Managing Customers Through Economic Cycles

By John McKean

Whether you are a global Fortune 500 organization or a small business Managing Customers Through Economic Cycles show you how to optimize your business's sales and marketing approaches specific to survive and thrive in each economic cycle and transition.

"The business case for continuing to invest in service and innovation can be compromised by an economic downturn. McKean clearly lays out the case for weathering the economic storm by achieving a careful balance of investment in the areas that truly matter – and continually using data to reinforce the idea that business can be more science than art, after all."
—Barbara Higgins, Vice-President, Worldwide Contact Centers, United Airlines

"John McKean's work has served as practical guide for me and my teammates. I have seen countless examples of businesses managing their customers’ experience with a short term economic view. If the right principles are employed consistently, as John teaches us, we can create the right emotional experience that delivers growth and loyalty – as well as the improved operating leverage – that are needed in good times and in tough times. Consistency of values and experiences keeps companies from having to be reactionary and short sighted in a down economy. Thanks, John, for another practical lesson."
—John Quinn, former Customer Service and Support Executive, Bank of America

"In good times and bad, forecasting where business is headed is both art and science. As John McKean so eloquently states, marrying data driven analytics with consumer insight is critical for managing through tough economic cycles. This book is a must read for anyone intent on driving greater profitability and consistently out-behaving the competition."
—Joni Newkirk, CEO, Integrated Insight, Inc., former SVP, Business Insight & Improvement, Walt Disney Parks & Resorts

"John McKean continues his pursuit of the profitable customer through the turbulent world of boom and bust. His book provides valuable insights into how businesses survive and thrive in a volatile economic climate."
—Trevor Dukes, Business Systems, WH Smith

"The rise of customer power coupled with challenging economic conditions demand that organizations leverage the power of the Internet and related technologies to stay relevant to their customers. As John McKean points out in his compelling new book, successful firms have built a core competency in leveraging information technology not only to survive economic transitions but thrive in an ever-changing economy."
—Erik Brynjolfsson, Professor, MIT Sloan School and co-author of Wired for Innovation: How Information Technology is Reshaping the Economy

"It would be hard to name a more relevant or timely topic for sales and marketing today than that of how to cope with economic downturns and upturns, and this is exactly the subject John McKean has insightfully tackled head-on in Managing Customers Through Economic Cycles."
—Don Peppers and Martha Rogers, Ph.D., Peppers & Rogers Group

• Language: English
• Publisher: Wiley
• Release date: Feb 18, 2010
• ISBN: 9780470662380

Book preview

1

Introduction

Business’s greatest customer opportunities and risks are determined by how well customers are managed through economic cycles. Despite the fact that 65% of a business’s existence is managing customers in hyper-competitive economic transitions, it is predominated by reactionary approaches and guesswork.

Whether it is how consumers change their buying behaviors or how businesses change their spending behavior through economic cycles and transitions, they both are predictable and addressable.

This book focuses on the unique business knowledge, skills, and underlying disciplines to enable any business to optimally address these distinct customer opportunities, challenges, and risks created as customers’ transition through economic cycles.

For the past decade, many industrialized nations have experienced strong growth with an unprecedented availability of financial resources. This fueled excess expenditures bordering on decadence. It was a sharp contrast to the Great Depression, the biggest crisis experienced by the world economy. Boom and bust are extremes in the continuum of economic cycles and each generates specific consumer behaviors.

If we hearken back to previous generations especially depression babies spending was characteristically stoic with patience and endurance toward one’s lifestyle, i.e. if they didn’t have it, they didn’t spend it.

This is in direct contrast to behaviors during these recent boom times. Consumers conspicuously consumed. They were able to leverage homes and other assets to gain access to extra money and so have been able to purchase more. However, they were also able to go further into debt. Credit cards have enabled us to spend more money than we actually earn. From a behavioral perspective, this has created an expectation of material entitlement beyond that which most generations could typically afford.

During 2008, the economy tanked. Real estate plummeted. People’s life savings were shattered, i.e. cut in half. Jobless claims reached a 26-year high. Consumers’ behaviors changed, and changed quickly.

What happened to businesses? What happened to their customers? Those businesses that were prepared and able to proactively use the economic turn as an opportunity flourished. Those that weren’t struggled to survive and in some cases, disappeared.

