The Role of the Customer in Turnarounds: 3 Paths Out of Distress


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published September 1, 2008

The world of turnarounds is one of extremes. At one end of the spectrum are the salvage operations where wrecked businesses are beyond saving and have their few remaining assets sold off in hopes of getting creditors a few pennies on the dollar. At the other, less populated end reside true resurrections where businesses are snatched back from the brink of extinction and returned to health. Where any given turnaround project lands on this continuum is often a matter of timing. Frequently it is the result of support from a group that is often underappreciated and under-utilized in turnaround work … the customers.

The simple truth is that without customers a business is merely a collection of what we call “Inert” assets that should probably be sold off for their scrap value. Without customers, the warehouses, server farms, factories, lines of code, delivery vans, intellectual property and piles of raw materials simply sit there and their value erodes. They are not what the business is all about. They are merely tools to attract revenue. That’s why a growing number of very successful businesses own no factory at all and contract out the manufacture of the products they sell. They know that the true worth of a business is found in its customer relationships, not in its bricks and mortar.

Customers(1) create a business because they are the source of revenue. We call them “Generator” assets because they are the tiny springs from which cash flows. Without them there is no business at all.

Customers are the only group that gives a business its intrinsic value. Without understanding them, no turnaround effort can bring a company back to life. It is important to determine who the customers are or who they were, why some stay around as well as why many of them have left, and what one has to do/say/pledge to get them to continue as customers.

It is an interesting paradox that the customers, the one group that can return a business to
health, are among its most abused stakeholders. And the abuse can take several forms:

  • As a business sours, quality of the product or service suffers, prices rise, and delivery dates are missed. That type of customer service never wins a J. D. Powers award as many of the little cash flow generators head to the exits.
  • In an effort to stay afloat, communication and sales budgets are slashed. Contact with the business slows to a trickle and customers are increasingly left in the dark with rumors and press reports their only source of information, true or not. Customers crave certainty. A business in distress provides little.
  • Just when their support is needed most, the focus on the customer shifts from trying to keep them happy to trying to get them to pay faster. No surprise then that customers defect to competitors at an accelerating rate as they hear more frequently from Accounts Receivable than they do from Sales.

Intentionally or not, the only sources of revenue are treated rather rudely. But this worst-case scenario need not be the epitaph of every distressed business.

If one seeks to exploit the customers as tools to turn around a crumbling business, the odds are much better that it can be returned to health. Even if it is not ultimately saved, its value can be increased to the benefit of its creditors. To do this takes a skill set and experience not often found in the typical turnaround team: a marketer’s perspective. The marketer’s perspective is one that eagerly takes on the role of ombudsman for the customer – one who understands their needs and strives within the corporate confines to satisfy them.

So let’s take a look at how a Turnaround Marketer approaches saving a troubled company.

3 Paths to Growth (and a successful turnaround)

There are really only three ways to improve earnings and grow a business:
Path 1: Find more customers,
Path 2: Sell customers more,
Path 3: Make a greater profit on what you sell them.

There is no number 4. Everything else a business does is just a strategy/tactic/tool to move along these three highly interrelated and interdependent paths. As examples …

Raise prices? You’re heading along Path 3, but may be backtracking down Path 1.
Develop new products? Path 2 and sometimes Path 1.
Cut production costs? Path 3 again.
Open an overseas market? Path 1.
Add service after the sale? That’s primarily Path 2.

Sounds simple enough but being so dependent on the customer for growth presents a
challenge for a business in distress. Earlier we said that the customers are among the most abused of stakeholders. In any turnaround situation it is important to quickly assess just how much abuse they have suffered and whether or not there is any hope of redemption. In extreme cases the only hope of saving the business may be to build a completely new customer base or to offer very different products and services for those you have been able to retain.

Knowing the Customer

A good marketer will tell you that customers, no matter what the business, exist in 3 basic
flavors: loyal, neutral and vulnerable. Let’s take a closer look at each by imagining you own a business, any business, because every business has customers. If it doesn’t, it’s a hobby!

