Cutting costs in a downturn may be unavoidable, even easy, but cutting costs while maintaining – or even enhancing – the product’s or service’s appeal for the consumer is the real challenge, even an imperative. Marketers will learn about five options for reducing costs and retaining customers.
The global recession has caused consumers to change their spending habits dramatically. Everyone from the very wealthy to middle- and lower-income consumers is showing restraint, moving away from luxury goods and focusing more on value and cost in their discretionary spending.
Predictably, this change has had a negative impact on revenue and margin performance for most companies. In Canada, from Q2 2008 to Q2 2009, operating revenue across all industries fell by 8 percent, while operating profits fell 32 percent.
Canada’s economy will recover, but it will take a while. In its October 22 Monetary Policy Report, the Bank of Canada predicted that the Canadian economy would emerge from the recession in 2009 with a 2.4 percent contraction, followed by 3 percent growth in 2010 and 3.3 percent growth in 2011. The economy may also not be as robust as expected, especially for the industrial, auto parts, communications, electronics, and pharmaceutical sectors; financial and energy sectors are expected to experience a stronger recovery.
Many companies may need to cut costs in order to survive the current downturn and the sluggish recovery. Most importantly, they will need to execute their survival strategies intelligently, without damaging the customer relationships that they have built over time. This article will describe five steps that a company can take to earn customer loyalty, retain repeat business, and build brand loyalty as the economy begins to rebound.
Cutting costs while maintaining the customer experience
If cost optimization initiatives are to work, they should be invisible to the customer, while emphasizing branding, value differentiation, and enhanced customer experience. In this way, customer relationships can be maintained and later flourish, when better economic times return.
Below are five areas that can provide opportunities to cut costs in ways that put the customer first and encourage customer loyalty.
Rationalize your portfolio
While comprehensive product portfolios allow companies to increase their brand awareness in different markets, offering a multitude of similar products can also make it difficult for customers to distinguish among the company’s brands. In a downturn, when consumers are spending less across the board, spending more on strengthening core brands that add value —and less on those that don’t—can be key.
To start, companies should conduct a critical inventory to determine which products, services, or brands provide strategic advantages? Which are most relevant to customers? Those that are meeting and will continue to meet the needs of core clients should be invested in further, through marketing and innovation. Companies should also carefully consider whether the laggards should be maintained or eliminated.
For example, in the last few years several large car companies around the world began rationalizing their product lines to gain greater brand differentiation. One such company, a large U.S. organization, reduced many U.S. product lines to four key brands that were the most profitable and offered the highest sales opportunities for the future. At the same time, it scaled back, discontinued, or stopped selling its other brands.
Enhancing service levels by focusing the energies of the company on its core, strategic advantages that best serve the customer is another way to look at rationalization. In the early 1990s, after almost 10 years of financial stress that led to a deterioration of the company’s brand, one of the largest American banks outsourced its IT so that it could focus on the things it did well—serving and building relationships with clients.
Few industries rely on information to serve clients like financial services organizations. Without IT, the millions of transactions that a bank conducts daily for its customers would be impossible. But, by outsourcing IT, the bank benefited from access to more advanced technology via the outsourced company, without having to deal with the costs of owning and operating the technology. More importantly, it gained a competitive advantage by being able to focus more staff on its core services. And then there were the financial gains—the move saved an estimated U.S. $10 million per year.
In a down market, many companies attack marketing budgets first, because they are often the easiest to cut, and without having to reduce the number of staff. But when broad cuts like these are made, they often do not take into account the effect they will have on the customer, and which can have an unexpected negative impact on the bottom line. Strategically trimming the marketing budget to focus on a strong brand, core service, or key clients is a smarter way to help optimize costs.
Many U.S. casinos are taking this approach by reducing promotional costs targeted at lower-spending customers in their marketing database (those spending $100 or less). The reason is that this type of customer may not use discretionary funds on a casino visit in the current economy. Instead, casinos are focusing marketing efforts on mid- to high-end clients. Once low-end clients start returning to casinos after the economy improves, marketing budgets can be re-examined and adjusted to include this market segment once again.
This marketing strategy highlights another way that organizations can optimize costs—using customer data obtained through loyalty or customer card programs to better target marketing programs or enhance customer service. Using customer and benchmark data that companies already have – especially using it more effectively — can offer huge benefits at relatively little or no cost.
For example, the hospitality industry, which understands the importance of maintaining the customer experience as much as possible to ensure brand loyalty, has found numerous ways to reduce expenditures that are invisible to the customer.
