Chasing the money

With inflation soaring the consumer is under pressure to reign in spending. Here we examine some implications on companies chasing sales in the lead up to Christmas and into 2023.

Over the last several years there has been a scramble to move to online and subscription. Anything and everything has desperately tried to present as 'tech', mirroring the long-time model of software where you never actually own anything, but instead subscribe.

When people talk of your data being valuable it is often difficult to visualise or rationalise why this is so, beyond imagining that a grotty sales person will be able to cold call you or send you a sales email. This much is true enough, but in traditional face to face sales the vendor has but a one time data point, anonymised beyond the credit card details, such that there is no predictability of whether that customer will return, or what they may purchase if they do.

With online subscription sales the customer retention model becomes much more transparent. There's much more predictability in both of the most important aspects for business growth and profit planning: "what" and "when". No wonder that such businesses became the darlings of investors seeking to de-risk their investments - a perfect marriage of money and company ambition that resulted in huge multiples and valuations, often to the exclusion of the underlying offering itself and whether it's operational numbers stacked up.

In recent months there has been a tempering of this movement, multiples have dropped from heady heights but do remain higher than those offered for non-subscription based businesses. What might the future direction be now that the environment - inflation, spending power, debt, economic contraction etc - is very different?

In the first instance many businesses following this model relied on a consumer willing to pay a premium. Products and services were 'premiumised' in order to offer some offset justification to charging more. D2C delivery models meant the customer needed to appreciate speed and convenience, whilst products needed to be perceived and presented as premium. Even in looser times the model being followed was a stretch: most of the companies offering and delivering food of one sort or another have been losing money hand over fist, for example.

What happens when the economy turns as it has, and the customer doesn't have quite the same amount of cash in their pocket? What happens when you have to raise prices even more, but cut some of the premium out in order to manage margins which were already negative? Chasing repeat sales was already a challenge, but now we have to add further economic pressure.

Clearly, cutting costs is going to come to the forefront, not least to shore up margins when so many input costs are rising. To be frank, anyone can cut costs. It's child's play. The more difficult thing to do is to make cuts without compromising either service or quality, to retain the premium feel and perception of your offering, and to retain the right skills that will sustain your business and it's values in the face of greater pressure.

More challenging still is to shore up the top line with improvement. Better services, better quality, better value, better everything.

How many companies out there are doing this? How many are examining their offering and improving it in any way which will carry meaning and value to the customer? How many are pivoting to reach new customers and increasing lifetime value of existing ones? How many are truly examining their execution processes and making step changes to improve them?

These activities are much more difficult. More difficult than choosing a cheaper cardboard box to ship the product in, or using less protein and more water, or leaving operations unchallenged.

Can we see examples of business doing the difficult things?

Yes we can. One such business is a food subscription operator that has pivoted from being mostly D2C, to exploit market growth in both q-comm retail and food delivery platform growth, opening dozens of dark kitchens to service new customers and reach new markets. Whilst they sought savings in product they challenged all areas of their business to maintain and improve the product, reducing cost but actually increasing the value to their customers.

Another business, a supplier of stationery and other goods to schools and councils, what might be considered a captured and mostly protected market but a market nonetheless under budgetary pressure and constraint. Rather than sit back and accept steady decline, this company has taken the initiative and reimagined their order fulfilment process that will see it able to compete on service and cost with the likes of Amazon.

Finally we have another example, a food manufacturer struggling like many with rising input prices and labour shortages. Historically this business has followed the pattern of hiring interims to plug gaps in management, and relied on managers to make incremental improvements to maintain control of costs. Recognising this for the 'doom loop' it is, they instead chose to undertake a more fundamental review of their end to end operation which resulted in a programme delivering a massive 40% uplift in throughput using the same equipment but with less labour, in a step change in approach.

Many businesses will continue to follow the 'doom loop' pattern during times of economic duress, and ignore the benefits of consulting experts. Some will do ok, but many will shrink as a result. It takes courage and bravery to accept outside challenge, but time and again the results of doing so are clear - better outcomes, better performance, and better financial results.

For more information on the advantages working with Applied Acumen, please contact the author.

Richard Shipperbottom is co-founder of Applied Acumen Limited, a firm providing expert consulting on all matters operations, supply chain and logistics.