There are many examples in today’s market of PE firms rapidly helping their midmarket brands implement digital strategies to improve customer experiences. By leveraging scale and best practices, these PE firms help their portfolio companies implement operational efficiencies and marketing efforts that influence consumer purchase behavior, driving higher topline growth leading to higher valuations.
The role of the PE firm in helping their companies expand digital strategies for growth is very clear. This was reinforced in a recent Forbes article by Stephen Diorio, PE and the New Science of Growth. Diorio appropriately pointed out that, “PE firms that know how to leverage brands, growth channels and use big (consumer) data will stand out as unique and profitable among them.”
Pitchbook’s 1Q 2019 US PE Middle Market Report also provided an insightful interview on pages 10-11 with Marty Okner, COO and President, dpHUE about how investments in digital practices and improvements to the brand experience are paying off for the nation’s fastest growing midmarket companies.
While that may not seem easy to analyze given the gap between what people say and feel, experienced marketers are able to adapt proven techniques from social science research to identify, track and measure how the brand delivers an emotional connection for the consumer.
In valuation exercises, PE firms are becoming more comfortable at looking beyond the expected funnel metrics—and into the emotional connections with consumer’s minds and hearts, or the “true lifetime value.”
So how does a growth-minded PE firm begin to process that? They think about the metrics involved in evaluating their brands like people. We’ve heard it said before - the most successful brands in the world connect with customers on emotional levels.
When a brand touches a customer with character, purpose and shared values they are rewarded with loyalty, advocacy, time and treasure. This is the emotional connection that consumers have with brands they can’t always articulate in a funnel metric.
For example, in less than a decade, Rent the Runway (RTR) has built a $100MM/year e-commerce subscription business to an @$800MM valuation. Their explosive growth coincided with the rise of the digitally native generation behind an intriguing promise of providing rentable, affordable, reusable, quick fashion.
On its surface, measuring the digital efforts and investments against the expected pain points for funnel conversion and customer experience metrics makes sense. I’m talking about service, speed, accuracy, pricing options, selection, return policies and accessibility to the latest fashion.
But what did RTR do to move the hearts and minds of Gen Z and tech-savvy millennials? They touched them with the brand’s sense of purpose and shared values as emotional purchase drivers.
At a fundamental level, the RTR brand–in an industry plagued by waste, dubious labor practice, and a historic lack of diversity—is tapping into the unspoken deep desires and needs this generation has for wanting to create a better world (i.e. smaller footprint, healthier environment, social justice, sense of security and communal caring) and is willing to make it their mission.
Considering the RTR example above, a PE firm wanting to leverage the spending power of Gen Z and tech-savvy millennials might challenge their portfolio companies about what test efforts are being made toward building on the emotional connections of shared values (i.e. water and CO2 reduction, recyclable packaging, animal-free dyes, fair wages, biodegradable & petroleum-free local designers).
Much like people, great brands make emotional connections. Smart PE firms seeking to deliver outsized returns, are helping their portcos look beyond hard funnel and experience data and increase value and maximize return on investment decisions by also examining how their companies are building those deeper emotional connections.
So how can a PE firm work with their portfolio execs to start to measure emotional connections to unlock that next level of growth? In researching this topic, I was inspired by an article I read in the Harvard Business Review HBR - Emotional Connection Matters More than Satisfaction where the authors, Alan Zorfas and Daniel Leemon, lay out the business case for using big data to identify “emotional motivators” that measure the feelings that drive purchase decisions.
In this research across hundreds of brands in dozens of categories, the study shows that:
“On a lifetime value basis, emotionally connected customers are more than twice as valuable as highly satisfied customers. These emotionally connected customers buy more of your products and services, visit you more often, exhibit less price sensitivity, pay more attention to your communications, follow your advice, and recommend you more—everything you hope their experience with you will cause them to do.”
“Their [feelings] provide a better gauge of future value to a firm than any other metric, including brand awareness and customer satisfaction, and can be an important new source of growth and profitability.”
The study goes on to demonstrate how their research methodology uses big data analytical techniques to get to the drivers of emotional connections, which lead to greater customer value and financial returns.
“Companies deploying emotional-connection-based strategies and metrics to design, prioritize, and measure the customer experience find that increasing customers’ emotional connection drives significant improvements in financial outcomes and lifetime value. Emotionally connected customers not only generate greater value, but in every interaction become more and more convinced that, ‘this company gets me.’”
For PE firms and operators wanting to differentiate and help their companies grow, uncovering how their brands are driving long term value through emotionally connected customers will be the key. Just like people, brands that make emotional connections will be rewarded with more frequent visits, greater advocacy and higher loyalty.
Indeed, emotionally connected customers will talk about your value, share your stories, follow your advice—and happily spread the word about their experience with the brand. Thus, in addition to measuring things like satisfaction, share of wallet, and customer churn, PE firms can now leverage Big Data to help their companies optimize emotional connections and capture the full value of the relationship.
To learn more about how Chief Outsiders can help evaluate your brands’ deeper emotional connections, please contact Rich DePencier at Chief Outsiders firstname.lastname@example.org
Topics: Private EquitySep 25, 2019 2:35:29 PM