What was the difference?

That was the question we asked ourselves. So following the 2008 melt-down, we at the Centre for Information Based Competition started tracking:

• Consumer behavioral changes

• Business behavioral changes

• Businesses’ response to behavioral changes

• How business changed buying behavior.

And using that data determined which core business competencies were critical to sustained success during changing economic times.

Research methodology

The research was global in its nature. It crossed numerous industries including but not limited to: financial services, telco’s, retailers, travel, manufacturing, and consumer goods. Both small businesses and Fortune 100 companies were tracked. To that mix we added insights from consumers, business leaders, and economic forecasters.

Key findings

The research showed that there are three areas where successful and disappearing businesses differ:

• The first is in understanding the science of their customers’ buying behaviors. This includes knowing who their customers are and how they’ re feeling. It also includes how the drivers of a buying decision changes as economic factors change.

• Second is leveraging loyalty within their consumer base. This requires a thorough understanding of the different kinds of loyalty and the financial benefits of each.

• And third is maximizing the core business competencies to not only proactively adapt but to use the changes that occur within the economy.

Beyond these three key areas of difference, the research also illustrated how community is playing an ever-increasing role in the success of businesses. This includes the physical communities. It also includes the virtual community. It’s the latter that is having significant impact on how customers and businesses interact, particularly during these changing economic times.

Summary

Economic cycles have both boom and bust periods. Businesses seeking long-term success need to thrive in all economic environments. Those companies who continue to achieve this have done so by having their core business competencies focused on meeting the predictable customer changes in a way that continues to leverage loyalty.

Simple - but how do they do it?

We have split the book into 10 chapters (Chapter 1 being the Introduction, and Chapter 10 a Summary) to answer that question.

Chapter 2 - Predicting/Preparing for Economic Transitions: How businesses can best predict and then prepare for any economic transition or cycle.

Chapter 3 - Science of How Consumers’ Buying Changes over Cycles: How consumers’ buying changes relative to (a) reprioritization of needs, (b) changes in how they perceive value, (c) in the context of how economic conditions influence (a) and (b).

Chapter 4 - Consumer Loyalty Strengths/Vulnerabilities in Cycles: How different loyalty types endure varying economic conditions.

Chapter 5 - B2C Approaches for Dynamic Consumer Needs/Value Tradeoff: Proven consumer tactics optimized for different economic cycles.

Chapter 6 - B2B Approaches for Different Economic Cycles: Proven approaches, transformation strategies, and business case methodologies for economic conditions.

Chapter 7 - Mastering Information across Economic Cycles: Strategies and tactics for leveraging information to optimize business through economic transitions.

Chapter 8 - Managing the Employee Factor through Cycles: Strategies on managing employees through economic transitions and cycles.

Chapter 9 - Leveraging the Power of the Community (Physical and Online): Strategies and tactics for leveraging the physical business community as well as online communities.

By sharing our research learnings, we hope to help businesses get and keep customers through periods of boom and of bust.

2

Predicting/Preparing for Economic Transitions

Understanding the macroeconomics which drive business cycles is key to developing a relevant strategy to manage through economic cycles. This last economic contraction, while not totally unique, followed an understandable pattern over past economic history. In this last economic downturn, some equated the business dynamics to a hangover after a binge, i.e. economic contraction after a global liquidity binge.

Many parts of the world had experienced a long global liquidity bubble that was fueled in large part not only by home prices in the US but also in places like the UK, Spain, and Ireland. As well, factors of equity markets in places like China drove a big run-up in commodity prices not limited to oil (which may have represented the last hurrah of the liquidity bubble). Investors were looking for the next best place to put their funds as the housing market came crashing down.

We also saw a rise in oil prices from 2002 to 2007 driven via strong economic fundamentals. The end of that run was largely due to speculative commodity trading. This significant factor was intensified by the strong growth in China. As China came off a blistering run of expansion, investors started moving into commodities as the global economic conditions began to unravel.

Simultaneously, the binge on liquidity driven by greed came unraveled when the US financial markets began to fall apart. The US banks have had so many toxic securitized loans themselves that in itself would have been bad. But they had also sold such loans overseas to UK and European banks - e.g. in Austria, Sweden, and Spain. These banks in turn made loans to private sector borrowers in emerging Europe. Homeowners in places like Hungary started buying euro denominated mortgages, which added to the huge exposure of European banks and their subsidiaries. All these available funds for both lenders and borrowers encouraged everyone to take on risks - risks that they perceived to be very low.

