The Implications On A Leaky Bucket Model

I recently started a project for a small and brilliant business which sells convenience to time pressed parents for their kids.

They have the classic "leaky bucket" business model because as the kids grow up, the product becomes less & less relevant to the parents – the parents' need it less. They basically have a window of 4 years to build awareness, drive consideration and develop an increasing loyalty with their customers AND turn a profit all at the same time.

So how can they build sales? Well let's continue the thinking of the leaky bucket by remembering the children's nursery rhythm - There's A Hole In My Bucket.

Then fix it dear Henry, dear Henry, dear Henry... - can we develop a broad range of strategic options to fix the leaky bucket that doesn't require straw, a sharp axe, sharpening stone or another bucket...

Option 1.
Fill the bucket right over the brim, so that they can maximise what is left in bucket. In the real world, this would mean driving more parents to consider and then buy this product. Simple to say, difficult and potential expensive to do... It relies upon a strong understanding of the target audiences needs (insight) and being able to communicate a strong & compelling message that meets those needs that only they can meet. One option to do this is to think about increasing advertising impact and reach - both of which require a bit of a gamble on how effective its going to be. Another way to consider increasing awareness & penetration is to look at similar products that target the same parents and piggyback with them, either indirectly (e.g. through usage association such as tonic with gin) or through direct link saves (such as placing tonic & gin in the same part of the store). Agencies such as dunnhumby can offer an understanding of what shoppers put in their baskets and utilise their coupon system to drive linked purchases. However, linksaves are not as effective in driving awareness as advertising or PR. Promotions can be another key way to increase penetration in store, but come at a high cost and are rarely effective in increasing long term loyalty.

Option 2.
Capture the waste water coming from the leak - in other words, capture the parents that fall out the bottom of the bucket by extending the proposition to include a new offering that meet the needs of children from 5 plus, especially given the investment in those 4 years to recruit the consumers in the first place. Again easy to say and tough to do. Innovation is a particularly challenging thing to do, with academic studies siting numerous different success rates, but basically it's no more than a 10% chance of success. However, brand extensions are more likely to succeed (marginally though...) as long as the new extended brand has a relationship with the original brand AND meets the need of the consumer in a unique way – a great example is how Proctor & Gamble took the Fairy brand from simple washing up liquid into washing powder.

Given what I know about this client and in particular their brand offering, I think this is unlikely as the brand is tied to a specific age and occasion.

Option 3.
Accept that it is a leaky bucket and make more money out of the leaky bucket than is currently being made. All of the following sub options are designed to drive more value from the existing core target consumers.

Option 3.a.
Increase the weight of purchase. From interrogating their data, my client knows that 35% of their shoppers make up 60% of their volume (a simple Pareto analysis or 80:20 rule) and they know that these shoppers buy 5 or more packs every time they visit a store. Brilliant news!

But how can they improve on that? Well, many other categories have increased their weight of spend by introducing multipacks, such as soft drinks, beer, toilet paper, washing powder etc. Basically these brands offer the convenience of buying multiple products in one easy shop and sometimes offer a discount for buying in "bulk". The best example of this is in beer, where 20 years ago, beer was bought in 4 pack cans. Now the variety of packaging formats (cans or bottles) along with the size of each type of format combined with the number of units per pack means that for some brands they have in excess of 200 SKU's just for one brand! The basic premise for each of these SKU's is to increase the weight of purchase and increase the value overall.

My client is lucky as they can not only play around with the number of units in a pack, the weight of each unit, but also have a number of different varieties to develop an infinite number of possibilities for multipacks.

Option 3.b
Increase the relevancy of the product. Again from their data, they know the number of times a shopper puts their product in one of their baskets. It's less than once a month. So how can they increase the frequency that a shopper puts their product in their basket? By understanding how the core shoppers (the 35% of shoppers that buy 60% of the volume) use their products they can look at other occasions that might be suitable. Pimm’s has tried for years to make it a drink outside of the sunny British summer (is there a sunny British summer????) and have had some marginal success in developing new products aimed at widening the frequency. With my client, until they undergo the analysis, it’s difficult to see a straightforward answer.

