Customers or Profits – is that a fair choice?
Do businesses really have to decide between making profits and serving their customers?
Stated another way, when businesses decide to make a profit do they do it at the expense of customers?
There are two really prominent business leaders, one from Japan and another from USA state so. The first is the CEO of SoftBank, Mr. Masayoshi Son, who has declared war on AT&T and Verizon Wireless with his investment in Sprint and his declaration to wage in price war. He declared,
(AT&T and Verizon) are burdened with the need to keep shareholders “rich and happy” with healthy profit margins and big dividends.
He signaled his intention to wage a price war to force the two leaders pick between keeping shareholders happy vs. keeping their customers happy. Just when AT&T and Verizon did an elaborate (and this time explicit) price signaling dance to get better price realization they may see themselves pulled back into a price war with Sprint.
In case of Amazon’s Mr. Jeff Bezos he strongly signals that his strategy is not to make profit by pricing high. In his open letter to customers on Kindle Fire he wrote, “There are two kinds of companies”
Amazon’s approach to eCommerce has been to completely drain the profit out of the market with lower prices and beat the competitors with better cost structure and efficient operations. It has been successful as a retail channel, forcing some to go out of business and the remaining to match its low prices. Notably Best Buy that suffered the biggest impact of showrooming could be next according to this report.
Is the choice really between profits and customers? Do companies that work hard to charge more face imminent demise?
Businesses thrive not because they work hard to charge customers less but because they offer best products that fill compelling needs at prices customers are willing to pay. That’s what is happening with Apple, REI, Lulu Lemon and all other luxury products. Apple makes more hardware revenue than entire electronics category of Amazon. If customer choices are driven only by lower prices this wouldn’t be the case, would it?
Businesses fail not because they work hard to charge customers more but because they have been charging for value they did not help create and hence it was not never theirs to begin with. That’s what is happening with Best Buy, Sears and other retailers who keep charging for value that customers do not get or want. Their strategy had been to open big box stores in affluent suburbs and hope customers didn’t mind the prices. They didn’t until they found alternatives. And now it is not these customer’s responsibility to offset the cost of bad strategy.
To be precise it is not a choice between profit vs. customers, profit come from customers,