Think You Know What Your Customer Wants? Think Again

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Posted: 04/12/2017

Peter F. Drucker, in his book Managing for Results, pointed out: “What the people in the business think they know about customers and market is more likely to be wrong than right”.

So he suggested this remedy: “Only by asking the customer, by watching him, by trying to understand his behavioir can one find out who he is, what he does, how he buys, how he uses what he buys, what he expects, what he values, and so on”.

Stated differently, there's much confusion with respect to what a company "makes" and what a customer "buys".

In a much celebrated Harvard Business Review article titled The Production Line Approach to Service, Ted Levitt showcased how companies often don’t understand what the customer really values.

Chill Winds for Ice Cream

What follows is an abbreviated version of the example Levitt lays out in the HBR article:

An ice cream manufacturer produced high-quality low-priced ice cream sold mostly to supermarkets.  

The manufacturer was located in downtown Boston and maintained a fleet of delivery trucks.

Due to limited storage space, supermarkets cannot keep large amounts of ice cream at one time. This required the manufacturer to deliver new orders several times a week – and in many instances the day an order was received.

The company's executives believed their supermarket customers "valued" their relatively low cost, high quality ice creams. In that assumption they were correct. But it didn't go far enough.

The state of Massachusetts, as many states do to attract new businesses, offered the company a lower tax incentive if they would move out from the center of Boston to a rural area located some 60 miles from their original location.

The executives were convinced they could now sell their ice cream at even a lower price and attract more customers.

So the company moved away from the centralised, urban setting where it began and built a new plant and housing for its fleet of trucks in a more remote location.

Even though the company operated as efficiently in the new location as they did in the old, the move ultimately jeopardised the company’s success. 

Speedy Deliveries Became Near Impossible

In its old location, the ice cream manufacturer did not have a problem quickly servicing phone orders because it had developed a routine among regular customers, and its central location made it easy for them to dispatch delivery trucks to make deliveries quickly within the city.

After relocating, management keeping manufacturing costs down but neglected keeping up its efficient and responsive order and delivery system.

Simply put, speedy (in many instances same day) deliveries were near impossible because the manufacturing plant and delivery trucks were located some 70 miles from downtown Boston.

Customers, frustrated by the slow response to their orders, began looking elsewhere for their ice cream products. 

Because the ice cream company never examined what made them so successful, they made an incorrect assumption that it was their low prices. 

By neglecting to focus on the true key to its success, its efficient, rapid, responsive delivery system, it lost customers and eventually ceased operations.

Lessons Learned?

What went wrong? The company assumed it knew what its customers wanted instead of simply asking them. As Levitt explained:  

“In building the new plant, the president and his management team focused on getting manufacturing costs down to rock bottom."

Service was not considered an integral part of the company’s product. It was viewed merely as “something else” you do in the business. Accordingly, service received inadequate attention, and that became the cause of the company’s failure. 

Bottom line: The ice cream company did not know what the supermarket customers really valued. They thought it was only price and quality; but it was also the ability to enable supermarkets to avoid stockouts by providing speedy reorders.

Reinventing an Organisation by Asking “What Is Value to the Customer?”

Tremendous competitive insights can be gained just by asking and systematically answering the question “What is value to the customer?” 

Drucker provides a superb illustration of the beauty and benefits of an organisation asking itself this question. 

An American company making lubricating compounds for heavy earth-moving equipment such as is used by highway builders has long had a reputation for the quality of its products.

Yet, it could not gain more than a very small share of the market, as it competed against every major petroleum company. It then asked the question "What is value to the customer?"

The answer is "to keep very expensive machinery operating without breakdowns". One hour of downtime may cost a construction company more money than they could possibly spend on lubricating compounds in the course of an entire year.  

The company usually works against a deadline and risks penalty payments if it misses it. As a result of this seemingly obvious insight, the lubricating compound manufacturer no longer sells lubricating compounds. 

Instead, he offers to pay the owner of heavy earth-moving equipment the full cost of any hour of downtime caused by lubricating failure.

The only condition attached to this offer is that the construction company adopt and follow a maintenance programme – designed by the manufacturer’s service representatives – which, of course, prescribes the company’s lubricating compounds.  

The company formerly had to price its products below those of the major petroleum companies. No customer now even asks "What do you charge for your lubricating compounds?"

This company became a maintenance company after it realised what its customers really valued. 

Similarly, many travel agencies have become meeting planners; Herman Miller bills for office furniture but sells improved office productivity and work atmospheres. 

Different companies from different industries, yet all reinvented themselves based on what the customer really wanted.  

If you missed part I of this story, To Win at Business, Compete on Value (Not Price), check it out here

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Posted: 04/12/2017