Who do you think will be more disappointed in the following cases:
You are running a raffle to give away iPad. The winner will be picked using raffle tickets. Each person gets either a blue ticket or a yellow ticket. There are 100 each and the tickets are numbered sequentially with blue tickets numbered from 738000 and yellow tickets numbered from 637000. People keep the stub and drop their tickets in a glass bowl (blue and red in same bowl).
Just before you pick a winner you announce – blue tickets are not going to be picked. You hear a collective awww from the audience. Then you go on to pick a yellow ticket and announce the winner.
Who will be more disappointed - 100 blue ticket holders or the 99 yellow ticket holders who did not win.
Say the winning yellow ticket number is 637065. Who will be more disappointed – person with ticket number 637000 or 637066,637064?
Variations:
- What if you handed out 150 blue tickets and only 50 yellow tickets and the rest of the process is the same?
- What if you were raffling two iPads instead of one and still disqualify all blue ticket holders?
- What if you were raffling two iPads and say one winner per ticket color?
- What if you were raffling two iPads and say both winners will be picked randomly regardless of color?
I have my hypothesis - here it is.
Case studies are an effective way for learning business concepts. Invariably these case studies are about most boring businesses, like some silicate factory struggling with falling revenue. Occasionally we come across some truly entertaining ones that are accessible to all and very nicely illustrate application of core business concepts.
It would serve you well to read this story in Huffington Post about a brothel. While some may be tempted to interpret this as truly unique to these entrepreneurs and try to learn new lessons, I see this merely as a case study for learning time tested business first principles.
What are these core principles? Let me list the principles and quote from the article.
1. Start with the customer segments and their needs:
“Most brothels are basically trailer parks in isolated places and there’s nothing to do once you get there other than have sex”
“people aren’t just going to a brothel looking for sex”
“You can’t stay overnight in most of them”
“Since many of the customers are physically disabled or have difficulty finding sex without paying for it”
As you can see they are not targeting every male member or even after everyone who pays for sex. They are after two key segments. One, those who “hire” brothels for more than one reason and expect lot more from the experience and two, those who are disabled. Within these two segments they still only target those with higher willingness to pay for what they value.
2. Product Positioning (no pun):
“We see this as the Ritz-Carlton of brothels,”
“We’re selling luxury and fantasy, not just sex,”
Product positioning is is not something you do to a product but do to the minds of customers. Positioning is creating a unique, relevant and differentiated positioning in the minds of the customers for your products.
Note also that by positioning it as Ritz-Carlton and not as Embassy Suites (another place you could spend the night) they are signaling the price premium and likely able to capture it.
3. Segment -Version Fit (or Product – Market fit):
“We see them (ladies) as the ultimate caregivers; they’re almost geishas and great conversationalists”
“ ideal sex worker would have training in both nursing and psychology”
“We’re not looking for Barbie dolls. They’re used to homage. I want someone who says, ‘What can I do for you?’”
“Not that there is anything wrong with sex. Austin says she’s gone to great lengths to ensure satisfaction for customers and the 50 or so sex workers who will be on site at any one time”
They got the segment and positioning right, next the product version must adequately serve the needs of the segments they are targeting. It is the Segment-Version fit that is more commonly referred to as Product Market fit. One does not take a pre-built product with rich features and force fit to any segment. We must build and deliver a version that meets the needs of segment we are targeting. Finally, a product must serve the primary reasons it was hired for. There are always a basket of reasons customers are buying a product. If the primary reasons are not met, it does not matter what other value the product adds.
4. Revenue Model and Product Mix – What are the different sources of revenue
“It costs nothing to stay at the resort. However, guests have to pay at least one of the women to accompany them around the Ranch at all times”
“this new establishment seeks to earn 40 percent of its revenue from goods and services unrelated to private time with the ladies ”
The first source of revenue is no brainer. But that is just one source and scales only linearly. They added the second source not as an afterthought but with clear goal of how much it should account for. This is about maximizing customer margin and not product margin.
Another point to note is recognize what they don’t want to charge for. This is not a hotel and customer is not choosing it to spend the night in clean rooms. While clean rooms and hotel like atmosphere are important to pick the place that is not what they value. So this establishment does not attach price to rooms but only to the time with ladies.
What is the price? The question almost all of us ask before we make our buying decision.
Is the price right? That we do not know. But we want to see the price. Hence there are posted prices everywhere you go.
