What we learn from Apple

I have a Creative MP3 player, and I recently bought a Samsung player for my son.  I bought my Creative a few years ago.  It was priced at a similar price point to the comparable iPod, but had a couple of extra features the iPod didn’t – FM radio and a voice recorder.  It had the same memory capacity, better video display and these two extra features.  Yet the iPod outsold it.

You see, when you buy an iPod, you’re not just committing to the player.  You also commit to the iTunes store.  And once you commit to the iTunes store, you’re locked in.  Because up until this year, the songs sold through iTunes had digital rights management (DRM) restrictions which were designed to stop these songs being shared.  But because the songs were encoded in a format unique to Apple, it made it difficult for an iPod user to replace their iPod with anything but an iPod.  Why?  Because the songs won’t play on the new player unless it’s an iPod.

When I buy songs through iTunes, I have to burn them to disc and then rip them to the MP3 format before I can add them to my MP3 player.  But if I had an iPod, they’d be ready to play immediately.

The restrictions have been relaxed now, but if I have a library of DRM music, I need to pay extra to upgrade each track if I want to remove the DRM restrictions.

By creating a complete system of buying and then playing music, Apple has created some barriers around its customers that make it difficult for them to move elsewhere.  The simple fact is this…if I have an iPod and it needs to be replaced, it’s too hard to look to any other players, even if they have better features.

This is an example of switching costs.  It costs me too much in time, money or some other commodity to change.  Because of this, I stay.

Creating Switching Costs

When I did my MBA I was introduce to Porter’s Five Forces analysis.  Within this framework was this concept of switching costs. 

Where there is little diversification, and a product is seen as a commodity, then the buying decision is primarily based on price and service.  The sellers embark on price cutting strategies, or offer higher levels of service to win the sale.  Both these strategies could end up costing more over the long term.

Where a product is differentiated and there is little perceived competition, it can command a higher price.  Because it appears different to its competition, consumers are less likely to move elsewhere because they’re not convinced they’re going to receive the same value somewhere else.

Porter, in his book Competitive Strategy outlines some major sources of switching costs:

• Costs of modifying products to match a new supplier’s product;
• Costs of testing or certifying a new supplier’s product to ensure substituability;
• Investments in retraining employees;
• Investments required in new ancillary equipment that is necessary to use a new supplier’s products (tools, test equipment, etc);
• Cost of establishing new logistical arrangements;
• Psychic costs of severing a relationship.

                                           Porter, Competitive Strategy pg 114

This blog is aimed at people who sell services.  If you’re good at selling your product, you should be aware of the relevant switching costs for your product.  This can be helpful if you’re trying to win a new client (so you can understand possible impediments to the sale proceeding) and it can also help you keep clients.

For many clients, the depth of the relationship is a huge switching cost.  Consider the client of an accountant.  They’ve probably spent years with the one accountant, and that accountant probably knows a lot about their personal and financial affairs.  If they switched to a cheaper accountant, whilst they may save some money, they’d see a massive cost in having to build a relationship with someone new.  There’s also the fear of making a mistake – ‘what if we move to this new accountant and we don’t like them?’.

In the above example we can see that in a service environment, cost may not be the deciding factor.  The important thing is to understand what is.

What Are Your Switching Costs?

Have a think about your product or service.  What are some of the switching costs that may inhibit a client moving to you from somewhere else.  How can you reduce the perceived level of pain of those costs?

What about your existing clients?  What are some things you can do to make yourself invaluable to them so they won’t leave you and go elsewhere?

In many cases, switching costs are not financial in nature.  They may be intangible, they may be time-based and they may be relational-based.

I’m not advocating being dishonest and locking clients in to service agreements that stop them from going elsewhere.  This is about respecting your clients, but also respecting yourself and having enough faith in your services that you’re confident in differentiating yourself from the crowd.

What do you think about switching costs?  Do you have any examples to share?  Leave a comment below.

I’ve been writing about Harry Beckwith’s book The Invisible Touch.  I mentioned how Beckwith looks at four key areas for the marketing of services businesses.  In previous articles I’ve written about how Price and Brand affects the perception of your service.  This week I’ll look at how the packaging of your service can influence your client’s perceptions.

I’ve written before about how clients look for cues as to the quality of your service – if they can’t see the physical service you provide, they look at how it is presented.

Beckwith points out that many service businesses cut costs when it comes to promoting their business – using cheap looking brochures, having their office poorly presented etc.  When clients look at those businesses they’re seeing that you lack confidence in how you present your business and they react accordingly.  If you don’t have the confidence to invest in your business, why should they?

