Defying Gravity: Innovating To Keep Pace With Change

I don't think I'll get much of an argument if I try to convince you that innovation is important. But let's take a minute to remind ourselves why innovation is so critical now.

The customer today is not the customer you knew five years ago. The year 2010 marked the point when the Millennial population--the age group from 16 to 34--surpassed both Baby Boomers and Gen-Xers to assume the coveted mantle of most significant consumer sector in the U.S. The sheer size, spending power, and affluence of the Millennials cannot be denied. The business challenge is communicating with this technology-savvy, socially aware audience in a way that builds brand loyalty and connectedness.

American Millennials: Deciphering the Enigma Generation, is an in-depth study conducted by Boston Consulting Group, Barkley, and SMG. The research, based on more than 5,000 consumer surveys, presents a fascinating profile of the Millennial consumer as well as insights showing how these younger consumers are different. Bottom line: To capture a chunk of this newer consumer market, you'll have to change. (Those who are interested can get the report from www.smg.com/research).

Of course it is no surprise that the economy booms and busts and that generations evolve new buying habits. Business, like life, is cyclical: birth, growth, maturity, and decline. The storyline is predictable.

1. Market Introduction: A new product/concept is introduced into the market. Sales and profits are low and demand must be created.
2. Fast Growth: With success, sales grow, and with economies of scale, profits grow as well. But competition develops too.
3. Maturity Stage: Growth slows, sales peak, and then sales flatten. Lots of competition limits pricing power and profitability.
4. Decline: Sales and profits decline from their previous highs. Market forces work like gravity to restrict growth.

Despite this natural business lifecycle, "no growth" is simply not an acceptable option. It is management's responsibility to anticipate these cyclical forces and to take action to generate sustainable growth. Sales and profits must be growing for the brand and the vast majority of franchisees. Here are three reminders why:

• Cost of sales and operating costs go up annually. Even in an era of 2 to 3 percent inflation, the cumulative impact of cost increases demands continuing increases in revenue. Cost-cutting may improve the numbers for a time, but no franchise shrinks its way to greatness.
• Managers and employees expect more every year. This isn't just a cost issue; it affects morale and retention. The best people won't continue to work for a loser, or even for an also-ran. Winners want to play for winners. The war for talent inexorably pushes wages upward.
• Investors and franchisees demand increasing returns on their money. Investors move their resources away from stagnant investments to better risk-adjusted returns. The same is true with franchisees, especially big, multi-unit operators.

To sum it up, a successful franchise requires continuous growth in sales and profits. "No growth" means being consigned to the heap of "has-beens" on the way to "gone." The only way to defy gravity and avoid becoming a dying concept in a saturated market is to get out in front of the business lifecycle by constantly introducing new offerings and appealing to new customers. To guide your innovation initiatives, here are some customer measures to analyze :

• How many of your target customers are aware of your concept, relative to the competition?
• How many customers like your brand, versus how many have tried your brand?
• What percentage of the total purchases in your market category are you winning compared with other brands?
• What percentage are outright brand rejecters? What are their reasons? What are their demographics?
• What is the mix of positive versus negative comments about your brand in social media? Are you even in the conversation?

With Millennials growing in influence, you must look outside of the four walls of your business more often. Otherwise, you could end up like some franchise companies that have improved their customer satisfaction measurements over the last few years, even as their transaction counts steadily declined. This data anomaly occurs when the customer base implodes, leaving only a diminishing base of hard-core customers who will buy. That situation demands innovation. Better execution is not enough.

Customer satisfaction among existing customers will always be an essential measure of success, but satisfying a shrinking group of customers is a losing hand. It means your brand is out of touch with the times. If you don't face those brutal facts and figure out the reasons why, you become irrelevant.

Jack Mackey is vice president of Service Management Group (SMG), a leading customer experience analytics agency that improves performance for franchise and multi-unit firms. You can reach him at jmackey@smg.com.