Option 3.c
Increase distribution. Using the nursery rhythm analogy again, this might be seen as increasing the number of times you can refill the bucket. Distribution has a marked and funny effect as not all stores are created equal. In the UK, each retailer classifies their stores into different groups and each group targets different types of shoppers or the same shopper for different occasions – e.g. not all Tesco's are in fact big supermarkets. Generally speaking, the more bigger stores that you can gain distribution in the higher the Rate of Sales (ROS) will be overall. Great news. This is down simply to being sold in more stores - availability drives demand - being available in more stores means that demand will grow. The same is true in my home with Tunnock's Caramel Wafers... if they are in the house, I'll eat them. If they're not in the house, I won't.

But something else also kicks in. The more stores that a shopper sees a product in, the more credibility the product is given by the shopper and therefore the more likely they are to buy it.

Studies have shown that if you can't achieve a set level of distribution within a set level of time (in beer it was under 66% Weighted Distribution within 12 weeks), then you are guaranteed failure (unfortunately, you can't guarantee success!).

Option 3.d
Increase the average price and there are two main ways to drive up price - directly and indirectly...

Option 3.d.1

Direct price increase - just simply increase the price to the customer. I've yet to meet a customer that likes price increases. In fact, a friend that works for one of the leading grocers in the UK, says that he is targetted on reducing the number of price increases he accepts every year and also on his profitability. So unless you can show the customer that this makes sense to their profitability either through re-investing that money into category volume driving initiatives (such as advertising - see Option 1) that offset the margin loss per unit, or that shoppers are willing to pay more for the product (only when the value equation is increasing can you show this) or that without your product his category will wither can you be confident of implementing a price increase. Achieving a successful price increase takes a great deal of planning (one source at a global soft drinks company says they spend 12 months planning in detail the price increase for the following year) and also requires a great deal of team work to ensure alignment in their messages to customers once hard nosed negotiations start and both parties get locked into their positions.

Option 3.d.2

Indirect price increase - this is really the black arts of promotional effectiveness. This client, like many others operating in the fast moving consumer goods market (FMCG), promote their products with retailers. Walk down any supermarket aisle and tens of products will be on promotion, with shelf cards highlighting the offer. Sometimes these offers drive a huge spike in volume, generally if they are on the ends or on pallet displays. The problem is, that for the brand owners (i.e. my client) they might be doing promotions only to please the buyer or to please the market by winning more market share at the expense of value or profit.

As hinted at in Option 1, the main role of in-store money off promotions is to drive penetration. That is to say, get more people to sample the product and then, ideally, have more shoppers once the promotion ends and the normal price returns. In the vast number of occasions that I have seen, this rarely is the case – I buy all my toiletries this way, simply by buying what’s on deal and stocking up, as the category demand doesn’t increase with availability.

The beer promotions in the 1990’s really highlighted how promotions could drive penetration and weight of purchase because the promotion helped drive overall category consumption - people were buying vast multitudes of beer at a cheap price, to then put in their fridge, which they duly consumed as they went into their fridge everyday, whereas before they wouldn't have any or only a little beer in the fridge, so their overall consumption of beer increased (the availability drive demand scenario). It seems that most people are indeed like me, as one beer is never enough...

Generally, promotions are overused and can become like a drug for brand owners. Brand owners see their volumes get high, and can't face the come down of their brands coming off promotion. And buyers play to that fear, as it's in their interests to have more promotions in their store as they don't really care what brand they sell as long as their category increases, and by having more promotions in store means that shoppers are more likely to come into that store and do their weekly shop there.

