Treating Different Customers Differently

In the Times Small Business section, Jennifer Walzer of Backup My Info! writes about her challenges with serving small accounts:

We love working with all of our clients, especially the smaller ones, but if we find ourselves spending all of our time helping the small customers get started with our service, we will not be able to grow into a $5 million-a-year business — or even remain profitable.

The fact is, it would take this salesperson only slightly more effort to close bigger clients that might spend, say, $2,500 to $5,000 a month or more.

[tweetmeme source=”pricingright”]While the “product” is data backup,  Ms. Walzer’s start-up chose providing exceptional support and customer service as its differentiation strategy.  Consider this scenario,

“What if the customers cannot easily see the difference between products in the market?
What if the product  by itself provides no competitive advantage”

The only reliable option then is to find non-product benefits that a business can differentiate itself on. Arguably, with customer driven product development this would have been a natural evolution of the product lifecycle.

Ms. Walzer adds,

Right now, we provide a high level of personalized, proactive support to all clients, whether they are backing up one gigabyte or several terabytes of data. We take care of a range of clients, from small firms to larger companies with more than a thousand employees. We offer clients a solution that protects their data, gives them peace of mind and solves critical compliance issues in a way that cheaper solutions cannot. We like to meet our clients in person and help them work out a disaster-recovery strategy. Every client is assigned a senior-level engineer during the installation process and for daily monitoring and support.

It is not enough that the benefits are unique – there are other prerequisites for uniqueness to become competitive advantage:

1. Customers must see the difference the way the marketer sees it
2. Customers must value the difference – there is an urgent need in the minds of customers
3. Customers must be willing to pay for the value they perceive they receive from the difference
4. Marketer must be able to produce and deliver (on scale) the difference at the price the customer is willing to pay and at cost that is profitable
5. Marketer can continue to maintain this difference and improve on it

The trouble with choosing exceptional service as the differentiator, as Ms. Walzer finding now,  is that it fails to meet almost all the preconditions stated above. Most significant of those five, in this case, is it does not scale well.

There is cost to serve each additional customer, be it the engineer cost or the opportunity cost of not serving the high value customers. Backup My Info! or any business must  know the cost to serve a customer vs. the revenue from them.

In the presence of costs to serve customers and variation in customers’ willingness to pay, it is never profitable to serve the entire market with the same great service.

This takes us back to Segmentation and Targeting – not all customers are same, not all need  the same product or the level of service and definitely not all want to pay the same price. Ideally it would have helped if they had started with a segmentation strategy and delivered different versions of their product and service at different price points.

What is ahead for them? I recommend:

1. Create versions with multiple levels of service and multiple tiers based on storage needs.
2. Unbundle the service from the product – make it available at a price to lower tiers.
3. Since the service had always been included, customers may not be willing to pay for it.  Use their marketing communication to improve the reference price of service in the minds of customers.
4. Focus sales efforts on acquiring the high value customers and make the low end customer sales fully low-touch.

If one price is good, two are better.