When the economy is buzzing, most companies can afford to overlook inefficiencies or take a broader view of what their customers want. But when times are tough, as they are now, companies have little choice but to re-evaluate how they do business if they hope to continue to grow and prosper. Managers are faced with essentially two choices: cut costs or understand precisely where the most profitable market demand is and align more effectively with it. Both options are difficult, but only one can achieve both short- and long-term objectives.
Throughout the recession, we have been inundated on an almost daily basis of news of companies closing plants, laying off employees and reducing product offerings. It is the rare business that has not taken action to reduce costs in some form. However, the supply-focused cost cutting approach can have several significant limitations, including:
• It is unlikely to be rewarded: Wall Street consistently rewards demonstrated profitable growth much more than it does cost cutting.
• It may not be realistic: Most businesses have aggressively attacked costs in recent years, so very few significant cost-saving opportunities remain.
•It's not sustainable: You can only reduce costs so much without affecting a business’ core operations.
Companies that develop new insights into demand can drive dramatic improvements in a company's cost and revenue positions:
• Reduce production costs: Lacking insights into demand can cause businesses to develop offers that under-deliver on the key benefits that profitable customers value most, while adding costly bells and whistles that don’t add value.
• Improve sales and marketing ROI: Without a precise understanding of demand, businesses tend to chase any and all customers with communications and marketing strategies that rarely hit the mark.
•Volume expansion: An improved understanding of demand brings new customers to the brand while simultaneously cementing relationships with existing customers
•Increased pricing power: New insights ensure development of products which deliver against the key needs of target consumers and for which they are willing to pay a premium.
Our work with a major food manufacturer can better illustrate how a precise understanding of profitable demand yields tangible results. This company was experiencing flat to negative growth on a historically key strategic brand, and was communicating in-market in a reactive way. Management had come to the conclusion that this core business had exhausted opportunities for growth and was seeking to expand the brand into new adjacencies. Using our hallmark demand strategy approach, The Cambridge Group undertook the following steps:
• Identified the most profitable consumer segments and need states, and determined what was most compelling to them
• Developed brand positioning and overall brand strategy. Which were specifically designed to motivate the most valuable consumer segments and need states
• Executed Customer Demand AnalysisTM to identify tangible product features which are both most valuable to target consumers and most profitable for the brand to offer
• Optimized brand portfolio strategy to maximize profitable growth while minimizing required capital investment
One year after completing the strategy, the results were clear: brand sales went from -1 percent to +15 percent and returned the brand to profitable growth—the only one at the manufacturer to simultaneously grow share, sales and margin that year. Furthermore, brand costs were reduced by eliminating packaging, supply chain and formulation components not motivating to target consumers. Trade spend was rebalanced to the most profitable, more premium SKUs. The target consumer and need state was redefined from single males to households with teens and from BBQ to after-school/afternoon snack, respectively. Even now, when most brands are experiencing pressures, this brand continues to enjoy unprecedented volume, revenue and profit growth and has surpassed profit targets by nearly 30 percent this year while achieving the No. 1 share position in its category.
The precision of demand analysis can be the solution to turning around brands that have seemingly plateaued. And the application of this analysis goes beyond consumer packaged goods—it has been successfully implemented at credit card companies, insurance companies, retailers and a range of others. In these difficult and uncertain economic times, understanding precise target segments, need states and brand strategy are critical tools to driving growth and profitability.
Gloria Cox is the Managing Director with The Cambridge Group. She specializes in consumer products and services clients, working with them to develop market-driven growth strategies through consumer targeting, brand strategy and positioning, and new product development.