“We could grow faster if those stupid customers just understood the real value of our solution.” If we had a dollar for every time we have heard a client say some version of that, we would be rich. The problem with that line of thinking is that it is a dead end. If customers are stupid, and knowingly buying something other than their best option, then what hope do we have of changing that?
We have come to believe that the ‘stupid customers’ line of thinking is a convenient, but at best superficial, explanation for not making a sale. The truth is that individual customers may seem stupid – they certainly make decisions that we don’t understand. But whole segments of customers are not systematically stupid, or they wouldn’t still be in business. Nearly always, a better explanation is that we have failed to fully understand value from the customer’s perspective. Too often we see companies who:
- Focus on value to themselves, not value to the customer (“we want to sell more high-end product”)
- Assume that their offering is the best alternative for every customer, without applying a thoughtful segmentation
- Are good at talking to customers, but may not be good at listening to them
- Frame the customer problem from their perspective without thinking through the trade-offs the customer faces as a business (best technical solution versus best way to solve the business problem)
As always, an example helps to illustrate this point. We recently worked with a client that produces an additive that reduces the processing cost for certain types of polymer-based products. They had a profitable business and had been quite successful when they were involved early in the product design and qualification process. They had demonstrated that they could help their direct customers meet their end-customers’ product specifications while reducing the cost to produce the product.
Their frustration came when trying to convert customers with existing products to their additive. They knew that substituting their additive would lower a customer’s production cost, yet they could not get them to switch. What was wrong with these ‘stupid’ customers?
Their salesforce treated this as an objection[JD1] to overcome and they rolled out different messaging and various commercial programs designed to get customers to switch. Thinking that it was a cash or capital problem, they had tried various financing programs. This still didn’t move the needle in terms of more customers adopting.
They tried to fund pilot trials. They offered to support the engineering effort to reformulate and provide free samples for evaluation testing. Still very few takers.
So what was wrong? What were they missing?
Understanding their customers economics
We forced them to step back and dig into their customers’ economics, not just the economics of producing the material, but the full end-to-end cost implications of designing, producing, qualifying, and delivering the material to their customers – the one-time expenses that economists would call “switching costs.” It turned out that in most cases the qualification process that end-customers required started all the way back at the design stage. They were involved in every step, from approving the formulation, approving the processing method, and then qualifying that the material actually met their specification.
In order to even initiate the change, they had to engage their customer (or more often than not, multiple customers) to even start the process. They would then have to disrupt their production to produce samples and support the end-customers through a lengthy qualification process. The cost of going through this process was in the hundreds of thousands of dollars, often approaching a million. So, while the eventual savings to the customer were real, when they ran the numbers the way a customer would, the payback on the switching costs was typically five years or more. These customers weren’t stupid – they were making exactly the right decision for them, given their limited resources.
After investing to understand their customers’ economics, our client dramatically changed their approach to the market. They found that not all applications had this stringent and costly material qualification process. Some end-customers (typically outside of automotive and aerospace) did not even require notification for a change in formulation, as long as the product still worked. Our client developed a focused Go-To-Market plan around these applications (aka segments) where the processing cost reduction far outweighed the switching cost (aka customer value), and not only increased their success, but reduced their selling cost, because they were no longer wasting time trying to persuade customers where they were not their best option.
If you are struggling to get customers to change what they are already doing, don’t assume they are making a bad decision. It is crucial in those cases to understand their underlying economic incentives in order to determine if your offering really creates value. By honestly evaluating the entire economic picture you can better understand both the value your offering can create, and identify the areas where your offering could be destroying value (like switching costs). Then, armed with that knowledge, you may be able to find segments of customers where those negatives are not as significant.
Failing to step back and think about the market systematically and objectively is an example of what we have called the strategy ‘short-circuit.’: assuming that your challenge is to educate customers on why they should buy your offering without thinking through the basics of segmentation, value and differentiation. Effective market strategy starts with listening, not talking, to develop an informed view of customer needs.
Remember, it is highly likely that your customers are acting in their own best interest. So, if they don’t do what you would expect, you probably need to dig deeper to understand and frame the decision from their perspective.