Did You Suggest Dasani Water Today?

Hudson  Group, a privately held retail corporation operates mainly Airport convenience stores under the brand Hudson News. You will find more than one in the same terminal, closer to most gates, and also one or more in the main terminal. Hudson News stores are  very neatly arranged and well lit  selling everything from books and magazines to snacks and bottled water. The stores have a open layout with things stacked along the walls. There is a center island with 2 clerks surrounded by every possible candy and gum.

When I stopped to purchase a pack of gum last week at a Hudson News store in an airport I noticed that the clerks were asking everyone, “Would you like some water with that?”. In the morning most travelers were stopping by for newspaper or a bag of snacks. All the same, even I was asked the same question for a pack of  gum. It was the equivalent of “Do you want fries with that?”. Over the few minutes I was there not a single customer that that offer. The clerks had several pallets of Dasani water, stacked u to their hips. As I peeked inside I saw the label posted on the cash register monitor, “Did you suggest Dasani Water Today”. I walked into every store in that terminal and found the same sticker and heard the same questions.

Clearly there was some incentive for them and the store to make the marginal sale. They sold 20Oz bottles for the price of $1.59, which is same price in any non-airport convenience store. The wholesale price goes for $0.5 to $0.75 per bottle but big volume discounts point to a much lower price. Hudson News sold only Dasani brand (Coca-Cola’s brand) and hence must get a much better price. Conservatively every sale is bound to make a profit of at least $0.75, accounting for any other marginal cost for transporting and storing.

Even if each store sold just 10 additional bottles per day, it is $7.5  in pure profit per day per store. This may not sound much but with low margins and obsessive focus on same store performance generating an additional sale of $15.9 and a profit of $7.5 is not bad. Cumulatively, that is $3000 in profit from 400 stores per day.

Now, $3000 for just planting the idea in travellers mind unobtrusively and for a reasonable price that is not much different from a non-airport store, Hudson stands to generate $1 million a year in additional profit.  A lucrative opportunity executed nicely. That said,  this is not a cure-all or a scalable solution. A clerk can afford to ask just one question without turning off customers and slowing down the transactions. Once fully exploited, there is no room for growth unless Hudson can switch to a higher margin product.

Kudos to the Hudson group management.

The Long and the Short of Lifetime Value of Customer

Zappos takes pride in describing itself as a great customer service business that happens to sell shoes. I had to return a pair of shoes. As it had been said very eloquently by many, it was the easiest task I have ever done online. Zappos knows they have not lost me and that I sure will buy more shoes from them.

On the other hand, I went to the local UPS store to drop off the package. I asked the friendly associate to tape my box and affix my printed UPS shipping label. He did, but charged me $1 for a strip of tape. He explained that he makes no money from people dropping off packages and in my case he lost money because he spent time and material and hence had to recover that cost.

It was not a big deal to pay a dollar. But …

Do businesses need to make money off of every customer interaction? The problem with most businesses, especially those run in franchise model with very low operating margin, is that they look for every opportunity to amortize the costs.

They look at customer interactions as transactional and not as a relationship.

The transactional model assumes every customer will visit your store exactly once (at least for the next few years). So the goal is to get the customer to pay. Even a small act you do for the customer needs to be charged.

The relationship model treats the customer visit as one of many opportunities to build a relationship with them. There is no concern about making money from every visit.

A customer who has bought other services in the past is not going to be happy for getting charged for every small thing. A new customer will form an opinion that will drive them away from the store for future services. The store should use every customer visit as an opportunity to build a stronger and better relationship.

The UPS stores are independently owned and operated by local business people. The franchisee, a local entrepreneur, pays a fixed fee and a percentage of revenues to UPS and takes as profit whatever is left after covering costs. Harvard Business School professors Campbell and Datar say in their working paper, “franchising imposes undiversified risks on the store manager and can create hold-up problems where franchisees may under invest in their stores”. This may lead them to measures that are needed to stay afloat but does not help the brand.

We can’t blame the franchisees for trying to stay afloat but customer experience is tied to the main brand. A customer will then relate the same experience to every UPS store and its offering rather than treat it as one off experience with an individual. UPS should incent the franchisees to build better relationships, and help reduce overhead costs by providing simple supplies to the stores to create better experience. This holds true for any business, franchised or not, big or small.

The high lifetime value of the customers in the relationship model requires businesses to look beyond profit from every visit and deliver above and beyond what is required.