Wednesday, July 11, 2007

Getting the customers you deserve

I pointed out that Canon has a better class of customers than its competitors. Today, I read about Sprint's efforts to improve customer quality by releasing problem customers from their contracts. A customer that calls support several times a day is clearly a customer that is not worth keeping. The letter makes the point a bit more lightly: "While we have worked to resolve your issues and questions to the best of our ability, the number of inquiries you have made to us during this time has led us to determine that we are unable to meet your wireless needs." One imagines these customers will be relieved to be let off the hook as well.

Sometimes companies ought to be selective in the people they take money from in order to avoid lower profit customers. Cutting off problem clients may be too extreme, but there are ways to attract "good" customers and avoid the bad. For instance, targeted advertising or limiting service to certain regions. Insurance companies and lenders often reject potential clients based on risk assessment. But the simplest solution is to charge higher prices. It isn't snobbish. People who pay more tend to be better customers if only because they are more profitable upfront.

With that in mind, let's turn to the mattress industry, which is in a rough patch due to the slowdown in home sales. Since mattress purchases can be delayed, consumers may chose to wait if they are worried about their financial future. As a result, mattress companies face the prospect of slowing sales. Select Comfort has refused to lower prices in order to boost sales and instead has focused on improving marketing and product features. On the other hand, Sealy has been offering discounts that average over 10%. As a result, Sealy's sold more and Select Comfort sold fewer mattresses.

Score one for Sealy, right? Not exactly. When you buy a mattress you are paying for the mattress itself, the brand on the label, possibly status, a short trial period, and a warranty of 10 to 20 years. In exchange, the company gets paid a premium upfront. If they are lucky, they won't hear from the customer for the next decade or so when they are ready to buy another bed. A really good customer might buy the company's bed for their children and vacation home, and tell all their friends about what a great mattress they bought. But for every good customer, there are several disgruntled customers. Bad reviews are one thing, but Select Comfort also warns, "We face an inherent business risk of exposure to product liability claims in the event that the use of any of our products is alleged to have resulted in personal injury or property damage."

Besides improving the product, the best defense against unsatisfied and litigious customers a company can deploy is to maximize the profit of the initial sale. Select Comfort is one part manufacturer, one part marketer, one part retailer, and one part insurer for its own products. Like any insurer, the temptation to write unprofitable policies during down markets can be difficult to resist. But resist it must or risk oversized losses for the sake of a few quarters of undersized earnings.


Anonymous said...

..."to maximize the profit of the initial sale."

And how do you do that? Well. As you mentioned. You can cut the costs of operating a business by controlling the aspects from manufacturing to retailer.
As for the Select Comfort Corporation. There are some ways that are effective. But that is for another time. Some practices are not as effective or even good business practice. And when any company takes the wrong direction, it is time that tells the story.
Even though the Company has done tremendous in the past, the stock has plummeted within the last 3years. Yet they are still opening up more stores without the consideration for cannibalization.
You have your sales workforce accountable for and document every 20 minutes of your workday. (just ask a salesperson) The retail salesperson's task has now been redefined to more of an administrative and telemarketing position. This is diverting their main focus away from customer in the store while they're trying to uphold this new quota. While increasing the workload with these tasks, they are increasing the budgets as well. Most stores can only attain less than 50% of their illusive goals set for them. .. Look at William R. McLaughlin's erroneous growth projections that were not attained. And that will answer the reason for a very low employee moral and a MUCH higher than normal employee turnover. Most other retail organizations would be embarrassed to admit this. But it's even admitted on one of their '06 training videos! Their 'NEW' direction is more focused on this well outdated "Six-Sigma" routine and is micro managing their sales force to extinction. That means the salespeople are being replaced MUCH quicker than the speed of 'normal attrition'.
The company is focusing on a 'what is wrong with our salespeople' mentality, instead of more appropriately applying the focus on the changing economy. They should be focusing on the current consumer spending style by adaptively seeking out new marketing and pricing solutions. And take more direct involvement and accountability with the salespeople in a pro-active way which they have not done for to many years. They are so disconnected with their "salesforce" that they do not have a clue what they think of the company right now. There needs to be some serious re-engineering for this company, and fast, before it's too late.
Great product. Great salespeople. Poor management.
aka. ex-SC employee

Jon Ericson said...

Thanks for the insight. From an investor's perspective, high turnover can be costly. It's doubly costly if the sales staff is being held accountable for situations outside of their control.

Anonymous said...

If it's not already known. This article is a prime example of what is partially made public. You can't cover up all the poor business practices and expect the investor to miss the signs.