Customer Profitability
While reading from the Lehmann and Winer text this week, I got to thinking a lot about how profitable some customers are. The goal of business is to maintain repeat customers. But I have discovered in my time that customer retention does not necessarily lead to profits in all cases. Customers can be unprofitable based on how they shop.
In analyzing my current work, I can see many examples of this. We offer a special that changes daily to entice customers to try new things and reward repeat customers who stick to their usual by giving them an opportunity for a price break every now and then. What I have noticed is that there are customers who only purchase the special on a daily basis. Others only come in when a particular item that they enjoy is on special. In both instances, these customers never make a full priced purchase, leading to very minimal profits, if any, as some of the specials wind up distributing product at cost. One particular customer would only come in when the milkshakes were on special. This special was designed to get customers in the habit of coming in during a hot afternoon for a refreshing shake but was priced to do little more than cover the cost of making it. Since the time we have stopped running this special, this customer has never been seen in our store again. These type of "deal prone customers" as they are labeled in the text are not exactly what businesses have in mind when seeking customer retention.
However, this is not to say that all customers who come in for a deal do not have the potential to be profitable. In fact, great deals or even freebies have proven to be very beneficial to many businesses in getting customers in the door. One initiative we have taken is to offer a free ice cream cake to all new residents in town. As part of their welcome package, they receive a voucher in the mail to redeem their free cake within 30 days. The customers who come in for this freebie are being introduced to our product and great service in the hopes that they will be extremely satisfied with both and come back for more on a regular basis. These customers who entered because of a deal have a much greater potential to wind up being more profitable for our business than those mentioned earlier.
The Importance of After-Sales Service
While most companies place a lot of importance on great service before and during a sale, it is equally important that the service that is provided to a consumer post-sale is just as good. We see the importance of after-sales service at my business on a regular basis, but more so from the customer's perspective. At our shop, every piece of machinery we have is crucial in the creation and preservation of our products as well as all of our ingredients. These various refrigerators, freezers, air conditioning and other machinery are all very important and need to be functioning appropriately for us to be able to operate. In the event that a problem arises (which occurs far too often for our liking) we count on the after-service sales of different companies to fix the problem and get us back to full functioning capacity. This is typically more important to us and will be of more value when going into an initial purchase than almost any other factor involved in our decision making process.
This demand for quality service after sales is not just relevant in machinery and other things where regular maintenance is a given. This is also important for us from the warehouse where we purchase the majority of our ingredients and packaging products. In the event that a product is out of stock, discontinued, or simply not offered by this particular warehouse, we have a tremendous sales manager that goes out and finds a company that can provide us with what we need, regardless of the fact that he will not be making a profit from this transaction and it will not directly benefit his own company. This type of service goes a long way and is never overlooked by us, making us a very happy, and more importantly for our supplier, a repeat customer.
The Transaction Utility
One topic that I found quite compelling in the reading this week was the concept of the transaction utility. The idea that businesses are informing consumers of what they have gotten or what they have preserved, rather than what they have lost is one that is smart and one that I have noticed quite a bit.
The first place I ever noticed the transaction utility being present was when shopping at Kohl's. Whenever I would check out of a store, the cashier always circled or highlighted and verbally informed me of the amount of money I saved on this trip through sales, clearances, coupons, or any other form of discount. Very little attention was paid to the price I actually paid outside of the exchange of payment itself. After noticing this on every trip I would take to Kohl's, I began noticing this in other places, particularly grocery stores. This trend was catching on and there were always savings to be highlighted.
And after a while, I got to thinking. Why are there always savings being highlighted? I began looking around at Kohl's and realized that there was not a single item in the store that wasn't being presented at a discounted price in some way. Shopping at a grocery store, provided that you have store card, nothing was ever purchased at full price. Additionally, I began to realize that at Kohl's in particular, I never shopped there without an additional 15-30% coupon in my hand or some other enticing offer. In fact, I had become one of those aforementioned deal prone customers that my business fears so much. Yet, Kohl's was still making a profit off of me, and every other customer who was in the store and shopping at a discount. Because unlike the deals at my business, these deals are set to entice but still be quite profitable.
I realize now that even the most basic sale that they offer, typically buy one get one 1/2 off, is no sale at all. This is simply the normal price that one should pay for them to maximize their profits. So what is in an MSRP? Are all of these numbers being inflated and overvalued just so that the customer thinks they are getting a great deal, when in reality they are paying what the product or service should be valued at in the first place? This transaction utility manipulates customers into believing that these extraordinary sales are a great savings and quite beneficial and that we are getting a steal at these prices. And stores are extremely effective in doing this. If you price the same exact product in two different stores at $19.99 but one store comes equipped with a 50% sign while the other makes no mentioned of a sale, what is going to look more enticing to a customer?
