Developing a Customer-centric portfolio strategy for consumer goods
The economics of surviving in an increasingly squeezed retail environment of the last few years have led many bricks and mortar, as well as online offerings to reduce prices across their portfolio to remain competitive. However trading price to sustain growth isn't always the most effective strategy, and it certainly isn't the most sustainable. In fact it isn't even where some customers would want an organisation to place their investment.
Mckinsey have some great articles around customer perceived value, and delivering value, which form great theory in understanding the basics of true customer based value mapping. However I often find there's a fundamental gap between high level strategic thinking in this space, and the nuts and bolts of executing a true customer-centric strategy that work's in the long-term. This gap is often the missing link that could help organisations operating in increasingly competitive markets to pull away from short-termist tactics that will hurt their profit line in the long-term.
In this article I offer a rapid 8 step approach in developing an executable portfolio strategy that understands customer value, and optimises future profitability. This suggested approach doesn't rely on availability of shopper data, but can be flexed if you have some available to you.
1. Understand what drives your customers shopping habits and decision making
The path from concept through to purchase in a customers mind is often a complex (often sub conscious) set of choices. Some based on fact, others on perception. However for the purposes of developing our strategy we should take these choices right back to basics, Take your customer decision making down to 2 basic questions. "What do I need" and "Where am I going to find it". Take what research you have, find some good brains from across your organisation, and brief them to come up with a prioritised list of what matters to your customers based around these 2 questions. The list of needs you come up with should be comprehensive, and cover all need states that your portfolio potentially covers. Examples on the "what do I need" side include brand, occasion, health needs, perceived benefits, specifications, Examples of drivers on the "where am I going to find it" include my usual weekly shopping destination, google tells me, shopping experience, and I know I can find what I want there. Depending on the product and the industry one of these questions may be more important than the other. For example, buying a new microwave is going to be clearly led by the need to heat food! Regardless, the output should be agreement in the room on what is really going to drive the majority of your customers decisions.
2. Segment your portfolio of products the way your customers sees them
Take your portfolio and develop an idea of what your customer decision hierarchy is for each product.. This should be done at a Pack level (e.g. 6 pack brand A Yoghurts), and the goal is to decide what needs are most important to customers of each product. Maybe you sell a healthy breakfast drink: the first step on your decision hierarchy for the product might be healthy nutrition, and the second step might be convenient purchase location. Map out as many steps as you think relevant for each product, and compare and contrast different areas of your portfolio to evaluate key differences between them.
The output of this step is a list of the products in your portfolio, mapped against how your customer makes purchase decisions. This provides 3 benefits:
1) You get a better appreciation of what your portfolio looks like from the customers eyes
2) You start to get an understanding of how you can differentiate the way you invest in your products
3) Going through this process helps to align key people in your organisation behind the same customer-led segmentation of your portfolio. This is particularly important for more traditional organisations that are still guided by internally derived divisions, rather external ones.
3. Segment your competitors products onto the same customer-centric map
Repeat step 2, but with your main competitor's products. Look at the competitor from the eyes of your customer, by defining your competition as the most likely products to be purchased in a particular segment, even if they are niche products/manufacturers
4. Decompose the root causes of performance in each segment
Use market data to decompose root causes of whats driving each segment. Is it price? Innovation? Shelf space? Distribution? Running through this exercise should provide a better understanding of how important each growth lever is to each segment. If you are a major player in your market, take a step back and evaluate how much of the change in the market place is being caused by your decisions, your competitors, or perhaps your distribution channels. Taking these 2 steps will allow you to where you are potentially over or under investing in different growth levers, according to the portfolio segmentation you performed in steps 1-3.
5. Identify key value items and develop a multi-year approach to winning with them
Now you're ready to develop a roadmap for the different parts of your portfolio - starting with your KVIs. Put simply, key value items are those that predominantly drive the customers perception of value (either in terms of price, OR quality). It's important to position these products first as they're the ones that are most likely to stick in peoples minds. They are also the products that are most likely going to form a "holding" position in your portfolio (don't over invest, don't deflate volumes).