- Price tags on the garments
- Price labels on store gadget displays
- Prices written on chalkboards in cafes and markets
- Price lists (or even price books) published by B2B marketers
- Pricing pages of webapps – presented in spectacular designs too
Marketers present prices and let the customers decide. No surprises.
Withhold the price information until after the customer consumed your product you are bound to shock them. We saw this with Uber’s dynamic pricing during New Year’s eve. We also see this in case of restaurants that charge “market prices” for their daily specials.
So we see published prices for everyone to see. We see several visual clues to tell us that the price is a “steal”. There are multiple price stickers, sales stickers, discount stickers. After all these, there is still one price – one price offered to everyone willing to make the purchase.
But charging a single price for a gadget or an entree does not maximize the profit a marketer can make. When you set a price for a gadget, there are
- some who are willing to pay that price
- some who would not buy at that price but would pay a lower price
- some who would have gladly paid more but are happier with the lower price you are charging
It is easier to see that in case 3 you are giving away too much and hence losing out on profit.
In case 2, as long as you can produce the gadget cheaper than the lower price the customer is willing to pay you are missing out on that profit (however small it is).
By showing the same price to all you give up on these two profit streams.
If only you can show different prices to different individuals. Their own price that 
others cannot see. That is the holy grail of perfect price discrimination – First Degree Price Discrimination.
But we do not walk around with the prices we are willing to pay pasted on our foreheads, nor can a marketer show the price to one but not to others.
Until now.
What if we are indeed walking around with the prices we are willing to pay pasted on our forehead?
Well not quite but close. We may be doing close to that with our real life and online social media behavior. We saw discounts on our insurance for our real life behaviors. We have seen cases where Capital One was showing different interests rates based on your web browser. The next step is to not quite unimaginable. It is indeed possible to feed your Likes, Status messages, Photos, Locations, Friends etc into an algorithm that can give with reasonable certainty your willingness to pay for different goods.
The second part of the puzzle is how can that price be shown only to you?
The disruptions that are happening in the form of mobile payments and app based purchases are addressing that. You can see how easy it is to do that for online purchases. It is not a stretch to extend that to offline brick and mortar store purchases. Your price is shown only when you scan the barcode or read the RFID with your mobile wallet.
Everyone sees their price, that no one else can see. Taking us closer to perfect price discrimination.
It does not end there. Customers’ willingness to pay is not a fixed number. It is malleable. Once customers open their mind a little through their social media behavior, they are are also opening a control channel to the marketers. A channel that will help the marketers nudge customers to pay a higher price than what they would have otherwise would have paid.
It is a brave new world. World with NO price tags, price lists, pricing pages and posted prices of any kind.
As a marketer, rejoice. As a customer, be worried.
For anyone studying business model disruptions, a rich case study is unfolding across the nation, from coast to coast, one food cart at a time. Let us not make this a culinary argument and look at this purely from business perspective. If you have not been following the stories here is a summary,
Food carts are restaurant on wheels. They come in all flavors and with clever names (Curry up now). They are showing up in office parks and business districts, catering to the lunch crowd. And that is the problem for traditional brick and mortar restaurant owners – the trucks are right at their doorsteps and eating their lunch (pun intended). The restaurant owners don’t like it!
Let us look at this in two parts to see the disruption. As I am wont to do, let us start with customers.
Customers/Customer Needs: Anyone with money to spend during lunch is a customer. Why are some willing to give up the sit down comfort and service of restaurants and try food carts? There is no one reason, there are always utilitarian and emotional reasons and it is the degree of intensity that varies for different customers.
Some were hiring the restaurant just to satisfy their hunger and they are happy to hire any other service that does the same job faster/better/cheaper. Some hire the restaurant for the experience but not likely all the time. In some cases they may be hiring the food cart just for the novelty and experience.
If you look at the comprehensive list of purchasing occasions you will find there were enough jobs for which the restaurants were hired only because there was no alternative. When food carts arrived the customers are happy to fire the inferior candidate and hire the new one.
The Incumbents: The restaurant owners had a nice run. Their product was hired by customers for lots of jobs even though it was not the right fit. Do not get me wrong, there are many other jobs for which restaurants are the right fit and rightly capture their share of the value add. But the rest of their customers incurred higher transaction cost for the value delivered. These segments were right for picking by anyone. Restaurants were however only too happy to serve the same product at the same price to all their customers and now see that advantage vanish.
