Monthly Archives: April 2008

Revenue: reason and source

Reason a customer pays for a product or service offered by a company is in most cases the source of revenue for the company. But then there are cases when this is not true. The reason a customer pays is one thing, which in most cases is the primary offering, but a completely different secondary or additional offering generates more revenue for the company. These are the cases when the reason and source of revenue are different, though mostly interdependent.

One of the most talked about examples in this case is Hertz rental car service. The biggest source of revenue here is the rental insurance that Hertz provide with its cars which is an additional and optional service the company provides when you rent a car from them (just for kicks, the second biggest source of revenue: used car sale). Another example to consider is the wholesale retail chain that loves to play the membership fee ballgame. Customers go to Costco because they like to buy stuff in large packs at a wholesale price. But Costco makes 70% of its operating income through the upfront membership customers pay for to get in the store. Similarly, consider Google. Customers go to Google primarily to search something on the Internet. Their main source of revenue: advertisements, the contextual offerings next to the search results customers are looking for.

It’s interesting to see an auto rental company, a wholesale store, and a search engine, each excelling in the core area of their business but making the biggest chunk of revenue from a secondary offering. The important thing here is to notice their focal point of operations. Hertz cannot shift its focal point from rental car business and generate the same revenue through insurance. They are able to generate rental insurance revenue because customers like their rental car service and buy insurance for the cars they rent. Similarly, Costco cannot sell memberships if the customers don’t find what they want from the stores and Google cannot generate ad revenue if the search results are not relevant enough for customers to keep using it.

This brings us to the real thing…the success mantra to keep the cash register ringing is: focus on the reason and embrace the source. When the source and reason are the same, its a smoother ride, but when they are different, you got to make sure that you provide great reason to your customers to come to you along with maintaining attractive revenue generating additional offerings.

It’s all about the perceived value

One thing that counts a lot for any product is its perceived value. Customers do not buy the product, they pay for the value that the product provides them. The more the perceived value of the product, less relevant is the price tag on it and vice versa. The concept of perceived value reconfirms the importance of de-commoditization. Commodity by definition is something that has low perceived value. So the best way to remove the commodity tag from a product is by focusing on what value the product provides to its customer and adding a differentiating factor to it to make your offering stand above the competition.

If a product can create high perceived value, it can earn premium. This is something that makes an iPod nano worth $200, makes a customer pay thousands extra to buy a BMW rather than some other mid-size car, and makes a bottle of Fiji water cost 200% more than a Dasani’s.

It is interesting to look at the perceived value of Internet products. How valuable is your email service for you? How much do you value a good search engine? How much value does a good social networking site provides you? I believe a lot. But still you pay nothing for it. The entire concept of high perceived value seems to fall apart on the Internet…well not really. The concept does hold true in the Internet world as much as it does anywhere else.

In case of services like email, social networking and information look-up, the customer goes for the service that provides the most value. In fact the perceived value is the only thing that counts here, because price is totally out of the equation. What is important here is to understand the perceived value of the service for the payer, i.e. the advertiser. The value for an advertiser is directly proportional to the value for the end customer. More customers go to the service that provides more value. This in-turn attracts more advertisers to it…generating more advertising revenue for the service…making it all about the perceived value.

Bundling: it’s solutions to problems

Flexibility is great for customers. It lets them choose and pick exactly what they need out of a set of offerings. But then there are some times when customers don’t know what all they need to solve a problem. And there are some other times when they have heard of some really cool products but are unable to figure out how they can be applicable to their business. These are the two cases, discoverability and applicability, where bundling comes into picture.

The idea is to target the niche by putting products together and adding bells-and-whistles to them, essentially creating a bundle for the target customers. Some really great examples of product bundling comes from the Microsoft Office. Microsoft Office has suites to meet the needs of any type of customer ever wanting to do anything with word processing or keeping inventory or preparing a presentation. These suites make it easier for customers to identify what all they need and how a product can be applicable to their needs. For example, with the help of bundling, a school can easily figure out which products out of the Microsoft Office family will be useful for it and how. Similarly, a small business owner can just pick up the bundle created specifically for small businesses and meet all her needs.

Some other great examples of bundling comes from Google. Google bundles their products in distinct areas to further simplify their offering to the niche customers. It could not be any simpler for a non-profit organization to discover and apply a dozen products including an online video community, a mapping software and a money collection service to their advantage without wandering around to get each one of them and figure their use. Similar offerings make lives of educators and businesses a lot easier as compared to otherwise.

Bundling is in some ways opposite to how we normally work. In normal scenarios, we look at a problem and work on it to figure out a solution. In case of bundling, we look at all the various solutions we have for different problems, identify who all are haunted by these problems and mix-and-match these individual solutions to develop a package for a type of customers. Just another time when we start from solutions and look for problems!

Customer is the King

There is a common misconception when it comes to defining who or what rules an industry. Technology companies think technology is the king. Media companies think content is the king. Companies in real estate think location is the king. And we can go on and on. But the real fact is, be it any industry, it is the customer who is the real king. 

Take for example technology industry. A company can develop some out-of-the-world cutting-edge technological applications by making great investments in R&D. But if there is no customer problem that this product is going to solve, what is the use of it? Or in other words, how can it be successful? A technological application can be successful only if it solves some problem faced by the customer or fulfills a requirement of the customer. To find the requirements and problems of the customers  is not a trivial task. Sometimes you have to go to great lengths to discover these requirements, or make the customer realize that they have a problem. The right way to do this is to put efforts in discovering what is missing from the customer’s world, or how something can be made better, or what problem a customer is facing and then develop applications to solve those problems (and sometimes vice versa).

One interesting thing to ponder over is what makes customer the king? I believe two things play an important role here: limited resources and availability of options. Most of the time, customers have limited resources. This makes the customers prioritize their needs. Add to the mix the availability of options to fulfill those needs, and we can pretty much figure out the result.

In order to be successful in this customer-centric world, any business needs to focus on a few key things. The business needs to make sure that whatever it is providing, or whatever it is working on, is way up on the problem list of the customer. It must be able to evaluate the customer’s pain-points and then use resources to address them in the order of importance for the customer. When there is choice, there’s got to be a differentiating factor, and this is as important in a customer-centric world as anything else. So another thing to focus on is to make sure it stands out of the lot and can be distinguished from the competition. And one more thing, the business needs to make a commitment to make sure it has the best customer service in the industry.