The Loyal Customer

These are the folks that are most tightly bound to the business. They may be the 20% of
customers that generate 80% of the revenue. They are the ones that will forgive you if you screw up once. Or maybe even twice. They like you; they understand you; they believe that what you sell them or do for them has value or is important to them. When you think of Loyals think Harley Davidson tattoos on the arms of 40-something orthodontists.

The Neutral Customer

The Neutral Customer likes you and what you offer but isn’t ready to die for you. They just don’t think about you all the time. But you have made their short list. For an example here think orange juice. Spend some time in front of the refrigerated case in a supermarket and you’ll see a lot of people shopping the orange juice section by staring at the price channel stickers. Tropicana? Minute Maid? Florida’s Natural? They’ll buy whatever is 2 for $7.00. Doesn’t matter to Neutral consumers of orange juice because it just isn’t a very high interest category for them. They might prefer Tropicana and hope it’s on sale when they visit the store. They’ll stock up if it is. Over time you may be able to transform some of them into Loyals, but a few will drift into Vulnerability at the same time.

The Vulnerable Customer

Your business’s grasp on these folks is tenuous at best. They may bolt at the drop of a hat, or a competitor’s coupon or more favorable credit terms. Screw up with this group and there are no do-overs. Your entire category may not be that important to them. They probably have a set of equally acceptable brands and buy whatever is on sale. As an example consider the purchasing agent who buys widgets. Because there is no such thing as a totally rational sale, whoever gets the next order for widgets may hinge on who provides the best golf outing and dinner. That won’t be the stated reason you get thrown under the bus. It will have something to do with a more tangible feature such as color selection or delivery date. Businesses cursed with a high percentage of Vulnerables are constantly searching for new customers to replace the departed. Retail bankers have been creating legions of Vulnerables over the last 20 years as fees escalate and customer service evaporates. Consolidation, interest rate promotion, online banking and the lure of free checking have put banking Loyals on the endangered species list for an entire generation just beginning financial adulthood.

Now that you know the 3 types of customers, think about what happens to them as a business slips into distress. This is somewhat of a chicken-or-egg discussion because it is sometimes difficult to determine if a business screwed up and drove customers away or if the business was asleep at the switch as customers were wooed away by a competitor and then the business began to get in trouble. And without conducting loyalty research, it is often impossible to determine what brought the business to the brink, if the tipping point is approaching where the slope gets steeper and more slippery, or if the business can be saved. Without an intimate knowledge of the customer relationships, what brought on the distress might be misdiagnosed.

An aside: Don’t confuse frequent customers with Loyal customers. Just ask Starbucks. Frequent (read that daily) customers have bolted for the Golden Arches and Dunkin Donuts as latte prices climbed and the economy soured. If all the Starbucks’ customers had been Loyals, baristas wouldn’t be hitting the unemployment line.

The Daisy Chain of Destruction

Let’s assume for a moment that a business has begun its descent into distress. Earnings have begun to shrivel and the call goes out from the Boardroom to improve them right away. Managers will immediately begin to attack the cost side of the earnings equation by taking the budget knife to costs. It is the instinctive reaction by the vast majority of managers because it’s relatively quick and fairly easy. But if no attention is paid to increasing revenue by following one or more of the 3 Paths, bad things can start to happen. At first they may be imperceptible but given enough time they can gather an unstoppable momentum.

Whenever the order is to cut costs the Marketing Department is usually the first stop. Advertising expenses are easy to reduce. Just cancel the insertion order. Postpone the new ads. Drop the next quarter’s promotion. Even businesses that have no marketing department do it. Industry shows are skipped. Trade association memberships lapse.

Next the budget knife heads over to the Sales Department. T&E budgets get slashed. The head count is reduced as the organization is reconfigured. Costs are cut and earnings improve, maybe, for a little while, hopefully. If not, more programs are cut and sales decline further. What we call the Daisy Chain of Destruction is in full swing.

Soon the big knife heads to Purchasing where cheaper (read that inferior) raw materials are sourced, corners get cut. Manufacturing processes are changed or accelerated. Want an example? Look no further than Schlitz. If you weren’t of legal age in the 1970’s, ask a beer drinker who was. At one time Schlitz was the #2 beer in the US. But they changed to a high temperature fermentation brewing process to cut costs, wrecked the taste, and pretty much killed the brand.

