spearheading the company’s move into the personal health and medical industry. The time frame for managing significant business change is three to five years, so organizations that are under siege from these forces must devise and initiate a response very quickly. The digital giants are moving fast, and even the pandemic crisis has not slowed them down.

The biggest problem in business today is that all too many managers are not embracing the Age of Diverse Markets success elements that will enable them to prosper. Instead, they are doubling down on tactical innovations and tuning up old practices from the Age of Mass Markets—usually with diminishing results. Savvy managers, on the other hand, are realizing that the new disruptors are not winning by doing old things better but instead, by doing new things that incumbent companies are simply not capable of doing with their current business practices.

The key to success in the Age of Diverse Markets is choosing your customer. This has three imperatives:

• Choose: Define a defensible strategy that your company can dominate, choose the customers who fit, and say no to those who do not.

• Align: Identify and build the capabilities that will enable your company to achieve high sustained profitability with your chosen customers in your target strategic group (that is, the set of firms pursuing the same strategy), and focus your resources to quickly excel in your strategic direction.

• Manage: Develop your organization so your managers can seamlessly coordinate to identify and support your chosen customers, and to meet their diverse and rapidly evolving needs.

The objective of this book is to explain the currents of change that are creating today’s disruptive tsunamis and to give managers a realistic pathway to success—one that involves managing in a new, creative, data-driven, and much more interesting way. In our experience across a range of industries, we have seen successful companies achieve long-term industry strategic leadership and sustain 10 to 30 percent annual profit growth—even while so many of their peers have run aground, victims of the devastating competition from the digital giants.

Jonathan Byrnes is a Senior Lecturer at MIT, and Founding Chairman of Profit Isle. John Wass is CEO of Profit Isle, a profit acceleration SaaS company with proprietary analytics that have produced sustained year-on-year profit increases on tens of billions of dollars of client revenues. Jonathan and John are co-authors of the forthcoming McGraw Hill book, ”Choose your Customers: How to Compete Against the Digital Giants and Thrive”.