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Follow the Money!
Buying patterns and the economy are constantly changing. Some products and categories that were popular are not anymore. You cannot control your customers’ tastes or the economy. But if you follow how the money is being spent, you can make a lot more! Unlike clicks and page views, buying patterns are very reliable as they are based on actual sales. Money changed hands. An economic transaction occurred!
Track sales transactions to understand your customer’s buying patterns, establish a more relevant product mix, satisfy more people and sell more.
Your customers speak to you when they buy. If you can listen to what your customer wants you can manage the buying process and you can influence and even control it. “Why would I want to do that?” you may ask. By better understanding your customer buying patterns you can establish a more relevant product mix that will satisfy more people. You can also guide them to more profitable choices at point of sale based on product availability or close substitution. You will satisfy more people and sell more. You will also make it easy for them to buy your products and services.
The Analytics of Buying Patterns
First, take the guessing out of the equation. You need to know what your customers are purchasing and what they want to buy from you in the future. This intelligence is available in your sales transaction data. Customers buy your products and services in distinct patterns.
Products and services have become more complex and companies offer a dizzying array of choices. However, with analytics the sales data will reveal popular combinations of choices. These popular combinations are guides on how you can make your products and services easier to buy. How you can make is easier for customers to do business with you.
There is also the issue of product profitability. Some of the choice combinations are more profitable than other. Again the analytics will reveal which combinations are moneymakers, and which ones not! Once again – if you have access to this intelligence, you can stock the right product mix and guide customer to better choices. If you stock inventory in your store you can leverage this intelligence to plan an optimal inventory mix. That means making the most money from the least amount of inventory investment while satisfying your customers’ needs.
Whether you are running an online store or a brick ‘n mortar store – this is a key principle to selling more and maximizing your capital utilization.
Do Customer Buying Patterns Exist?
Customers have to make choices in order to buy configurable products. Do they make these choices at random, or are there patterns? When we look at the sales history for a configurable product, like a car or a computer, can we tell if customers have just been flipping coins and rolling dice? Or do their choices hang together and make sense? To answer this question, we would have to look at how they buy combinations of options. In the previous post, I took a pizza as a simple configurable product, and looked at how customers ordered pairs of toppings. Just by looking at the sales numbers we could detect that the selection of pineapple and Canadian bacon are not independent. Even if we had never heard of a Hawaiian Pizza, we could discover it in the data.
Even more information is hidden in combinations of three toppings at a time, or four toppings at a time. Any combination of toppings will have appeared on some of the pizzas that have been sold (or maybe none). The relative popularities of all the different combinations has a clear message: customers are not flipping coins. Some toppings naturally go together, and others do not. Pepperoni, broccoli, and anchovies is just unlikely. If a particular pizza restaurant has a few “house specials”, like the Meat Lovers and the Veggie Delight, we can see them in the data, even if we don’t know their names.
What is true of the pizza is also true of other configurable products: computers, trucks, tractors, lighting fixtures, industrial fans, and so on. All products that have variety. Customers make choices, but not by rolling dice. There are combinations that go together and combinations that do not. A pizza maker can juggle the preferences of his customers in his head. But when a product has 30 or more features, intuition is overwhelmed. The number of combinations explodes so fast that the unaided human mind can’t see the patterns. At this point, mathematical models and intense number crunching can reveal the patterns and let the product manager for a line of trucks be as confident as a pizza maker.
Do Customer Buying Patterns Exist?
Buying patterns are real, and they manifest themselves in how customers buy combinations of options. With the computing power we have available today we can detect and capture them. These patterns can then be used to design “house specials”, forecast future sales, and guide customers to what we want to sell them.
So, who else is talking about customer buying patterns?
Intel Talks about Changing technology buying patterns
Customer Buying Patterns have Changed. What’s Your Plan?
An entire report that summarizes the results of a consumer usage and purchasing pattern survey conducted in March of 2007. The survey was conducted with In-Stat’s Technology Adoption Panel (TAP) — a dynamic, online panel of more than 19,000 technology users and decision makers. Over 1,400 technology users responded to this focused survey.
Findings in this report include consumers’ time spent on PCs, when they last purchased a personal-use PC, the PC’s features/form factor/usage, the desired features of future PC purchases, changes in usage patterns, and consumers’ thoughts about new technologies.
The changing patterns include -
- When consumers are likely to make their next PC purchase.
- The features consumers state they want
- The features consumers state they really want, based on changes in their usage/buying patterns.
