Don’t Let Price be the Tie Breaker for your Products or Services
Have you considered offering “freemiums” (free products or services) to build your customer base? I encourage you to reconsider. Giving away a product or service, in hopes of gaining a following, often back-fires and results in a disappointing return on investment. The reason is that “free
” does not top
the average consumers’ buying criteria. In fact, a number of double-blind research studies aimed at pinpointing buying criteria have revealed that shoppers almost always place more value on attributes other than price
In support of this view, I’ll discuss the following proclamations to reveal how “freemiums” can lead to failure while relevant messaging
nearly always trumps the give-a-way.
Why Free Fails.
- Free or drastically discounted prices can actually undermine growth attempts.
- How to identify what your customer values most when making a purchasing decision.
- Explain the importance of constructing a relevant customer message.
Sarah E. Needleman’s recent Wall Street Journal
article acknowledges that many massive companies have enjoyed success by using the freemium model
to build a customer base - think Dropbox, Skype and LinkedIn. But Needleman cautions this approach due to the substantial probability of a back fire. This results when a company is not offering what their customers value
. Customer service, speed of delivery, quality of service, warranties, and a good return policy are just a few attributes that may be more valuable to your customer, other than the price of your product.
I believe the same thing applies not just to freemium offerings, but also to deeply discounted products or services. When companies don’t sell a solid value proposition, they often default to price as the tie breaker between themselves and their competition. This is a very dangerous approach. Identifying Buying Criteria.
How do you identify what’s valuable to your customer? Although customer satisfaction surveys act as report cards, they aren’t always the best way to determine what is valuable to your customer. This is because they only question customers about topics determined by the businesses management, which naturally neglects the consumer standpoint. For example, a survey question may ask, “On a scale of 1 to 10, how satisfied are you with delivery?”… The customer may answer ’10,’ because the delivery was facilitated flawlessly; at the same time, their buying criteria may be something completely separate, such as accurate delivery and/or accurate invoicing, but the survey neglected to ask about that. Fail to identify your customers buying criteria and you may as well delete your entire marketing plan.
A personal example: I recently purchased a garment bag/suitcase from overstock.com for work travel. I rarely make such purchases online in fear of receiving a product that was described improperly, and then end up having to pay 20-35% of the product price in shipping the item back. Overstock offered free returns, so I decided to take the leap and order. Low and behold – the bag was too big to carry on, but the description made it seem otherwise. When I went to make the return, I was informed that the return shipping amount would be withheld from my product refund because they were not ‘responsible’ for the reason of return.
So yes, shipment of the product to my home was great. Communication was efficient. Price was reasonable. But I would have paid more if my needs were being met. In fact, I purchased a bag from Macy’s at almost twice the price I paid for my Overstock bag, less than a week later. Overstock’s inability to fulfill the main element of my buying criteria – a hassle-free return – has lost them a customer.
I have heard countless sales people complain that ‘all their customers care about is price!’ Price is what the customer will fall back on if you fail to communicate relevantly
. "Offer me features that I want and I’ll buy it from you. Offer me what corporate has told you they think I want, and chances are you’ll have to sell it to me...and it better be cheap."
Start-ups and the Freemium Frenzy
Needleman recognizes that the freemium model is especially attractive to start-ups because of its potential to attract a large customer base, with the hope of converting them to paying customers. Needleman spoke with Vineet Kumar, a Harvard professor involved in a study of the freemium model, and noted that “the problem is, it's not always obvious what features should be free and which should be paid.” Kumar warns that offering too many features in the freemium version of your product or service risks "cannibalizing your paid customers." Offering limited features may result in minimal interest.
Don’t get me wrong, free or drastically discounted prices do
have a place in the market, if you’re Walmart. But unless you’ve established a distribution model so lean that it allows you to charge a lower markup then anyone else in the industry, then freemiums and discounted prices probably aren’t the secret to boosting sales.
On September 28th, The Wall Street Journal announced that the U.S. Postal Service (USPS) will again default on its obligation to fund future retirees’ health care costs. The $5.6 billion default marks the second failed payment to the U.S. Treasury in two months.
