Tagged by: Mind of the Customer

Buyer Psychology and Customer Value: Why People Buy Starbucks coffee?

How Starbucks Differentiated in a Commodity Market

Hint: it is probably not because of the quality of the coffee.

This post was inspired by a question on Quora that asked if Starbucks coffee was really superior and how the company made it addictive. What i found very interesting about this question is that the quality of the coffee is not really that important. There are other psychological and emotional reasons why Starbucks is so successful worldwide.

After all, contrary to what most people believe, we all make purchase decisions emotionally and then (sometimes) justify them rationally. This is true in B2B and B2C, it is true for $1 or for $1 Billion purchases. And it is critical for all marketers to understand.

Hint: it is probably not because of the quality of the coffee. This post was inspired by a question on Quora that asked...

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How can a higher price result in more sales?

Value and Price

The concept of sales going up with a higher price is counter intuitive. It goes against the basic concept of price and demand taught in school. It defies the ‘law’ of demand. But it is real. Here are a few examples:

  • I wrote about a post about doubling price with no decrease in sales and a dramatic increase in profits in A Pricing Lesson from the Concorde it’s one of my most popular posts.
  • Here is a story of doubling the price of software and selling ten times as many copies.
  • Another software product originally selling at $3K was doubled in price with no impact to sales volume.
  • An entrepreneur quadrupled subscription prices with no impact on unit sales, effectively finding a 4x sales increase with the same demand..

But the question we need to ask us is Why? Increasing price is fantastic for any business because the additional revenue goes straight to the bottom line. If you have been reading this blog, you know I am a fan of leading with value rather than discounts. Not that I every advocate abusive pricing, which is simply a form of bad profits.

Back to the question – Why is it that customers are willing to buy more products at a higher price? The answer is straightforward: price communicates value. Maybe we can be bolder: price establishes value in the mind of customers.

Imagine I told you I just found a wonderful whiskey that sells for $5 a bottle. It is not credible. Your first thought may be that I don’t even know what is good whiskey (and you’d be right, but that’s another story). Conversely, when you are at a restaurant and you see a bottle of wine priced at $150. you immediately assume it is of very high quality.

You can charge more money for a product and see higher sales when your price and the value you deliver to customers is not aligned. In other words, when you are leaving money on the table.

How do you know if you are in this situation? The first and most common clue is when the price for your products or services is determined using a cost plus model. You have a target profit margin that gets added to your total costs and that becomes the price. This happens often when finance is in charge of pricing. The alternative is value-based pricing.

Building a value-based pricing model requires understanding your customers, what aspects of your product or service they value, and how they quantify that value. Often times, the value customers put in a product or service is determined by pricing anchors. Pricing anchors are prices in the mind of the customer that provide a range of costs for a product, a service or to solve a problem.

Pricing anchors are the reference points customers use to judge the relative price of your products. In a future post, I will explore how you can set these anchors using techniques such as Goldilocks Pricing.

For now,  imagine you need to replace the furnace in your home. You may think a furnace is going to cost you somewhere between $700. and $1200. (these are the numbers that came to my mind)  Whether those figures reflect the range of prices in the market is irrelevant. When you call the repairmen you will judge the price based on the range established by these anchors.

As in the post about the pricing lesson of the Concorde, when your price and the expected price are misaligned, you can make a correction without an impact to demand. You can also do this with products that don’t have a strong price elasticity.

Understanding your customer segments, their anchors, their values and their price expectations is fundamental for value-based pricing.

Let’s look at another example: As told in the book Playing to Win , when P&G was re-launching the Olay brand they did test on three prices:

  • At $12.99 the sales were good. It was affordable to the mass market.
  • At $15.99 sales tanked. Not expensive enough to be considered a premium cosmetic for the mass market, and to cheap to be a credible quality product for the prestige shopper
  • At $18.99 sales were great. A good value but not too cheap for premium shoppers, yet credible as premium and still affordable for Mass market

Launching at $18.99, Olay became a $2.4 billion dollar business for P&G with double digit growth and fantastic margins.

Pricing can make or break a business. I want to suggest another resolution for the new year (the first one is at the end of this post): understand the value model for your products and services, and use it to review your pricing strategy.

The concept of sales going up with a higher price is counter intuitive. It goes against the basic concept of price and d...

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The Basic Formula for Business Success

what makes a business successful

What drives business success? What is the one thing any business can do to increase its chances of surviving, thriving and growing?