One U.S. hotel chain, for example, chose to make subtle and simple cuts during the current recession, such as providing only one room key to single guests instead of the usual two. They also reduced the temperature slightly in guest rooms and reduced the amount of garnishes in food and drinks—things that most customers would not notice.
Another hotel chain eliminated the need for a concierge in its lobbies by installing a touch-screen computer to help guests locate a restaurant, get a weather update, or obtain other information they required. The company also shut down whole floors when unoccupied, consolidated suppliers, and reduced the number of items on its restaurant menus to reduce costs intelligently.
Protect and develop human capital
There are numerous ways to manage human capital effectively in a down economy and to help companies maintain customer service levels. Asking employees to take on a flexible or part-time work schedule (where possible), forego pay increases, or take days off without pay are a few strategies for reducing HR costs without letting people go.
Some companies are being even more creative. A large car company, for example, has to pay its employees even when they are not needed on assembly lines. Instead of sending employees home, the company enrolls them in quality control and productivity skills training. What was previously costing two plants about U.S. $35 million per month in wasted wages is now being reinvested in employees and improving efficiency on the assembly lines.
Utilize technology to your advantage
During the current economic downturn, many service organizations are finding that their clients are demanding that they provide more work while spending less. Some companies have looked to IT to help make this possible. A large Canadian law firm, for example, recently implemented videoconferencing at all of its office locations for internal and client meetings in order to reduce travel expenditures.
With its lawyers travelling less to client meetings, the growing reliance on videoconferencing has helped the firm realize significant operating cost savings. Videoconferencing has also allowed lawyers in the firm to reach clients, consultants, and other stakeholders from all over the world more quickly and efficiently. This, in turn, has provided a competitive advantage for the firm. It has been able to respond to the negative effects of the downturn faster than its competitors.
And there have been other benefits, too. The firm has noticed that more people participate more fully by videoconference than they had in the past by teleconference, because the visual nature of the technology reduces the amount of multi-tasking that users would normally engage in on a teleconference call, such as reading and responding to e-mails, etc. And the videoconferencing has allowed lawyers and other employees to enhance their working relationships by being able to “put a face to the name” much more easily.
Enhance areas of weakness and fill gaps in service offering
Since asset and company valuations tend to be lower during a recession, purchasing distressed assets that offer strategic advantages or high future growth potential, or acquiring companies to gain a new market presence—at a discount—can reap huge benefits. But the reduced valuation shouldn’t be the only consideration. The purchase needs to make sense for both companies and proper due diligence needs to be done. Acquiring a company that is over-leveraged or underperforming due to poor management, or purchasing distressed assets that are no longer of strategic value to the seller, are key ways of investing in the company now to help build up weaker areas of the buyer’s business.
In the 2001 recession, for example, a UK consumer goods company purchased a Canadian-based beverage organization, making it a world leader in volumes and profitability. That same year, a U.S. industrial and consumer products manufacturer acquired a U.S.-based retail automation and environmental products and services provider, which is now among its most successful and profitable businesses.
Going from surviving to thriving
Customer perceptions and spending habits change with the ebb and flow of the economy. In more buoyant economic times, when consumers are confident and have a positive outlook on the economy, they spend. In a deep recession, when consumers feel insecure and not in control, they continue to spend, but they do so with greater caution. They begin to look for greater value and security in their purchases—the additional warranty on the computer or loyalty program points on the plane ticket—or even an emotional connection with their own personal values, such as the company’s support for charities, the community, or the environment—something that helps justify the expense.
Many companies are taking the time to understand these changing customer perspectives and react to them. Many hotels, for example, are responding to their customers’ wish to protect the environment by going green. Not only do green initiatives provide added value to customers by connecting with their personal values, they also offer an opportunity to save labour and equipment costs by running washers and dryers less frequently, for example, or reducing electricity costs by encouraging guests and staff to turn off lights when they are not needed.
A large U.S. retailer is also doing more to connect with its customers by addressing their need to give back to the community. The retailer provides discounts to loyal customers via e-mail offers throughout the year, and recently began donating a percentage of these sales to local charities. The retailer is able to cut through the clutter of discount offers its customers receive by providing a way to help differentiate and validate the purchase for them.
Companies that take the time to understand changing customer dynamics, differentiate themselves in consumers’ minds, and answer their customers’ needs will likely be ahead of the game. Focusing on the customer experience is something organizations should do now not only to survive, but to be able to build brand loyalty and thrive when the economy rebounds.
A rebound will not happen overnight, and nor will consumer confidence and trust rebound any time soon. When the economy does improve, of course, companies should refocus their strategies for the upswing and beyond. They should take a fresh look at their business and consider what they need to do next to build, grow, and succeed—always without losing sight of the customer.