The USPS May be on the Verge of Losing its Competitive Advantage
While there’s no doubt the USPS must overhaul its business model if it wants to stay in the game, closing offices and eliminating Saturday delivery only undermines its competitive advantage- further exacerbating its financial woes. Virginia Congressman Gerry Connolly said it best, “Giving up six day mail service, closing rural post offices, and ending next day mail service will forfeit USPS’ competitive advantage, and would accelerate the decline of the Postal Service.”
Just like thousands of companies, large and small, the USPS is responding to financial trouble with a laser-like focus on cost-cutting; believing that cutting costs (read: eliminating services) will help pull it out of the red. The trouble is this: the cost cutting measures the USPS proposes represent valuable customer services. Cutting these services results in an inconvenience to its customers, and jeopardizes its competitive advantage.
What other company delivers first class mail to your door six days a week and offers a brick-and-mortar shop in every small town across America? What other company offers affordable Saturday parcel delivery? This is what makes the UPSP unique. Par down on post office facilities and strip Saturday delivery - you’ve effectively wiped out the agency’s only differentiators. Disgruntled customers will look elsewhere.
Moreover, your friendly postal worker acts as a company ambassador; an extended competitive advantage of sorts. Customers often develop a genuine relationship with their mail carrier who strengthens their confidence in, and emotional attachment to, the USPS. Take away that friendly ‘Saturday hello,’ and the convenience of Saturday mail delivery that comes along with it, and you’ve told your customer that their needs don’t matter. You’ve distanced the customer yet again and practically begged them to look for an alternative. These are distinct competitive advantages that the USPS should maximize and exploit, not eliminate.
In 1985, Michael E. Porter wrote a ground breaking textbook, Competitive Advantage: Creating and Sustaining Superior Performance. Porter stated that a competitive advantage can come about in two ways—cost advantage and differentiation advantage. The USPS should be capitalizing on both.
Interested in learning more about the positive impact of a well defined competitive advantage? I suggest you read Creating Competitive Advantage, by Jaynie L. Smith. This powerful guide ranks in the top 1% of books on Amazon.com and BarnesandNoble.com, and will help you begin to learn and understand the power of identifying and communicating your Competitive Advantages in order to stay ahead of the competition.
Chilis, Applebees and Chevys, among others, are testing table computer screens to take orders, pay the bill, and play games. You can watch movie trailers, news tidbits, whatever your preference. A Wall Street Journal article revealed that dinner out is now going to be like dinner at home - Everyone will be interacting with a screen with little or no family conversation.
These restaurant owners are making an interesting effort to be relevant to today’s world. Imagine the young couple on a date at such a restaurant. They can text each other, or share a videogame. They won’t ever have to talk to a waiter or for that matter, each other. Ah, the sign of the times. The Chuck E. Cheese generation is growing up, with their high need to be entertained.
So far the study revealed that 52% of diners would use an electronic payment system at their table (heck, we already do that in taxis around the country); and 31% are likely to use the games or internet access while dining. Isn’t that what the iPhone is for?
In the test so far 7 out of 10 diners elected to use the device. In some cases diners are charged a buck.
The restaurant can prompt the table, “Want another drink or dessert”? Dessert purchases are up 30%. Tips are above average when payments are made using the device as well. So this appears to be a win/win. The establishment is clearly meeting the relevant needs of the customer and winning while doing so. (I wonder why we are willing to buy more dessert from a video screen than a human. Our guilt is not visible to the plasma?)
If the nationwide test continues to prove that this particular competitive advantage is relevant to the customers, diners will chose to eat at the restaurants that offer table tablets and leave their iPhones in their pockets.
USA Today reported that one restaurateur invested a million dollars to set up his establishment and only $30,000 spent on the iPads, a small percentage to provide a strong competitive advantage. Another owner says theft has not been a problem and they haven’t lost or broken one iPad. The Lark Creek Steak restaurant in San Francisco loves the advantage. The President Quinn McKenna says it allows them to show a customer what rare, medium and well done actually looks like to ensure it matches that of the diner's expectation. Older customers still want the paper menus. To be relevant to that target market, both versions must be offered.
