Don't let a black swan make you a turkey. Or, the danger in focusing on the most profitable customers

 

So, it turns out there is a risk involved in concentrating efforts on only the most profitable customers. Granted, that sounds highly counterintuitive, especially after the known rewards reaped from exceptional customer service performance. And, few would argue with the Pareto rule with plenty of evidence that 20% of customers can drive 80% of value. With that in mind, it makes sense to have a strategic focus on the most profitable segment and it can be highly detrimental to be unfocused, attempting to be all things to all customer segments.

 

Here’s where the danger lurks, though. Over-serving the requirements of the most lucrative customers to the exclusion of meeting the needs of less-demanding customers effectively creates low-hanging fruit for competition and for new entrants. Clayton Christensen labeled this process as ripe for disruptive innovation back in 1995. As he articulated, ignoring the needs of customers creates an opportunity for smaller companies with fewer resources to challenge incumbents by offering more suitable services and products at more competitive prices. Once footholds in the low-end of the market are established, challengers can move up the chain and attack more profitable market segments. That is one type of disruption, from low-end creep. Depending on a company’s lock on distribution channels, product or service switching costs and the company’s brand strength, it still might make sense to ignore less profitable customers.

What it points to, though, is that your competition can eat your lunch if you are not paying attention to where the industry is going. If you don’t evolve and maybe even cannibalize your own products and services in favor of those that meet emerging needs, you might well get blindsided.

 

 A related but different concept is Nassim Taleb’s theory of the black swan. His is a lesson in preparing for a highly improbable, unexpected event that has a massive impact. While it would be impossible to predict a surprise, one defense is identifying areas of vulnerability. Think about it: What is not a surprise to a butcher is a surprise to a turkey.

This idea applies even on a far less grand scale for surprising, momentous events, that while not revolutionary, can still have enduring, brand-altering, customer market-changing impacts, if the cards are played right. Your company might not be large enough to have a risk management department and therefore maybe a crisis management strategy, but you can and should adopt an opportunity mindset. Now, there are few occasions as opportunistic for a mediocre restaurant chain such as Red Lobster as say Beyoncé singing about it at the Superbowl but one never knows. After all, Leiceister City just won the English Premier League Title with 5,000 to one odds and Donald Trump prevailed as a Republican Presidential nominee.

 

Do you have a team who can think fast and act creatively in the event that serendipity hits? There can’t be a playbook, actually. The opportunity plan is rooted in a culture that fosters innovative thinking and nimble action, anchored by engaged employees.

To avoid being a turkey, spend some time cultivating an environment that is both protected against unforeseen risks by mitigating vulnerable areas, watch where the industry is headed, listen to the unmet needs of your less profitable customers, and create an innovative, engaged workforce that can exploit opportunities as well as mitigate dangers.

#disruptive innovation #NassimTaleb #taloise 

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