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Monday, September 26, 2011

Are Businesses Run By Idealists or Crooks?

Neither, with a few exceptions.

Businesses are run to meet buyers' needs and to make a profit. How they behave is subject to the urgency of the buyer's need and the value the buyer places on satisfying that need.

To illustrate, let's look at two ice water stands set up by some neighborhood kids.

Scene1: The local marathon finish line is in the neighborhood and the two ice water stands are set up by the finish line. Stand One is at the finish line – ice water is 25¢ per glass, and Stand Two is 20 yards past the line – ice water is15¢ per glass.

Which stand gets the runners business? Stand One get the business because the buyers urgency is to satisfy the thirst not shop for a 40% discount.

Scene 2: The popular local park attracts a lot of visitors and the main park trail ends in the neighborhood. Stand One is at Trail's End – still charging 25¢, and Stand Two is 20 yards further – charging 15¢.

Which stand gets the park visitors business? The urgency of satisfying the thirst is significantly less for the visitors than the marathoners, consequently, the value of a glass of ice water is lower and a majority of visitors will seek out the lower priced water of Stand Two.

Scene 3: The local road cuts through the neighborhood with few cars per hour. Stand One is located at the speed bump and Stand Two is 20 years further up the street – no change in the pricing by either stand.

Which stand gets the drivers business? Probably neither since there is no urgency of need and many other alternatives the driver can seek beyond the two local stands.

Is Ice Water Stand One being mercenary for charging a high premium because of its prime location in Scene 1?

Is Ice Water Stand Two being predatory for discounting prices significantly in Scene 2?

Probably not – the stands are responding with their approach to meeting the buyers' need-value proposition and to market competition.

While Stand Two may have set prices based on a “fair profit” as an idealist, the more likely reason is the discount is an attempt to influence the buyers' need-value mix to attract sales. Similarly, the premium charged by Stand One is recognition of the urgency of the buyer to satisfy the need while recognizing the buyer has a competitive choice is value takes precedent over urgency.

Do these principals scale to other businesses? Yes, and they become more complicated as new variables are added which affect cost, output, and regulatory or social restrictions.

Buyers won't buy unless they believe the need will be addressed by the seller's solution and the price is compatible with the perceived value.

Is this why organizations with money in the coffers but few customer sales are not interested in buying services to improve operations or upgrade technology – and won't invest in improving the sales process?

What are you seeing?

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1 comment:

Thoughthebrowser said...

What I get from your post is that which choices you make often depends on what you want to do. Even crowdsourcing for data is colored by the questions you ask. You don't go with your gut, you go with your prior experience, so getting relevant prior experience is more important than I previously realized.