marketing and sales executives from Silicon Valley

Thursday, September 16, 2010

Did you just break the value contract?

I thought I'd take a few moments to discuss something I call the 'value contract'. It's the implicit agreement that a business has with it's customers and it's usually an unspoken agreement tied into the customer relationship.

An example is Costco - the value contract in my mind for Costco is that I will get good quality and a fair price and can return anything in a reasonable time frame. In return for those things, I have adjusted my behavior to go to Costco in spite of the long lines. I've traded quality, prices, and customer service for a little time. That's the Costco brand in my mind, and I would guess that it's somewhat similar for millions of it's customers.

I regularly go to an electronics store, and to me, the brand means "low prices, pretty good selection, random service levels, with value oriented food". The food was cheap and decent enough that I went out of my way to go there just in case there was a good electronics deal to be found. Value-priced food was my rationalization for going since I wouldn't otherwise have driven there. I suspected others felt the same, as there was a decent lunch crowd. In marketing and business terms, it seemed like a loss leader - something with negative or lower than normal margins to draw in buyers.

Last summer, for some unknown reason, this store increased the price of their combo meal by 17% and started using obviously cheaper sandwich ingredients. I was bothered by it, and vowed to give up my habit of eating there. I failed. It took three more meals of bad food and higher prices to finally break that habit, but during that time, I noticed that the deli crowd dropped dramatically as did overall traffic to that store during lunch. Other people appeared to be bothered by the change in price and quality. Finally, I took my lunch buying and lunch-time electronic shopping to a competitor.

Three months later on a random weekend visit to my original lunch spot/electronics store, I noticed that the price dropped back down to the original level. I promptly adjusted my schedule and used the same excuse to go back. To my surprise, both the price and food quality had be adjusted to the original levels. As I continued to return week after week, I noticed that the lunch crowd was building back as well.

So someone figured out that the deli was indeed a loss leader, bringing in shoppers who otherwise might spend their time and money elsewhere, right? Maybe, or their memory only lasts 9 months. At a recent visit, they upped the price by 17% again and changed their side dish/chips vendor to one with portions nearly 1/2 of what they gave a year ago. I looks like they are breaking that value contract again.

I'll be breaking that lunch habit faster this time. Did someone break a value contract with you in a bonehead way? Please comment or click the ThankThis button if you like this article.

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