Consumers are PEOPLE not numbers

Well they are in! After a grueling week of reviewing business plans, making edit suggestions and coaching, my mentees got their business plans in to the MIT100K competition. The MIT100K Launch finale is on May 14 and I’ve always had a lot of fun at this event. I never fail to learn something new watching the finalists talk about launching their own startups. Given that this is a student run event, you’d think that it’s just a bunch of 20-something year old undergrads competing but it’s not. True, MIT attracts the best and brightest kids for their undergrad programs but the institution also has several graduate programs that attract experienced professionals who are the best in their fields and also compete in this contest. The only requirement to enter the competition is that at least one member of the team is a current MIT student so it’s likely to have highly sophisticated teams comprised of working professional engineers and seasoned entrepreneurs on board with a MIT student who may be an experienced working professional as well. As an example, when I entered the contest, I was a student who had already been a lawyer for several years and also had over a decade of experience managing projects and divisions in biotech and government organizations. My team members consisted of MIT bioengineering professors and even a physician from one of the Harvard-affiliated hospitals.

One of the main reasons why I’ve stayed on to participate in the MIT100K, besides enjoying being part of the community, is that I get to learn from my mentees. Whether it’s about their technology or ideas or just what they know about their target markets, there is always something to learn. In addition, I’ve found that working with entrepreneurs in an academic setting helps me continue to improve as a lawyer in that I get the opportunity to really learn about my clients. As a corporate lawyer, I work with a variety of companies but where I believe that I bring value is in helping new entrepreneurs. I don’t particularly think it’s because I’m an amazing lawyer, rather, it’s because I’ve invested the time to work with, learn from and be among them. I happen to believe that there is no better teacher on how to create value for your clients/customers other than your clients and customers.

Learning to take lessons from my clients wasn’t an easy thing for me to pick up. In fact, during my first week of business school at MIT, I heard the title of this post from one of my professors and immediately thought: Did I accidentally wander into a classroom at Harvard? I mean, haven’t you seen Goodwill Hunting? This place is supposed to be crawling with math geniuses, they love numbers! Shouldn’t I be learning advanced quantitative and predictive analytics methods from them? If I develop an amazing product (in my case, an amazing set of quant skills) then the masses will just have to follow, regardless of whether I know who they are…right? However, as I quickly learned, by trial and error as well as some math models, the answer to this is no. In fact, not just a no but a hell no, for if no one understands or cares about what you’re offering, no matter how brilliant you think it is, no one is going to show up to listen to you, let alone buy whatever you’re selling. This is why it’s so important, in addition to understanding the numbers, that we also remember to consider who our customers are and know that they are not merely variables in a math equation. Because it is in knowing and understanding who they are that we’re able to create value for them and when we do that, then they will follow and buy the valuable product/service that we’re trying to sell. I eventually learned this from my esteemed professors after years of fighting it, which is why I think it’s funny that it’s what I’ve mainly been working on all week to convey to my startup mentees. And it’s not just this year, it’s actually every year that this is where I seem to spend a lot of time on in the business plans I review.

Oftentimes, we develop business plans around numbers. I’ve read so many business plans that have this statement: “the market size of X product = $Y.” This semi-equation hardly makes any sense to me because I have no idea what number of people (“P”) the solution, “X”, applies to and WHY they are willing to pay a total of “$Y”. Are they all willing to pay equally or is there some variability? What if we have people who can’t pay the price of $Y/P now but can likely pay more than $Y/P later or even better, become a loyal, price inelastic customer forever? We can’t really distinguish these other factors from the numbers alone, which is why, when I read a business plan that has that statement, I ask the authors to tell me about the potential subscribers of “X” (e.g. who are they? what do they do? what is their problem? do they have any ability to segment their problem? What solutions are they applying now?). True, this might require more time than just having a computer generate variables and apply equations but it’s the most effective way to learn about your consumer. And at the end of the day, no matter what it is you’re selling, the person buying is still going to be a person and not a number on a financial statement.

