How Well Do You Know Your Core Customers?

HANNAH BATES: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business. Who are your primary customers? Harvard Business School professor Robert Simons says that’s the most important question of your strategy – and the hardest to answer. Simons says that many firms make the mistake of defining their customers too broadly.  To succeed, you have to target your resources at the people who really drive the most value. In this episode you’ll learn how to accurately define your primary customers using factors like your firm’s culture, your core capabilities, and where you get the most profit, and you’ll learn how to allocate resources for secondary and tertiary customers. This episode originally aired on HBR IdeaCast in March 2014. Just a note – we recorded this by phone. While the audio quality isn’t great, the conversation is. I think you’ll enjoy it. Here it is.

SARAH GREEN: Welcome to the HBR IdeaCast. I’m Sarah Green. I’m talking today with Robert Simons, Harvard Business School professor and author of the recent HBR article “Choosing the Right Customer, The First Step in a Winning Strategy”. Bob, thanks so much for talking with us today.

ROBERT SIMONS: Well, it’s my pleasure.

SARAH GREEN: So I have to ask you, you start the article by discussing several different definitions of what a customer could be, which a little bit surprised me. I mean, why go to that trouble today to define what a customer is? Don’t we know?

ROBERT SIMONS: Well, it turns out, I think we do not. Or maybe the other way to think of it is we too often describe almost everyone as a customer. And this has come through very much with my work with companies and at Harvard education programs that we’ve fallen into what can be seen as on one hand, a very inclusive habit of calling every constituent of the firm a customer. And sometimes even– well, I shouldn’t say sometimes– I would say most companies actually use the word customer internally. So that Manufacturing is a Department of R&D, and the HR department has customers all throughout the business. But I’ve discovered that the very skilled managers who are sensitive to the competitive effects of that typically will not allow it. So part of the reason for writing this article was to alert people of the importance of having clarity as to who the primary customer was, really that one individual or group that unlocks value in the firm.

SARAH GREEN: Now before we get into more on that primary customer, I’m just curious, why is it so tempting for us to keep the definition of customer so broad?

ROBERT SIMONS: Well, it’s a great question. And I think you’re exactly right. Often, it’s the case that you don’t want to offend or exclude anyone. And it seems to be, well, why not just do it? If it will make someone feel more important or make them feel like they’re part of the value proposition and they’ll feel good about themselves, why don’t we just call them a customer? And on the face of it, nothing wrong with it. But of course, resources are limited. Attention is limited. And the more people we call customers, the more we’re diffusing resources and attention over all kinds of different entities and constituents that are not really at the core of the business.

SARAH GREEN: So in that case, to bring some narrow focus to this, with so many different competing potential customers, how do we know which customers ought to be the primary customer?

ROBERT SIMONS: Well, this is the million dollar question. And I would argue that, in fact, this is probably the most important question of your strategy. So there’s not a one size fits all or generalization. And different firms in the same industry will make very different choices how to do this. And as I argue in the article, once you’ve made that decision, you’ve got to put all your resources around it. Now to your question, typically when we look at companies who have done this well, they really have a sense, in the background, in terms of their history and culture, what I call perspective. And if you look at, whether it’s Amazon, or whether you look at Walmart, Apple, there is the history, a sense of the past, the preferences of leaders that define what they like to do, what they don’t like to do. The second issue you look at is the core capabilities or competence of the business. And of course, some are very good at logistics. Some are good at technology. Some are good at brand marketing. And you have to pick and choose your battles. And the third piece of the puzzle, the third piece of the equation, is where you expect you can get the most profit. And some customers will be able to give you high margins, some will not. And this very much comes to your ability to play in the marketplace, what the power structure of the market looks like, where you think you can extract the maximum value.

SARAH GREEN: Now you mentioned a couple companies there, including Amazon. And I was wondering if you could just walk us through some of the kinds of choices you were just talking about, but with the case study of Amazon.

ROBERT SIMONS: Well, Amazon is an interesting story, because I think all of us know Amazon. And probably you would realize, as well, that Amazon probably has the highest customer loyalty of any company in America. Now it could be, and if you think of the business itself, they could be focusing on the consumers who buy the products. They’ve got related party sellers who host on the website. They’ve got enterprises they deal with and content providers. And so if you look at their written material in the annual report, they will talk about all of these different constituents. But they are crystal clear. And really, Amazon is a great example that they always and everywhere focus on the consumer. And what that means is they will put the needs of the consumers ahead of third parties on their websites. They will put the needs of consumers ahead of their own term profit requirements. They will bend over backwards trying to always put the consumer first and allocate maximum resources to the consumer. And because of that, many, many people will time and again choose Amazon as the point of purchase, because they’re easy to do business with. The return policies are so generous. The website gives so much information, not only about products you’re purchasing, but what competitors are offering, where you might buy it more cheaply. And it’s turned out to be very much a winning strategy for them.

SARAH GREEN: Now in a case like that, I get that you have to focus on a primary customer. But how do you know how much attention to give to your secondary or tertiary customers? I mean, is it all or nothing, or do you still have to balance it out?

