Making Money Off Customer Ignorance
At a time when customers are getting more and more empowered with the free flow of information and sharing of ideas, comes this article. Harvard professors Gail McGovern and Youngme Moon writes that companies can profit from customers’ confusion, ignorance, and poor decision making in two related ways. The first evolves out of the legitimate attempt to create value by giving customers a broad set of offerings. The second emerges from the equally legitimate decision to use fees and penalties to cover costs and discourage undesirable customer behavior. In the first case, a company creates a diverse product and pricing portfolio to offer various value propositions to different customer segments. All else being equal, a hotel that has three types of rooms at three price points can serve a wider customer base than a hotel that has just one type of room at one price. However, customers benefit from such diversity only when they are guided toward the offering that best suits their needs. A company is less likely to help customers make good choices if it knows that it can generate more profits when they make poor ones. Of course, only the most flagrant companies would explicitly seduce customers into making bad choices. Yet there are subtle ways in which even generally well-intentioned firms use complex portfolios to encourage suboptimal choices—tactics that hasten the descent down the slippery slope. The article urges companies to look for warning signs: Are our most profitable customers those who have the most reason to be dissatisfied with us? Do we have rules we want customers to break because doing so generates profits? Do we make it hard for customers to understand or abide by our rules? Do we depend on contracts to prevent customers from defecting? Read the excerpt here.