Increasing Company Profits
As I see it, there are 3 ways for a company to increase its profits.
- Get more customers.
- Reduce expenses.
- Squeeze more money from existing customers.
The first is the most obvious, but some companies have either terrible marketing departments, ineffective sales departments, or unproductive engineering departments (these are the three major profit centres).
The second is always useful to be doing, not just when a company wants growth. But there are limits to this endeavour because only so much "fat" can be trimmed before it hits muscle, and eventually bone. Companies must have some expenses in order to make revenue and, just like humans, a little fat helps to cushion–or protect from–adverse situations.
The third, and final, way to increase profits is what I see most companies doing. Since they lack the ability to find new customers (with lead generation or by successfully entering new markets), they simply resort to cannabilizing their existing customer base. In doing so, they consistently squeeze customers with price increases to see what each customer's individual tolerance can withstand. Sometimes these price increases can be written off as "adding value" or, in the worst case, as "matching inflation" but in reality it is neither. I have been fortunate to see this happening from the inside of companies and, each time, it comes down to the idea that the company wants to increase the Customer Lifetime Value (CLV) or Average Revenue per User (ARPU).
Every time the situation arises where a company wants to increase profits, yet only follows Option 3, I ask the executives two things:
What are our customers saying they actually want?
What are our customers trying to do?
The point of this seemingly simple question is to get at the heart of the problem. Invariably, the executive management layer doesn't know what the customer wants and thus doesn't know how to connect value to an increase in prices. I've never met a customer – nor been a customer myself – that has thought, "Yeah I want to pay more for the same value". But often this is the conclusion executives in companies arrive at. They have ideas, sure, but those ideas are founded on increasing ARPU. Instead, talking directly to customers will reveal how they use a product or service and whether they are open to paying more if they see more value. Now, what is "value"? That will differ based on each customer, which makes the problem all the more difficult.
If each customer has different definitions of value, then that leads you to two options. The first is to build a set of disparate features into a product. This rarely works out because the features will start to look "bolted on" and the product resembles something akin to the "6 Dollar Man" imagery from Family Guy. The second option is to distill the differing opinions of customers down into what it is that they are trying to achieve. There's the old adage that a customer is always right. I both agree and disagree. I like to think that a customer should always be treated with respect, but that customers can be wrong. Instead, customers often state feature requests as short-term goals, rather than focusing on their long-term goals. In other words, ask customers "what are you trying to accomplish at the end of the day, regardless of using this product/service or not?"
Often, in answering my first question, I will read someone's reinterpretation of a customer's wants. This is unhelpful. When we want to see what a customer really wants, we need to hear or read from them in their own words. Some of the things that get lost in translation–so to speak–are the filler words that customers use (indicating they aren't certain) and complaints. The complaints, as I've seen, get reintrepreted by the transcriber to soften their blow against any perceived damage they may do to the reader. For me, complaints are just the expression of pain. Listening to customers means understanding their pain and, perhaps, feeling that same pain as if you are experiencing it. The complaint is just the end result, the trick is understanding how the pain was triggered in the first place. Solve that, and you have created feature that is valued by the customer, and if there's value then there's opportunity for payment.