Big Red Car here. The Boss was up early this morning. He got an email from a pal asking about my post in regard to the Old Economy >>> New Economy transition — link — and the pal wanted to have a concrete example of how this would impact, say, marketing organization.
So here goes.
Old Economy company
In the instance of looking at an Old Economy company — say a little manufacturer, a printer, a restaurant, a retailer, an entertainment company — it has been around a long time. Way beyond “proof of concept” and likely profitable.
You are going to buy this company on some multiple of cash such as 3-5 times TTM cash flow. Three to five times trailing twelve months cash flow.
In this cash flow calculation, often the owner has included the compensation paid to them as the manager of the business. That is now going to become part of your cash flow when you buy the business.
So, the Old Economy company, as an example, is paying the owner $100,000 per year and making $250,000 annually (post-tax).
The purchase price, as an example, is going to be four times that cash flow or $1,000,000 plus you are going to be able to pay yourself $100,000 (pre-tax).
That is the base case. We will discuss valuation and other acquisition considerations in another post.
But that gives you an idea from whence you are starting.
So you walk in the first day and ask: “Do we have a computerized list of customers?”
And, in fact, you do but it has not been updated for a couple of years and in the hub bub of selling the business nobody has been working the list. The list is out of date but you do have a list.
So, now the issue is to transform an outdated list of customers into a New Economy marketing driver.
What exactly do you do?
New Economy marketing drivers — building the initial customer database
You are going to do the following specific things:
1. You will re-design the customer data base to ensure you are capturing the right information. Name, snail mail address, email address, cell phone, birthday, anniversary and other data specific to your new business. Get the information you need.
2. You will find out if your customer owns a computer, is on the Internet, uses email, uses text messaging, uses Facebook, uses Twitter. Find the baseline.
3. You will fashion a way to connect unique customer data — frequency of visits, amount of purchases — to that database. Simple stuff. Put a dollar value on each individual customer.
4. Now you will have an ability to analyze and sort the customer database and isolate certain characteristics — Internet users, email penetration, text messaging penetration, Facebook users, Twitter users, average spend per visit, total spend per year.
You will likely have about 60% computer ownership, 50% Internet users, 45% email penetration and 95% smartphone/potential text messaging, 30% Facebook users and 25% Twitter users.
The total number of customers and these percentages can be dramatically increased by your marketing efforts. This is the low hanging fruit you are going to pick by drawing this company into the New Economy.
New Economy marketing drivers — working with your existing customers
You want more customers and you want to capture more customer data. Stating the obvious.
But you also want to get your best customers — the ones with the highest value per visit — to make more visits.
You want all customers to visit more frequently and you want them all to spend more money per visit. But the easiest way to impact the bottom line of the company in the short term is to get your best customers — dollar value and frequency of visit — to come more frequently. Mull that over a bit.
Verify your own instinctive assessment
You did a bunch of due diligence before you decided to buy the company and you think you know who the customers are. You likely know that you can do a better job on customer engagement and attraction. You may have a bit of a queasy feeling in your stomach about customer retention but your seller is 75 years old and you have an ironclad non-compete, so you are not scared just a bit apprehensive.
So, you decide to conduct a focus group to engage with some of the company’s best customers. This technique allows you to assess the company’s reputation.
You want 3 enthusiastic customers. You want 3 neutral customers. You want 3 sourpusses. You want one wild card. You want a mix of gender which reflects the overall customer base.
You learn how to conduct a focus group and you prepare about 5-7 questions and expect to spend about an hour with the group. You want to get them talking and you don’t want the company’s management or former owner anywhere near the focus group.
You pay the participants for their time, you feed them and you give them a discount card on their next purchase.
You will learn some amazing things.
If you have the time and desire, you can also conduct a Customer Satisfaction Survey using Survey Monkey to gauge — duh — customer satisfaction.
Now you have a lot of data as to your point of departure. Let’s make some New Economy tools.
Now that you know a bit about your customers — updated database, dollar weighted database, technology/social media penetration assessment — you are ready to begin developing the other obvious tools that will complete the transformation.
Stop right here for just a second — If you are going to tell the Big Red Car that all these tools exist already, that they are operating well, that the seller’s son went to Stanford and his daughter went to Wharton, then guess what — YOU DID NOT BUY AN OLD ECONOMY COMPANY. Part of this transformation is to ensure that you have bought the right company.
You will develop the following tools:
1. A web site (likely with a blog presence);
2. A Facebook presence;
3. A Twitter account;
4. An email marketing program;
5. A text messaging program;
6. A customer loyalty program; and,
7. A written marketing program which uses these tools to communicate with your customers and which contains a formal pricing strategy.
Your written marketing program will subsume the other tools, will pay homage to the 4P’s and will incorporate cutting edge branding, messaging, communication, positioning, social media, SEO, SEM and will be a continuous lab experiment with a feedback loop and some significant tinkering based on performance analytics.
You will have a dashboard and you will identify perfectly measurable results and will graph everything to ensure you can identify the trend. You will make friends with the trend and dine out together often. The trend is your friend.
As the numbers come into focus remember this old chap — CTA v LTV. This is an important measure of ROI on your entire effort. Use a one year, two year and three year frame of reference. Make the numbers prove themselves.
You will educate and train your staff and recognize that you may have to add a few folks to operate this system. It may cost money to do this. It is an investment in changed outcomes. It costs money to stand this system up and much less money to operate it.
And that’s exactly what you have created — a system.
Crawl, walk, run
In any significant change, you have to crawl, walk, run. Make it simple and then better and then complex. Iterative improvement.
You have seen this before.
Even if you personally are ready to strip off the sweats and start sprinting the entire team has to cross the finish line at the same time.
Don’t scare off the company’s long term employees by trying to get them to drink from the firehose. Small doses of change at first, lots of communication, roll stuff out in front of the employees and do it all gradually.
The Boss did exactly this with 40 multi-state, multi-operating units in a bit more than a year. Created the entire infrastructure from scratch, took databases from 1K to 4K and from 3K to 11K, created 600+ pieces of video content. It can be done. It is hard work.
OK, grasshopper, that’s exactly how you transform a marketing program from an Old Economy to a New Economy marketing program. Any questions? Please ask me.
But, hey, what the Hell do I really know anyway? I’m just a Big Red Car.