Thursday, October 6, 2011

The 10,001 customer problem

The 10,001 customer problem is one of my favourite models of reality. There are two reasons I like it. One is that it seems to work and be instructive. The second is that, to the best of my knowledge, I invented it. A bit of vanity can’t be helped occasionally.

The idea is that most people or organisations are trying to manage a very large number of small relationships, and a very small number of big relationships. Imagine you are a petrol station manager. You have thousands of customers buying fuel, and you have to try to satisfy each of them, to make them buy a bit more or come back more often. And you have one fuel supplier, say Shell. Now where should you focus your energies? If you can persuade Shell to give you a bit of extra credit, or some support with discounting, or some improvement to the station, it can be worth thousands. The 10,000 can be worth thousands too, collectively. But to maximise bang for buck, the smart owner focuses on Shell.

There are examples everywhere. If you are a salesman, you can either try to sell to 10,000 customers, or alternatively you can try to convince your boss to reduce your target or give you a reward anyway because he likes you or thinks you are trying hard. As British Gas, you can either offer superior customer service, or secure some monopoly concession from the regulator. If you are Shell, you can either try to squeeze a bit more value out of 30,000 petrol stations, or alternatively secure one juicy exploration deal. As a Tesco store manager, you can display your milk beautifully, promote and advertise milk skilfully, price milk cleverly – or just squeeze another penny off milk from the buying department.

In each case, the smart people choose the few important relationships over the many smaller ones. But look more carefully. In most cases, the enterprise would be better served if the focus was on the many small relationships. The few, big relationships are often internal, are often a zero-sum game, and rarely create value for the system. We want people to innovate and create customer value outwards, but their incentives usually drive them inwards instead.

There it is, the 10,001 customer problem. As with many problems, recognising it is the first step towards solving it. To solve it, make sure rewards for the 10,000 are as big as possible, and for the one as small as possible. In the first example above, Shell can make its supply contracts fair, transparent and demonstrably non-negotiable. The sales manager can make KPI’s for his sales force as objective as possible, and the review system as unbiased as possible. The Gas regulator can be truly independent and pro-competition. Shell can create a retail division with a role only to grow sales in stations. And Tesco can remove buying price from the KPI’s of the store managers.

In the latter two cases, Shell will still make sure its best people are doing deals in Qatar, and Tesco will have their best people as buyers, but the organisational division will at least ensure that the 10,000 are not ignored completely. For what good is oil from Qatar without any outlets to sell it? And what is the only true basis for Tesco to get better supply prices than the power from scale emanating from its selling excellence? This demonstrates the second weakness with focusing on large relationships – even when it is productive at first, it tends to be unsustainable.

In this week’s Economist, I read of a study with one of the best demonstrations of the 10,001 customer problem I have ever seen, in the finance and economics section, entitled Money and Politics, link Someone has found a link between the amount of lobbying a firm does, relative to its size, and its share price performance. Believe it or not, the big lobbyers do better.

Isn’t this priceless? Firms indeed do better (in the short term) focusing on the one big relationship, in this case a regulator, than getting on with the boring business of caring for real customers. British Gas, keep up the crap service, you know the regulator is the real game in town. And, true to form, lobbying is internal and non-productive to the wider economy.

This study was from the US. It is no surprise the growth and innovation have slowed – companies are rewarded not for that, but instead for buying lunch for a congressman. I wonder if the correlation is as strong in Europe? My guess would be that is very high in Greece or Italy but lower in Holland or Sweden or Germany. Nellie Kroes as competition commissioner probably did more to foster European growth than any other individual – more power to her.

Russia and communist countries are built on the power of lobbying and patronage. This is arguably what ultimately makes the system uncompetitive and ultimately unsustainable. What about China? Once the demographic dividend has worked its way through, will the propensity for patronage kill their growth too?

Just like in a firm, a country can address the 10,001 customer problem too. Transparent, independent regulation. Keeping politicians out of the way. Tough anti-monopoly laws. Support for small businesses and plurality. Training in customer facing skills over political ones. Banning or heavily restricting lobbying, or pricing it out of the market? Taking the money out of politics.

This could be a winning business and industry policy. And, sorry Ed Miliband, it is the diametric opposite of what you were proposing last week, which would be a dream world for lobbyists. Wrong, wrong, wrong.

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