The story of Chicken Dan - And his secret to success in a seaside town

Dan moved to the seaside to open a cafe just over a year ago and he is doing really well. I know that because when I last visited the town - at 7.30am he was (a) Open, (b)busy with tables full, (c) smiling. As any small business owner will know - being busy in peak season is not that difficult. Being busy off season is a job well done.

Almost a year to the day when I first visited his cafe I walked back in again - just another customer off the street with a wet dog. The first thing he said was "Hello Buster" - and then "it is Mick isn't it"? Whatever his technique might be - it is amazing. The act of remembering someone's name is a huge emotional and commercial pull. But to be honest - even if he said 'sorry I forgot your name' that is fine. The fact that he wants to remember is the significant thing.

As a small business owner it fascinated me to see how strong his brand was on the high street - after only being open a year. I wanted to understand the secrets of his success. I suspect it is not about making better sandwiches or selling cheaper coffee. I think it is about leveraging small things to have a big impact. How to create differentiation in a way that his competitors are less able to imitate. Most importantly to understand how he creates high value relationships in a crowded competitive market.

Making the small big

This list offers a few of the things I noticed about how Dan operated during my visit.

• The warm welcome; I first went to the cafe was after a beach walk with Buster my dog. Strolling into town there was a cafe and sitting outside were loads of people all with their dogs. Naturally I grabbed a seat and ordered a coffee. Within minutes Dan came over and asked if it was ok to give Buster a chicken treat. Obviously every morning after that Buster would drag me to Dan's place. He said whenever he is out walking around town dogs suddenly sometimes rush up to him and sit down waiting for their chicken treat, (hence my nickname of Chicken Dan). It doesn't take a lot of math to work out the return on capital. Compare the cost of a slice of chicken to a daily coffee and cake visit for 7 days. This is a short term investment that offers immediate Revenue.
• Be loyal to your locals - In a seaside town the big money is made in peak season. But in winter a lot of the service shops will pull up their shutters as there is little profit to be made. However, Dan understood that as a percentage of the total revenue the locals offer a limited income - but discarding their custom could damage the long term relationship. He took a decision to stay open so the dog walkers always had somewhere to go after the morning walk for a cup of tea and bacon roll. That loyalty to his locals is repaid everyday. Even when the other cafes are open - Dan's place is full of dog owners chatting (and spending). Shop owners can choose not to open up - but dogs owners will rarely choose to skip their dog walk. Looking after this niche market offers a robust way to develop low cost Repeat revenue.
• Make their important your important- The fact that Dan's team all try to remember the dogs names is a really nice touch. Unlike Essex - in many holiday towns you are viewed as strange if you don't take a dog wherever you go. Dan seems to understand the power of making what is important to your customer important to him. Imagine you have invested all your savings in a new bike or car - when you take it to the garage you want to feel that they will love your toy as much as you do. If customers see that their prized toy is important to the mechanic then the chances are they will share their experience with other people in their network. The upside for Dan is that the next time I meet a dog owner on the beach I will rave about his cafe and how he much he welcomes dogs. This Referral process means I am selling his business for him and reducing his sales and marketing cost dramatically.
• Anticipate the need - As we walked off the beach to make a long early drive home back to sunny Essex - Dan shouted out goodbye. He then noticed we didn't have a coffee for the trip. He opened up especially to make sure we had a hot drink for the drive home. There was no logical financial gain as we would not be back for another year. He did it because he believed in caring for the customer - not to make a quick buck. He knew that early coffee is important for us and so he made it important for him to a point where he could anticipate our need. Like the motorbike shop who ensures there is hot coffee available for riders on a cold wet day, or builders laying down protective sheeting to stop dust spreading through the house. Anticipated solutions have incredibly high payback value. The payback for him is that the first thing I did when I got home was give him a rave Review on Trip Advisor and Facebook.

The four R's of sustainable success

After watching Dan's operation for a week (whilst loaded with extra shots of coffee) I did get a sense that four things stood out. These are the stages a customer will go through as they engage with the business:

1. Revenue - This is an inactive relationship. transaction relationship. At a commercial level revenue is generated but it is a commodity purchase. Payback from the customer is simply revenue with no added extras. There is no engagement or relationship in place.
2. Repeat - This is an active relationship. At this level the relationship is developing in more of an active one - the customer revisits and increases inbound revenue.
3. Referral - The can now be seen as a pro-active relationship. The customer recommends it to other people and so increases total visits and total revenue increases. They are taking a proactive stance and developing a shared capital.
4. Reviews - This is a coactive relationship. The customer is prepared to shout from the rooftops how much they like the cafe. The customer has developed a close logical or emotional relationship with the firm and customer capital has been established. By writing an online review they help grow the potential customer base exponentially. These people are taking the time to actively promote and sell your business for you with no fee or cost involved.

