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Libey Incorporated
Economic Outlook
Secrets of the Catalog Master
Vol. MMVIII No. 4
May 2008
May 2008
Cherry Hill, New Jersey
Des Moines, Iowa
Donald R.
Libey, Editor
Value
by Donald R. Libey
All that you read, all that you hear, all that is driving the economy is linked to one fundamental concept: Value. Here are some thoughts that I come back to and write about every 10-12 years as the “Value Cycle” goes around once again and we learn all over about what it takes to survive.
Monetary Value
When the economic cycle heads to the bottom of the chart, everyone’s monetary value declines. Yes, I know, somewhere in the world someone is getting rich, but unless you own an oil producing company, it isn’t going to be you.
The down-cycle in economics squeezes most companies and people equally. It is an economic principle you can pretty much count on. If you are feeling the pressure, so is your competitor. We are all in the same boat and we all are at the mercy of the tides, winds and the storms.
You have seen this time and again; you have just forgotten about it, or you really never thought about it. Remember the rising DotCom bubble? Everybody’s relative monetary value was increasing in that period. Remember the 70s? Inflation and interest rates were at 17 percent and rising, and the value of the dollar high and king of the world currencies.
Remember 2004 and the salad days of private equity buy-out firms? Valuations of businesses were 7, 10, maybe even 15 times earnings. Life was large. If you had a business, 2004 was the time to sell. Everybody’s business was worth more, even if it wasn’t a very good business.
The Point: Monetary value is relative. It is all based on the economic cycle of the moment. And those cycles change. Monetary value is not exactly something you can count on. It is changeable.
Product Value
Product value is the inherent value of the product or products that you sell. If they are in high demand and proprietary to you, you have a very high product value. If they are in high demand and are available from many, you have a lower product value. If they are in low demand and available only from you, you have a high product value. If they are in low demand and available from many, you have a very low product value.
Product value—in addition to demand—also cycles based on relevance. Highly relevant, proprietary products create high product value. Irrelevant or obsolete products, regardless of the proprietary nature, create low product value. As product relevance ages, product value declines.
Product value also is influenced by quality of demand. If a product is mandated by legislation, it must be purchased. If a product is influenced by social necessity, it is likely to be bought. And, if a product is a ‘nice to have’ it may or may not be bought, based on economic whim (disposable purchasing capacity and personal desire).
The Point: Unlike monetary value which is relative and changeable due to external forces that you cannot influence, product value is self-determined and controllable. You can influence the inherent value of your product.
Business Model Value
How you sell has a value. If you sell in the manner the market demands, you will have a higher business model value than if you sell in a manner that the market does not want or respond to. If the market only wants online sales, your model value will be higher if you are a pure-play inline marketer. If the market only wants face-to-face sales, your model value will be higher if you have well-trained field salespeople.
Granted, the business model value and the product value are somewhat linked. If you have a high demand proprietary product, you will probably be able to sell it any way you want and, therefore, are likely to choose a simple, online streamlined model. But, if you have a low demand commodity product, you may need ‘relationships’ that can only be created through face-to-face selling (read ‘buying lunches’ and ‘playing golf’ with customers).
The Point: Business model value can be self-determined and controlled; however, it is a very difficult value to change on a cyclical basis. If the economy tanks and you need a sales force but are only an online company, you have a business model value problem.
Inventory Model Value
How you stock products has a value. How you stock products also has a cost. Basically, there are two models: Stocking and Drop Ship. The primary differences in the models are gross margin and expense. You get a higher gross margin when you take title to goods, but that costs money to maintain a warehouse and fulfillment staff.
If you are a stocking inventory company and the market tanks, it is very difficult to convert to a drop ship company. A rising market and a falling market generally benefit a drop ship model because there is less adjustment required to market economics.
The Point: This is a semi-controllable value factor, but it requires a profound upheaval in all systems and processes when market economics call for a change, an upheaval that is also profoundly expensive. If you are a drop ship company and you must change to a stocking company, you are going to need a warehouse, a racking system, an inventory management and analysis system, an employee division, senior management with inventory management and shipping experience, and dozens of other needs. Similarly, if you are a stocking company and need to change to a drop ship company, you will need to get rid of a whole lot of overhead. In the final analysis, the gross margin increase or decline (and the related expenses) must be sufficiently positive in order to make a change, and that change must be long term and not short term cyclical in nature.
Management Value
You either have good management or you don’t. After 30 plus years in this business, I can say that 20 percent of the companies have good management and 80 percent don’t. This is due to lots of things, but mostly due to ownership’s value of people and the potential value people can add to the business.
When owners believe they are the know-all, end-all, the management value is low. Where owners believe in surrounding themselves with people who are smarter than they are, the management value is high. It’s all about egos.
When ownership is cheap, management value is cheap. When ownership invests in management, management value is high.
When ownership possesses a company with high monetary, product, business model, and inventory model value, management value is high. When ownership possesses a company of little monetary, product, business model and inventory model value, management value is low.
The Point: When you own something of high value, you provide high value management. When you own something cheap and of little value, you provide drones.
You get what you pay for. And, you pay for what you get.