Few businesses take the time to test, through trial and error, like these restaurant chains, or using some disciplined form of market research. The Return on Investment for validating customer’s values and their respective level of importance is tremendous. I can’t help but wonder why less than ten percent of small, medium sized businesses invest in collecting the Voice of their Customers.
A recent article in the WSJ on the ascendance of Spirit Airlines highlighted many of the features that have come to represent the race to the bottom in the airline industry:
- No more meals, drinks, or service of any sort
- Pay extra for luggage, checked and carry-on
- Less leg room/comfort
- Poor on time performance
Spirit is the airline version of a low-cost competitor. In fact, their market niche is defined in the WSJ article as being “ultra-low cost.” Every market has their version of a Spirit Airlines. In construction, they’re the company who win bids by quoting a price so low that they can’t possibly make money, and then adds change orders that continually raises the total price. Need your car’s oil changed? Spirit is the equivalent of the oil change place that offers $9.99 oil changes, and then charges $15 more for oil designed to work in your car.
Ultra low cost providers can be frustrating to long-time stable businesses because their sales tactics so often work. Many buyers are enticed by the low up-front cost, and fail to consider everything else that goes into the transaction.
As someone who travels quite a bit, I’ve flown Spirit. Like everyone, I was enticed by the low cost, but there was another factor that influenced my decision to try them. When I had flown other low cost airlines such as Jet Blue and Frontier, I had decent experiences. In fact, with Jet Blue, I had free access to TV the entire trip – something I have to pay for with many of the legacy airlines like United, American, and Delta (that’s if they even fly planes that have TVs, which seems to be rare). My perception of the airline experience was that once you got on a plane, there really wasn’t much difference between any airline.
Until I flew Spirit.
Every airline seems hell-bent on giving you less leg room. This trend is part of what makes a supposedly higher-end airline experience feel like a low-end experience. A Spirit seat is extremely uncomfortable. Like many buyers, it wasn’t until I tried the low price provider that I understood the full value of what I was getting before.
After flying Spirit, I began to look at flying and have asked myself – what else am I willing to pay extra for? Herein lies the problem for the airlines, as my list is surprisingly short:
- Frequent flier miles
- Flight schedules
- Non-stop, or direct flights
Some of the other items that I wouldn’t be willing to pay more for include:
- Baggage check-in
Stop Differentiating - Start Selling Relevance
Take baggage fees as an example of a differentiator. Southwest has an ad campaign built around the fact that they don’t charge baggage fees. Am I willing to pay more for that? As a business traveler, I rarely check in a bag (I almost always carry on my luggage), so the fact that some airlines charge a fee whereas others don’t doesn’t factor into my buying equation. This doesn’t mean the Southwest campaign isn’t effective in pointing out a differentiator. Were my priorities correlated to those of the buying public, Southwest’s ad campaign would be a perfect example of what Jaynie Smith says in her new book, Relevant Selling, “differentiators are not competitive advantages unless they are relevant to the customer.”
Anyone who owns a smartphone or tablet PC has experienced the thrill of downloading apps. These handy little software programs help us navigate our world, play games, connect with friends, save money and unlock the little mysteries of everyday life.
But even though there are thousands of apps on the App Store and other app marketplaces, most people don’t use very many apps and end up deleting most of the apps that they downloaded.
As this article in USA Today points out, most apps quickly lose their “app-eal.” Of the 42% of Americans who have smartphones with apps, 68% of people only use five or fewer apps in the course of a given week. 80-90% of apps are eventually deleted. Clearly, only a few apps prove themselves to be useful enough and relevant enough to stay on people’s “must-use” list, day after day.
Two marketing lessons that your company can learn from America’s thousands of abandoned apps?