Their reaction can be summed up nicely by the comments made by their rep in KQED’s Forum interview,
“Our original business plan did not take into account these food carts taking away our customers”.
Isn’t this a luxury every business would like to have?
That is the core problem. Disruptions don’t telegraph their arrival. Uncertainties are the unknowables. You can’t ask for protection because of your failure to model these uncertainties.
If disruptions these are the unknowables how can they model these?
There is really only one way - starting with customer segments and asking what jobs are the different segments hiring your product for. If your product is not the best candidate for each one of those jobs it is currently hired for it will be disrupted. The flip side of my earlier statement, “anyone with money to spend is customer”, is , “anyone goes after that money is your competitor”. And they do that by doing the job faster, better, cheaper.
If the customers hired your product only because of lack of alternatives are they really your customers to begin with?
Your failure to focus on customer needs cannot be fixed with newer regulations to stop the disruptors.
We all hear about customer loyalty and the need to focus on increasing loyalty. Loyalty cannot stop disruption. If you do not want to be disrupted it is you who should show loyalty – loyalty to the job your customer hired your product for, doing the job better than anyone else can.
The stories of Steve Jobs’ obsession with details and his effective use of Apple stores are not new. We are all mesmerized by an anecdote in Isaacson’s book that describe how Mr.Jobs was personally involved in picking color of the wood panel for the stores.
Just so you know there have been others.
Here are some quotes from a book (click to find out which one) about a business. This describes what happened in 1824.
Using store design to attract customers:
[Redacted] took advantage of the latest ideas to attract business to his shop, starting with the shop window. While most other had green-ribbed windows, [redacted] had a myriad of small squares of plates of glass set in mahogany frame that it is said he polished himself each morning.
Remember how excited you were when an Apple store opened in your city or how you drove 50 miles to the city where it opened to see your first Apple store?
This design feature alone was such a novelty that, “people would come from miles around”.
What do we see when we walk by Apple store in a mall? Something unusual in the midst of the the same old boring mall displays.
On peering through the windows, prospective customers were intrigued by the unusual, a touch of the orient in the heart of smoky industrial street.
When we enter an Apple store the inviting open displays gets us,
The many inviting delicacies were displayed among handsome blue Chinese vases, Asian figurines and ornamental tea chests.
Of course finally who do we see when we enter the store? Those Apple store employees who seem to have descended from another world, with their blue t-shirts they are not allowed to sell or give to charity and with titles like Genius
Weaving his way through all the exotica was a Chinese worker in Oriental dress, weighing and measuring, promising something different,
And you thought Steve Jobs was the first to use store design as a marketing tool
Note: You are likely right that this article suffers from narrative bias, but the bigger point is so does any article or book about Apple or any other brand’s mystical characteristics.
When you think of a product what comes to your mind? When does a product become a product?
Take a moment and and complete this sentence
It’s not a product until ______________________
I saw what I believe is the most correct way to complete this sentence. I am not sure if I would have come up with that in my first attempt. The answer comes to us from a Times case study of a small business trying to sell their current product into newer markets.
Here it is, I used white for text color to help you not see it before you came up with your own answer. Highlight the next line to see it.
It’s not a product until you define a set of customers whose needs you meet and who want to pay you.
I agree.
Remember the question I posed some time back on finding probability of a tweet with a link being retweeted? The quiz was a fun way to make the audience realize for themselves the futility of any tips they see on improving retweets. 390 people took the quiz and answered it, (40 because I asked, 350 because Avinash Kaushik asked).
Here are the results. Big thanks to SurveyGizmo for its amazing survey platform. The reports pretty much write themselves. You should not even try anything else for running your surveys. For all percentages you see the base is 390 responses.
For the first question I presented the only data that I saw in the report I quote. The answer distribution looks like this
One could say, close to two third are likely to believe and accept whatever is implied by the commentary associated with a partial finding. While 36% asked for more data only a third of them asked for the right data, the percentage of tweets retweeted, that will help them answer.
After they answered the first question I provided the additional data, percentage of RTs. I provided as optios the correct answer , the two wrong answers from previous question and two bogus answers. The answer distribution looks like this
About one in five found the answer (answer is 16%). It is likely that, even in the presence of additional data, four out of five people can be convinced to accept a different answer. For example, when a spurious conclusion is presented in the form of a fancy infographic or presented by someone popular. When you see 5000 people tweeted an infographic that talks about scientific ways to improve retweets, it is hard to stop and do the math.
