Unlike 20 years ago, CFOs today have a critical role as key members of teams developing and managing their companies’ brands. They are essential to their companies’ brand success in three areas:
- Defining a defensible, high-profit competitive positioning
- Identifying the most important touchpoints for their high-profit customers
- Balancing the increasingly diverse resource needs of their target market segments
Two decades ago, in the waning days of the century-long mass market, marketing groups had a clear mandate: develop a brand that would maximize company revenues. In the prior Age of Mass Markets, markets were mostly homogeneous. The paramount company need was to get big in order to gain the compelling benefits of economies of scale. There was some product differentiation, but the underlying objective of company marketing groups was to grow market share by treating all revenues as desirable.
But then Amazon and the other digital giants began to move quickly to change the underlying structure of the former mass markets, creating today’s Age of Diverse Markets. Amazon, the poster child for digital success, had one terrific strategy: provide almost limitless products to individual customers with arm’s length services in an information-rich environment. Amazon and the other digital giants focused all their resources on this strategic objective, and relentlessly refined their business model to meet their customers’ developing needs.
As incumbent companies saw their long tail of small customers migrating to Amazon and its peers, they reacted with alarm, and most often doubled down on their long-term strategy of targeting (and trying to hold onto) all revenues and minimizing all costs. The problem was that they were not structured to compete successfully with Amazon’s highly focused small-customer strategy.
The right answer to the positioning puzzle that incumbent companies faced was not to double-down on the “target all revenues” strategy that worked in the homogeneous markets of the past, but instead to position into the higher-service market segments that the digital giants are not structured to serve. In part, this meant accepting the need to cede a significant portion of small customer revenues (which were largely low profit).
Define a Defensible, High-Profit Competitive Positioning
Understanding, planning and overseeing this repositioning process requires the unique skills and perspective of the CFO. Since brand positioning is the vital first step in brand management, the CFO is an essential participant in this process.
Concurrently, fundamental changes were taking place in product pricing and cost to serve. In the past, these were relatively stable for most customers. Today, all this has changed, especially in the higher-service market segments. Prices often vary from customer to customer, and even within larger customers based on the related services that are part of the product offering (e.g., delivery to the point of use). Cost to serve varies widely as well.
This shift means that the traditional aggregate metrics of revenue, gross margin and cost are not adequate for making management decisions appropriate for diverse customer segments. Enterprise Profit Management (EPM) is custom-designed for today’s management decision-making because it is based on transaction-level profit metrics (creating a full P&L for each and every transaction, or invoice line).
In the past, companies did not have the computer analysis resources to analyze profitability at the transaction level, but today, EPM can calculate the detailed profit landscape of a complex company (down to individual transactions: every time a product is bought by a customer) in two to three weeks.
The profit pattern that emerges from EPM is startling to managers who are inexperienced in these powerful new granular profit analytics. Yet this profit segmentation pattern is common to almost every company—B2B and B2C—regardless of industry:
- Profit Peak customers: About 20% of your customers produce 150-200% of your reported profits
- Profit Drain customers: About 20% of your customers typically erode about half of the profits that your Profit Peaks generated
- Profit Desert customers: About 60% of your customers typically produce miniscule profits but consume about half of your resources.
Amazon specifically targets most companies’ Profit Desert customers, and serves them with a constantly improving, focused operating network. Most incumbent companies, on the other hand, have sales and service processes that seek to bridge the diverse needs of the fragmenting market segments.
The CFO has a central role in developing these EPM profit metrics and ensuring that they are a central building block in every company activity. These metrics are especially important in brand management because they spotlight the customers that are producing the highest profit in a company’s diverse customer base.
Once CFOs have identified their companies’ profit segments, they can join with their marketing counterparts to judge the risk factors that might endanger their company’s penetration of their Profit Peak market segment. This positioning analysis enables the team to determine if the company’s Profit Peak business has a defensible profit growth path, and if not, whether to urgently develop a program to counteract the threat or to refocus on another defensible segment that can serve as a platform for accelerating high-profit growth. (see: How To Manage Your Most Important Risk – StrategicCFO360)
Identify Your Profit Peak Customers’ Most Important Touchpoints
As companies move into the defensible higher-service segments of their market, they typically find that the customers in these segments have diverse needs. In response, the company needs to construct custom-tailored packages of products and services that meet these divergent needs. CFOs share prime responsibility with their companies’ marketing groups for developing cost and profit estimates for these product/service packages both during the development process, and at scale, and for ensuring that their company’s resources are redirected to grow this lucrative, but complex, set of customer segments.
For example, SKF, a manufacturer and distributor of ball bearings, was having difficulties with the aftermarket segment of its business. The customers were very price sensitive and the ball bearings were viewed as a typical commodity product.
The SKF aftermarket team met with several of their customers and determined that there were two important segments—industrial aftermarket (replace bearings in machine shops) and automobile aftermarket (replace bearings in vehicles being repaired). Customers in these two segments had very different needs. The industrial aftermarket was very concerned about the machine downtime required to replace a bearing, while the automobile aftermarket was primarily concerned with quickly identifying the right bearing and obtaining the ancillary products and information to replace it (often, while customers are impatiently waiting for their cars to be returned).
In response, SKF developed for its industrial aftermarket customers a set of comprehensive maintenance programs that included sealants and maintenance products. Here, the objective was to sell fewer bearings, avoiding machine downtime. For the automobile aftermarket, SKF developed a set of products, including instructions, tools and ancillary products that would enable a car mechanic to quickly provide the repair service. Both programs were very successful.
Balance Your Company’s Increasingly Diverse Resource Needs
The CFO has a very important role in partnering with the marketing group to estimate the likely profit and complex costs to develop, sell and scale these increasingly diverse packages of products and services that are the future cornerstones of the company’s profitable growth. In parallel, the CFO needs to use EPM to model how the company’s resources should be redirected from the old broad-market objective of targeting all revenues and minimizing all costs, to the much more targeted, complex new set of strategic objectives. The resulting profit growth analysis will inform the marketing group of when target sub-segments can be supported as the company shifts its resources to ramp up the new strategy.
This analysis is not sequential, but rather is organic. The CFO and the marketing department have to work together closely at every stage of the repositioning process: profitability analysis of market segments, targeting diverse sub-segment needs, developing a phased program to grow both revenues and profits in the target segments, and shifting the company’s resources to align with the new, focused strategy.
In the past, the marketing group had a mandate to grow revenues by any reasonable means. Today, the most important element is to position the company to focus on its current and future Profit Peak business, and to ensure that the company’s resources are aligned to reflect this essential focus.
Without the central participation of the CFO, successful brand management today is not possible.