Economists have a different definition of profit than accountants, because they consider both parties to a transaction. Adam Smith made the observation that a transaction between two parties will only take place to the extent that both parties benefit, by receiving more in value than they are giving up. U.S. Congressman Samuel Barrett Pettengill [1866–1974] gave the following excellent definition of profit from an economist’s perspective:
The successful producer of an article sells it for more than it costs him to make, and that’s his profit. But the customer buys it only because it’s worth more to her than she pays for it, and that’s her profit. No one can long make a profit producing anything unless the customer makes a profit using it.
Stanley Marcus [1905–2002], one of the sons of the founders of Neiman-Marcus, put it even more explicitly:
You’re really not in business to make a profit, but you’re in business to render a service that is so good people are willing to pay a profit in recognition of what you’re doing for them.
This is the ultimate principle for any business because it places the focus where it belongs, on the customer.
It is a deceptively simple question: What are we getting paid for? Yet many businesses arrogantly assume they know what their customers want and believe they have been giving them exactly that for years. This is a myopic vision, and potentially harmful, because there now exists a plethora of information available on why people buy, how they buy, and the decision process they go through, which businesses ignore at their peril. Economist Shlomo Maital, who has been teaching economics to business executives for decades, has put forth 13 forces that shape what people buy, in his book Executive Economics:
B bandwagons and bubbles
C cost, or price
E elasticity, or sensitivity to price
F fashion and fads
M minds and money (From Maital, 1994: 171)
Some of the above factors explain why jewelers have long understood that people do not buy diamonds for the four C’s inherent in them: color, cut, clarity, and carat weight. They implicitly understand what people are really buying is the reaction of others––the man pictures the reaction of the woman he loves while she imagines the reaction of her family, friends, co-workers, and so on. They also explain why movie attendance and book sales are dramatically affected by word of mouth––the so-called bandwagon effect.
Many theories attempt to explain why people buy what they do. Economist Thorstein Bunde Veblen [1857–1929] posited many theories in his book The Theory of the Leisure Class (first published in 1899), which Maital has drawn upon for some of the above motivations of why people buy. Veblen referred to a “barbarian culture,” citing that trophies such as property or slaves were signs of successful aggression. In today’s culture, luxuries are the major signal of status and class, which Veblen reasoned were purchased for two reasons: to show others you are a member of the class above and to distinguish yourself from those below. Economists of the day did not take Veblen’s book seriously, finding it obtuse and unsupported by any evidence. One Chicago economist said, “I congratulated him and asked if he had thought of having it translated into English.”
A better theory is posited by Michael LeBoeuf, Ph.D., in his book How to Win Customers and Keep Them for Life: Revised and Updated for the Digital Age. He suggests that customers have the following motivations for these various purchases:
Don’t sell me clothes. Sell me a sharp appearance style, and attractiveness.
Don’t sell me insurance. Sell me peace of mind and a great future for my family and me.
Don’t sell me a house. Sell me comfort, contentment, a good investment, and pride of ownership [and a piece of the American Dream].
Don’t sell me books. Sell me pleasant hours and the profits of knowledge.
Don’t sell me toys. Sell my children happy moments.
Don’t sell me a computer. Sell me the pleasure and profits of the miracles of modern technology.
Don’t sell me tires. Sell me freedom from worry and low cost per mile.
Don’t sell me airline tickets. Sell me a fast, safe, on-time arrival at my destination feeling like a million dollars.
Don’t sell me things. Sell me ideals, feelings, self-respect, home life, and happiness (LeBoeuf, 2000: 22–23).
Successful salespeople do not necessarily ignore features in the products they are selling, but they almost always add “which means” to the end of every explanation of their product or service offering. For example, “This car has a V-8 engine, which means it will last longer because it doesn’t have to work as hard as a smaller engine” (Williams, 1998: 98).
Advertising giant Leo Burnett used to say, “Don’t tell me how good you make it; tell me how good it makes me when I use it.”Despite all of the untold millions of products and services for sale in today’s marketplace, customers will exchange their hard-earned money for only two things:
Solutions to problems (LeBoeuf, 2000: 23).
Focusing on the total customer experience––solving the problem and creating the good feelings––demonstrates not just competency, but distinction. But the utilitarian view posited by LeBoeuf does not help a firm custom tailor its service offering to its various customers. It is easy to get caught up in hairy hypotheses that are long and complicated, but I prefer to shave with Occam’s razor––a medieval philosophical concept that states it serves no purpose to achieve a result with many assumptions rather than with a few. Which is why I prefer Theodore Levitt’s theory of what customers really buy: expectations. Levitt was a marketing professor at Harvard Business School, and once the editor of Harvard Business Review.
His expectations theory is useful because it forces the company to focus on the utility the customer is trying to maximize. By ascertaining customer expectations, the company has the ability to manage––to a certain degree––those expectations.
Southwest Airlines is a master at managing customer expectations. Customers understand very well that it is a no-frills airline, with no assigned seats (although this is expected to change), no food, no first class, and so on. However, since they have lowered customers expectations in these areas, when they crack irreverent jokes, achieve a stellar on-time arrival record, and do not lose your luggage, all at a price comparable to driving yourself or taking the bus, most customers walk away with their expectations exceeded––and, more importantly, they come back to fly Southwest again. Compare these expectations to buying a first-class ticket on, say, United Airlines. The customer’s expectations of every aspect of the flight are totally different.
Because expectations are dynamic, not static, it is also imperative to continuously ask customers what they expect. A company should never rest on its laurels and assume it knows exactly what the customer is up to.
Continuous learning from customers is an ongoing process and requires many different listening posts to accomplish. It is not enough to send out periodic Internet “how are we doing” customer satisfaction surveys. Most people do not fill these out, limiting their response and usefulness right from the start. Furthermore, most of the questions are biased and may not deal with the issues the customer is concerned about. Not many customers are very excited to fill these out, because they tend not to spend their waking hours cogitating on how the businesses they patronize can provide more value. After all, it is not the customer’s job to be innovative. Marriott has learned to engage customers in dialogues at many different levels,
often surveying their business customers on the concierge level during cocktail hour through informal chats. The data may not be as scientific and precise, but there is no doubt to Marriott that the information conveyed is much more relevant to customers’ true concerns and experiences. When one Chicago Marriott had budgeted $20,000 in order to upgrade the black and white TV sets to color in the bathrooms located on the concierge level, based on actual conversations with engineering and concierge-level team members, they learned that not many people requested the upgrade. What they did want, based on insistent requests from guests, was irons and ironing boards.
Focusing on the customer’s individual expectations forces the firm to individualize its service delivery to that particular customer’s wants and needs. No two customers should be treated equally. Customers want to be treated individually, or better yet, specially. This is inherently easier to accomplish in service organizations than in manufacturing, although with the recent trend toward “mass customization” of everything from Levi Jeans and baby dolls, to bicycles and children’s books, this is changing.
There is another major lesson with respect to customer expectations. Businesses compete against any organization that has the ability to raise customer expectations. FedEx brought a new standard to the passenger airline business with respect to handling and tracking luggage, just as anyone who visits Disneyland or Walt Disney World has their expectations raised when it comes to customer service. Once people experience premium service, they want more of it and are less and less tolerant of those organizations that do not deliver on the promise. This expectation dynamism, though, requires that leaders constantly look beyond their own four walls to learn from other industries.