Once the bottom started falling out of the real estate markets, the bottom fell out of the lending frenzy. Within regional markets, areas such as emerging Europe were spinning their own web of liquidity bubbles, e.g. Hungarian households were borrowing in euros and Swiss francs in hopes that they would hedge against exchange rate differentials.

This all may appear to be a unique perfect storm of economics … but it is not. History is full of financial and market calamities, which coincide with each other. It is a fact of business life. Bad economic and business cycles happen. Good economic and business cycles happen. All businesses can count on both in varying degrees of severity.

Historical examples

1620-1637 Tulip Mania¹

Tulip Mania (or Tulipomania) is an extraordinary event in the history of cut flowers. It refers to a period in the Netherlands, in the early 1600s, where speculation on tulip bulbs reached fever pitch resulting in extremely high prices being paid for single bulbs and the inevitable crash. People won or lost massive amounts of money gambling on the color of the flower produced by tulip bulbs, which in those days was unpredictable.

News of the massive profits speculators were making quickly spread, and by 1634 even tradespeople were becoming involved. One current day view on why this happened is that it was not caused by irrational speculation or greed, but rather by a Dutch parliamentary decree (originally sponsored by Dutch investors made wary by the Thirty Years War in progress) that made the purchase of tulip bulb futures contracts a fairly risk-free proposition.

Either way, this flood of new money caused prices to escalate rapidly in 1635, with many people buying on credit. By 1636 sales were structured by unofficial colleges or stock exchanges that held auctions at local inns. Speculation had also started on futures - in other words on the accessibility and price of bulbs at a specified future time.

It is problematical to convert seventeenth century tulip prices to modern currencies, as many were sold for livestock and houses. As an estimate, the average annual income in 1620 was about 150 Dutch florins. If we assume that this is comparable to $50,000, then in 1620, at the start of the tulip mania, a single bulb changed hands for about $330,000. Fifteen years later, in 1635, 40 bulbs were sold for 100 times this sum i.e. $33 million, or $825,000 per bulb. The record sale was in 1636 when a single bulb of Semper Augustus, a striped carmine and white variety, sold for between 5000 and 6000 florins (depending on the report you read), which equates to between $1.67 and $2 million. The actual price for this small bulb, thought not to be of flowering size, was 4600 florins plus a coach and two dapple-grey horses.

The bubble ruptured in February 1637 when the soaring prices could no longer be sustained and there was a huge sell-off. Prices plummeted and many people were financially destroyed. While official attempts were made to resolve the situation to the satisfaction of all parties, their efforts were in vain. In the end individuals were stuck with the bulbs they held at the end of the crash - no court would impose payment of a contract, since the debts were judged to be sustained through gambling, and therefore not enforceable by law.

This was not the only time in history when flowers became the object of frantic market speculation. Smaller booms followed with tulip bulbs in Istanbul in the early 1700s, and in the Netherlands with hyacinth bulbs in 1734, and gladioli in 1912.

1720 South Sea Bubble²

The South Sea Company was a British joint stock company that traded in South America during the eighteenth century. Founded in 1711, the company was granted a monopoly to do business in Spain’s South American colonies as part of a treaty during the War of Spanish Succession. In return, the company assumed the national debt England had built up during the war. Speculation in the company’s stock in 1720 led to a tremendous financial bubble known as the South Sea Bubble, which financially destroyed many. In spite of this it was restructured and continued to operate for more than a century following the Bubble.