How you package your business also gives you an opportunity to differentiate yourself from your competitors.  When you design a brochure or an advertisement do you use similar images to those your competitors use, or do you use something completely different that’s unique to your business?

The packaging you use speaks volumes about your business.  In one of my previous jobs I used to visit financial advisers.  Their waiting rooms created a mixed range of first impressions in me.  Some were very professional in their look whilst others seemed to be behind the times.  I sat in one office where the most recent magazine to read was over 2 years old!  I’ve seen some great offices – one had a book full of client testimonials that were glowing in their praise of that financial planning business.  Reading those testimonials helps potential clients become more comfortable with the business.

I’ve sat in an accountant’s office where client files were everywhere – including all over his desk and on the seat I was supposed to be sitting in.  So much for privacy!  I’ve visited other offices where all the interviews were conducted in dedicated interview offices – clean environments that existed solely to help create a good impression.

Beckwith concludes his section on packaging with the following questions:

What does what your offer look like?

Does it look like excellence?  Does it fit the prospect’s image of an extraordinary service?

Does your package, your place, and even your person enhance the experience?

Your package is your service.

And he’s right.  Your package really is your service in the eyes of your clients.

So, how do we apply this to our businesses?

What does the packaging of your business look like?  Are you cutting costs but also compromising the look and feel of your service?  Does your web site look fresh and new, or is it dated and cheap?  Do you look like you’re worth what you charge?  How do clients perceive the packaging of your brand – does it look like they expect it should?  Do you know what they expect?  Remember, when I can’t see the physical product you sell, I begin to look at all the other aspects of your offer, and the packaging is one of the main things I look at.

Please leave your comments and let’s share ways we can improve the packaging of our businesses.

Photo by MarkHillary

photo credit: mangee 

 I’ve been reading The Invisible Touch by Harry Beckwith.  I like Beckwith’s books – he’s one of the few writers around who writes specifically for those of us who sell services.  In the book he looks at four keys to selling a service:

1. Price
2. Brand
3. Packaging, and
4. Relationships

In today’s article I’ll share some of his thoughts on Price.  Over the next week I’ll blog on the other three points.  As I outline some of these ideas, have a think about how they could apply to your business.

Beckwith explains how price is seen as an indicator of how good the service is likely to be.  He says

A price tells us how good a service probably is, then convinces us how good the service probably was.

I’ve read other articles through my MBA studies that back this up.  When you buy a physical product i.e. a TV, you tend to shop based on price unless there are other factors that you see as highly important to the overall deal.  When you buy a service, it’s difficult to compare apples with apples as the service you buy will be slightly different depending on who delivers it.  I’ve spoken before how consumers look for things that make the service become more tangible – one of these factors is price.

Harry uses the example of how in the 80′s Gibson were losing share in the guitar market.  They tried lowering prices and that actually led to a further reduction in sales.  They decided to increase prices and, you guessed it, sales increased.  Faced with a choice, if a consumer can afford to, they are more likely to pay a higher price for a service to gain the benefit of the perceived higher quality.

Harry is also against discounting, arguing that the discount buyer is only buying your price and doesn’t value your service.  He suggests if you offer a discount once, the client will expect it every time.  And the won’t value your skills or abilities – they only value the price.

He speaks about pricing based on the value you create instead of an hourly rate.  My last article touched on something similar.  He suggests creating a tiered pricing structure, where clients can pick from a menu of services that are combined in a set of pre-determined packages.

So have a think about these ideas.  Are you guilty of discounting prices to gain business when in fact you should be increasing them?  Is the service you sell sufficiently differentiated from your competitors that you’re able to charge a premium price?  Are there opportunities for you to change the way you charge and introduce service packages?

Please feel free to leave some comments on this article and let me know what you think.

photo credit: SideLong

 Jamie Harrop had a post a few days ago about charging clients a fixed monthly fee for the web / design / maintenance work he does for them.  You can read his post here.

In my business we do something similar for some clients – charging a recurring, monthly fee for our ongoing service and advice.  We call it a ‘retainer’ and explain to the clients it’s easier to charge a set fee rather than charging by the hour.

Alan Weiss has a concept of ‘value based’ fees.  Alan is a well respected consultant who doesn’t charge by the hour.  He determines the value he is able to bring to the client and charges accordingly. 

Think about that for a moment.  If your advice results in a client being $100,000 better off, what is that advice worth to the client?  It may not have taken you very long to come up with the advice, so if you charge by the hour, you won’t charge much.  But if you charge according to the value you create, you’re able to charge more.  Face it, if you’re experienced, you should be able to do the job quicker and more effectively.  Alan has an article about value based fees you can read.  I recommend his Million Dollar Consulting book. 

