An owner of an Indian restaurant in Tel Aviv, Israel, built his establishment on the foundation of customer choice – with a twist. Customers order the meal of their choice from a menu without prices and at the end of the meal, they are asked to pay according to their perceived value of the meal. The customer sets the price! Many companies would argue that customers are unable to correctly identify the real costs of doing business and would take advantage of this business model by underpaying. Yet, this restaurateur has found his business model to be extremely profitable with customers often paying a higher price than he would have charged. Prices paid by customers are often so high that they exceed those set by comparable restaurants. While some customers purposely underpay, the vast majority are honest, appreciate and compensate accordingly. Trusting customers to place a monetary value on their own experiences has proven to be extremely profitable.
In typical business relationships between customers and companies, each side attempts to extract the maximum value from the other while providing as little as possible. This stands in stark contrast to the business foundation of our restaurateur which has that customers are better able to determine the value of their respective experiences. In cooperative relationships, each side recognizes the value provided by the other and is willing to give of themselves. From a business perspective, when given the opportunity to set their own prices, customers will ignore standard costs of doing business (e.g. manufacturing) and base their decision on the value they receive from the product or service. However, since companies have become accustomed to determining prices based on costs, they fail to recognize the true customer value of their products and services, and price them accordingly.
In the early 70’s the introduction of the quartz mechanism dealt a severe blow to the Swiss watch industry. Almost overnight, an industry renowned for centuries for its craftsmanship and quality faced the prospect of cheaper and more accurate watches. Many factories ultimately closed and industry production declined sharply. However, despite the losses, the industry rebounded and has witnessed impressive results. In 2005, the size of the Swiss watch industry topped $10 billion and the country exported 24.3 million watches. Today, more than 500 factories manufacture watches, a testament to the industry’s vibrancy.
What happened? Was quality sacrificed? Did price wars ensue? Swiss watch makers made the mistake of viewing their products from a functional rather than a customer perspective. Though less accurate and more costly than Quartz watches, the Swiss manufacturers in the early 70s failed to recognize the customers’ appreciation and admiration of their craftsmanship, and more importantly, just how much more they were willing to pay for it. While quartz watches emphasize cost and accuracy, many customers continue to seek a more personal experience and want to express themselves through the products they use (or wear). A watch not only reflects personality and status but it’s location on the human body (touches skin) can create a powerful emotional bond with its owner. The failure to understand the customer’s perception of product and service value drove many Swiss watch manufacturers to lower prices and for some, out of business.
In the world of customer experiences, it is important to start with your customer. The customer is not the last, but rather the first step in the creation process. The more we immerse ourselves with our customers’ viewpoint and perceived value the better the match and chemistry will be between the customer and product. The better the chemistry, the more profit companies will generate. Pricing your products from an internal rather than a customer’s perspective often leaves money on the table. Start with the customer and let them drive the value and profit.