05 March, 2012

The customer always pays for everything - there’s no-one else

‘Oh no, we can’t charge for that; the customer won’t pay for it.’

A lot of businesses struggle to make a buck because they give too much away. Unduly low pricing is just one reason, but, especially in services business, uncharged but necessary services are a big factor. Project oversight and administration are classic examples. So is freebie design before a sale is agreed. Or installation services. Or post-sales support. Or any one of a thousand examples. Assuming this isn’t a fundamental input cost problem, operational effectiveness problem or price/packaging/presentation problem, you’re kidding yourselves.

Of course you could be confused by not knowing who is your customer. Simple - who pays? Free-to air TV customers are not the audiences who watch the programmes; the customers are the advertisers or government subsidisers - attracting viewers is the service being offered. Likewise, so-called free internet services. They’re not free. The advertisers are the customers - they pay for eyeballs and click-throughs. If you make baked beans, your customer is the supermarket, not the person who buys the beans to eat. (Of course, attracting the bean eater is a central part of the value proposition you make to the supermarket). There are some mixed mode businesses where different customers share the cost, but you get my drift - the customers are those who pay.

If defining your real customer is not the issue, but you can’t make a buck for the goods and services you provide, then you have to make some changes:
  • Make sure your market offer is what the target market needs, that it represents value for money, and that your price regime covers your true total development, promotion and fulfillment costs plus a reasonable profit (assuming you’re not in early-stage).
  • Do a better job of building demand and demonstrating the value of your market offer. Tell the customer if you provide the extras, and the value of them.
  • Change your market offer, your promotion, your fulfillment, your price or all four. If the extras aren’t valued, then stop providing them.
  • Walk away from customers that won’t buy your market offer at your price, and find customers that will, because it represents value for them.
  • Or get out of that line of business.
If you don’t believe in your product/service and the value it represents to your target customer, no-one else will. Be proud of your product, price and value proposition.

Your customer always pays for everything, including all your costs and your return on capital. There’s no-one else. If your customers don’t pay for everything, you don’t have a viable business.

Flashback: first published February 6th, 2008; repost prompted by lots of heated discussion following my review of Hermann Simon's book "Manage for profit, not for market share

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