Should you drop some of your product variants?
Product variants and differentiated pricing can be powerful revenue generators. Businesses augment their basic product to generate more customer value and can charge more for perceived higher quality. To operate this model successfully, businesses must be able to trace product and ongoing service costs. If not, some of those variants can unknowingly cost profit.
The full story
Does what goes up, have to come down?
Rapid growth is the ultimate dream of many businesses. An ambitious CEO of a young digital marketing firm had successfully navigated the complicated journey in securing initial financial investment which allowed the founders to exit. He was now fully in charge of his business. The business generated and sold customer leads for financial services products such as life insurance and mortgages.
He’d achieved rapid growth in the UK market and grew from a team of 10 up to over 30. But, as sales volume increased, he faced a new challenge, the law of diminishing returns. As the business produced more leads the quality rapidly declined. His customers weren’t happy and began to decrease order volumes, he knew if he wasn’t able to get the quality and volume up he wasn’t going to convince investors his business model could be expanded abroad and potentially worse, the UK business would shrink.
The unique pricing model
The business operated a unique pricing model; asking customers to only pay for leads that they were able to contact. Finding one person looking for life insurance online is easy; finding the 100th or 1000th person becomes more challenging. The business was innovating finding more and more ways to drive traffic to its lead capture sites; but increasing their supply was disproportionately pushing up the volume of leads that were uncontactable and thus valueless.
How could he continue to grow without compromising quality? He was dying to move onto the overseas expansion chapter of the business but knew he couldn’t leave the UK business until he figured this out.
The diagnosis process
The business had been on quite an adventure
He was passionate about his story of growth, I could sense that in the early days the team was very close knit and could adapt quickly to messages they heard from each other. It sounded like the type of start-up journey all entrepreneurs hope to tell.
By comparison, the post investment growth phase, sounded like a bit of a roller-coaster. Things were changing almost every day, lots of new faces joined the journey and he clearly missed the experience he lost when the founders exited. The new monthly meetings weren’t as fun, there was a big disconnect between supply and sales.
Understanding supply
The CEO was keen to introduce me to the supply teams; praising them for the additional volume they had achieved. Their main supply source was search engine marketing, paying for search engines to display their adverts based on keywords.
Supply teams had heard the message loud and clear ‘we need volume’ and were proud of how fast they had achieved more. They were self-confessed geeks who loved optimising and pushing their targets; generating new keywords had become almost a team competition.
Each month they were given a target volume and provided with an average sales price from the previous month; which they used to continually optimise their keyword portfolio to maximise profit as they saw it.
The sales team had experienced growth differently
The sales team also had a lot of passion but were very different to the supply teams. Convincing customers to try a new marketing channel where they only paid for real customers had never been a particularly tough sell.
However, as they grew the average lead quality or contact rate their customers had enjoyed was declining and long standing customers were beginning to decrease their orders. They recognised the cost of their staff unsuccessfully attempting contact was not just in efficiency but also in morale. At month end when customers reported the contact rates and price they were going to pay, teams were getting more and more deflated, especially when the subsequent orders were for lower volumes.
Making the connection between supply and sales
I wanted to see what the data’s story was like.
Initial analysis didn’t tell me much; there wasn’t a conclusive pattern to follow. We needed more detail. Digging into their system I found a lot of lead source information that wasn’t being passed through. I took a set of the data and matched it to obtain the connection between generation and performance; suddenly this revealed the insight they were missing. Analysing by keyword showed consistent differences in quality.
Interestingly some of the highest priced keywords weren’t producing the highest quality leads. Consistently connecting keywords with the quality they generated would allow supply teams to push for more of the best leads.
The CEO was delighted by these findings and instantly saw he had what we needed to solve the problem. Understanding which exact sources were commanding higher quality and therefore higher average prices would mean the team could differentiate spend and generate more volume.
What we learned from the diagnosis process
By connecting the data across the value chain, it was possible to lower spend, increase quality and increase volume.
The flaw of averages and failing to differentiate masks the true picture
By using last month’s average price for supply optimisation not only was it out of date, it didn’t provide enough detail; in some cases foregoing supply actually increased profit.
The true cost of product variations must be known to understand their profit to the business. Many businesses have complicated product portfolios but are unable to differentiate product profitability, unfortunately they are often leaving money on the table.
Communication is a process that needs to be optimised like any other
When the business was small everyone could easily talk to everyone else; as the business grew no new mechanism was put in place to ensure smooth communication and clarity along the value chain.
This is not a new problem and many businesses face this issue as they grow and become frustrated that everyone isn’t on the same page. This business needed to communicate the value of each lead source back to the supply teams but had no mechanism to do so.
Higher cost doesn’t mean higher quality and vice versa
The new data set had revealed that the most expensive keywords weren’t always producing the highest quality leads and that some keywords that the search team had considered the ‘best’ were producing only uncontactable leads.
It’s easy to assume that you get what you pay for but for businesses with complex product inputs this isn’t always true; connecting the information across the chain and verifying the source of the quality element can drive real optimisation and profit opportunities.
Designing an effective solution
We had revealed the key to higher volume at higher quality but needed to work out how to pass that information back to the supply teams.
I created matching tables taking data from keyword tools and lead information from the customers back to the source. Using these new tables we were able to craft a series of real time dashboards that let both the supply and sales teams optimise the business.
The CEO was also provided with a quick view dashboard so he could check in on progress, volume and quality.
The outcome
He got the sustainable business growth and enjoyed some other benefits too
Revenue and quality increased and costs decreased leading to month on month profit growth for the business. He had proven the UK business model worked and strengthened his business in other ways too:
Increased prices
Most customers provided not only contact rate information but also conversion rates; the business was now able to predict which leads would be most likely to convert for their customers. They had a real understanding of lead quality from the eyes of their customers and were able to command higher prices for those leads more likely to convert and customers were delighted to pay.
Competition amongst customers
The higher and differentiated quality, led to customers competing for the very best leads and asking for higher volumes than the company could supply. They began offering even higher prices to guarantee supply and in the first year of implementing the new system they achieved 100% retention of their key clients. Their business had become very effective at solving a problem for their customers and the scarcity of this solution pushed up the price and strengthen the relationships with the key buyers.
Improved team morale
Sales and production teams had the information at their disposal to optimise for the entire business, they were performing better and working in harmony with each other. Monthly meetings became about communication not negotiation. Data had provided a new communication mechanism linking the teams together.
Are some of your product variants perhaps costing you money?
Like this CEO, have you been through rapid growth or change and are facing new challenges? Do you need to focus on the financial side of the business but know operations needs to improve? Do you know the margins of each of your product variants? Do you know there must be further optimisation for your business?
Using data to create communication mechanisms or creating full data sets to allow for optimisation along the value chain might provide the answer. You don’t need to tackle it alone; I can guide you through a process for you to unlock the value in your data and harness its power.
To chat through your optimisation opportunity, please get in touch.