Choosing Your Customers

Choosing to serve certain customers often requires a firm to choose not to serve others. It may be difficult for a firm that wishes to serve every consumer to accept, but it is utterly inevitable that chasing one rabbit means not chasing any other. The struggle for firms is that, in attempting to grow their business to serve more customers, it diminishes the fitness of its service to their existing customers: a dilemma that persists against all efforts to overcome it.

The notion that firms choose customers seems a bit awkward, but it is a natural consequence of the decision to pursue a certain mission and undertake a certain set of activities, given a limited amount of resources. To manufacture shampoo is a choice to manufacture nothing else. To manufacture a shampoo for women is to choose not to consider the needs of men. To sell it for $20 a pint is to choose to ignore those who are unwilling to pay that price. To sell it in the northeastern US is to withhold it from those who live in other areas.  

That feels a bit like a logical fallacy - the negative consequences of a choice are not the primary intent - but at the same time I don't think firms are as reckless as people and are well aware that what they choose to do with their resources means not choosing to do other things.  It's called "opportunity cost" in economics classrooms, and a thorough and sound decision will have considered all alternatives and chosen the best course.   You're not culpable for murdering a person because two were drowning at once and you only had the time to save one of them - which is a bit melodramatic but well explains that a firm must choose to pursue one course of action because it does not have the resources to pursue them all.

Even so, it is nonetheless true that a decision to do one thing results in neglecting others, and this is not always bad.   You can't do everything well, but must and should focus on accomplishing what you can.   The problem is in accepting the opportunity costs of action.  To return to the metaphor of saving two drowning people implies that you can save one but not both - that is, you cannot half-save each of them, it's one or the other.   But when it comes to serving customers, you can indeed attempt to serve two at once, or feel that you have achieved success by half-serving each of them - though their perspective is that they have each been poorly served.   It seems a very bad decision.

What I am implicitly advocating is that to be effective, you must not only acknowledge the opportunity cost, but embrace it.    Choose to serve one market segment exceptionally well, rather that attempting to serve multiple segments poorly.   In effect, trying to serve more customers is to diminish quality of the customers you would otherwise have been able to serve well.

Returning to the earlier examples: To add more product lines is to neglect your flagship product. To rebrand or retool the shampoo as a unisex product after years as a women's brand will attract some men, but lose some women. To raise or lower the price will attract customers who think differently about their willingness to pay a given price for a given quality. To expand the geographic domain is to focus less attention on the territory you once commanded.

In general, I am left with the sense that firms face a choice, the extremes of which are to provide a limited selection of high-quality products to a well defined market segment, or to attempt to sell a broad array of low-quality products to a poorly defined market segment. It seems to boil down to the omnipresent argument of quality and price, but it touches on a larger concept of the market a firm chooses to serve, and that quality/price is merely one of many consequences of making such a choice.

Ultimately, it becomes a strategic decision: to determine how much you can do well - better, in fact, than anyone who might seek to compete with you - and accept those limitations. Obviously, a firm that imagines it can be everything to everyone is wrong. But the same problem expresses itself in more subtle ways when firms attempt to stretch even a little: to offer a new product line that has affinity to an existing one, to expand your market by one demographic factor, to make minor adjustments in price, or to make modest increases in territory.

Moreover, it is not as dramatic as saving one and leaving the rest to drown, but serving whom you can leaves the rest for others to serve.  You're not the only lifeguard on the beach.   Or more directly, you are not the only firm that provides service, and in most instances attempting to serve everyone means serving no-one particularly well.   Better to leave the other markets to other suppliers until you have the resources to pursue them yourself.

The success or failure is small, and one counterbalances the other in minor ways. A firm may not collapse overnight, but may experience a minute loss in profitability (even if revenue may seem to be increasing) over the course of many years, as the result of a bad decision - and pile of additional bad decisions as a way to make the original bad decision work out for the better.

It all comes back to the basic strategy: the importance of choosing your customers wisely, playing to your strengths, and making sure that your reach does not exceed your grasp. It's likely easier said than done, and likely easier to recognize in arrears when a mistake has been made.