ROBERT SIMONS: It’s a great question, because none of this is to suggest that all the other constituents in the value proposition are unimportant. But just as you realize that if you argue– if I argue that our objective is to maximize the resources that we apply to customers, then the flip side of that is you should minimize resources that go to everything else. Now having said that, I need to be very careful here, because what you’re trying to do is give all the other constituents of the value proposition, the value equation, enough resources to do what they need to do, but not a penny more. Because what you’re trying to do is find that margin where you can take any additional money, any additional resources, and apply it to the customer. And why this is so important is in many, many companies, a lot of support groups, staff groups, they are always asking for more resources. They’re always trying to build larger empires. And you’ll find companies like Amazon push very hard against that. And their theory is, if we can keep that at its absolute minimum, then we can free up resources that we can apply to our customer. It is the case, though, that depending on the business, some of these support groups, some of these other units, may need a lot of resources. So if you’re in a business, for example, where human resources are important, if you’re a human capital type organization, consulting firm, investment bank, you would put a lot of resources into your HR function. But even there, what you’re trying to do is find out how can we give them just enough to get their job done and then take the rest and put the maximum resources against their customers.

SARAH GREEN: Now, in a case like that, where you then have sort of made the bet and you’ve moved ahead, how can you be confident knowing that you’ve made the right choice?

ROBERT SIMONS: This is something you always have to be testing. And I think companies that make the choice and deciding if your customer may be looking for differentiation, premium features, or lowest possible cost, or customized service, and you allocate all the resources necessary to meet that customer’s needs, if you execute well, you should do just fine. Now to your question, and where this also leads, is nothing is stable over time. So you’ve got to build up some kind of interactive systems, control systems that are constantly gathering information from the marketplace, what your customers value in, what competitors are doing, how technology is changing, and use that information to come back up to keep testing whether or not that choice remains valid.

SARAH GREEN: Now, additional question about that. Say you’re really afraid of making the wrong choice. Is it worse to make no choice and sort of keep peanut buttering everything around? Or is it worth to make a bad bet and choose one customer, but maybe it wasn’t the ideal one?

ROBERT SIMONS: Well, it’s hard to generalize on that answer. I think companies in emerging industries, certainly in many technology start-ups, they don’t want to make the big bet. They want to stay fluid, flexible, experiment. And I think you can do that for a while. But I think over time, as the more focused, determined competitors enter the space, whether it’s an Amazon or a Google or whoever it might be, if you haven’t made that choice, I think you end up being an also ran. You end up being left behind. Now to the second part of the question, if you’ve made the wrong choice, if you’ve done the analysis properly, there’s no reason you have to make the wrong choice. There’s enough, typically enough, room in any market that different companies can serve different customers. And as long as you’re clear how you’re making that choice, where you’re going to put resources, you’re going to be very tough to beat. And I should say on that thought, this whole concept only becomes important if you’re operating in a highly competitive market, which is to say that there’s some other business trying to steal your customers, your best people. If you have a monopoly position or if you’re working for a government agency, you don’t have to worry about any of this.

SARAH GREEN: Well, let’s talk a little bit more about how this plays out in different industries, because we have been talking a lot so far about the tech industry. But how does this shake out in maybe some industries that might not behave quite the same way?

ROBERT SIMONS: Well, this will be true for any industry. Think of the beauty industry. Mary Kay is a great example of this. They have to decide in that business who they should choose as their primary customer. And the choices they have are the consumers, who actually buy and utilize the products, or the independent beauty consultants that are part of the delivery system, the distribution channel. And Mary Kay has very clearly and very carefully chosen independent beauty consultants as its primary customer. And what they do is they have built their entire organization to meet and exceed the needs of those beauty consultants, with the idea that if they can ensure the beauty consultants prosper, are well trained, are highly motivated, they in turn will reach out and do a good job attracting and selling the products to the consumers. And because of the strategy, Mary Kay has gone from 175,000 beauty consultants in the mid-’80s to something like 2 and 1/2 million beauty consultants today in 39 countries. And they’ve done it. They’ve prospered by having real clarity as to who their primary customer is, putting all the resources on that customer. That will be very different if you went to a L’Oreal or a Bobby Brown or somewhere, where they would have much more focus on the consumer as the end customer, and they would put much more resources around advertising, trying to appeal directly to that end consumer.

SARAH GREEN: So once you know who your ideal customer should be, how do you know what’s really important to them? Because sometimes the customers themselves don’t even seem to know.

ROBERT SIMONS: Again, it’s a great question. And so once you make the bet, of course, that’s not enough. Because the only reason, in fact, you need to know who your primary customer is is so you can be sure you’ve done a good job allocating resources in a way that meets the needs of that customer. And a necessary condition, then, of course, is you actually understand what it is that customer needs. And so different companies have different ways of doing it. If you look at Federal Express, they bring their customers in for two-day customer summits twice a year. And they really ask them, what are we doing that you value? But importantly, what are our competitors doing a better job than us. And so how can we allocate resources? Companies like Google, a tremendous amount of time in the lab working with individual users of the product, trying to understand how different colors or arrangements of the user interface affect eye movements and things of this nature. Other companies, Henkel in Germany, the CEO has set up the TOPS program, where every executive in the company is responsible for interacting on a regular basis with the senior buyers of all their major companies. Proctor and Gamble sends people out to actually go on shopping trips and sit around the dinner table with consumers, trying to understand what aspects of the product they value and how to ensure that they’re meeting those needs.

SARAH GREEN: Well, Bob, that’s an amazing list of examples. Thank you so much for talking with us today.

ROBERT SIMONS: Well, I am very pleased to do it. Thank you.

HANNAH BATES: That was Harvard Business School professor Robert Simons in conversation with Sarah Green on the HBR IdeaCast.  We’ll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. We’re a production of the Harvard Business Review. If you want more articles, case studies, books, and videos like this, find it all at HBR dot org. This episode was produced by Anne Saini, and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.