All businesses will recognise these four steps and should have strategies to target them in differing ways. For example Apple uses this approach by making the stores warm and welcoming and allowing people to play. Easyjet uses personalised feedback groups to get qualitative feedback on their new business ideas. And increasingly firms use twitter as way to het immediate and intimate connection with customers.

When we look closer there are two other dynamics in place that indicate what is happening during this process.

Lets consider first the payback ratio of these four steps using a coffee shop as an example. By payback ratio I mean the relationship between one event and the revenue created. Consider how an astute record company will sell a single, get it on a film soundtrack, on a compilation CD and then in the long tail placed in a TV advert. A single capital investment has generated multiple revenue opportunities. A coffee shop can sell a coffee. A smart coffee shop will use this event to create ongoing income by repeat business, referral and social sharing.

1. Revenue (Inactive) - Return on the business investment is ￡2.50 for a coffee. If managed well then there will be a fair profit within this revenue. But it is single shot revenue and the profit margin is dependent on a managed cost base. Lots of customer buying a coffee give a profit - but not an optimal profit.
2. Repeat (Active) - The customer revisits. Maybe they visit four times in total over a week. This gives ￡10.00 revenue. The upside for the business is no incremental marketing costs have been incurred and the profit margin is enhanced. Also the increased stock turnover allows lower cost base from higher purchasing power.
3. Referral (Proactive) - The customer recommends the coffee shop to another five people who also visit four times. At that point total revenue is growing exponentially. All this with no increased sales and marketing costs as the initial customer has absorbed these.
4. Reviews (Coactive) - The customer is so enthused by the coffee shop that she reviews it on Trip Advisor, Google and Facebook. If we assume the town Facebook page has 5000 members then it is not beyond reason that 1% will try the place. That is 50 new customers through the door with a revenue of ￡125. If only 10% go to level 2 relationship (Repeat) that delivers further income. As the number of new customers increases or the type of customer changes (Level 1,2,3 or 4) the opportunities for exponential growth in the business are massive.

We can then see how the Payback Ratio also relates to Payback Period. I buy a coffee today and this generates revenue for the business. My repeat visit may be tomorrow or next week so there is a time delay. The people I refer may pop in next time they are in town and this may be in a few months. And my post on Facebook may take months to create a revenue stream. The interesting thing with Level 4 relationship is that when i scan the social media sites for a new place to eat - I look at the reviews but don't always check the dates when they were made. The Long Tail of online reviews can have incredible permanence and revenue potential.

This highlights one of the dilemmas for any small business. Where do they place their precious time and energy. Is it on generating cash for today or capital for tomorrow? There is no 'right' answer for how an owner chooses to split their time between today or tomorrow. But it should be a conscious operational, tactical and strategic choice of resource allocation. Do they spend the morning standing at the door chatting to people to encourage them pop in for a coffee. Or do they sit in the back office building a Facebook page so that people can leave their thoughts on the business? The choice is a hard one - but it is a choice that should be made consciously and not by chance.

The final element to consider is the Customer Capital. As the customer moves from Revenue, to Repeat to Refer and finally Reviews - the nature of the relationship with the business changes. It shifts on an emotional and logical level. At the start we might view it as an objective relationship. There is no personal investment in the business and so little customer capital. But as the journey progresses both business and customer invest in each other to create a joint capital fund. This can be seen with leading brands like Harley Davidson, Apple and Facebook. People invest in these by association. They buy the brand, the t-shirt and are happy and often proud to associate with the business name.

Consider some of the businesses you buy from and how you view them. How would you define your relationship. Is your coffee shop an objective relationship and you view it as a commodity where one place is as good as another - or is it personal. Do they know what you want when you walk in and do you have a favourite seat. When you open the door does it remind you of the old TV show Cheers (Where everybody knows your name)? The nature of this relationship has a direct and profound impact on the business revenue today and long term viability. A smart business is always working to migrate a significant percentage of its customers to a level 4 relationship.

Climbing the levels

The core goal of any SME business must be to consciously optimise the four levels of this model. The greater the number of Level 4 customers the higher % margin. One way to measure where your customers are on the 4R model is to listen to their language.

For example when you hear people talk about their local coffee shop are they going for 'A' coffee. Where the supposition is that any coffee shop will do. Do they go to 'The' coffee shop. The suggestion is that other people will know which one they are at. Do they say 'you can find me at my cafe'. And so indicate a strong subjective possessive element in the description. Or do they say 'I'm going to Dan's' - where the assumption everyone will know its a cafe. Much like Hoover captured the brand for vacuum cleaners or Google becomes a verb as well as a noun. The shift from objective to subjective is also a shift from short term to long term commercial success.

Sliding down the levels

Not to consider in depth here - but the line can go the other way. It doesn't take a lot to convert someone in the +ve coactive stage and convert them into a negative advocator or detractor. They may set out to first reject the company and in some cases seek to harm it.

