Customers are unwilling to entertain higher prices, even if the products involved offer better value than before. George F. Brown, Jr. shares a no-risk strategy that works by offering options.
In the early 70s, The Godfather gave us the immortal phrase “Make him an offer he can’t refuse.” While his line of business was well suited to executing an offer of this kind, most of us are in businesses where the customer can turn down an offer without having to worry about the consequences of saying no to the Godfather.
The Godfather’s quote surfaced in a meeting where the topic of discussion was the rejection of a new product development concept by numerous customers served by an instrument manufacturer. There was disappointment all around, as members of this manufacturer’s team felt the new concept offered significant improvements in terms of features and performance.
Lamenting the stream of rejections, one executive noted that “In most of our meetings, we never really got to the point where we could demonstrate what the next generation of products would be able to do. The customer closed down the discussion as soon as they heard that it would come with a higher price tag.” He went on to use the quote from The Godfather to describe the only option he could think of other than giving up on the concept underlying the new product development plan. Unfortunately, his presentation of the first option suggested a higher probably of jail time than of customer buy-in.
Customer unwillingness to entertain ideas that come with a higher price tag is, unfortunately, all too common in today’s business environment. In the first chapter of CoDestiny, we present a case study involving Emerson, a diversified manufacturing firm known for its engineering excellence, reflecting a similar set of customer challenges. Emerson executives made comments such as “They treat us like a commodity” and “If an idea costs a dime more, they reject it unless we are willing to fund it out of our own pockets”. Almost every business supplier can cite an example of such treatment, and most believe that they and their customers alike are harmed by the focus on cost at the expense of innovation. The likelihood of customer resistance to ideas that come with a higher price tag is a fact of life in most business markets these days.
It should not be accepted, however. Good ideas, even with a higher price tag, can make solid business sense for both the supplier and its customers. The instrument company executive was on the right track in conjuring up the famous Godfather quote. What he needed to do, however, was stand it on its head: “Make them an offer they can refuse.” The concept is quite simple and responds to the fear of raising prices that prevails in most businesses.
The frequent rejection of a higher-priced ingredient by a supplier’s customer is rooted in that customer’s fear that if they take actions that cause them to raise their own prices, their own end customers further along on the customer chain will react badly and cut back purchases, either switching to a competitor or making do with fewer units. That fear triggers the conservatism that this instrument manufacturer and many others experienced. One of the instrument manufacturer’s end customers was honest and explicit about this in an interview: “The idea that [the instrument manufacturer] brought to us was decent, probably had potential. But it set off the alarm bells here. We’re pretty risk averse, especially in this fragile economy. Our own strategic plan called for us to hold the line on prices this year, so any idea, whether homegrown or from a supplier, that would result in us having to raise prices or cut margins isn’t going to find a happy home here.”
Rather than fighting that battle, a sound strategy is for a supplier to bring its customer an option by which they can continue to offer their own end customers the same product at the same price as before, plus the option to trade up to a better product at a higher price point. The downside risk is eliminated, as the “old option” is still on the table for those end customers that prefer that point on the product-price spectrum. But some upside opportunity is created, as the supplier and its customer can both achieve a gain from those end customers who prefer the improved product even though it is more expensive. When you “make them an offer they can refuse”, you eliminate risk and, at the same time, open the possibility that you have “made them an offer they want to accept”.
Quite a few suppliers have achieved success through this strategy of defining options through which their own customers can offer a standard product at their current price point and a new, higher-end option at a higher price point. This approach allows the supplier to provide its own customers with a “no downside, real upside option”. It allows them to present innovations and product development plans as concepts through which their customers can make more money. The supplier can explain to its customer that if the end customers select the higher-end option, the supplier and the customer can share the rewards of reaching a higher price point. Furthermore, if the option takes off and gains market acceptance, the supplier and the customer can be major winners as the market moves to the higher price point. And all of this can be achieved without risking the current business.
As a familiar example of this strategy, many of the options that we take for granted on our cars and trucks followed this path. Automotive suppliers first introduced innovations in the aftermarket, getting motivated buyers to have their vehicles refitted with small items like cup holders; consumer electronics like CD players, DVD players, navigation systems, and security systems; performance options like those associated with The Fast and Furious movies; and even products like sunroofs that required actual alterations to the vehicle. As such options gained popularity in the aftermarket, the next step for suppliers was convincing conservative, risk-adverse carmakers to offer these as options on their vehicles. Many of us can remember making the decision to buy the car with the CD-6 player and the sunroof, even though it had a higher sticker price. When consumers selected vehicles with such options, the carmakers made more money. Today, most cars offer those options as standard equipment.
The automotive industry is not the only one where this strategy has proven successful. Examples abound in diverse industries and across geographic markets. There are two strategy fundamentals that suggest why this is so. First is the fact that the strategy falls into the category of those that create value for customers as the route to capturing value for shareholders. The supplier that brings this concept to its own customers does so with the following message: “We have an idea that can help you make more money”. That’s a message that almost always gets attention and buy-in. Second is the fact that this strategy enables suppliers and their customers to do a better job of segmenting the end customers in the market being served. For those at the good-better end of the spectrum, the traditional offer at its lower price point is available. For those at the better-best end of the spectrum, the upgraded product at a higher price point is available. Customers in each segment are being provided an option responding to their tastes and preferences.
What is required to make this option successful is insight about the factors that drive purchase decisions several stages down the customer chain. The automotive parts manufacturers understood that there were emerging niche groups of buyers that were interested in these capabilities and that would buy them for their vehicles. They also developed channels through which these products could be sold and installed in the aftermarket, often very different from the car dealerships where the actual vehicles were purchased. Solid insights about the needs of end customers, especially those that aren’t being met well, are critical to the success of this strategy. If all of the end customers do reject the offer, nothing has been gained.
Focusing on trade-up options, rather than trying to convince customers to make a wholesale change to a higher-priced product, is a solution to the conflict between the need for differentiation and the skepticism about the wisdom of raising prices. Firms that take this perspective can translate new product innovation concepts that were initially rejected into success stories for their customers and their shareholders when they “make them an offer they can refuse”.
* * *
George F. Brown, Jr. is the CEO and cofounder of Blue Canyon Partners, Inc., a strategy consulting firm working with leading business suppliers on growth strategy. Along with Atlee Valentine Pope, he is the author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, published by Greenleaf Book Group Press of Austin, TX. See www.CoDestinyBook.com for more details.
