Why Customers Who Switch Aren’t the Customers You Think
Many growth-based investment theses are predicated, at least in part, on growing share by capturing customers that can be enticed to switch from a competitor.
To that end, Commercial Due Diligence analyses should include discussion of:
- The overall size of the total addressable market;
- The overall rate of switching in the market; and
- The Drivers-of-Choice for the segment of customers who are open to switching
Quantifying the overall rate of switching is clearly important – we wrote about it in an analysis of why “large” markets sometimes yield less-than-expected growth (Available Market Size article).
Now, we want to highlight the importance of understanding the Drivers-of-Choice for the segment of customers who are open to switching (and note that this is different to just mapping the overall Drivers-of-Choice in the market).
Take a recent example:
A niche business services firm – playing in a very large market – sought to differentiate on the grounds of innovation, use of technology and quality of service. Our early analysis showed that, across the whole market:
- Some customers valued this proposition; and
- Some customers were willing to trial new providers
However, looking more deeply, an interesting trend emerged. The customers with highest willingness to switch were typically “bargain hunters” – primarily making their purchase decision on the basis of price. Customers who had been willing to “pay up” for premium services were satisfied, loyal and saw ongoing increases in value from the innovation that their providers were delivering.
Thus whilst the target’s core proposition was well received in the market, its ability to win with the specific customers who were willing to switch was very low.
Of course, the aim of this analysis isn’t to “kill” deals. Instead, by entering a transaction with a clear understanding of potential challenges, you are best placed to shape the future strategy and to plan for appropriate investments to ensure success.
In this case, two key opportunities emerged:
- A pivot away from organic growth to a roll-up of other complementary businesses in related sectors
- Increased development efforts to support a more basic, tech-enabled service to capture share within price conscious customers