One thing that I love about skin care brands is that they are actually very good at knowing who their customers are. Take SK-II for example, in their financial statements they describe their 3 market segments (i.e. customers). Their first customer, who they’ve named “Madam” is described as an older and affluent indepedent woman who has a lot of disposable income to spend on pampering herself and is loyal to SK-II. According to SK-II, in 2012, Madam helped generate about 70% of SK-II’s revenue so, naturally, the company spends a majority of their customer outreach efforts to Madam. This is probably why we see so many ads for SK-II that don’t make much sense from a problem-solution perspective…Madam isn’t looking for a solution, she’s jut a loyal customer and will buy SK-II regardless of what the brand puts out there and how much it costs.

The next customer is named “Missus,” who is a young, adventurous and successful woman who has a little bit of disposable income to spend on pampering herself but also needs it to work as a solution to her problem within a short amount of time. She can’t afford to keep buying SK-II at her current income so she’s a more problem-solution oriented customer.  In 2012, Missus helped SK-II generate about 20% of its revenue. However, given that Missus converts to other brands easily and doesn’t do as much as Madam in terms of helping SK-II generate revenue, SK-II does very little to target them. I, for one, am a Missus and glad that SK-II doesn’t target me in their ads because I think they’re meaningless. I started buying SK-II over 10 years ago because I wanted a good over-the-counter anti-aging product. At the time, I had great skin that I’d maintained and wanted to make sure it stayed that way. I didn’t have any skin issues rather, I just wanted a good anti-wrinkle regimen. Well, 10+ years later, I’m still using SK-II and have no wrinkles despite the fact that I turn 40 this year. While I think SK-II is great, I have no brand loyalty. Instead, I merely buy their stuff because it’s provided a good solution to my anti-aging problem all these years. At the same time, I do understand that it’s an expensive brand so I would be easily converted by another solution if one came along that performed as well as SK-II at a lower cost. BUT they would need to convince me with data, not Cate Blanchett dancing around in a white gown trying to sell me a “miracle”.

“Gentleman”, the third and last class of SK-II customers, helped SK-II generate about 10% of its revenue in 2012. Gentleman is a contemporary man who appreciates good skin care and likes to take care of his skin. While there aren’t very many men who fall within this category, SK-II believes that it may be able to generate more revenue from this customer if he was effectively swayed to become SK-II’s loyal fan. So, of course, the company spends a lot of money targeting Gentleman. I, personally, don’t know any men who spend as much time thinking about skin care as I do. However, being around men and being married to one, I understand that if they get used to something, they tend to stick with it and not bother shopping around just for the sake of shopping around. Guessing on SK-II’s perspective, investing in acquiring this customer segment now is a great strategy to reap the rewards of price inelasticity from this customer segment later.

SK-II isn’t the only brand that does this. If you go to any social media platform such as Instagram, Twitter or Facebook, you’ll quickly realize that cosmetics brands are investing heavily in gaining access to and understanding their customers. I personally interact, on an almost daily basis, with brands I use such as, Drunk Elephant and Tatcha on social media. They even ask me to post what my daily skin care regimen is and ask if I have any questions or concerns. At first, I thought this was creepy but over time I’ve come to realize that giving them feedback actually enables them to deliver a better product to me. If not, consumers who are reading my concerns on social media are more than happy to recommend other skin care lines. In any case, it’s not surprising that these brands have successfully entered an already crowded skincare/cosmetics market. They invest in knowing who their customers are and by doing so, they are able to target their products to the right customers, ones who actually care about what they’re selling and are willing to buy. This is also how these brands are able to develop customer loyalty. In fact, Drunk Elephant has such a loyal customer base that Sephora (their primary retail outlet) has had to limit the number of Drunk Elephant products it’s customers can buy during its annual sale event so they don’t sell out. Pretty good for a 6-year old company that sells 12 products and hasn’t used any celebrity endorsements yet.

Identifying your customer isn’t just for driving up sales but it gives you an opportunity to figure out how much to spend to get them and how. What do they need? How can you help? What can you offer so that they don’t go somewhere else? How do you establish loyalty so that they are wiling to tolerate any price increases (within reason of course) that you may need to implement in order to survive as a business? Because buiiding a business isn’t just about selling a great solution to a market that spends a lot of money. Rather, it’s about knowing and understanding your customers so that you can adapt your numbers (e.g. expenditures, revenue) and solutions accordingly in order to deliver value to them. Because no matter how smart you are or how good your numbers look, there is always going to be someone at the purchasing end making the decision to buy and that someone is a person, not a number.

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