Come to an agreement within your organisation of how large you think your KVI's will be as a percentage of your portfolio in 3-5 years time. Cross tabulate this with your long-range margin ambitions to get a better understanding of how much margin you think your KVI's will need to deliver in the future. Then overlay your long-term COGS projections (based on commodity fluctuations and manufacturing forecasts) to get to an output of how much you will need to charge for your product in 3-5 years time. Then work backwards to the present day to draw out your year by year pricing approach for each KVI (consumer price and cost price). If this year by year price progression is too steep from a customer point of view, then work on product or pack engineering to bring unit cost down. If the price perception isn't congruent with customer expectations, then work on either bringing the price in line with expectations, OR bringing customer expectations in line with price. The key here is consistency. Develop a 3-5 year roadmap for these products and (unless there are fundamental changes in the market), stick to your roadmap. Remember, customers don't like inconsistency! This is true for all aspects of your product, such as pricing, branding, and quality.
6. Identify future King pins and prioritise growth levers
Whilst KVI's are important in terms of customer perception, Kingpins are products that are important from an organisation perspective. They may be the brand flagship carrier, be strategically important to your future ambitions (to you or your retailers), or have high future growth potential. These products should receive a disproportionately high level of time and resource investment over time. Their presence should be pushed across any relevant channel to maximise "front of sight, front of mind"
Next you will need to prioritise growth levers for your Kingpins. Start with your portfolio segmentation from steps 2 to 4. What growth levers are most likely to provide you with the growth you want, where you want it? If you pull these levers, what are the likely competitor reactions, and reactions from potential new entrants? What are your likely moves to counteract these reactions?
Use the strategic brains in your organisation to think at least 3 steps ahead. Conduct a game theory workshop to develop a range of scenarios and how they are likely to play out. If you invest in price to achieve growth with your Kingpins, will you start a price war? Will you devalue your brand? Will you risk cannibalising other areas of your portfolio?
7. Design the optimal strategy for complimentary products
By now you've developed a growth plan for the products that are most important from your customers perspective (KVI's), and products that are most important from your organisations perspective (King pins). The majority of products in the remainder of your portfolio can be grouped as complimentary products. I use complimentary here not as a means to describe 2 products that a customer would want to purchase together (e.g. coffee and sugar), but complimentary in the commercial benefits they gain in being grouped together. There are a few reasons why the product may be complimentary
- Customers see them as complimentary; either because they fill a very similar need state (e.g. same product, 2 different pack sizes), or because they're visibly seen together often (on shelf, in adverts, at home etc.)
- Complimentary products could unlock economies of scale for each other. Firstly from an operational perspective, allowing smaller retail customers to hit volume targets required to bring unit cost down, or in being sold as an assortment together (think of variety crisp packets). Secondly, if selling to large retailers, in achieving scale of offering required to win those all important gondola ends
Lay all your potential complimentary products out on a table, and evaluate which KVI's or King Pins they compliment best. Decide whether the complimentary products should adopt a follower strategy (aka same strategy as it's KVI/King pin) or whether a more bespoke strategy is required.
8. Develop your 3 year forecast
You've now segmented your portfolio into KVI's, King pins, and complimentary products. Any products remaining that you haven't already thought about are likely to be "ghosts", which (due to their low importance) should receive proportionally low time and resource investment. If you're still spending in ATL, or trade investment, consider pulling back to reallocate your resources elsewhere.
Finally, develop an estimate for a 3 year financial forecast and compare this to the current market trajectory, by segment, by channel. This is a crucial step of the journey that's often performed at too high a level, or not consolidated across different segments of the portfolio, Performing this analysis at a more detailed level across your entire portfolio allows you to see whether your growth estimates are unrealistic within the context of the market, and provides you with a first view on where you're potentially over/under investing for growth. If you have access to demographics, then you should also evaluate your forecast in the context of how your customer demographics are changing. Are you developing a compelling proposition for different ages, ethnicity's, and household sizes? If the macro trend is for smaller basket sizes amongst urban dwellers, are you reconfiguring your pack architecture to compensate?
And that's how you develop a customer-centric portfolio strategy in 8 easy steps. Whilst this approach still works if you're the type of organisation that likes complexity, it doesn't need complexity. The beauty of it is you can make it as simple or as complex as you want!