By understanding the shopper's behaviour, brand owners can become confident in weaning themselves off the promotional drug. For example, my client knew that only 1 in 20 baskets of their core shopper ever had a competitor product in it, that is to say they had a high degree of loyalty and combined with the other data, showed them that the risk of core shoppers switching out was relatively low. Furthermore, they found out that the promotions were not driving any more people into their products so were fundamentally only about the perceived need to steal share - but they weren't really effective in doing that, just that they were offering a reduced price to shoppers who would have bought it anyway at a higher price. Suddenly they didn't feel like it was rocket science...

Option 3.e
Cost saving. By offering a cheaper product at the same price, they could make more money. But the risk is that by reducing the cost through reduction in quality means that shoppers no longer value the product in the same way. So the trick with cost savings is to reduce the cost of things that add no or little benefit, ideally in things that customers can't see. So the first thing to be clear upon is what is the shoppers' needs and how the current product benefits those needs. Only then can you look to see how you can engineer your products to reduce costs. After several years of reducing costs, my advice is go slow...

So what to do?
All of these are viable and some are mutually dependent but their individual success is largely dependent upon gaining success with their customers. Will the corporate buyers of large retailers understand what they are trying to do and support their plans, especially the potential of a price increases, betting on the basis that they can increase the total value by increasing the volume at a greater degree than the offsetting loss of margin per unit? Persuading those buyers takes understanding, creativity, alignment and passion...

Starting Up In A Recession

I was recently asked by an old colleague who is thinking of starting her own business whether she should start a business in a downturn or not...

At first I thought about giving the "standard" response about historical examples of businesses that started in recessions such as Microsoft, but then I thought better of rolling out that cliche.

Starting a business always carries a degree of risk and depending upon the type of business being started, the general macro economic factors can have a massive impact, just ask Woolworth creditors and shareholders...

But I have a slightly more pragmatic viewpoint... Unless you have funny shaped crystal balls, you'll never know if it's going to be a recession or a boom time, and frankly don't try to guess it either.

What is far more important than timing is whether or not customers actually need only your product or service, in boom AND bust times.If the answer to that is yes, then go ahead and start in a recession as you will probably succeed.

So spend the time understanding what customers need and whether or not you can meet their needs better than anybody else rather than spendign time worrying about recessions or boom times.

There's only 3 things you can sell to a business

I have been working on a number of b2b projects recently and what I have discovered is that everything they do with their clients boils down to either one of three things or a combination of three things.

Before I disclose the three things, some wider thoughts...

Businesses like people have needs. And they only buy products or services that meet those needs. But unlike people, businesses are massively motivated by the power of money, either spending it or creating it - that is their raisin d'être. To enable them to make money, they have a number of drivers, which in turn each have a number of supporting elements.

But no matter what sector, nor the size of the business, the need for buying a product or service comes down to one or a combination of these three things which fits with their core supporting elements

1. Sell more
2. Save more
3. Solve more

So quiz yourself the net time pitching to a company to ensure you are able to demonstrate to one or a combination of the three things....

Will this sell more of their products? Will it make them more money? Will they increase their frequency of purchase or their spend per purchase?

Will it save them money? Even if they have to spend more money to get this product or service will it make them more efficient over the long term on the basis of an Internal Rate of Return?

Does it solve a problem better than they can solve it themselves? Does this problem stop them or slow their business down?

And if you don't have an emphatic "Yes" to any of those questions, don't waste their time...

Returning to the scene of the crime

Today I returned to my old employer's office on a social visit.

The visit brought out mixed emotions in me. It was nice to see everybody but it was also a bit depressing to see everybody there, still going about their normal routine.

I went there to help an old colleague who is leaving to set-up on her own and also gain her help on a couple of my own ideas.

We spent some time chatting about what it feels like leaving, our different reasons for leaving and then discussed her ideas and plans.

Bizarrely enough, her main idea is in an area similar to one of my own, but with a different perspective. Her idea is aimed at an earlier stage to mine, and there could be quite a lot of synergies, especially around the marketing and networks we develop.