As the budgets are trimmed things may look ok. Costs are lowered; earnings hold or might even be up. But remember those hundreds, thousands or millions of little springs from which cash flows? You know, the customers. What about the impact on them?

It’s not unusual for a lot of the Vulnerables and even some of the Neutrals to head down the street when they sense changes in the wind. They head off to find an acceptable competitive alternative. In many cases it is an unconscious desertion. They just don’t see any of your ads to bring you back to top of mind. They don’t see your sales manager as often. They just don’t think about you any more. Or in the case of the Schlitz drinkers, they don’t like the way you taste!

(Timeout for a cold one: Interestingly, Pabst has re-launched Schlitz in bottles proudly touting the 1960’s recipe … for the handful of beer drinkers who still remember it. Oh, by the way, Pabst doesn’t own a brewery. But this is all a subject for a different paper. Now back to our regular programming.)

And remember that golf-loving purchasing agent? He now buys from one of your competitors, even though their rep is a tennis player, because he really liked the regional sales manager you canned during the most recent restructuring to improve earnings. The competitor saw an opening and pounced.

But now earnings deteriorate further, more cuts are made and customers don’t hear from you any more. Oh, sure they get a fax or an email every once in a while. Or they may get a call from the new outbound telemarketing service hired to replace the old (and expensive) internal sales team. But they aren’t as knowledgeable or empowered to make real commitments to customers so sale-closing rates drop.

The daisy chain of value destruction grows in length. The number of customers heading for the hills climbs and revenues plummet. More costs are cut to improve earnings and quality suffers. Still more customers defect, and those that remain are starting to pay more slowly because they know you’ll ship anyway because you need their business no matter what the cost. Rumors about your long-term prospects (or lack thereof) begin to swirl through the trade propelled by competitors who really don’t want to say anything bad (wink, wink) but feel it is their duty to let your customers know about the trouble you are having.

Pretty soon all that is left is a shrinking group of Loyal Customers who have stuck with you even as things got tough. There are also a few Neutral and Vulnerable stragglers who just aren’t motivated enough to change their ways … yet.

But wait. Suppose for a moment that we don’t play this game all the way to the final whistle. Instead let’s jump back in time to the point where the first earnings hiccup occurred. And rather than just taking a chainsaw to the easiest costs to cut, (2)  let’s think about the revenue side of the earnings equation. Think growth and the 3 Paths to achieve it.

Pick a Path, or 2, or 3, to Walk

And you’ll need to do it fast supported with almost no resources because the goal is to grow revenues as quickly as possible while holding down costs. While it’s sometimes true that you have to spend money to make money, spending it increases costs and further reduces earnings so get used to achieving growth by moving budgets around instead of asking for more.

We are now entering a realm where the skill set required is not usually found among those frequently involved in turnarounds: law firms, operating consultants, or accounting practices. It requires a depth of understanding of the primary tool used to move down the 3 Paths of growth: the brand. It also requires brand-builders with experience in the high velocity, resource-lean environment of turnaround work.

Most marketers, however, are ill prepared to operate in a turnaround environment where time is of the essence and resources are limited or non-existent. Success in turning a business around requires the ability to bring a fresh set of experienced eyes to the table to connect the dots in new ways. It requires an optimistic outlook that focuses on growth rather than just on stopping the bleeding. It requires the ability to work with speed. It is an environment that many marketers find uncomfortable if not paralyzing. It requires a Turnaround Marketer.

The first step is to get an honest handle on the customer base and its segmentation. If customer loyalty research exists, great. If not, take some of those limited resources and get it done.

“Wait a minute. You said this has to be done with velocity. Research takes time. First we get a proposal, then we get it approved, then they draft a questionnaire, then they recruit respondents, etc. etc. We’re talking months we don’t have!”

In the old days that may have been true but no more. There are some real smart, real fast people out there who can turn quality loyalty segmentation research fast. They cut their teeth, so to speak, on acquisition due diligence work and you know what kind of speed that takes. Now they are applying that same swiftness to turnaround projects.

