"Customer experience"—a combination of décor, taste of food, and service—accounted for 73% of the price variation at NYC restaurants; cuisine accounted for 3.5%, location just 2.5%. Richard A. D'Aveni, Harvard Business Review, November 2007.

Why Customers Pay a Premium Price

Customers do not make all purchase decisions the same way. In fact, each customer has a split buying personality. One is inherently NOT loyal and can even be adversial towards vendors. The other seeks trusting, committed relationships and the “value” these relationships deliver. Which one do your business practices court?

In one of our white papers, “Selling to the Right Personality for Loyalty and High Lifetime Value” (www.thewhetstoneedge.com/papers/selling.pdf), we argue that when customers use the indifferent buying personality they don't see meaningful differences between competitive products. As a consequence they tend to make purchase decisions based on a trade-off between price and convenience. They act indifferently towards the purchase as if it is just a task to be complete.

In contrast, when customers are emotionally engaged purchasing logic shifts dramatically. Engaged customers put a premium on the experience they expect from the product. The price they are willing to pay is associated with how meaningful they perceive the experience to be.

In our paper we discuss the psychological principles that give rise to the two buying personalities and discuss business practices that put these principles into action.

Recent Research

An article by Richard D'Aveni in the November 2007 issue of Harvard Business Review provides statistical evidence to support our position.

At the outset of his article, D'Aveni makes several statements about price and perceived value that should startle you:

• Most customers are unable to identify the features that determine the prices they are willing to pay for products or services.
• 50% of salespeople don't know what attributes justify the prices of the products and services they sell.
• Companies overestimate the benefits of their own offerings while underestimating those of rivals.

D'Aveni's used regression analysis to explain the variation in price in a given marketplace. Essentially this boils down to collecting data on all they benefits and features offered by competing products and crunching the number to predict which of these variables best predicted price were willing to pay.

What Customer Buy in High-end Restaurants

In one analysis he compared the 1700 Zagat rated restaurants in New York City. What he found was that the primary driver of variations in food prices wasn't restaurant location or type of cuisine, as one might expect. It was a combination of factors that one could call "the customer experience" —the extent to which the décor, the taste of the food, and the service satisfied customers. That accounted for 73% of the variation in price in different restaurants. The type of cuisine accounted for only 3.5% and location only 2.5%. The customer experience reaches customers emotionally and leads to engagement. Customers willingly pay for it.

In contrast, the low-end restaurants had to compete on price. These restaurants had to drop their prices over time to sustain themselves. In our terminology, the more expensive restaurants focused on winning mindshare while the low-end restaurants were forced to compete with each other for market share.

Harley Davidson Facing a Shift in Context

In 2002, D'Aveni carried out a similar study that compared the price positioning of Harley-Davidson motorcycles with large bikes offered by Honda, Yamaha, Kawasaki and Suzuki. The Japanese bikes offered 8 to 12 percent more horsepower but customers were willing to spend 38% more on a Harley.

The premium customers were willing to pay was attributable to intangible secondary benefits the company offered such as the image created by membership in the Harley Owners Group (HOG) and the Harley-Davidson apparel. These created the impression that its customers were rebels and enjoyed an adventurous lifestyle. Emotional considerations associated with the customer experience.

By 2004, D'Aveni's price-position mapping revealed a different picture. Harley still garnered a greater price than Japanese motorcycles but it no longer commanded the highest premium in the market. Victory and Big Dog, two new American made big bikes were getting a 41% premium over Harley's with similar engine capacity. Rather than emphasizing the macho rebel image, these newcomers attracted a younger generation by giving them the ability to customize the bike to reflect themselves—the emotional dimension of self-expression. By 2006, Harley figured this out and began responding in kind.

Ask yourself, do you have a deliberate strategy to emotionally engage customers and garner a premium price. Or...

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For insights into how Social Media impact the customer experience check out our two new flash videos:

Web 2.0/Social Media: Why All the Hoopla? (05:43) and Social Media and Business Relationships (02:43)

and two white papers:

Why Online Communities Matter and Social Networks and Online Communities Create Elastic Ties and Surprisingly Powerful Pay-offs

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For additional information on trust and customer relationships, check out John's book, Addicted Customers: How to Get Them Hooked on Your Company. www.AddictedCustomers.com.

This newsletter is brought to you by The Whetstone Edge, LLC (www.TheWhetstoneEdge.com).

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