- How consumers view new technologies
However – buying patterns are constantly changing. As social networking grows, we are watching new markets emerge every day. There is gold for companies who can continually detect these patterns and offer the right products and feature mix.
Self-Service simplifies Product Offerings and increases Margins
Self service is a term we all know, such as pay-at-the-pump gas and self-checkout stations at some grocery stores, and now more obscure things like video game kiosks by GameFly, but the true tidal wave of self-service hasn’t even started, and it’s going to be good for both the consumer and the manufacturer, if done right.
Self Service Grocery Scanner
When you checkout your soda and cereal by swiping products across a scanner at the auto-checkout stations, there isn’t much complexity other than when you get a problem with the scanner reading a smudged bar code or trying to locate the button for ‘snap beans’ when you put those on the scale. The transaction is smooth, quick and you are in control, which is a good feeling as a buyer, you are not being sold, you are buying just what you want, quickly and easily.
But what happens if you try to buy a “configurable product“? In the grocery store, the only thing configurable is the weight of produce, but other than that, the costs and configurations are set in stone and are detected by reading the bar codes. Easy to understand as the buyer and relatively easy to deal with as the seller. Configurable products are those where you have to make many choices before you can order the one product. Products like computers, cars and thousands of others where the buyer has to describe their preferences or choices so the product can be created and delivered. It’s even more complex in a B2B environment than it is in B2C, where the products available and choices are astronomical. Products like Lighting, Valves, Agriculture and Construction Equipment, Lifts, Electrical equipment, cooking equipment and conveyors have more choices and variants than you can imagine and that variety makes it hard to order, build and deliver efficiently.
Usually a large direct sales force is sent out with complex price books (sometimes online in PDF form) to sit with customers and prospects and help them combine choices in hopefully valid ways. The choices a customer have to make are quite extensive, ranging from tens to hundreds of choices. Most of these choices the customer doesn’t care about, but they are required by the manufacturer just so they can build a valid product. Customers care about the few things that matter to them but after that, they will just choose things that “seem to make sense” just to complete the order. Sometimes they don’t even do that, they get so frustrated with 60 more questions about features and options on the product (many of which they don’t understand) that they walk away.
In some cases companies believe that putting in a configurator is the solution to their problem. Configurator’s automate the order process by ensuring that the order is VALID. The engineering and marketing rules that drive what can be built and offered are setup in a configurator such that the user ordering the product is led through valid questions and end up with a build-able product. Now this product may be build-able but it also may be a one-off low-margin brand new SKU that manufacturing hasn’t built before and requires some parts they aren’t carrying at this time. All this for something that was only 2 choices from a very popular configuration. And those 2 differences only happened because the customer was asked 20 more questions after they entered the 5 things they cared about. They chose as best they could, but without any guidance or suggestions, ended up on a new SKU which will ultimately explode into huge numbers of parts and processes to support the new SKU.
Now if the customer only had to enter the 5 things they cared about and the system recommended the combination of other choices such that the customer’s price limit was met and the configuration wasn’t a new SKU and the SKU had a good margin, then it would have been a win-win for everyone. And the whole process could be complete quickly and easily. The customer wouldn’t have to answer any other questions and would feel that same feeling that you do when you swipe your can of soup across the scanner at the market. The manufacturer wins as well because the customer was guided toward an existing configuration so the cost of creating and supporting a new SKU was avoided. It’s happening now with recommendation engines that leverage buying patterns to suggest full configurations based on the few attributes a customer gives it. Just like Amazon can recommend other books you might want to read based on the current “fly fishing” book you are looking at now, suggestion engines can be utilized to provide this convenience for much more complex products.
That’s the self-service tidal wave that’s coming, when all products, not matter how complicated can be ordered by simply asking for the attributes that YOU care about, what your price limit is and then Voila! it’s done. Customers will order more from companies that offer this convenience. Just think about how often you walk into the gas station to pay as opposed to pay at the pump. And if you had two stations to fill up at, one was pay at the pump and the other required you stand in line after pumping the gas, which do you think you would most often go to? Simplification is good for everyone, and profitable too.
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Q&A with Mark Gottfredson, Bain & Company
In today’s post, we talk to Mark Gottfredson about product complexity and customer choice.
Emcien: It’s natural for companies to add products and features to keep customers happy. What are the downfalls?
MG: The challenge of adding complexity is it’s the most natural thing in the world. Marketing comes up with new ideas for products or configurations to get the next bit of market share or a little bit more share of wallet. But most companies aren’t so good at retiring products; they don’t have a similarly robust process for taking things out of the catalog that no longer sell, or sell only small amounts. They don’t do a good job of balancing.