One of the things we chatted about was about how she should get after her idea once she left... passionately working on her own vs tailoring her proposition to the needs of the customers... Should she focus solely focus on her passion, bunker down for a couple of months, developing her own solution bouyed by her passion and then take it out into the big bad world? Or should she go out and see what people want and then develop something from that, which she might not feel that passionate about?

I suggested doing both.

Developing the outline of her proposition and then getting feedback from her potential customers and then in turn taking that feedback, developing it more and seeking more feedback so that by the end of it you have something which is relevant to the customer but also something she could be passionate about it.

I think & feel that she's got a great idea and will be able to offer something amazing for her customers and I look forward to seeing how it develops...

Incentives

I've been pondering incentives & penalties recently, and how they can influence people's behaviours, probably because of books I've been reading on Economics / Game theory and also events over the summer with my business buddy.

As I've said earlier, I am an equal partner in a business with my business buddy, and over the last 6-9 months, not much has happened. To some degree we haven't moved forward that much. That isn't strictly true, as we did have a major rethink in May about our product range & strategy, but essentially we're still where we were in January in that we have a web site set up, ready for trading.

Over the summer, I could have easily intervened in the inertia and made something happen, as is very much in my personality. However, I chose not to. I did what I perceived what I thought was a fair amount of work and no more. But why stop at that?

I felt that any work I did beyond my "fair share" would not reward me beyond my 50% of the share capital. I felt that my partner would be "unfairly" rewarded for my extra work, as he was focussed on something else, of far more importance and he had admitted he hadn't given the fair level of input to the project.

But perhaps that is not logical. Currently I am earning zero dividends from that share capital because there are zero sales because the outstanding work has to be completed. If I had made the interventions, then I would have at least a chance of earning something. So therefore I could justify my intervention.

However, I think, on balance I did the right thing. Simply put, it is impossible to have an exact "fair share" of the workload between two parties, and I accept that. Also, it would have set a precedent which I would not be happy or willing to live up to in the future - my business buddy can clearly see the impact that he has in the business and also that I have in the business.

So what's my solution on how to solve this problem in the future? It comes down to having a fair and transparent guideline for the share capital. The premise of 50:50 share capital is intact, but it slides depending upon how much time and how many of the actions are put into the business.

This is how it could work in practice...

All parties agree a nominal value for the business... perhaps its £1,000, with the share of the value of the business being determined by who does what, on the basis of time. Basically the longer it takes to do, the more shares you get. It could be engineered to ensure a 50:50 split, if the time taken was equally split.

We need to make sure that there is no "inflation" in the complexity of the tasks being set. For example, it might only take me 30 minutes to upload 10 products onto a web page, but if I was being devious I might claim that it will take me 2 hours. That would be "cheating" so I could quadruple my share capital. But there's also the view that I can do things quicker than the other party and vice versa. So how do we get round the problem of inflation and efficiency?

My way round this is for the tasks not to have any owners at first, and each party individually estimates the amount of time it would take to complete the task. The parties then combine their times for each task and take the lowest time for that task as the "currency" for that task (remember the more time spent on the work = greater share capital).

The parties then bid for ownership of that task, with every bid reducing the estimate of time for that task (i.e. reducing the share capital value of that task), therefore driving down the cost until it becomes optimally efficient (why would I bid for something that would take longer than I thought it would!). If nobody "bids" for ownership of that task then the party who estimated the shortest time for that task ends up owning that task. This reduces the risk that parties will under call the time it to do a task that they don't know how to do but spoil if for the expert in that field.

As an example, say the action is to develop a web page. Now I might not know anything about web page development (which isn't far from the truth!). But my partner does know about web page development. Now if I was being devious I could undervalue this task by estimating a significantly lower value, so that my partner ends up with lower capital. But by making the lowest estimate the winner, it means I would be shooting myself in the foot because I would then have to learn web development thus spending valuable time that I could spend on other tasks where I could be more efficient with my time and therefore earn more capital.