Customer Value
Customer value has a number of facets. When customers come from a large universe, their value tends to be higher based on potential market size. But, sometimes, when customers come from a very small universe, their value tends to be high if product value is high. The first customer slice, for me, is universe size. Then, when that is defined, I look at the relative monetary and product values to gauge the initial customer value. Some of the basic questions to be investigated are product usage rate, proprietary product potential, average order value, availability of substitutes, market ‘dwell’ (how long I can expect to sell these products to this market segment at these prices), and a host of other factors. In the end, I come up with a reasonable customer value expectation.
Customer value also has to do with loyalty. If the customer universe is a ‘one-off’ universe and tends to buy one time, it is, by definition, a low customer value universe (unless there is a huge gross margin involved). If the customer universe has proven its repeat purchase loyalty, it has a high customer value.
Universe specificity is another measure of customer value. When a group of customers are specific in their product demands (water and liquid flow measuring devices, for example), that group of customers are of much higher value than a universe that is non-specific (industrial products, for example). And, if the customer universe has three or four specific product demands, customer value can be enormous (water and liquid measuring devices; flow meter calibration equipment; pipeline cameras; liquid tank level alarms, for example).
And customer value is also a reflection of monetary value. If the universe spends a lot of money on the average purchase, then it is of higher value than the universe that spends little on the average purchase. Granted, recency and frequency must also be factored into the customer value, but—overall—there is a dollar value to be assigned to any group of customers and, if it is high, that is better than low.
The Point: Customer value involves universe, loyalty, specificity, and monetary value. High value customers add more value than low value customers.
Customer Service Value
The level of provided customer service and the customer perception of that customer service create a customer service value for all companies. Let’s begin with the nadir of customer service to understand how this value is derived.
Airlines no longer even bother to consider customer service because it no longer matters. If you want to get to Point B, you have to use them. Essentially they are flying buses and the ‘drivers’ just have better hats. There is no customer service value in the airline industry.
Big Box retail has converted to self-service. There is no customer service differentiation or value in retail; only price matters.
Any business that requires having an account (telephone service, insurance, cable TV, Internet broadband, banks, hospital billing departments, etc.) have no customer service value because there is a vested interest in making it impossible for you to change anything.
The value of customer service is now defined as “The advantage to the company in shifting you from a human contact to an automated contact at less cost and less risk of lowering your monthly account charge or average spend.”
In a down-cycle economy, the level of customer service offered is more likely to be gutted than enhanced. Enhancing is a cost; gutting is a savings. Therefore, when the economy and the price of oil create $6.3 billion in losses at Delta Airlines, the logical thing to do is to eliminate 10,000 customer-oriented positions. Gut the customer.
Customer service value is totally controllable. Customer service value is not relative. Customer service value is self-determined and is influenced internally, not externally driven. It may be one of the only things you can selectively control in a down-cycle market.
The Point: Customer service value is, perhaps, the element that controls all of the other values in the business.
The Value Mix
If we look at each of the different ‘values’ described above and attempt to describe them in some way that ranks the ease and benefits of change, we might come up with the following for you to consider:
|
Value |
Controllable |
Difficulty
in Changing |
Benefit in Up/Down
Cycle Market |
|
Monetary Value |
No |
Difficult-Cyclical |
No-All in same boat |
|
Product Value |
Yes |
Difficult-Positioning |
Only in cycle direction |
|
Business Model Value |
Yes |
Difficult-Long Term |
Only in cycle direction |
|
Inventory Model Value |
Yes |
Difficult-Facilities |
Only in cycle direction |
|
Management Value |
Yes |
Difficult-Ego/Recruiting |
Only if owner buys in |
|
Customer Value |
Yes |
Difficult-Universe Shift |
Only if contra-cyclical |
|
Customer Service Value |
Yes |
Easier-Attitude/Process |
Yes-Both directions |
If we look for something that is easy to control, change and that works in any cycle of the economy to provide greater benefit in value, it would be customer service. The other six value properties are difficult to change, require long term change, and often only work in anticipation of a short-term change in the direction of the economic cycle.
I would also venture that—of all choices discussed—customer service may be the lowest cost change a business can make with the greatest, immediate reward. Call it what you will—satisfaction, loyalty, retention—it begins and ends with the customer’s choice of which company to do business with.
Within the multi-focal world of customer service are many areas for exploration. It can be speed of fulfillment, speed of order entry, friendliness, returns management, open account policies, choice, dedicated account reps, or any of a hundred elements. By and large, however, these often require only attitudinal change supported by appropriate management and systems changes. If you want to be the very best in customer service, you can do it without rebuilding the entire infrastructure of the business.
Conclusion
It seems to me that the economic cycles that determine up or down markets are, by and large, caused by externalities that we cannot influence or control. When they occur and cause internal economic stress, it may be prudent to have a defense that can be created easier, simpler and more effectively than a defense requiring a fundamental, infrastructural or market universe change.
For me, that reliable, ‘good in any economic cycle’ solution has always been a focus on and enhancement of customer services. If the world is only buying 70 percent of what it bought last year, then I need a solution that guarantees I can expand or better retain my existing market by at least 30 percent at a cost I can afford and at a risk to my business infrastructure that is as low as possible. If I can do that, I will survive yet another of the regularly occurring economic cycles and live to fight another day. If I don’t, I will be irrelevant in the marketplace and I will perish. It’s all about customers.
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