Most decisions we make are based on incremental economics. Each decision makes sense in its own right, but the costs of complexity tend to grow systemically. You can’t tie them to a single product decision. Take tinted windshields, for example, that you can sell as an option for $120 and 40% of customers will buy. Assuming the costs of tinting the windshield including inventory impacts, etc., are $9, it will always make sense to add the option. By itself, it is a rational decision, but when coupled with hundreds of other decisions, we end up with dozens of options like power windows, 13 exterior colors, 10 interior colors, 7 different radio and speaker combinations, etc. Eventually, the vehicle can be made in 10 billion different ways, and you don’t know what the next order will be. Since you can’t effectively forecast anymore, you get frustrated and buy a $50 million forecasting module to try to manage all the complexity. You have difficulty balancing your lines, build inventory and increase supply chain costs. Unfortunately, when most companies finally decide to reduce complexity, they “cut off the tail” of low-running options or SKUs. But they don’t remove the systemic costs, and they don’t see any benefits.
Emcien: Companies often overestimate the value buyers place on having many choices. What are the downsides?
MG: Go to a banking website like Citibank or Bank of America. The site describes itself as a full-service bank that has all the items you could want. There are long lists of products like credit cards with different reward programs, as if to say, “We have a lot of products. Surely there’s one here for you. Good luck finding it.” High complexity is a priori evidence that you don’t know what your customers want.
Emcien: When do fewer choices mean higher sales?
MG: When you understand customers. Dell understands customers well. Dell’s website is Spartan; there are just a few choices. If you choose a desktop, up pops three computers: high, medium and low cost. These three configurations are what your segment – home, professional, government – wants. You can customize each one, but you’ll make it as expensive as the next higher model, so then you switch to that and you’re still buying a standard configuration. Every time I have seen complexity reduction done right, sales have increased.
Emcien: How do overoptimistic sales expectations help to spread complexity?
MG: What happens is sales looks for a gimmick that gets them the next sale. Many manufacturers think whatever’s thrown over the wall from product management and sales must be good to go. And sales thinks more is better! Engineers love to engineer; they’ll give you complexity. Most firms build complexity systematically into operations, and then they build systems to handle the complexity, and that’s high cost.
Companies should think about what business would be like with a zero-complexity baseline – how they would operate if they offered just one product or service. The purpose of zero-based thinking isn’t to eradicate complexity; it’s an exercise to reimagine the business with the optimum amount of complexity.
Mark Gottfredson is a director of Bain & Company’s office in Dallas, Texas, which he founded in 1990. Over the past 26 years, he has advised chief executives and top-level managers in a wide range of industries. Currently, he serves as the Global Head of Bain’s Performance Improvement Practice and is also a leader in the firm’s business strategy, airline, financial services, manufacturing and energy practices.
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Arm your salespeople to make the sale
I was talking to an executive at Oracle, and he told me that CRM is entering a new phase. Salespeople are the revenue generators of a company. Current CRM tools have served the purpose of helping salespeople organize their customers’ contacts and manage the sales process and pipeline, but this isn’t enough.
Your salespeople are representing and selling your product. Customers who want to buy your product typically list a few things they want and look to the salesperson to guide them. The salesperson is their advisor on your product offering. The salesperson is expected to know the product and suggest good choices for the customer. Is your salesperson equipped to do that?
There was a time when life was simpler and products were simpler. The customer said, “I want a 17″ TV.” The salesperson could look at what he had stocked and reply, “I have a 19″ I can give you for the same price.” Wow! Done!
Today, even the best salespeople don’t stay at one job for long. They move, selling what sells. Training sales newbies on a product is a big challenge for companies, and the cost of the salesperson not knowing the product he’s selling is VERY HIGH. As many as four out of five quotes are lost because customers weren’t guided to a good product selection. You can fill this gap by arming your salespeople with tools and product knowledge that will help them advise customers effectively on your product. Your company needs salespeople to have that capability so you can make money on the stuff they sell!
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Variation is valuable
Advances in interconnection technologies are driving an increasingly demand-driven market. Customers are learning to expect to get what they want, when they want it, how they want it. And they tell you in each and every interaction they have with your company, or not. In a demand-driven world, increasing product variation and complexity in your business model is inevitable. Left untended, your business can become a tangled web of counterproductive business strategies with a dense portfolio of product families comprising thousands, even millions, of variants.
