The FTSE 100 has just reached a four year high, China is starting to open for business again, and the UK reported GDP growth of 0.1% in November rather than the anticipated decline. Well, that’s all right then, perhaps we shall avoid the promised recession after all, and can crack on with business as usual.
But perhaps not. Research by restructuring firm Interpath found that the number of companies filing for administration jumped 46 per cent last year from 710 to 1,039 as inflation dealt a “body blow” to companies recovering from the pandemic. And the latest Business Confidence Monitor (BCM) for Q4 2022 shows business confidence falling across the UK.
So which scenario should we believe? Well, it’s sector specific of course, but we are certainly seeing some clients taking a prudent view of the year ahead and challenging their teams to cut costs and trim margins. But how should you do this?
One approach we don’t recommend is taking a ‘blunt axe’ and slashing 10% off everyone’s budget. Labour is often the largest budget line, particularly in service businesses, so this becomes the prime candidate. British Airways found this out the hard way when it emerged painfully slowly from lock-down because it had let go of so many flight crew. Ryanair kept its crew on at a reduced salary and came roaring back to take market share. A blanket approach to cutting costs is nonsense and implies that executives have no idea how value is created in their business and what matters most to customers. If they did, they would be far more selective in choosing where, and how much, to cut and by doing so put distance between the brand and its competitors by improving customer experience rather than ruining it.
It’s estimated that reducing customer churn by just 2% has the same impact as reducing costs by 10%. Therefore, in tough trading conditions it’s even more important to keep your customers loyal. WPP/Kantar conduct an annual survey into the world’s most valuable companies called BrandZ. It found that those companies who provide a superior customer experience grow five times faster but, more importantly, accelerate out of recessions much more quickly. So yes, you may have to make cuts but do so in a way that maximises value to the business and minimises the impact on customers. As Reg Sindall, former EVP of Corporate Resources at Burberry said, “Nobody ever cost-cut their way to prosperity”.
Here’s our top tips for managing in a recession and emerging even stronger:
1. Focus on the few things that matter most to your customers.
You can’t afford to waste precious resources providing more than customers really want or are prepared to pay for so find out what matters most to them and reallocate your resources, focusing on the things they do want, not the things they don’t. For example, some years ago our CEM+ research for Premier Inn found that guests valued the sleep experience most and the registration experience least, so instead of just cutting back or ‘fixing’ registration they eliminated it completely replacing it with self-check in kiosks. The resulting cost saving was used to install luxury ‘Hypnos’ beds which further differentiated the brand.
2. Segment your customers based on profitability rather than demographics. In tough trading conditions when customers are scarce you want your best customers spending more with you rather than your competitors so focus on their profitability and deploy your resources accordingly. For example, one of our US clients, one of the world’s leading asset managers, identified that smaller retail clients were happy using automation and self-help to manage their accounts whereas larger institutional clients valued a personal relationship. As a result, they introduced a segment-channel service model that not only improved the customer experience and pricing but also reduced overall labour costs.
3. Introduce technology that will enhance your customer experience not just cut costs. There is no doubt that new technologies like AI, Chatbots and ChatGPT are revolutionising customer support through improved response times whilst reducing costs. However, now is not the time to spend large sums of money on technology plus the disruption of installation unless you have first designed the experience that it is intended to create and are sure that the technology can deliver it. Some years ago, Gartner research found that 55% of CRM installations failed to deliver benefits and, diluted earnings. So, first make your customer experience and processes effective, then make sure they are efficient. Only then, automate them.
4. Operations first, marketing second. A big mistake is thinking you can simply market your way to a better outcome. Yes, you need to communicate your proposition to customers to protect market share, but this needs to be based on a solid foundation. In our last blog we reported that Hermes, the delivery company, rebranded as Evri, in an attempt to turn around a reputation for poor customer service and regain share in a very difficult market. Despite spending a great deal of money with its branding agency and repainting its fleet of vehicles, Evri found itself in exactly the same situation this year with the media reporting ‘Christmas Misery’ because of late or mishandled deliveries and poor service.
5. Increase communication to your people and customers. In tough times there is a tendency for organisations to ‘hunker down’ and thus the leaders become internally focused. It is even more important for leaders to ‘walk the talk’ to keep their people confident and motivated and to communicate directly with customers to keep them coming back. A great example of this is a communication I received from Chris Pitt, the CEO of First Direct, one of our favourite brands and the subject of a chapter in our book ‘Uncommon Practice, People who deliver a great brand experience’. In his email he thanks customers for their business, wishes them all the best for 2023 and highlights how the brand is focused on delivering value for customers. For example, First Direct’s money coach team helps customers manage the rise in the cost of living. Its chatbot helps customers resolve simple enquiries quickly and cheaply yet the First Direct promise to be “at the end of a phone, should you need to talk with us, 365 days a year” still holds true. As a result of this unrelenting focus on customers, First Direct has once again been voted the number one banking brand for Customer Service.
Recessions are never easy. Tough decisions need to be made including cutting costs and letting people go. But that doesn’t mean to say that we need to lose sight of the things that ultimately create business success: satisfied customers, and motivated employees. Bear markets provide the stimulus to really examine our business: to focus on the things that matter most and thus emerge ahead of the competition. I am reminded of a story; two explorers were in the jungle when suddenly they spotted a large bear following them. One explorer quickly dropped his pack and replaced his heavy boots with running shoes. His companion said, “Why you are doing that? You’ll never outrun a bear”. His friend replied, “I don’t need to, I only have to outrun you”.
Shaun Smith, Smith + Co