ERM, GRC and Bad Starbucks Coffee (Part II)
So how could Starbucks solve this problem of one bad cup of coffee spilling to creating one dissatisfied customer, and those customers adding up over time to topple them as a market leader? How could they measure this risk and mitigate it?
But first remember, this is only a problem because Starbucks was a dominant market leader; they were practically the only major player in this market. They created the market and then rapidly saturated their primary and secondary markets (Wall Street was thrilled). Normally they could lose customers and simply replace them with new ones and retain their position. For a market-leader such as Starbucks it is easier to add new customers quicker than they create customers dissatisfied enough to leave them, especially because there were few real alternatives. That’s the value of a strong brand, especially a lifestyle brand, and being a dominant market leader. The brand does the work for you. Once your secondary market is saturated this advantage quickly evaporates (further compounding this shift is senior management’s inability to acknowledge and accept that this advantage is now gone).
Being the market leader also gives you a ton of customers, at least significantly more than your competition. That’s the real hidden advantage of being so dominant. Business at its core is always about the transaction. Always. With greater numbers (more transactions) nearly everything works to your advantage. As information becomes the dominant differentiator for all companies, being market leader provides diametrically greater advantage – it helps you understand your customer better than your competition. Or at least you could understand them better. That is of course the challenge.
But how do you understand each individual customer when you have so many?
The answer lies in those fancy black cards they try to get ‘preferred’ customers to use. They don’t push them because it makes transactions easier at the register, it is because now they can track you and therefore understand you. They can see all the obvious things about you with relative ease: how often and what you purchase (customer lifetime value the one true metric), where you purchase (required in our discussion above), fluctuations by time-of-year (affects product strategy), consistency of store usage (affects store design and placement amongst other things), ect. When they intersect these numbers they can see more insightful information such as am I trending towards being a better or worst customer? And that answers our initial question.
Remember, they are a market leader. They don’t have to make me like them; they just have to make the majority of customers like them the majority of times. The advantages of a market leader will carry them forward, especially because they are a lifestyle brand. When they moved into their tertiary markets they not only entered a market that didn’t fit their value proposition, they also eroded their primary and secondary market customers.
This is not simple overexpansion. Which is the easy answer everyone will go for. It is vastly different. You can recover from overexpansion; this will kill your corporation.
The fancy black preferred customer cards worked in theory; in reality they failed. No one really buys into the proposed value proposition of having an extra credit card in their wallet making them more special. For a customer it just becomes something else to carry. So companies offer discounts for using them. But they can’t offer enough to make it worthwhile for the customer over time. The discount is essentially buying your consumer behavior data. It is priceless but they don’t want to pay for it because turning this priceless data into information is a weakness for most organizations – Starbucks included. They give up on understanding our behavior this way.
But the answer on how to make this work has finally arrived. What do you think it is???
David F. Giannetto, back after a long Christmas break to finish my third book!