Short-term revenue gain at the expense of long-term profitability

In a Marketing State of Mind

  

Most customers like to maintain the status quo; it’s expected and satisfying when a transaction meets your expectations. It’s pleasant when one happens to exceed your expectations. And it’s maddening when one dashes your expectations, especially when it’s at your expense.

As a semi price-sensitive and exclusively devoted airline loyalty-program customer, I always fly Continental Airlines when possible in order to receive miles towards their One Pass program. When Continental joined the Star Alliance network it became possible to fly US Airways and still receive miles towards Continental’s One Pass. When the time came to purchase a ticket the US Airways ticket was slightly cheaper than Continental, so I took a chance and purchased it. Logging in today to check into my US Airways flight and confirm my seat, the seat map came up along with a message:

“You can either buy choice seats or receive a free seat [assignment] from the airline”.

I could purchase a “choice seat” (defined as all aisle seats except for the last two rows + exit row seats) for $30, or I could accept the “free seat” (defined as all other seats) from US Airways, which turned out to be a window seat. First of all, the aforementioned “free seat” wasn’t indeed free – it cost me $500 per leg of the trip. Perhaps now is also a good time to insert that for the past five years as I’ve flown continental more than 40 times, I’ve always had the choice for an aisle seat. Always. For free!

With US Airways, not only was I refused the option to choose, but I owed the company money if I wanted to maintain my status quo.

Doing business with a company is like a contract. A customer pays the company what he thinks the product or service is worth, according to personal preference or socioeconomic status. The customer holds up one end of contract while the company holds up the other end. If at any point in the contract the payer feels that the payee failed to satisfy the contract, there will be customer dissatisfaction.

In a broad sense, the fuel of a relationship between the customer and the company is the ratio between a customer’s expectations of “normal” as it relates to the product or service, and the actual outcome of the product or service. For example, I purchase an ice tea from Starbucks expecting it to taste a certain way. As long as the product tastes equal to or better than my expectations, the relationship is satisfied.

Holding all else constant:

if “expected normal” = outcome, or if “expected normal” > outcome, your customer will either continue purchasing at the same rate, or increase their likelihood to to purchase in the future. Either way, you’re looking at a positive trend and long term growth.

if “expected normal” < outcome, you risk the transaction being cancelled, a dissatisfied customer as well as a decreased likelihood of future transactions. You’re trading short term gain for long term growth.

Here is a chart that shows the three different ratios:

There is a positive trend when the customer experience meets and exceeds expectations. There is a negative relationship when expectations exceed experience.

Over time, the bar for “expected normal” can raise as interactions with the company continue. What used to be a nice service enhancement becomes an expectation in future encounters. It becomes your new expected normal for when you enter a transaction. You hold every firm selling that product/service to that level of expected normal as you make your purchasing decision. When you interact with a company that doesn’t meet or exceed that expectation, your level of satisfaction is affected.

So, back to the story:

At the $30 price for a seat upgrade, a measly 6% of the cost of the ticket, this may seem inconsequential. But it wasn’t, since I had expectations that were greater than the outcome. Not only did I reject the additional 6% aisle seat charge, I also re-allocated my remaining $5,000 travel budget for 2010 to Continental instead of US Airways. That may not seem like a lot of money for US Airways. However, look at their tradeoff: a potential 6% increase in revenue per customer for a 400% increase that they were promised sans poor experience. Now imagine that number multiplied by a greater volume of customers. Think about the magnified potential for this seemingly hasty company decision.

So, a few lessons learned:

• If you’re going to charge more money, be upfront about the cost at the beginning. It’s not a good idea to trick your customer when their switching costs are higher. You’ll get this deal, but you likely won’t get the next one. Short term gain at the expense of customer satisfaction is not good for long term profitability.
• By all means, exceed expectations so that likelihood for repeat purchase increases.
• Increasing customer share of wallet by improving customer propensity to repurchase is better than stiff-arming customers for more revenue per transaction. Both revenue per transaction and customer lifetime value should be examined together when making decisions that will impact customers.

Until next time,

Lydia

Filed under: Marketing, Strategy

Wanted: A Mentor

Ruminations on Management
I came across an old paragraph that I wrote one day many years ago, in seeking a mentor in a manager. My modus-operandi stems from one of my father’s wise sayings: “always hang out with people who are better than you. They’ll pull you up to their level and encourage you to be more, to do more”. Naturally, this results in a high expectation of management, as well as a high calling of myself:

Wanted: A mentor that will challenge, teach, coach and encourage me to become a better leader in the business environment. Someone that brings years of experience in both succeeding and failing and who is willing to impart those lessons on someone who is still growing. Someone who will look at who I am today and see potential for what I can become tomorrow. Someone that will force me out of the box into very uncomfortable situations, but be there to give wise advice and support if/when I fail in those situations. Someone who will proactively seek to put me in situations that will grow my skills and abilities and push me out of my comfort zone. Someone that reads voraciously and synthesizes information into actionable application that makes his/herself, business and the world a better, more efficient and effective place. Someone that is constantly questioning, looking, learning and taking-in everything – and reminding others to do the same. Someone that is a very effective communicator, an empathetic leader, a wise counsel and in a state of constant improvement.

There is a scenario often played out in business called “success to the successful”, which is fundamentally about self-fulfilling prophesies. Two people, A and B are given an unequal amount of resources (e.g. attention or time). The theory follows that person A, receiving more resources, will succeed. He succeeds because of the resources, and his resulting success impels the giver to provide him with more resources, further fueling his success. At the same time, person B receives fewer resources. His lack of resources is the source of his failure. His failure prompts the giver to provide even fewer resources, further fueling his failure. The virtuous cycle for A continues as does the vicious cycle for B, ultimately satisfying the two self-fulfilling prophesies. If you expect people to fail, they will. If you give people the resources to succeed, they will rise to the occasion.

When you manage people, do it with the intent to make them capable of doing your job one day, or better yet, doing more than your job. This is more than an altruistic attempt at mentoring; it’s a profit-maximizing mindset that will improve the bottom line of your company. By challenging others and encouraging their potential, you not only improve who they are, as a by-product, you improve the organization as a whole.

Filed under: Career development, Coaching, Management