Monday, August 17, 2009

Harold and the Price of Coffee

Harold Bishop A man (lets call him Harold) owned a coffee shop and it did ok. He often thought that it could probably do better and  this was because mostly he sold lots of coffee but never made a lot of money. He didn't really know where to begin so he asked his mate (lets call him Trent), that knew a fair bit about small businesses, for some advice.

Trent spent some time with Harold looking at the business – all the usual stuff – promotion, the products on offer, the location, competitors, the price etc. Trent also did a bit of research on other coffee shops in the area and the thing that struck him most was that Harold’s coffee was 30 – 50 cents cheaper than the other coffee shops.

Trent had a chat to Harold about the possibility of raising of the prices because, from what he could see, every other aspect of Harold’s offerings were spot on and the price seemed the only place to leverage.

Harold didn’t like the idea and argued that the reason he got lots of customers was because the coffee was cheaper. However, Trent persisted and convinced Harold that the easiest and most obvious way to make the business more profitable was to increase the prices. Harold’s chin wobbled and his glasses fogged a little but he reluctantly agreed to trial it for a month.

The first two weeks saw sales drop as many of Harold’s regular customers had started going elsewhere. What would normally be busy morning periods had turned into a slow few hours. Harold wasn’t a happy camper and Trent wondered if he had given Harold the wrong advice. They resisted the temptation to drop prices and Harold stuck to his agreement to trial the higher prices for a month.

Slowly but surely, the customers started to return until they were just as busy before but making more money. Harold thought it was probably because he had great coffee and people had decided that it was worth the price increase after all. However, Trent encouraged Harold to ask the customers why they had left but then came back. Harold tried this and nearly everyone said something along the lines off “I initially left when you put your prices up because I wasn’t happy. I went around the corner but the barista wasn’t as half as nice as you. I really missed your smiling face and warm welcome in the morning as it really put me in a good mood before work. I missed you, so I decided to come back and now I think the extra cost is worth it.”

Technically, the customer value proposition is the sum total of benefits that they receive in exchange for money and time (or other). The small but important word in that sentence is sum.

coffee sign Often businesses think too narrowly about what their customer value proposition is and focus on the pure product/service and the price the customer will pay. For Harold’s customers it wasn’t just about the coffee and the price. The value proposition for Harold’s customers was the whole customer service experience they received.

The interesting thing about Harold’s story is that what made his value proposition more appealing to customers wasn’t something that he had to spend any money on.

So what is it that your company offers customers that increases the value proposition from a simple goods for money situation?

As a consumer, what companies do you frequent that boost their value proposition in interesting ways?

Hat Tip Hat tip to Josh Strawczynski and Marketing Profs whose recent work inspired this post. You can check out the post from Josh that inspired me here and read the Marketing Profs “Get to the Point” email that inspired me here.


Matt Granfield said...

Matt Granfield likes this.

Incidentally, I don't watch Neighbours, did this actually happen on the show?

Daniel Oyston said...

ha ha ha no it didn't happen on the show (I am never home to see Neighbours – I assume it is still on?).

Instead, I read the story somewhere a while back and only remembered it after reading a few posts that talked about value lately.

The reason I used Harold is because a mate of mine who reads the blog but never comments (Trent) nicknamed me Harold (I have no idea why, he thinks he is funny but no one gets his jokes :)

I just thought it would be a funny to use Harold and Trent because it would make him laugh! The rest of the story, as far as I know, is true.