The transaction utility is a sneaky, devilish tool being used by companies to provoke customers into buying. It is highly effective, very smart, and is making me want to end this blog right now and go find a sale.
The Benefit Ladder: Tangible and Emotional Benefits
As discussed this week in class, products and services offer both tangible benefits that actually serve a purpose to the consumer, as well as emotional benefits that satisfy the consumer and help them respond to particular products and services. Looking at the Pharmasim simulation, both tangible and emotional benefits can be found.
The Allround product is created to fight cold, cough and allergy. The purpose of the product is clear, meaning that the tangible benefits are clear. The consumer who uses the product will receive a treatment to eliminate the symptoms they are feeling from their body, leading to a healthier consumer. With the tangible benefits come emotional benefits. People will feel better about feeling better, and as a result will feel good about the product. Peace of mind is a benefit that this product offers as consumers can be comforted in knowing that should any of the applicable symptoms arise, they have a trusty solution to their problem and will be able to go on about their lives normally. The benefits of Allround are very clear to be both tangible and emotional.
In the classroom discussion, I got the sense that people were more conscious of tangible benefits and felt that they were more important than emotional benefits of a product. In my particular industry, I do not think that's the case. Take our standard sundae or ice cream cone as an example. The product is clear. But what tangible benefit is it providing? In reality, the items we offer are more of a luxury item and not at all considered a necessity. I suppose you could argue that the tangible benefit is to satisfy hunger. In the end, I'm not buying that. We are considered a "frozen dessert retailer" officially, dessert being the key word meaning your hunger was satisfied before coming to our establishment. If anything, I would say that our tangible benefit is more of a hindrance on some consumers as we directly conflict with the weight loss, summer beach bodies, and lower cholesterol that so many desire. So if there is not a clear tangible benefit, it has to be the emotional benefits of our products that keep customers coming back for more. Indeed I find that to be true. People become attached to a particular product or a certain flavor that they have always loved. Some people even become attached to the shop itself. We have many people that have moved away to different cities, states, and even countries, yet every time they come back home they always come back to the shop they grew up going to. There is clearly an emotional benefit for our customers that supersedes the tangible benefits that the majority of our products offer. While this may not be the case with every company, it is certainly true for ours.
Cognitive Dissonance
I found the discussion on cognitive dissonance to be quite interesting. There were numerous different outlooks on this subject that all brought up interesting points. I certainly understand how this post purchase dissonance takes place and have seen examples of it in myself and from others. What I would most like to discuss is two of the questions posed in class.
The first question centers on why companies don't do more to prevent or alleviate cognitive dissonance. The way I understand it, companies are not trying to have a buyer experience cognitive dissonance after they purchase their good or service. They would much rather prefer a customer be completely satisfied and not second guess their decision at all. That is why companies make information easily accessible to consumers, have a sales and support staff available for their use, and try to provide great customer service after purchase. Most companies would find it hard to do any more to prevent cognitive dissonance. It is other companies that are the ones causing the cognitive dissonance to occur because they are also doing their job in spreading information about their products or services. Now that a consumer has made a purchase and they begin to see promotion of a similar product, it is only human nature to second guess yourself and think what would have been had you chosen the other option previously. This is not reflective on the efforts of the original company you bought from in anyway but is rather reflective of a consumer being unaware of all choices available to them. This leads into the second question that I wanted to focus on: whether or not an educated buyer makes a difference. Absolutely! An educated buyer is the best way to prevent cognitive dissonance from occurring. It is up to the consumer to research all available options to them, weigh the pros and cons, and determine what product or service will benefit them the most and create the most value for them. A consumer who does their research and narrows down their decision based on all available options will likely not experience cognitive dissonance. The only way this can occur is if the product does not live up to expectations, a change in what benefit the customer needs occurs, or the consumer simply makes a bad decision.
I recently bought a new car (Nissan Altima) and made sure that during this process I researched all options that had any interest to me. I did my research based on the money I was willing to spend and sifted through all my options. I determined the best fit for me based on all of the benefits I valued most and made my choice. As a result, I have not experienced cognitive dissonance because I was a well informed and educated buyer. I took into account all the information that was given to me by various companies, made my well-educated decision, and was extremely content in making it.
If only I had bought that Aston Martin...
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