The second in a series of articles by Professor Christoph Loch, Hanadi Jabado and Professor Stelios (Stylianos) Kavadias looks at the importance of understanding your customers when growing your business.
We all fall for the temptation to extrapolate from experience. The founders and leaders of SMEs do it too with their early successes: initial sales are taken as proof not only of what these initial customers value and want, but of what all customers want. This leads to assumptions being made about the market, i.e. “we know what the customers want”. However, that is very different from having a strong understanding of the market. Before long, SME leaders may be spreading themselves too thin, firefighting to support sales targets, or finding their numbers plateau despite continuous sales efforts.
Does this sound familiar? Why do we think this happens time after time? The short answer is that many SMEs develop a strategy that is not based on an understanding of their customers’ true needs.
Let’s look at three examples of this pattern.
SME case 1
A flour manufacturer saw its annual sales frozen despite its best efforts. They invested in the technology of their production process in order to achieve the most fine-grained flour and offered it in larger packages. This was justified by a cost/benefit analysis. However, sales did not budge. It turned out that their customers did not care about the most fine-grained flour and they did not want large quantities. As the company moved away from the theoretical cost/benefit analysis and started talking to their customers, they quickly realised that the clients wanted a coarser type of flour which was more suited to local tastes and in smaller quantities for home cooking. The company adapted its offering, and achieved gradual increase in sales.
SME case 2
A small ICT company invested heavily to improve its customer support response time, believing that their business would grow through referrals. However, they gained a lukewarm sales increase with no sign of the desired customer referrals. They did not understand this disappointing customer behaviour until the leadership team decided to get out of the office and sit side-by-side with their key customers in an effort to understand their needs. The findings were startling: customers did not care so much about the speed of response, but the quality and depth of the problem resolution. The company had wasted effort in the wrong direction and it eroded their capability to fulfil the real customer needs.
SME case 3
A successful catering company expanded its activities from weddings to corporate events in order to achieve growth. After 12 months they still had very low sales in the new segment, although their core offering (food design, quality and delivery) was of a high standard. They finally surveyed their clients and found out that they were not cost-effective for the corporate market. The decision to focus on emotions and experience was appropriate and appealing for the weddings market (ensuring a premium) but it was too expensive to fit the corporate market with their need for efficiency. Ironically, the emotional strength in the wedding offering was unappealing to corporate customers because it came across as “unprofessional” and “difficult to engage with.” As a result, the company decided on an overhaul of their corporate event division.
All three companies made the same mistake. They based growth decisions and investments on extrapolation: an assumption of the value they thought they offered to the target market based on their earlier experience. This is a common mistake amongst SMEs and often turns into a serious drain on the SME resources and detracts the SMEs from tackling their growth objectives.
A more strategic approach involves regular checks with customers (especially new ones!) about what they truly value in the offering. And you can’t always just ask because the answers may be merely polite; you may need to observe customer behaviour.
Before deploying a new service, tackling a new market or expanding their offering, SME leaders must ask (and answer) some very simple but extremely important questions. (A note to the SME reader: the answers will always prove to be more difficult.)
- What value do you actually offer to your clients?
- What is it that your customers really value?
- What are you really good at when servicing your customer?
Having clear answers to these questions lies at the heart of forming a strategic plan for attracting customers. Any attempt to grow without first taking a hard look at strategy will make the road to growth paved with obstacles; all of a sudden growth will become both complex and expensive. Typically, SMEs that avoid answering these questions end up tinkering with their products and spending resources without a clear target. A lack of resources becomes a challenge especially when you are unwisely using the ones you have.
The road to growth does not have to be complex if you invest in understanding your core competencies and what services and dimensions your customer truly appreciate. Not understanding your strategy (customer needs and your capabilities) makes all your actions look like shooting darts in the darkness with increased risk of missing your targets. As an SME leader, you have only a limited number of darts. You better your chances if you get some light.
This article was co-authored by Professor Christoph Loch, Dean of Cambridge Judge Business School (CJBS); Hanadi Jabado, Executive Director of the CJBS Entrepreneurship Centre; and Professor Stelios (Stylianos) Kavadias, Academic Director of the CJBS Entrepreneurship Centre, as part of a series on SME for growth.