If your customers love you, you don’t have to focus on being the cheapest. In other words, you don’t have to price your products to be less profitable. A loyal customer is more interested in sticking with your brand than in saving a buck or two.
In the previous chapter I talked about one of the greatest brand builders in the world—Coca-Cola. Coke’s brand has given
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the company a competitive advantage, but it has also ensured cus- tomer loyalty.
When a company builds its brand in the right way, it creates customers who love the brand so much that they’re almost irra- tional at times. They feel good about buying the brand, and they eventually convince themselves that it tastes better. They are in love with the product—but more than that, they are in love with the image surrounding the product, and they want to associate themselves with that image. Not only do they want to drink Coke in public, they want to drink it in the privacy of their own homes, even if it tastes exactly the same as the generic brand. In fact, even if the generic brand is made by Coke and is only packaged differ- ently, they are absolutely convinced that the branded product tastes better.
I know whereof I speak. When I was in graduate school, I had a group of six friends who rented a house together. None of them
D O I N G I T R I G H T
I may be in the computer industry, but there’s nothing I hate more than walking into a computer store. I find that the staff is usually either overworked, undertrained, or both. One of the main reasons Dell has rocketed to the top of the computer hardware industry is that it was able to deliver to the customer what the competition only promised: the undivided attention of a salesperson who is helpful, patient, and extremely knowledgeable.
Not only does Dell’s sales staff know Dell’s products backwards and forwards, the salespeople are able to intelli- gently steer customers toward the options that will best serve their needs. Dell is willing to build a custom machine for each customer, and consumers can do the entire trans- action by phone from the comfort of their favorite easy chair, or online 24 hours a day.
Dell Computer didn’t begin its life as an industry giant.
The company got to the top by offering significantly better service than its competition.
had much money, so they decided to share food. A month into their cohabitation, the six of them set up a rule: If anyone in the house wanted a brand name of a certain kind of food, they had to prove that they could taste the difference.
It worked this way: Whenever a roommate insisted on a certain brand name, one of the other roommates would go out and buy four different brands of the product in question. One would be the brand the person was so insistent about. The other three would be competitors or generic incarnations. Then everyone would do a taste test.
The roommate who made the purchases would lay out eight plates or glasses, two of each sample, and everyone in the house would have to rate them. No one knew which was which. If the per- son who’d insisted on having a certain brand-name product could correctly identify it, then the household would buy it. Otherwise, it would be no-name from then on.
Over the course of their living together, each person in the house requested a taste test several times. Each of them was absolutely positive they’d be able to correctly identify the brand they were so fanatic about. At least once a month the roommates would test out the old tastebuds, and, more often than not, I’d watch. They checked whether they could tell the difference between margarine and butter, imitation sour cream and the real thing, Coke and Pepsi, or Frito-Lay and supermarket potato chips.
Of the 20 or 30 times they held these taste tests, there was only one occasionwhen a requester was actually able to pick out the favored brand correctly. I repeat: only once!Product loyalties may have con- vinced each of them that they could tell the difference, but their tastebuds said otherwise.
Now, grad school was a long time ago, and I’ve repeated this story many times over the years. Interestingly, almost every person I’ve ever told the story to is convinced that he or she could pick out favorite brands in a blind taste test.
This is especially true for soda. People are 100 percent con- vinced that they could pick out Coke from a tableful of competi- tors. At their insistence, I’ve run the test several times, and less than 5 percent of participants have successfully picked Coke. But the fact that so many people believethat they can pick out Coke
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shows how strong their customer loyalty lies, and it speaks vol- umes about Coke’s brand.
When it comes to customer retention, perception is every- thing. The product needs to be more than the best fit for a cus- tomer, it needs to be perceived as the best fit. How a company markets itself has a big impact on the type of customers who will want to align themselves with the product.
E-mail is the perfect example. iVillage and Hotmail may both offer free e-mail to anyone who wants it, but the type of person who wants to identify with iVillage and the type who wants to iden- tify with Hotmail are very different indeed. An 18-year-old male wouldn’t be caught dead with an e-mail address associated with mothers and mothers-to-be.
This concept of customer image alignment is relevant to almost any company on the planet. It speaks to why a customer will reject a perfectly good cup of diner coffee for a cup of Starbucks that costs $2 more and requires a 10-minute wait. It speaks to why someone would buy a pair of Guess? jeans over a comparable pair of no-names and why someone would pay $100 more for an elite bottle of wine with the same exact quality rating as one that’s read- ily available.
Let me tell you another story. I once had an economics profes- sor who was a consultant for the Parker pen company. At the time, most of the pens on the market cost an average of 29 cents. Parker developed a new pen and hired my professor to help decide how to price it. At first, Parker was leaning toward charging 39 or 49 cents, but it ran some studies which showed that if the pens were priced at
$2, Parker would actually sell more units than it would at the cheaper price!
The pen was nothing exceptional, but at $2 it made people feel exceptional. It seemed like a more elite product, and there was a market for that. Since that time, companies like Cross and Mont- blanc have taken advantage of this market, creating status pens that cost hundreds, even thousands of dollars. Customers have been all too happy to pay a premium for the luxury.
Customers like to feel special, and elite products allow them to feel that way. There’s an interesting dichotomy in the buying habits of today’s average consumers. On one hand, they want to
get a good price when purchasing certain items. On the other hand, they’re willing to pay a premium for products that let them treat themselves.
I recently visited a BMW dealership. I was looking at a car, and a salesperson steered me toward another part of the lot. He led me to a car called the M5 and made a point of telling me that BMW had manufactured only 2,000 of them. The price was steep, let me tell you—but the salesperson told me, “If you buy a Porsche, you’ll be one of the masses. If you buy this car, you’ll be one of the few.”
The M5 may cost a fortune, but there are customers lining up to get one. It’s amazing what people will pay in order to stand out—and it’s important to factor that customer inclination into your assessment of a stock’s worth.