We are always looking for a single thing that can give us success, the ephemeral silver bullet. It’s called the delusion of the single explanation (read more about this one and 8 other delusions here). In business, like in most cases, it is always a combination of factors that results in success. Strategy is probably at the top of the list. Other factors include execution, passion, culture, and some may even say luck (timing is usually a better description).

While I believe Strategy is the #1 factor, I was looking for a formula to create a strategy that could be applied broadly, to almost every business, of any size and industry, to increase its chances of success. I think I found it.

The Formula for Business Success

Long time ago, probably in the early 90s I saw a magazine ad for Lotus (I believe) which had a central message designed to make small business owners feel empowered. The headline read:

Give Customers What they Want, Make Money, Repeat

Since, it stuck in my mind because of its simplicity and power. I am sure most people read it and thought “d’uh! – of course!’. Some of the most powerful concepts in business and in life are hidden behind simple phrases like this one. Often we fail at the basics. Often we get distracted by complex stuff and ignore the basics. My college professor used to say “Marketing is common sense, which is the least common of all senses. Never underestimate the Power of Simplicity.

Why is this simple customer so powerful? Let’s break it apart:

  • Give Customers what They want – offers four insights:
    • Giving customers what they want is very different than giving customers what you sell. This means you must change your marketing and your entire organization around customer needs, not around your products.
    • Second, it means you must first find out what customers want. really listen about what they want and make fundamental changes to deliver it. Like Domino’s when they changed the recipe for their pizza based on customer feedback.
    • Third, it means you need to decide who is your customer. It is very hard for a business to try to satisfy every kind of imaginable customer. You need to understand market segment,s buying behaviors and the type of customer you are better suited to serve. You can start with  simple terms – do you want to serve a quality oriented customer, a price conscious customer or one that values full service?
    • Fourth, the ‘Give’ talks about the delivery model. I think about it as understanding how your customer wants to consume your product. What format, what pricing model, what packaging, what place, etc.
  • Make Money – This is about having a fundamental understanding of your business metric. Understanding your cost to acquire a customer, your fixed and variable costs, cash flow, profitability, margin, cost of capital – start with the basics. If you talk to owners of small businesses, you may be surprised how many have no clue about many of these metrics. The same can be said of product managers, marketers, and even large companies. Remember the dot com bust? The focus on making money also means your business must be market driven, not technology or buzzword driven. Another no-brainer that is often the cause of business failure.
  • Repeat – This is a key part. It talks about building the culture, the processes and the company around these basic principles. Listening to customers once is not good. Looking at your balance sheet every now and then is not good management. These need to be habits. Even more than that, they need to be made core of the way you think about your business – as an entrepreneur, as a CEO or as a product marketer in a large company.

I hope this formula can help you and your business, or at least re-think your overall strategy.

What drives business success? What is the one thing any business can do to increase its chances of surviving, thriving a...

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People Buy Emotionally, then Justify Rationally

From the teenager girl buying her next cell phone at a mall to the CIO making a multi-million decision that will impact his company’s information platform, people make emotional decisions and justify them rationally.

Why have people grabbed over 50 million Motorola’s RAZR phones? style. Not because of its performance as a phone, ability to get multimedia content, or ease of use. It is cool  and it’s the gadget to have. Even Samsung this week launched a copy cat.

When we talk about mobile platforms for enterprises, people talk about “security” as a key factor in making purchase decisions. However, most of these people do not have a thorough understanding of what should be their security requirements and how each platform meets those requirements. Surely there are many people who do, my point is that many decisions are made based on perceptions and pre-conceived notions.

Most people who like technology feel very passionate and personal about the technology decisions they make. When I was in high school I was part of the Commodore 64 clan, and we tried many times to convince the people on the dark side (Apple II users) about the superiority of the Commodore machines.

In retrospect, I remember feeling a bit envious of some of the Apple’s  features, but my choice went far beyond a simple purchase. I still have a strong emotional attachment to Commodore that influenced my decisions and the recommendations I made. Quite frankly, I cannot say all the advice I gave to friends and customers (I used to own a computer reseller company) was completely unbiased and facts-based. but I am not the exception.

A CIO who is anti-Microsoft, for example, would be naturally predisposed to support Linux and see that platform as more secure and more cost effective. His feelings will be reassured every time he would read an article about a Microsoft patch, subconsciously ignoring the article on the other side of the page talking about Linux’s vulnerabilities. The same happens for a CIO who has been using Microsoft’s (or Sun’s or Oracle’s) platform successfully. It’s just human nature.

So how are you as a marketer optimizing your customer engagements for emotional impact?

From the teenager girl buying her next cell phone at a mall to the CIO making a multi-million decision that will impact...

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