So by now, we know how long all the actions should take and the corresponding level of capital each action offers, and we should also have bided on each action ensuring a "fair" split of capital. Now, we introduce an incentive to finish the task on time by having a deadline. If the deadline on that action is missed, then both parties have an equal chance to complete the action and increase their share capital.

One last thing to introduce would be a floor level of shares for an individual to ensure that if an unforeseen event comes up meaning that one of the parties can't complete their tasks, then they are not wholly penalised and end up with zero.

This only really works if there is trust & respect for each party. If you don't have that level of trust you shouldn't get into business with each other! If you don't respect the other party then you probably don't need them, so why get involved with them in the first place???

Bearing in mind trust & respect, interestingly in Tim Harford's book "The Logic of Life", he quotes the authors of Freakonomics arguing over the split of any future revenues before they started to write it. They both dug their heels on demanding a 60:40 split of the revenues, but each party had wrongly assumed that the other one had wanted the 60, when actually they thought their own contribution was worth 40. It was only after they both realised their mistakes that the agreed to do the book. That's an interesting view in how to run a partnership - only enter into ones where you are valued more than you value yourself!

Another interesting dilemma on incentives is with a friend who recently offered me a "cut" of any business I bring him. Nothing wrong in that, but it doesn't feel right with me nor does it actually incentivise me to send him work. I think it's something to do with the fact that the cut is not worth my reputation in sending him the work and also something about "karma". I feel it would be bad karma only to pass on work for the basis of a cut and not on the quality of the work itself. Perhaps that's the actual point... I really don't know how good he actually is and until that I won't recommend him, no matter how much of a cut he gives me!

The Moron Magnet

The last six months have been great. A long overdue trip to see friends around the world and to get set for working on my own. A brilliant start to my freelance life. More opportunities than I can shake a stick at...

Despite all the great things, one thing has been a great annoyance - my moron magnet. It seemed that everyday I would become frustrated with something and / or someone. It just seemed to take ages for anything to happen.

And it took an old colleague and fellow freelancer to point out to me that it wasn't me, just a couple of things compounding together.

First of all, in my old job, I was surrounded by intelligent & motivated people. They had to be to get let in the car park in the morning. On a daily basis, we would be engaging in small talk, corpoate problem solving and sparking ideas off each other. Now, that has to a greater / lesser degree disappeared, certainly on a daily basis. I would argue that the level of interaction I now have is significantly lower in the intellectual horsepower stakes than I once did (as ever there are exceptions to that rule) and that worries me a bit, in so much that my own intellectual horsepower will diminish, in a form of cerebral atrophy. To me this was an unforeseen cost of going freelance.

The second thing was that in my old job, I was somewhat cushioned from the outside world. For example, I didn't have to buy stationery, I just went to the cupboard and found a pen sitting there when I needed it, usually just before I went into a meeting. I didn't have to worry about the corporate credit card being set up - it was already set up. I didn't have to worry about the coporate mobile phone. And even if I did have to worry about these things, I still had the power of my employer behind me, which meant I could phone up a dedicated helpline and get things sorted out with the seeming efficiency & importance that I thought I had, but was probably more likely due to the company I worked for. Now, the cushion has been removed and I am sitting on the cold, hard seats just like everybody else.

Those two factors compounded each other... Getting a fully working bank account should not take 12 weeks, but it did. I was flabbergasted. But it seems that's just "normal". That orders placed on the internet for business goods would either not appear, delivered to the wrong address or would be delivered despite leaving a calling card saying that I had to pick it up at the "local" depot (which turned out to be a 30 minute drive away) only to find out when I got there that they had already delivered the item to an different address and didn't have my signature.

All of this, perversly, gives me great hope. There is a great deal of opportunity out there for entrepreneurs willing to take on the morons and beat them... I, for one, will be a very loyal customer!