- Don’t get caught up in “innovation” if it’s not relevant to your customers: I’ve seen this happen time and time again in dozens of situations and dozens of industries. Often companies get entranced with the idea of “innovation” or using technology for its own sake, but they forget to ask if the new technology is going to be relevant to customers and make customers want to buy it. It’s no good to create a new product with lots of bells and whistles if your customers don’t want the bells and whistles, or don’t know how to use them, or don’t know how to fit the new technology into their lives. Do your homework first: research customers perspectives.
- Follow the right metrics: The app marketplace is a popularity contest. App developers pay close attention to how many people have downloaded their apps onto their smartphones. But according to the USA Today article, a better measure of an app’s success is not the number of downloads, but how many people are actually using it. An app that is retained by at least 30% of the people who downloaded it is considered “sticky;” all the other apps are just taking up space on people’s smartphone screens. In the same way, many companies measure marketing success by the wrong metrics. It doesn’t matter how many people watch your ad or watch your YouTube video if those marketing efforts don’t lead to actual sales. (Or worse, my own pet peeve, it doesn’t matter how many “creativity” awards your ad agency wins if the ads don’t help sell products.)
There are over 1 million apps waiting for people to download, but most will never become the next “Angry Birds” or “Words With Friends.” How can your company become more “sticky” with your customers? Is your company’s idea of “innovation” actually making something better and more efficient and more valuable in a way that is relevant to your customer’s buying decision, or is it just “technology in search of a home?”
I had the privilege years ago of meeting David Neeleman, founder of JetBlue. I am as impressed today as I was then by JetBlue’s understanding of delivering relevant competitive advantages. Most airlines deliver next to none, I am sorry to report. I fly over 100,000 miles each year so I can report from personal experience: most airlines don’t focus on customer care. Early in my career I worked in management for two major airlines, both now dead: Pan Am and Eastern Airlines.
There are many reasons those two carriers are no longer here. The head of a major union walked his members off the proverbial plank killing Eastern Airlines when they were struggling to make ends meet. Pan Am also had union issues as well as cash flow challenges due to over extending on new aircraft and then the Lockerbie, Scotland explosion was the last straw. They could not withstand the last knockout punch.
But early in the aviation glory days, the one thing airlines focused on was being relevant to passengers in ways that mattered most. This is what brought the success to those carriers and made them the preeminent names in aviation as the industry was growing. There was a great deal of attention paid to schedule timings - arrivals and departures times most valued by fliers. We analyzed the heck out of competitive time slots and fought hard to win favorable departure and arrival times from airport authorities. Today I cannot find a nonstop from my hometown airport Fort Lauderdale to 80% of the destinations I travel to. The Nonstop flight is an endangered species. It’s an example of how the airlines operate their businesses based on their internal systems, and not based on what customer’s value.
JetBlue on the other hand makes great efforts to meet the customer needs in many ways. In a Wall Street Journal article, How JetBlue Cracked the Boston Market , it is made clear that JetBlue is cleaning the clock of its rivals at this major airport. Their competitors pulled back on nonstops and made business travelers fly through hubs. As a result the business traveler happily moved over to JetBlue. Business travelers prefer convenience of nonstop flying over accruing thousands of miles we may never use (We travel so much that the last thing many of us want to do with our precious downtime is fly somewhere with our free miles).
JetBlue welcomed the business travelers by adding extra leg room options without charging an arm and a leg and global computer reservations systems for complex ticketing. It also added expedited security screening to match the carriers who previously catered to the business crowd. They have a newer fleet than most carriers, and a much more amenable culture for service personnel than many airlines. Their free onboard DirectTV at every seat is a major hit, few competitors have matched. Dave Barger, JetBlue’s chief executive says that 30% of their traffic is now business travelers, aka the higher yield passenger. Not bad for an airline that started out as a low cost, vacation traveler’s airline.
I spend most of those 100,000 air miles each year presenting to business leaders. I stress the importance of aligning internal decisions based on customer needs. It is interesting to note how few companies are using customer needs as their strategic driver. Customers know when companies are customer focused, or internally focused.
Like the JetBlue story, every day we find examples of the companies whose meteoric rise tanked because they stopped tuning in to their customers. Please don’t be one of those. Learn what is most relevant from your customers, the return on investment is staggering.