Once you get a real handle on the customer base, the relative size of the three loyalty segments, and what motivates customers to buy from you, you can set about following one or more of the 3 Paths to revenue growth using the real tool you have: your brand(s).

The brand is the one asset that can generate cash flow. At its core, a brand is a financial transaction where a business exchanges a good/service/IP for a customer’s cash and both parties receive value.

And every business has a brand or brands. Just ask Warren Buffett.

The trick in the turnaround arena is to increase the number or frequency or size of those brand transactions without spending bags of money to do it. Let’s take a look at a few examples.

Find More Customers

When we need an example of how attracting more customers can be done by gaining an intimate understanding of their needs and wants, we always come back to the turnaround of Chrysler under Lee Iacocca. Many view this rescue as a fantastic piece of financial engineering built upon the Federal loan guarantees that gave the company a shot at survival. And while that is true, equally important was the re-engineering of the product offering to attract new customers. From the ashes of Chrysler rose the minivan and the K car, both of which revolutionized the car business. By the way, they even went so far as to produce the Voyager and Caravan on a stretched K car platform. Remember,
hold down costs at all costs.

Another example from a few years ago involved car batteries. While many people know Johnson Controls Inc. (JCI) for its building and HVAC control systems, not so many know about its battery division and a significant amount of turnaround prestidigitation that took place there in the 1990s. So let’s hop in the time machine and start at the beginning by heading back to the Eisenhower years. In the late 1950s, a company called Globe-Union invented the thin-walled polypropylene battery case, a breakthrough in automotive batteries because it was lighter and stronger than the hard rubber cases used previously. In 1967 Sears began to use this technology in its DieHard battery. By 1971, Globe-Union was the leader in replacement automotive batteries with sales climbing past $100 million a year. At about the same time, JCI began to diversify beyond its building and energy control. In 1978 Globe-Union merged with Johnson Controls and brought with it its largest customer: Sears.

For the next 20 years things were pretty good. However, the battery group was the least profitable of the divisions of a now very diversified company that included automotive seating systems and plastics. In 1991, JCI attempted to sell its battery division without success. In 1994 the roof fell in: JCI lost its contract for the production of the Sears DieHard battery to Exide. It has been estimated that this loss of a single customer cut $150+ million of annual revenue out of the company.

While JCI reduced manpower and cut costs to try and stop the bleeding, it also decided to attempt what for the time was a fairly radical move: replace the customer. They assembled a SWAT team of internal people and external resources willing to work in a high pressure, limited resource environment. Over the next 3 years they attracted new customers and end users through a combination of new products, new brands, innovative marketing programs and just plain hard work. Contracts were signed or renewed with AutoZone, Wal-Mart and Interstate Batteries, the largest battery distributor in the US. In late 1997, JCI’s battery group signed a contract to supply a new customer with a top-of-the-line premium battery … Sears.

It was gratifying work and a turnaround in every sense of the word. We know. Our people were involved. If you would like to know more, give us a call. We enjoy recalling how exhilarating a time it was.

Sell Each Customer More

This is often the home of the new products practitioner, though now we are supposed to call it innovation. We always get a chuckle from that. Our guess is that the track record of new product introductions across all industries has been so miserable for so long that someone figured they could buy a little more career time by changing the name. Interestingly most aren’t doing much better as innovators than they did as new product geniuses. But we digress.

This path played a big part in the JCI battery group story because when faced with the loss of a big customer, a natural place to turn is your remaining customers. But it poses some very real challenges because they know what a blow the loss of a major customer is. The remaining customers now believe they have more control over you and are inclined to do some nasty stuff, like trying to exact some pricing concessions or exclusivity arrangements. Not that they are bad people. They are just business people who happened to wake up one morning and found they’re a much bigger fish in the pond. Actually, it’s just that the pond got smaller.

A natural reaction by a distressed company is to respond to the foot-on-the-throat pressure by doing whatever the customer wants. And that might have been the reaction of the battery group had it been a stand-alone company. Some like JCI hold their ground and respond by finding ways to sell the remaining customers more. They created a continuous stream of new products, new brands (like licensing the Eveready and Energizer brand names for car batteries), and new marketing ideas.

