In recent articles I’ve discussed how concentration of suppliers (for all businesses) and customers (in the B2B environment) can radically increase risk to the business. Yet what about customer risk in the B2C environment? If you have many consumers as customers, where does the risk come from?
The key risk is substitution – where a consumer switches from buying your product to something else that fills their needs, typically a direct competitor. Sometimes the switch is temporary and sometimes permanent. A dominant company with a long track record against established competitors would argue that its customer base is steady and unlikely to defect, but it happens:
As an example, I’d like you to consider a time of extreme economic uncertainty, a time of potential existential threat to many, a time when politically power-struggles took place around a negotiation table yet also saw prominent leaders gunned down by extremists. Police couldn’t control the populace so the Military were called in. Ordinary citizens carried guns, some moved towns or even emigrated seeking safety elsewhere. The private security industry boomed. Those without a “Plan B” stockpiled foods, protected their homes and prepared for a long-lasting siege.
Could this time have been the USA during a Hurricane that flooded parts of a major city, destroyed homes and left many without electricity for weeks? Could it have been Greece during the height of the Euro crisis? Bosnia? The Czech Republic? Syria? Egypt? Libya? It could have been any of these, and the reality is that it could happen near you with little notice. However the example I will discuss comes from 1994 – in the months preceding South Africa’s general elections – the elections that would mark the transition to that countries’ peaceful democracy.
The consumer switch happened during the elections, but it took a while to figure out that a lasting change had happened, which meant that nearly a year after the event I got a call from a client asking for help understanding a problem. Their sales in the category had dropped around the time of the 1994 elections (i.e. ‘existential crisis), and their market share hadn’t recovered. They had gone from being dominant in a category to be the 2nd biggest player, having lost about 30% market share. Their calculations showed that they’d lost this share in just 1 quarter, on a business that had been very predictable over 30 years of its history. So what had happened?
The company that had lost market share sold powdered milk. Powdered milk competes with fresh milk and long-life milk (and of course Soy products but they are a very small part of the pie). With the crisis of the elections looming their international parent had adopted a ‘wait and see’ attitude that in turn had been adopted by the local branch. Given that many foresaw a prolonged civil war this wasn’t entirely a bad decision. So they kept production going but didn’t make any new investments into new machinery or push sales. Marketing campaigns were kept simmering along – after all, what’s the point of investing in marketing when the world is about to end?
Most consumers took a different approach: they stockpiled at least some reserves of essential items. Milk is pretty high on this list but you can’t stockpile fresh milk. So they stockpiled their old favourite alternative – the powdered milk made by my client. Then stocks ran out. Any retailer will tell you that a stock-out can be disastrous because you risk losing a sale that you’d otherwise have made. In this case the consumers couldn’t find what they wanted, so they bought the alternative – long-life milk, where a new brand had been released about 5 years previously with limited success (since most consumers hadn’t really tried it yet). The retailer didn’t lose a sale but my client did. The consumer bought something they were unsure of, under the duress of a potential existential threat.
What happened next is that the elections went peacefully. Production of all milk products carried on, but powdered milk never regained its pre-election share. The reason is that consumers who had bought the long-life brand now had it in their homes and they actually tried it. They were surprised to find that it tasted very good and they preferred this taste to powdered milk. So they permanently switched products and never went back.
Even with the election and the stockpiling consumers wouldn’t have switched if there’d been sufficient stock of their old favourite, but a lack of stock gave the consumers enough motivation to try a competing product and that permanently changed the fortunes of two companies in the market, one at the expense of the other. A big business with steady revenues and stable growth lost 30% of its market share in a single quarter to an established competitor.
So how low-risk is your business? What would it take for your consumers to switch to an alternative product or brand? Will it take an existential crisis or something far less threatening and far more common, like a new advertising campaign or better packaging? Which long-term threats will prove to be opportunities for you: climate change, rising energy costs, the rise of the hyper-connected world, or the shift in power towards China? Or will the next Marikana spark a series of events that transforms a peaceful democracy into another African civil war? What will we stockpile this time?