I still remember the local motorbike company who sold very very expensive motorbikes. A new financial director arrived and decided to start charging for the coffee. There was a complaint after complaint and this eventually turned into lost sales. And you don't need to lose a lot of customers to wipe out a profit margin the automotive trade. The mistake was to focus on the short term revenue and forget the customer capital. Bikers like clubs. And these clubs are are fermenting pools where people can moan about their dealers. One bad story will spread like wildfire in the space of a club meeting and cause serious damage to the total customer capital base.

At first the bikers refused to visit on the Sunday run and then the would start to reject the relationship by choosing to get their bikes serviced elsewhere. The next stage is when the coffee issue snowballed into a bigger ball as other gripes were added to it and it festered and became the focal point of the conversation whenever people met. Finally you could hear the roar of disapproval both verbally and in the online forums. The end result was the bike club simply found another shop to be associated with. The cost of a few cups of coffee did some serious damage to the revenue of the business.

As far fetched as this may sound consider the fall of the Ratners jewellery chain. Ratners jewellery chain has admitted for the first time that its business was decisively wounded when former chairman Gerald Ratner described one of its products as “total crap”. Mr Ratner’s ill-judged comments accelerated a spiral of decline for Britain’s biggest jewellery group which plunged ￡122.3m into the red in the year to February and is to close 330 shops in Britain and the US. The slip from the top of the slop does not take long if the right (or wrong) thing is said to he customer base.

For a more recent example of the dramatic journey from positive to negative customer engagement look no further than the Roar of disapproval to the Conservative manifesto. The policy caused anger because payments after death could eat into the inheritance of offspring whose parents were unlucky enough to suffer from a condition – like dementia. The phrase “dementia tax” caught hold and arguably lost them the election as the Roar of anger could be heard as people contacted their MPs to complain. The seemingly invincible poll lead collapsed in a matter of a few days and nothing they seemed to do could stop it.

4Rs Scope and application

The use of a simple business development framework like this is not restricted to Chicken Dan. It applies to all small businesses (new, emerging and established). It is also of particular significance to people in the gig economy. For anyone on a zero hours contract their relationship with the firm should be to treat them as their customer. To get the desired weekly hours they need should aim to have the relationship operating at least Level 2 - but ideally Level 4.

We can also see this in relation to the corporates. How do you feel about your bank? Are you in a Level 1 and would happily change banks. Are you Level 2 and go there but don't sing their praises? Have you hit level 3 and suggest to your friends that they should move to them? Or would you be happy to sing their praises on the town Facebook page?

This same idea can be applied for internal customer supplier relationship. If you are head of the HR or Finance department - how do your internal customers view you? If you are still at Level 1 then I know of a few outsourcing firms who will be looking over your shoulder ready to offer lower transactional costs to your firm!

On a personal note - after my prolonged sabbatical and foray again as a gigging musician - my goal was to always migrate the pub landlords, club committee members and festival agents up this line. Getting gigs is hard, but if a band can get ten venues at level 4 and life gets a lot easier. Consider the commercial journey of Lilly Allen, Justin Beiber and the Arctic Monkeys. They were smart enough to migrate their fan base up the four levels.

Key questions to consider

If you are Chicken Dan, the marketing director of a large building firm, a new player in the gig economy or head of the call centre team in a large corporate - there are a few simple questions to consider:

• What is the split of my total customer base across the four levels?
• What split do I want (all at Level 4 might not be appropriate)?
• What percentage are moving up or down the levels?
• What strategies do we have in place to move people up the levels?
• What strategies do we have ensure we don't let them slide back down?
• What is the risk of a Level 4 customer relationship turning bad and using their social capital to damage the firm's brand? People can switch from coactive to detractor status in the blink of an eye is they feel used or taken for granted.
• What characteristics do we have that moves people up the levels that other can copy - how well do they imitate our process?
• Where competitors have 'borrowed' our techniques and enhanced them - what can be 'borrowed' back?
• What characteristics do we have that moves people up the levels that competitors are unable to copy - why is that? How can we make it harder for people to imitate?
• What can we learn from other industries who are smart at moving people up the levels?

In the same way that the fish are the last to see the water - sometimes it can be hard to see the answers to these questions. As you live in the business everyday objective evaluation can be hard. This is the where a good coach will help significantly. They can help you to step back and look at your customer relationship model from a cold clinical perspective and not be clouded by dreams and wishes. A good coach will force you to see your business as it is and not as you wish it were. They will challenge you to work on ways to help customers move up the Levels and so help deliver sustainable business success.

Watching the 'Chicken Dan' story unfold...

Dan is a very very smart guy. Everything he does suggests a sophisticated approach to marketing and building a small business - but in a very understated way. I don't know if his capabilities are learnt or latent - but they are really very effective. I look forward to watching his journey over the years with great interest.

Mick Cope

[email protected]