In the turnaround effort, a series of innovative products were produced for the automotive market and specialized markets such as marine and racing. A series of low cost, customerspecific sponsorship and field marketing efforts were developed. In fact, each customer pitch included a presentation of fully fleshed out promotion and marketing ideas specific to that customer as well as private label branding ideas. (Not often that you see private label and branding in the same phrase.) All of these efforts were aimed at getting customers to buy more. And along the way they bought products that generated greater profit.

Make a Greater Profit on What You Sell Them

All the brands of products or services available in any given industry or category occupy specific places on a price continuum. At one end (or the bottom if you like) is the really cheap stuff. At the other end (or the top) sit the ultra-premium brands. The profits made on each pretty much follow the same linear relationship. Timex has to sell a whole lot of $19 wristwatches to match the profit generated by a single TAG Heuer Chronograph.

With imagination you can sometimes get your customers to trade up to the high priced and higher profit end of the continuum. And sometimes you can’t. One of the best examples of the former is Toyota’s creation of Lexus to take its Loyals up the profit and price ladder. An example of the latter is found with Smirnoff and its decades long inability to move its customer base upward. At one time it was the top rung of the vodka ladder, only to get eclipsed successively by Absolut, Skyy and Grey Goose while its own repeated attempts to launch an ultra-premium version of itself failed with every consumer segment.

JCI, on the other hand, succeeded by focusing its new products effort in two directions. One was on creating value-added enhancements that would command a higher price point and greater profit. The Security battery was one such up-market effort. It incorporated a computerized security system for the vehicle within the battery case and the simple act of replacing the battery gave the customer state-of-the-art anti-theft protection.

The second avenue the R&D folks pursued was to make every battery the best battery possible, not the cheapest. It is interesting to note that the earlier mentioned JCI battery that first got back into Sears was the premium DieHard Gold, not a discount priced piece of junk. At a time when it would have been easy to cut prices and produce an inferior product, JCI tacked in the other direction and headed up the quality (and profit) ladder.

As we have said, the 3 Paths are interconnected and interdependent. Heading up on one can force you back down another. There are a number of case studies that show what can happen when you try to follow Path 1 to more customers by attracting them with something that you make less profit on. An effort that takes your brand down-market in hopes of attracting new customers can be expensive and painful. If you ever have the chance, ask a long time Cadillac employee about the Cimarron and look for the very pained expression on their face. Granted part of the reason for its introduction was to meet the increased CAFÉ standards for company wide fuel efficiency, but it was arguably a response to low priced import compacts from manufacturers such as BMW. The Cimarron missed the mark at almost ever turn and is credited with significantly tarnishing the Cadillac brand image.

3 Paths At Once

It is also possible to travel all 3 Paths simultaneously. There is a small machine tool distributor in Illinois who has proven you can do it all with one product. It helped save the company. If you would like to hear about it, give us a call because we are out of time for today.

So, the next time you find yourself faced with the need to turn around a distressed business (short of an asset sale salvage operation) think about growing not just stabilizing. Think about all the tiny springs from which cash flows and how to attract more of them while increasing the flow rate. Think about bringing in a marketer skilled in turnaround work. It could be a very valuable (and value enhancing) experience.

By the way, Marketing Valuation Partners LLC is a winner of the Harry Preucil Award for Pro Bono Turnaround of the Year from the Chicago Chapter of the Turnaround Management Association. We are told that we are the first marketing consultancy to receive a turnaround of the year award from TMA. It was for the work we did with the machine tool distributor mentioned above. You didn’t think we would leave out the sales pitch did you? You know us better than that.


1.  When we say customers, we mean profitable customers. A business that has its customer base overrun by the unprofitable is destined for the salvage yard. And spending more and more on discounts to attract them speeds up
the trip to the final destination.
2.  Just between us we have never met a business that couldn’t cut some costs with no impact on the customer base. But we can talk about that another time.
3.  Sidebar Digressions have been removed from the original white paper.

About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.