2024 will see national elections in both the US and the UK.* In both cases, the election will be won and lost in a handful of key marginal seats (or “swing states,” for US readers) - constituencies where the winning margin at the last election was less than 5% of the vote.

Parties will pour resources into these areas in the hope of identifying the specific issues that matter most locally, and maximising their share of the vote. Equally, pollsters are working to refine their techniques for polling at the local level, in the hope of more accurately predicting the overall election outcome.

What lessons can we take from this from a CDD perspective?

Almost all 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 Diligence analyses should include discussion of:

1. The overall size of the total addressable market;
2. The overall rate of switching in the market; and
3. 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 back in 2016, in an analysis of why “large” markets sometimes yield less-than-expected growth (read here).

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:

1. Many customers valued this proposition; and
2. Many 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.

Net-net – while 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.

Building on our political analogy: the messages that energize the core, life-long, evangelist voters aren’t necessarily the same as the winning messages for the marginal people in the marginal seats.

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:

1. A pivot away from organic growth to a roll-up of other complementary businesses in related sectors
2. Increased development efforts to support a more basic, tech-enabled service to capture share within price conscious customers

Back to our political analogy – defining national issues is useful, but if our plan is predicated on winning specific seats, we need a nuanced understanding of the precise messages in the key battlegrounds.

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*Updated in August 2023

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