In 1720, in return for a loan of £7 million to finance the war against France, the House of Lords passed the South Sea Bill, which permitted the South Sea Company a monopoly to do business with South America. The company underwrote the English national debt, which stood at £30 million, on a commitment of 5% interest from the government. Shares instantaneously rose to 10 times their value, speculation was rampant and a host of new companies, some fraudulent or just unrealistic, were launched. For example, one company was created to buy the Irish Bogs, another to manufacture a firearm to shoot square cannon balls and the most absurd of all For carrying-on an undertaking of great advantage but no-one to know what it is!! Incredibly £2000 was invested in this one! The country went crazy - stocks increased in all these new companies and other questionable schemes, and huge amounts of money were made. Then the bubble in London burst. The stocks crashed and people throughout the country lost their fortunes. Porters and ladies’ maids who had purchased their own expensive carriages became destitute almost overnight. The Clergy, Bishops and the gentry lost their life savings; the whole country suffered a shattering loss of money and property. Daily suicides were common. The naive mob, whose inherent greed had lain behind this mass hysteria for wealth, demanded revenge. The Postmaster General poisoned himself and his son, who was the Secretary of State, avoided blame by unexpectedly contracting smallpox and dying. The South Sea Company Directors were incarcerated and their acquired wealth forfeited. There were 462 members of the House of Commons and 112 Peers in the South Sea Company who participated in the crash. Frenzied bankers crowded Parliament and the Riot Act was read to return order. As a result of a Parliamentary inquiry, John Aislabie, Chancellor of the Exchequer, and several members of Parliament were barred in 1721.

As these two examples illustrate, going from boom to bust wasn’t necessarily about a lack of regulation or securitization. It wasn’t about some bizarre form of derivatives. It wasn’t caused by credit default swaps (CDS - credit derivative contract between two counterparties). It is easy to blame twenty-fi rst century capitalism or modern finance but when businesses look to the longer historical context of what happened, economic cycles are almost a guarantee for every generation or couple of generations. Whether the discussion falls to Japan’s crisis, the horrific South Korean financial crisis, Sweden (GDP dropped over 11% over three years), or Finland’s financial crisis, modern history is also littered with examples of financial boom and bust. We have a tendency to believe that these are exceptional economic times when economies go horribly south but in fact it is just the natural evolution of human beings and society. It was about human nature, greed, and follow the herd instincts.

Emotional anchors from economic cycles

As well as stimulating the greed and herd instinct behaviors, economic cycles create emotional anchors. Recognizing these emotional anchors (or legacies) of economic cycles is necessary in understanding how consumers as human beings will react to current and future economic cycles.

The economic downturn that is most indelibly marked on the older population of consumers is the Great Depression. This economic cycle has indelibly shaped their lives and how they purchase. Even though they have lived through many eras of prosperity, these consumers’ lives and how they stand was forever changed. For the over-30 population, most have experienced multiple years of prosperity and recessionary economies. The degree to which consumers’ buying patterns are changed by previous economies is dependent on the severity of the economic cycle as well as the spacing between the economic cycles.

As one can see from the sequence beginning in early 70s, the US recessions have been relatively short in duration, which has minimized the emotional anchors caused by the constricted economy. While the recessions below are designated as US recessions, most of them have worldwide economic effects because of how closely many countries are tied to the US economy and the US consumer.

• 1973-1975 - oil crisis, stock market crash:

• Recession Duration: 2 years

• Years of previous prosperity: 13 years

• Causes: A quadrupling of oil prices by OPEC coupled with high government spending due to the Vietnam War led to stagflation in the United States.

• 1980-1982

• Recession Duration: 2 years

• Years of previous prosperity: 7 years

• Causes: The Iranian Revolution sharply increased the price of oil around the world in 1979 resulting in the 1979 energy crisis. This was caused by the new regime in power in Iran, which exported oil at inconsistent intervals and at a lower volume, forcing prices to go up. Tight monetary policy in the United States to control inflation led to another recession. The changes were made largely because of inflation that was carried over from the previous decade due to the 1973 oil crisis and the 1979 energy crisis.

• 1990-1991

• Recession Duration: 1 year

• Years of previous prosperity: 10 years

• Causes: Industrial production and manufacturing trade sales increased in early 1991.

• 2001

• Recession Duration: 6 months

• Years of previous prosperity: 11 years

• Causes: The collapse of the dot-com bubble, the September 11th attacks, and accounting scandals contributed to a relatively mild contraction in the North American economy.

• 2007 (Dec)-current

• Recession Duration: ?

• Years of previous prosperity: 6 years

• Causes: The collapse of the housing market led to bank collapses in the US and Europe, causing the amount of available credit to be sharply curtailed, resulting in a massive liquidity crisis. In addition, oil prices were high, stock markets crashed worldwide, and a banking