However, make no mistake, variation is valuable. To deny complexity or view the long tail of product variation as a management failure is to deny diversity of the world in which we make our living. Eliminate complexity in your product offer and you will find yourself competing with boatloads of product from China, India or any of a number of low-wage production markets.
The “keep it simple” principle is the root of good management. However, as Oliver Wendell Holmes, Jr. has observed, “I would not give a fig for the simplicity this side of complexity, but I would give my life for the simplicity on the other side of complexity,” it matters which form of simplicity you choose. The wrong simple answer is to try to focus on the 20% of product variants that make up 80% of your revenue, the head of the ubiquitous Pareto distribution, and find ways to minimize or eliminate the so-called unprofitable remaining 80% of product variants that lurk in the tail. Hello commodity, goodbye margins. The right simple answer is to deliver Intelligent Variation based on the voice of the customer shouting through the many interactions they have with you each and every day.
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Guiding salespeople
We have talked a lot about how configurations and complexity affect an organization, but often we forget to look at customer-facing roles. While managing product complexity is important for product teams and production teams, it should also extend to the sales force.
At the end of the day, the number one mission for your sales team is to SELL. And often this push for revenue brings additional complexity back into the organization through new one-off configurations salespeople have promised to customers. Even worse is that these configurations might be one or two small changes away from a very popular and maybe more profitable configuration.
Product configurations can be used to shape not only customer demand but also sales behavior. Using a set of pre-ranked configurations based on metrics such as margin, days to sell or current inventory level, you can offer your sales team a structured plan that incents sales through tiered commissions.
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The quality connection
Recently I wrote about quality rankings for automotive manufacturers and the perception of these rankings in the market. While the marketing teams at these companies must shoulder the burden to convince consumers about their products’ quality, there is a very real connection between product quality and configuration management.
In many industries where products have grown over time with constant additions of new features and flexibility to allow customers to build to order, the level of complexity is staggering. Often the number of configurations sold on an annual basis is surprisingly close to the total units sold for that same period. This “snowflake” situation is one of the worst possible scenarios in product complexity as each unit has its own signature. Obviously, the production of these products also requires flexibility in manufacturing. This may result in reduced use of automation, and often it leads to units being reconfigured where components installed during one step are either removed or modified in a later step due to a unique situation.
These one-off manufacturing processes open the door for product quality issues due to fewer controls during production. Put simply, if I can reduce the number of different things that must be done during production I should be able to do those things better.
So product management teams have direct input on product quality via product complexity. Managing the product option mix to reduce the overall number of configurations can promote the increased quality that all manufacturers are looking for.
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Help the sales team help the customer
This morning I was talking to the VP of business process improvement for a company that sells industrial machinery. Their products are highly configurable. She told me that every year they have 50% new configurations they have never seen before. The number of choices on their products has grown over time. ”A salesperson can’t know everything about the product,” she said. “Customers want a few choices, and before you know it, the quote has crept into a configuration that’s bad for the customer and bad for us. “
As the VP explained, the biggest opportunity for complexity management is at the point of taking an order. A customer wants to be guided to complete their order. This concept is called Demand Shaping. There are myriad ways a configurable product can be ordered. However, each customer cares only about a few features that are of high importance to him or her.
Understand product choices to manage complexity
A product is a collection of features, and each feature has alternative options. Understanding features helps determine strategies such as late staging. Some features are tangible, material things about the product: which engine, how much memory, Bluetooth. Other features are abstract or soft, like geographic region or sales channel. Among tangible features, distinctions can be made on the basis of the degree of postponement possible.
Pin-on features can be added to the product at the last minute, after a specific order is received. The classic example is the power cord for a printer. Hewlett-Packard avoided having different printers for different countries by attaching different power cords to a common printer.
Reconfigurable features can be changed after a real customer order is received. There are literally hundreds of different kinds of tractor tires, depending on the work a tractor will be used for. A tractor has to be built with some kind of tire just so it can be driven off the assembly line, and it’s easy to change the tires to suit the customer.
Line features, by contrast, are so basic to the product that they can’t be changed, such as the chassis or transmission for a vehicle or the motherboard for a computer.
Abstract or soft features are really attributes of the order rather than of the product itself. But they may be very valuable in understanding customer demand. The pattern of choices for tangible features may vary considerably by geographic region, which is a soft feature. For example, engine block heaters are popular in North Dakota and convertibles are popular in Florida, but convertibles with engine block heaters are almost non-existent.
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