The key is being able to quantify the value you create in both monetary and non-monetary ways.

I’d like to combine the two ideas – recurring revenue and value based fees – and discuss them in this article and look at ways you can introduce recurring fees to your business.

There’s a number of business models that work on recurring revenue.  Some obvious ones are:

• Storage facilities that charge a monthly fee for rent
• Gyms and fitness clubs
• Pay TV
• Billboards
• Finance – think about the regular bank fees and interest payments they receive

I’m sure you can think of a range of others.

Think about gym memberships.  I remember reading some academic research that showed that people who pay their gym membership monthly attended the gym more regularly than those who paid it annually.  If every month you see the membership fees being taken out of your bank account, you’re more likely to want to get value for money.  Regardless of how you pay, most gyms structure their membership fees so that there appears to be greater value in having an annual membership rather than a pay-per-visit membership.

In many businesses where the product being sold is knowledge or information, there may an opportunity to do something similar.  The key is being able to sell a service that requires more than a one-off transaction.  The most effective models of recurring revenue come about where there is an ongoing relationship between the customer and the provider and the customer is receiving something of value for the money they’re paying.  In fact, that’s one of the main selling points to introducing recurring fees to your clients – I want to have a long-term business relationship with you, rather than a one-off transaction.  You then need to demonstrate the benefits to them of working with you over time.

The concept of switching costs is also important to consider.  Put simply, a switching cost is a cost to the customer to take their business somewhere else.  For supermarket shopping, switching costs are low – whilst it may be convenient to do all my shopping at the same store, there’s no major inconvenience to me to go elsewhere other than finding my way around a new store.  This can be common in businesses where the client makes their decision based primarily on cost.

Service businesses – businesses where clients buy knowledge – can build up high switching costs over time.  This is because as we know more about our clients, we can work more effectively with them, being more responsive to their needs and introducing products and services to them that they wouldn’t have thought of themselves.  The financial planning industry is a good example – as we learn more about our clients (and we learn a lot of personal things about them), it becomes too much of an inconvenience for them to go somewhere else.  The inconvenience is not just based on costs (i.e. fees to set up a new financial plan), but time is also a major factor.  The client thinks “I’ll have to spend hours with someone new building trust and helping them understand what I’m after.  It’s easier to stay where I am.”

Have a think in your business about how you can build high switching costs to discourage your clients going elsewhere.  High switching costs can improve client retention.  High switching costs also give you an opportunity to charge a premium as the client’s decision is based on a range of issues, not just cost.

An outcome of retaining clients over the longer term is that they become more likely to refer new clients to you.  As you demonstrate value over time and become a trusted outsourcing partner, you increase the likelihood of referrals.

Another benefit of recurring fees is that they allow you to budget and plan for the future more effectively.  If you know you have a fixed amount of income coming in every month, you’re able to plan better and commit money to growth strategies.  In some industries business valuations can be improved based on the amount of recurring revenue.  If I was looking at two service businesses, and one had clients on a monthly service agreement, I’d be willing to pay more for that business based on the likelihood of that revenue continuing into the future.

Finally, if you’re looking to introduce recurring fees, understand the things you do that the client sees as being valuable.  Survey your clients, ask them lots of questions – find out things you do (or don’t do) that are valuable to them.  And you need to find a way to show your value, even if they don’t directly see it.  We don’t see our clients monthly – most come in every 6 or 12 months, but they still pay their retainers monthly.  We make sure we communicate with them regularly, and help them understand that even though we may not have spoken with them that month that we’re still doing things behind the scenes that benefit them.  Have a think about your industry and look at ways you can remain in contact with the client and still provide value beyond a face-to-face meeting.

I’ve been inspired by Alan Weiss’ value based fees approach.  If you’re going to look to implement a retainer fee structure, try to get away from basing it on an hourly rate.  Think more in terms of a package of services you will provide, some of which is valuable to the client but not time consuming for you. 

Whilst you’re looking at packages, consider putting together a choice of 3 or 4 different service packages or offers that progressively build on the range of services offered (i.e. a basic service package through to a comprehensive or premium package).  Think about the financial and non-financial benefits to the clients.  Think about offering a priority service to those who are on a monthly retainer. 

I’m interested in whether you feel it’s worthwhile using recurring and value based fees in your business.  Let me know what you think.  And before you write this off and decide it would never work in your business, think again.  Challenge yourself and see if you can think of ways you can charge clients a regular retainer rather than a transaction-based fee or an hourly rate.