The takeaway is, it is hard for folks to stop and take a critical look at social media findings reported. It is even harder to seek the right additional data and do the math. So most yield to mental shortcuts and answer the easy question.
Note that this 16% number is calculated only to show you what is the average. But average hides segments. Likely there are multiple segments here. For some, link or not, everyone of their tweet may be retweeted. The only takeaway is this is a probability calculation and not a recipe and as we collect more data the probability will change.
We all would like to believe there is nothing like our product or service. After all we are innovators and our vision is to change the way people do things. The investor pitch deck from a startup, Everest, sums up this attitude
Let us take all such claims at face value and treat every one of these products and services as new. Then we face the key monetization question
What do we charge for a service that we just made up?
To make this question more meaningful let us use a simple yet real life case study instead of talking about hypothetical product. The case study comes to us from NPR Planet Money, (Don’t read the full story yet, I will take you to the middle of the story to set up the case)
Two guys offer visa form printing services in front of the New York Chinese consulate.Visa applicants, turned away at the visa counter for filling they wrong forms, come to these guys who have computer and printer in a RV parked right outside the consulate. No such service existed before. They just made this up. How do you think they should price this innovative service?
As I wrote in the past, there are two places to start to answer the pricing question – even for something we’re building just now, Product or Customers. My recommended starting point is, Customers.
Even if the product is innovative and what you are building doesn’t exist yet, the needs are not. The needs are why the customers are hiring your products for (Christensen). If needs indeed exist then they are currently addressed by different customers differently.
In general there are always different customer segments. For some the needs may go unaddressed for others the needs may be addressed through alternatives, however sub-optimal they may be. There may not be a competitor product but there are always incumbents. In some sense, doing nothing is an alternative too (for Intuit’s TurboTax, they defined their incumbent as paper and pencil).
In the Chinese visa case the alternative is walking to the closest internet cafe and paying for printing or coming back another day (like those with low opportunity cost for their time).
You can’t serve all segments, at least not initially. You need to choose your segments, those that offer the best return with your limited resources. After all strategy is about making choices.
Say you choose the segment that used to walk to nearest internet cafe. By choosing this segment you already know they are willing to pay for printing the forms at the internet cafe and they incur additional pain to make the round trip.
Your next step is to position the product in the minds of the target segment. Positioning your product is not about how innovative it is but about what job you want them to hire it for and why your product is better than anything else that customers hire now. If you can’t position your product you can’t control its pricing.
Once you perfect the positioning, pricing is the next logical step. Hiring your product over the alternative adds incremental value to customers (like avoiding round-trip walk) and you price your service to capture your share of the value created.
How do you quantify the value created and how do you know your right share that customer will willingly part with? Some customers know, some don’t. It is up to you to do the value creation math and show it to them. Then you rely on quantitative methods, pricing experiments and signaling to find your fair share – the price customer is willing to pay without pain.
In general, cases where you have repeat customers it is important to get the first pricing correct. Choose too low, you forgo profits. Choose two high and continue to drop prices, you lose credibility. That said, if you have done the Segmentation right, Targeting right and Positioning right, the pricing can’t be far from right.
Let us come back to the case study. They had no repeat customers. They chose to experiment. They charged $10, the same price charged by internet cafe and found the demand overwhelming. Next they went to $40 and found drop in sales. Now they charge $20.
Be it a software product, magical delivery service or Visa form printing service – you need to worry about monetization. Otherwise why do it, however innovative the service is?
So what do you charge for a service that you just made up?
Readings:
- NPR Planet Money Story http://www.npr.org/blogs/money/2012/01/04/144636898/a-man-a-van-a-surprising-business-plan
- Segmentation
- Startups and Segmentation
- An entrepreneur will not always succeed in positioning his latest innovation the next “new thing.” http://www.chicagobooth.edu/capideas/oct09/5.aspx
Note 1: Note that the pricing for the service did not take into account the cost to rent the van, opportunity cost of the two guys operating it, or the cost of printing. Pricing comes before costing. If you cannot deliver the service profitably at the price customer is willing to pay you need to explore options.
Note 2: The price $10 set by internet cafe is the reference price in the minds of customers. Even if that price is wrong (cost based) you are stuck with it unless you can shift the reference.
